10-Q 1 form10q.htm CUTERA, INC 10-Q 3-31-2013 form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 

(Mark One)

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

For the quarterly period ended March 31, 2013

OR

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

For the transition period _____ to_____.

Commission file number: 000-50644

Cutera, Inc.
(Exact name of registrant as specified in its charter)
 

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

3240 Bayshore Blvd., Brisbane, California 94005
(Address of principal executive offices)

(415) 657-5500
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    x    No    ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x     No    ¨

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

Large accelerated filer  ¨
Accelerated filer  x
Non-accelerated filer  ¨
  Smaller reporting company ¨

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 April 30, 2013 was 14,674,829.
 


 
 

 

CUTERA, INC.

FORM 10-Q


 
 
Page
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1
3
 
3
 
4
 
5
 
6
 
7
Item 2
12
Item 3
19
Item 4
19
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1
20
Item 1A
20
Item 2
32
Item 3
32
Item 4
33
Item 5
33
Item 6
33
 
34

 
PART I. FINANCIAL INFORMATION


CUTERA, INC.


(in thousands)
(unaudited)
 
 
 
March 31,
2013
 
 
December 31,
2012
 
Assets
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
17,272
 
 
$
23,546
 
Marketable investments
 
 
70,821
 
 
 
62,026
 
Accounts receivable, net
 
 
6,814
 
 
 
8,841
 
Inventories
 
 
11,091
 
 
 
11,114
 
Deferred tax asset
 
 
39
 
 
 
40
 
Other current assets and prepaid expenses
 
 
1,511
 
 
 
1,439
 
Total current assets
 
 
107,548
 
 
 
107,006
 
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
 
1,312
 
 
 
933
 
Deferred tax asset, net of current portion
 
 
518
 
 
 
553
 
Intangibles, net
 
 
2,392
 
 
 
2,566
 
Goodwill
   
1,339
     
1,339
 
Other long-term assets
 
 
362
 
 
 
397
 
Total assets
 
$
113,471
 
 
$
112,794
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
Accounts payable
 
$
2,161
 
 
$
2,107
 
Accrued liabilities
 
 
7,087
 
 
 
9,493
 
Deferred revenue
 
 
6,766
 
 
 
6,618
 
Total current liabilities
 
 
16,014
 
 
 
18,218
 
 
 
 
 
 
 
 
 
 
Deferred revenue, net of current portion
 
 
2,538
 
 
 
2,102
 
Income tax liability
 
 
320
 
 
 
412
 
Other long-term liabilities
 
 
1,449
 
 
 
1,288
 
Total liabilities
 
 
20,321
 
 
 
22,020
 
 
 
 
 
 
 
 
 
 
Commitments and Contingencies (Note 10)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
 
 
 
Convertible preferred stock, $0.001 par value; authorized: 5,000,000 shares; none issued and outstanding
 
 
 
 
 
 
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 14,671,912 and 14,233,476 shares at March 31, 2013 and December 31, 2012, respectively
 
 
14
 
 
 
14
 
Additional paid-in capital
 
 
105,089
 
 
 
100,552
 
Accumulated deficit
 
 
(12,036
)
 
 
(9,873
 )
Accumulated other comprehensive income
 
 
83
 
 
 
81
 
Total stockholders’ equity
 
 
93,150
 
 
 
90,774
 
Total liabilities and stockholders’ equity
 
$
113,471
 
 
$
112,794
 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
CUTERA, INC.


(in thousands, except per share data)

(unaudited)

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2013
 
 
2012
 
Net revenue:
 
   
 
 
   
 
Products
 
$
11,523
 
 
$
11,854
 
Service
 
 
4,444
 
 
 
3,873
 
Total net revenue
 
 
15,967
 
 
 
15,727
 
Cost of revenue:
 
 
 
 
 
 
 
 
Products
 
 
5,422
 
 
 
5,651
 
Service
 
 
1,995
 
 
 
2,194
 
Total cost of revenue
 
 
7,417
 
 
 
7,845
 
Gross profit
 
 
8,550
 
 
 
7,882
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Sales and marketing
 
 
6,456
 
 
 
7,437
 
Research and development
 
 
2,121
 
 
 
2,216
 
General and administrative
 
 
2,289
 
 
 
3,495
 
Total operating expenses
 
 
10,866
 
 
 
13,148
 
Loss from operations
 
 
(2,316
)
 
 
(5,266
)
Interest and other income, net
 
 
135
 
 
 
96
 
Loss before income taxes
 
 
(2,181
)
 
 
(5,170
)
Provision (benefit) for income taxes
 
 
(18
)
 
 
97
 
Net loss
 
$
(2,163
)
 
$
(5,267
)
 
 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
 
Basic and Diluted
 
$
(0.15
)
 
$
(0.38
)
 
 
 
 
 
 
 
 
 
Weighted-average number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic and Diluted
 
 
14,408
 
 
 
13,960
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 

CUTERA, INC.


(in thousands)

(unaudited)

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2013
 
 
2012
 
Net loss
 
$
(2,163
)
 
$
(5,267
)
Other comprehensive income (loss):
 
   
 
 
   
 
Available-for-sale investments
 
   
 
 
   
 
Net change in unrealized gain (loss) on available-for-sale investments
 
 
4
 
 
 
170
 
Less: Reclassification adjustment for (gains) losses on investments recognized during the year
 
 
 
 
 
(6
)
Net change in unrealized gain (loss) on available-for-sale investments
 
 
4
 
 
 
164
 
Tax provision (benefit)
 
 
2
 
 
 
38
 
Other comprehensive income (loss), net of tax
 
 
2
 
 
 
126
 
Comprehensive loss
 
$
(2,161)
 
 
$
(5,141
)
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
CUTERA, INC.


(in thousands)
 
(unaudited)
 
 
 
Three Months Ended
 
 
 
March 31
 
 
 
2013
 
 
2012
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 
$
(2,163
)
 
$
(5,267
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
 
 
 
Stock-based compensation
 
 
820
 
 
 
738
 
Depreciation and amortization
 
 
320
 
 
 
343
 
Other
 
 
34
 
 
 
14
 
Changes in assets and liabilities:
 
 
 
 
 
 
 
 
Accounts receivable
 
 
2,027
 
 
 
640
 
Inventories
 
 
23
 
 
 
(1,153
)
Other current assets and prepaid expenses
 
 
60
 
 
 
444
 
Other long-term assets
   
35
     
28
 
Accounts payable
 
 
54
 
 
 
101
 
Accrued liabilities
 
 
(2,504
)
 
 
(661
)
Other long-term liabilities
 
 
259
 
 
 
27
 
Deferred revenue
 
 
584
 
 
 
(118
)
Income tax liability
 
 
(92
)
 
 
(9
)
Net cash used in operating activities
 
 
(543
)
 
 
(4,873
)
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
Acquisition of property and equipment
 
 
(525
)
 
 
(277
)
Business acquisition
 
 
 
 
 
(5,091
)
Proceeds from sales of marketable and long-term investments
 
 
500
 
 
 
10,729
 
Proceeds from maturities of marketable investments
 
 
11,050
 
 
 
11,135
 
Purchase of marketable investments
 
 
(20,473
)
 
 
(13,442
)
Net cash provided by (used in) investing activities
 
 
(9,448
)
 
 
3,054
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
Proceeds from exercise of stock options and employee stock purchase plan
 
 
3,717
 
 
 
586
 
Net cash provided by financing activities
 
 
3,717
 
 
 
586
 
 
 
 
 
 
 
 
 
 
Net decrease in cash and cash equivalents
 
 
(6,274
)
 
 
(1,233
)
Cash and cash equivalents at beginning of period
 
 
23,546
 
 
 
14,020
 
Cash and cash equivalents at end of period
 
$
17,272
 
 
$
12,787
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
CUTERA, INC.


Note 1. Summary of Significant Accounting Policies

Description of Operations and Principles of Consolidation
Cutera, Inc. (“Cutera” or the “Company”) is a global provider of laser and other energy-based aesthetic systems for practitioners worldwide. The Company designs, develops, manufactures, and markets the CoolGlide, Xeo, Solera, GenesisPlus, ExcelV, VariLite (acquired in 2012) and truSculpt (introduced in 2012) product platforms for use by physicians and other qualified practitioners which enable them to offer safe and effective aesthetic treatments to their customers. The Company’s products offer multiple hand pieces and applications, which allow customers to upgrade their systems (Upgrade revenue). 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, Titan and truSculpt hand piece refills, and distributing third party manufactured dermal fillers and cosmeceuticals.
 
Headquartered in Brisbane, California, the Company has wholly-owned subsidiaries in Australia, Canada, France and Japan, that market, sell and service its products outside of the United States. The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All inter-company transactions and balances have been eliminated.

Unaudited Interim Financial Information
The financial information filed is unaudited. The Condensed Consolidated Financial Statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for the fair statement of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The December 31, 2012 Condensed Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). The results for interim periods are not necessarily indicative of the results for the entire year or any other interim period. The Condensed Consolidated Financial Statements should be read in conjunction with the Company’s financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission (the “SEC”), on March 15, 2013.

Use of Estimates
The preparation of interim Condensed Consolidated Financial Statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported and disclosed in the Condensed Consolidated Financial Statements and the accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, the Company evaluates these estimates, including those related to warranty obligation, sales commission, accounts receivable and sales allowances, provision for excess and obsolete inventories, fair values of marketable investments, fair values of acquired intangible assets, useful lives of intangible assets and property and equipment, recoverability of deferred tax assets, and effective income tax rates, among others. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Note 2. Cash and Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments, with an original maturity of three months or less at the time of purchase, to be cash equivalents. Investments in debt securities are accounted for as “available-for-sale” securities, carried at fair value with unrealized gains and losses reported in other comprehensive loss, held for use in current operations and classified in current assets as “Marketable investments.”
 
 
The following tables summarize unrealized gains and losses related to our marketable investments, designated as available-for-sale (in thousands):

March 31, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Market
Value
 
Cash and cash equivalents:
 
   
 
 
   
 
 
   
 
 
   
 
Cash
 
$
1,740
 
 
$
 
 
$
 
 
$
1,740
 
Money market funds
 
 
12,333
 
 
 
 
 
 
 
 
 
12,333
 
Commercial paper
 
 
3,199
 
 
 
 
 
 
 
 
 
3,199
 
Total cash and cash equivalents
 
 
17,272
 
 
 
 
 
 
 
 
 
17,272
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government notes
 
 
4,001
 
 
 
5
 
 
 
 
 
 
4,006
 
U.S. government agencies
 
 
32,249
 
 
 
44
 
 
 
(1
)
 
 
32,292
 
Municipal securities
 
 
5,467
 
 
 
17
 
 
 
(2
)
 
 
5,482
 
Commercial paper
 
 
10,958
 
 
 
7
 
 
 
(1
)
 
 
10,964
 
Corporate debt securities
 
 
18,011
 
 
 
70
 
 
 
(4
)
 
 
18,077
 
Total marketable investments
 
 
70,686
 
 
 
143
 
 
 
(8
)
 
 
70,821
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash, cash equivalents and marketable investments
 
$
87,958
 
 
$
143
   
$
(8
)
 
$
88,093
 

December 31, 2012
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Market
Value
 
Cash and cash equivalents:
 
   
 
 
   
 
 
   
 
 
   
 
Cash
 
$
2,198
 
 
$
 
 
$
 
 
$
2,198
 
Money market funds
 
 
17,348
 
 
 
 
 
 
 
 
 
17,348
 
Commercial paper
 
 
4,000
 
 
 
 
 
 
 
 
 
4,000
 
Total cash and cash equivalents
 
 
23,546
 
 
 
 
 
 
 
 
 
23,546
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government notes
 
 
4,005
 
 
 
4
 
 
 
 
 
 
4,009
 
U.S. government agencies
 
 
24,910
 
 
 
48
 
 
 
 
 
 
24,958
 
Municipal securities
 
 
4,184
 
 
 
23
 
 
 
(1
)
 
 
4,206
 
Commercial paper
 
 
10,515
 
 
 
4
 
 
 
 
 
 
10,519
 
Corporate debt securities
 
 
18,281
 
 
 
59
 
 
 
(6
)
 
 
18,334
 
Total marketable investments
 
 
61,895
 
 
 
138
 
 
 
(7
)
 
 
62,026
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash, cash equivalents and marketable investments
 
$
85,441
 
 
$
138
   
$
(7
)
 
$
85,572
 

As of March 31, 2013 and December 31, 2012, the total gross unrealized losses were $7,000 and were related to short-term marketable investments. No securities were in unrealized loss positions for more than 12 months.

The following table summarizes the estimated fair value of our securities available-for-sale and classified as cash and cash equivalents and marketable investments classified by the contractual maturity date of the security as of March 31, 2013 (in thousands):

 
 
Amount
 
Due in less than one year
 
$
39,455
 
Due in 1 to 3 years
 
 
34,565
 
Due in 3 to 10 years
 
 
 
Due in greater than 10 years
 
 
 
 
 
$
74,020
 

 
Note 3. Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

 
·
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
 
·
Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
 
·
Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

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

As of March 31, 2013, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above was as follows (in thousands):

March 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Cash equivalents:
 
   
 
 
   
 
 
   
 
 
   
 
Money market funds
 
$
12,333
 
 
 
 
 
 
 
 
$
12,333
 
Commercial paper
 
 
 
 
 
3,199
 
 
 
 
 
 
3,199
 
Short-term marketable investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government notes
 
 
 
 
 
4,006
 
 
 
 
 
 
4,006
 
U.S. government agencies
 
 
 
 
 
32,292
 
 
 
 
 
 
32,292
 
Municipal securities
 
 
 
 
 
5,482
 
 
 
 
 
 
5,482
 
Commercial paper
 
 
 
 
 
10,964
 
 
 
 
 
 
10,964
 
Corporate debt securities
 
 
 
 
 
18,077
 
 
 
 
 
 
18,077
 
Total assets at fair value
 
$
12,333
 
 
$
74,020
 
 
$
 
 
$
86,353
 

As of December 31, 2012, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above was as follows (in thousands):

December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Cash equivalents:
 
   
 
 
   
 
 
   
 
 
   
 
Money market funds
 
$
17,348
 
 
 
 
 
 
 
 
$
17,348
 
Commercial paper
 
 
 
 
 
4,000
 
 
 
 
 
 
4,000
 
Short-term marketable investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government notes
 
 
 
 
 
4,009
 
 
 
 
 
 
4,009
 
U.S. government agencies
 
 
 
 
 
24,958
 
 
 
 
 
 
24,958
 
Municipal securities
 
 
 
 
 
4,206
 
 
 
 
 
 
4,206
 
Commercial paper
 
 
 
 
 
10,519
 
 
 
 
 
 
10,519
 
Corporate debt securities
 
 
 
 
 
18,334
 
 
 
 
 
 
18,334
 
Total assets at fair value
 
$
17,348
 
 
$
66,026
 
 
$
 
 
$
83,374
 
 
The Company’s Level 2 investments include U.S. government-backed securities and corporate securities that are valued based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The average remaining maturity of the Company’s Level 2 investments as of March 31, 2013 is less than 36 months and all of these investments are rated by S&P and Moody’s at A or better, with the exception of two short-term municipal notes that were rated at SP-/+.


Note 4. Inventories
 
Inventories consist of the following (in thousands):

 
 
March 31,
2013
 
 
December 31,
2012
 
Raw materials
 
$
6,932
 
 
$
7,221
 
Finished goods
 
 
4,159
 
 
 
3,893
 
Total
 
$
11,091
 
 
$
11,114
 

Note 5. Warranty

The Company provides a standard one-year warranty on all systems. Warranty coverage provided is for labor and parts necessary to repair the systems during the warranty period. The Company accounts for the estimated warranty cost of the standard warranty coverage as a charge to costs of revenue when revenue is recognized. The estimated warranty cost is based on historical product performance. To determine the estimated warranty reserve, the Company utilizes actual service records to calculate the average service expense per system and applies this to the equivalent number of units exposed under warranty. The Company updates these estimated charges every quarter.

The following table provides the changes in the product warranty accrual for the three-month period ended March 31, 2013 (in thousands):

   
Amount
 
Beginning Balance – December 31, 2012
  $ 1,212  
Add: Accruals for warranties issued during the period
    901  
Less: Settlements made during the period
    (1,054 )
Ending Balance –March 31, 2013
  $ 1,059  

Note 6. Deferred Service Contract Revenue

Service contract revenue is recognized on a straight-line basis over the period of the applicable extended warranty contract.

The following table provides changes in deferred service contract revenue for the three-month periods ended March 31, 2013 and 2012 (in thousands):

 
 
March 31
 
 
 
2013
 
2012
 
Beginning Balance
 
$
8,539
 
 
$
5,838
 
Add:         Payments received
 
 
3,602
 
 
 
2,495
 
Add:         Contract revenue assumed with business acquisition
 
 
 
 
 
780
 
Less:         Revenue recognized
 
 
(2,990
)
 
 
(2,571
)
Ending Balance
 
$
9,151
 
 
$
6,542
 

Costs incurred under service contracts were $1.7 million for the three-month period ended March 31, 2013 and $1.7 million for the three-month period ended March 31, 2012 which are recognized as incurred.

Note 7. Stock-based Compensation Expense

Stock-based compensation expense by department recognized during the three-month periods ended March 31, 2013 and 2012 were as follows (in thousands):
 
 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2013
 
 
2012
 
Cost of revenue
 
$
159
 
 
$
143
 
Sales and marketing
 
 
199
 
 
 
140
 
Research and development
 
 
101
 
 
 
146
 
General and administrative
 
 
361
 
 
 
309
 
Total stock-based compensation expense
 
$
820
 
 
$
738
 

Under the 2004 Equity Incentive Plan, the Company issued 438,403 shares of common stock during the three-month period ended March 31, 2013, in conjunction with stock options exercised.

 
During the three-month period ended March 31, 2013, the following number of equity awards of the Company’s common stock was granted (in thousands):
 
 
 
Shares
 
Stock options
 
 
60
 
Restricted stock Units
 
 
5
 
Total
 
 
65
 

As of March 31, 2013, there was $3.5 million of unrecognized compensation expense, net of projected forfeitures related to non-vested stock awards. The expense is expected to be recognized over the remaining weighted-average period of 2.4 years.

Note 8. Net Loss Per Share

Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the year. Diluted net loss per common share is the same as basic net loss per common share, as the effect of the potential common stock equivalents is anti-dilutive and as such is excluded from the calculations of the diluted net loss per share.

The following number of shares outstanding, prior to the application of the treasury stock 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,
 
 
 
2013
 
 
2012
 
Options to purchase common stock
 
 
3,738
 
 
 
3,664
 
Restricted stock units
 
 
149
 
 
 
55
 
Performance stock units
   
     
 
Employee stock purchase plan shares
 
 
32
 
 
 
25
 
Total
 
 
3,919
 
 
 
3,744
 

Note 9. Income Taxes

For the three months ended March 31, 2013 and 2012, the Company’s tax benefit was $18,000 and tax expense was $97,000, respectively. The Company’s income tax benefit in the three months ended March 31, 2013 was primarily attributable to the release of uncertain tax position liabilities due to statutes lapsing offset partially by income taxes of the Company’s international operations, while the income tax expense for the same period in 2012 was primarily attributable to income taxes of the Company’s international operations offset by benefits for income taxes related to gains and losses on marketable and long term investments recorded in other comprehensive loss.

The Company utilizes the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. As of March 31, 2013 and December 31, 2012, the Company had a 100% valuation allowance against its U.S. deferred tax assets. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. In evaluating the ability to recover deferred tax assets, the Company considered available positive and negative evidence giving greater weight to its recent cumulative losses and its ability to carry-back losses against prior taxable income and lesser weight to its projected financial results due to the challenges of forecasting future periods. The Company also considered, commensurate with its objective verifiability, the forecast of future taxable income including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.

On January 2, 2013, the President signed into law The American Taxpayer Relief Act of 2012, or ATRA. Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts incurred through December 31, 2011. The ATRA extends the research credit for two years for qualified research expenditures incurred through the end of 2013. The extension of the research credit is retroactive and includes amounts incurred after 2011. The benefit of the reinstated credit did not impact the Company’s statement of operations for the three months ended March 31, 2013 – in the period of enactment – as the research and development credit carryforwards are offset by a full valuation allowance.


Note 10. Commitments and Contingencies

Capital Lease Obligation
Commencing in the first quarter of 2013, the Company financed vehicles for some of its sales employees in North America. As of March 31, 2013 the gross value of the leased vehicles was $351,000 and the accumulated depreciation was $14,000 and the minimum lease payments that the Company is committed to are as follows (in thousands):

Fiscal Year Ending December 31,
 
Amount
 
2013(remainder)
 
$
70
 
2014
 
 
94
 
2015
 
 
94
 
2016
 
 
90
 
Total
 
$
348
 

Litigation and Litigation Settlements
The Company is named from time to time as a party to product liability and contractual lawsuits in the normal course of business. The Company routinely assesses the likelihood of any adverse judgments or outcomes related to legal matters and claims, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after analysis of each known issue, historical experience, whether it is more likely than not that the Company shall incur a loss, and whether the loss is estimable. As of March 31, 2013, the Company had accrued approximately $0.2 million related to pending product liability and contractual lawsuits.


Caution Regarding Forward-Looking Statements

The following discussion should be read in conjunction with the attached condensed consolidated financial statements and notes thereto, and with our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2012 as contained in our annual report on Form 10-K filed with the SEC on March 15, 2013. This quarterly report, including the following sections, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout this report, and particularly in this Item 2, the forward-looking statements are based upon our current expectations, estimates and projections and reflect our beliefs and assumptions based upon information available to us at the date of this report. In some cases, you can identify these statements by words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” and other similar terms. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements. These forward-looking statements include, but are not limited to, statements relating to our future financial performance, the ability to grow our business, increase our revenue, manage expenses, generate additional cash, achieve and maintain profitability, develop and commercialize existing and new products and applications, and improve the performance of our worldwide sales and distribution network, and the outlook regarding long term prospects. These forward-looking statements involve risks and uncertainties. The cautionary statements set forth below and those contained in Part II, Item 1A – “Risk Factors” commencing on page 20, identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. We caution you to not place undue reliance on these forward-looking statements, which reflect management’s analysis and expectations only as of the date of this report. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-Q.

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 our business, a brief discussion of our product lines and the opportunities, trends, challenges and risks we focus on in the operation of our business.
 
·
Critical Accounting Policies and Estimates. This section describes the key accounting policies that are affected by critical accounting estimates.
 
·
Results of Operations. This section provides our analysis and outlook for the significant line items on our Consolidated Statements of Operations.
 
·
Liquidity and Capital Resources. This section provides an analysis of our liquidity and cash flows, as well as a discussion of our commitments.
 

Executive Summary

Company Description.

We are a leading medical device company specializing in the research, development, manufacture, marketing and servicing of laser and other energy-based aesthetics systems for practitioners worldwide. We offer easy-to-use, products which enable physicians and other qualified practitioners to perform safe and effective aesthetic procedures, including vascular and benign pigmented lesions, hair-removal, skin rejuvenation, body contouring, skin resurfacing, tattoo removal and toenail fungus. Our platforms are designed to be easily upgradeable to add additional applications and hand pieces, which provide flexibility for our customers as they expand their practices. In addition to systems and upgrade revenue, we generate revenue from the sale of post warranty service contracts, providing services for products that are out of warranty, hand piece refills, and third-party manufactured dermal fillers and cosmeceuticals.

Our corporate headquarters and U.S. operations are located in Brisbane, California, from where we conduct our manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. We market, sell and service our products through direct sales and service employees in the United States, Canada, Japan, France and Australia. Sales and Service outside of these direct markets are made through a worldwide distributor network in over 60 countries.

Products

Our revenue is derived from the sale of Products and upgrades, Service, Titan and truSculpt hand piece refills, and Dermal fillers and cosmeceuticals. Product revenue represents the sale of a system. A system consists of a console that incorporates a universal graphic user interface, a laser and/or other energy-based module, control system software, high voltage electronics and one or more hand pieces.

Our broad portfolio of Product brands include:

 
·
ExcelVTM
 
·
Xeo®
 
·
GenesisPlusTM
 
·
truSculptTM
 
·
CoolGlide®
 
·
Solera®
 
·
myQTM
 
·
VariLiteTM
 
We offer our 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, resulting in Upgrade revenue.  Service revenue relates to amortization of prepaid service contracts, direct billings for detachable hand piece replacements (except for Titan and truSculpt) and revenue for parts and labor on out-of-warranty products. For our Titan and truSculpt hand pieces, after a set number of treatments have been performed, the customer is required to send the hand piece back to the factory for refurbishment, which we refer to as “refilling” the hand piece. In Japan, we distribute Merz Pharma GmbH’s (“Merz”) Radiesse® dermal filler product; and Obagi Medical Products, Inc.’s (“Obagi”) cosmeceutical products.

Significant Business Trends

We believe that our ability to grow revenue will be primarily dependent on the following:

 
·
Consumer demand for the application of our products.
 
·
Continuing to expand our product offerings ─ both through internal development and sourcing from other vendors.
 
·
Ongoing investment in our 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 our products can be displayed and used to assist in selling efforts).
 
·
Marketing to physicians in the core dermatology and plastic surgeon specialties, as well as outside those specialties.
 
·
Customer demand for our products.
 
·
Generating ongoing revenue from our growing installed base of customers through the sale of Service, Upgrade, Titan and truSculpt hand piece refills, and Dermal fillers and cosmeceuticals.
 

Our total revenue increased by $240,000, or 2%, in the three-month period ended March 31, 2013, compared to the same period in 2012. Historically, the first quarter of the year is our seasonally lowest quarter of the year, while the fourth quarter is the strongest due in part to tax deduction motivated purchases.

Geographical Revenue
Our U.S. revenue increased by $177,000, or 3%, in the three-month period ended March 31, 2013, compared to the same period in 2012. This increase was due primarily to our recent new product introductions (ExcelV and truSculpt) and the acquisition of Iridex’s aesthetic business in February 2012 that resulted in incremental Service revenue, which was partially offset by a decline in revenue of some of our legacy products.

For the three-month period ended March 31, 2013, our international revenue increased by $63,000, or 1% compared to the same period in 2012. This revenue increase resulted primarily from higher revenue from our direct operations in France, several of our Asian distributor countries, offset by declines in revenue from Canada and Japan, which was due in part to the decline in their currencies versus the U.S. Dollar.

Revenue by Product Category:

Significant changes in revenue by product category were an increase in Service revenue by $571,000, or 15%, due to the acquisition of the Iridex aesthetic business in February 2012, which was partially offset by a decline in our Dermal filler and cosmeceutical revenue in Japan, due primarily to the weakening Japanese Yen, versus the U.S. Dollar, and some volume discounting.

Factors that May Impact Future Performance.

Our industry is impacted by numerous competitive, regulatory, macroeconomic and other significant factors. Our industry is highly competitive and our future performance depends on our ability to compete successfully. Additionally, our future performance is dependent upon our ability to continue to expand our product offerings, develop innovative technologies, obtain regulatory clearances for our products, protect the proprietary technology of our products and our manufacturing processes, manufacture our products cost-effectively, and successfully market and distribute our products in a profitable manner. If we fail to execute on the aforementioned initiatives, our business would be adversely affected. A detailed discussion of these and other factors that could impact our future performance are provided in Part II, Item 1A “Risk Factors” section below.

Critical Accounting Policies and Estimates.

The preparation of our Condensed Consolidated Financial Statements and related disclosures in conformity with GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates, judgments and assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances. We periodically review our estimates and make adjustments when facts and circumstances dictate. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected.

Critical accounting estimates, as defined by the SEC are those that are most important to the portrayal of our financial condition and results of operations and require our management’s most difficult and subjective judgments and estimates of matters that are inherently uncertain. The accounting policies and estimates that we consider 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 our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 15, 2013. There have been no significant changes to the accounting policies and estimates disclosed in our Form 10-K.


Results of Operations

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

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2013
 
 
2012
 
 
 
 
 
 
 
 
Net revenue
 
 
100
%
 
 
100
%
Cost of revenue
 
 
46
%
 
 
50
%
Gross margin
 
 
54
%
 
 
50
%
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Sales and marketing
 
 
41
%
 
 
47
%
Research and development
 
 
13
%
 
 
14
%
General and administrative
 
 
14
%
 
 
22
%
Total operating expenses
 
 
68
%
 
 
83
%
 
 
 
 
 
 
 
 
 
Loss from operations
 
 
(14
)%
 
 
(33
)%
Interest and other income, net
 
 
1
 
 
 
1
 
Loss before income taxes
 
 
(13
)%
 
 
(32
)%
Provision (benefit) for income taxes
 
 
 
 
 
1
%
Net loss
 
 
(13
)%
 
 
(33
)%

Total Net Revenue
   
Three Months Ended March 31,
 
(Dollars in thousands)
 
2013
   
% Change
   
2012
 
Revenue mix by geography:
 
 
   
 
   
 
 
United States
  $ 6,488       3 %   $ 6,311  
International
    9,479       1 %     9,416  
Consolidated total revenue
  $ 15,967       2 %   $ 15,727  
                         
United States as a percentage of total revenue
    41 %             40 %
International as a percentage of total revenue
    59 %             60 %
Revenue mix by product category:
                       
Products and upgrades
  $ 9,197       (1 )%   $ 9,258  
Service
    4,444       15 %     3,873  
Titan and truSculpt hand piece refills
    1,190       5 %     1,130  
Dermal fillers and cosmeceuticals
    1,136       (23 )%     1,466  
Consolidated total revenue
  $ 15,967       2 %   $ 15,727  
 
Discussion of Revenue by Product Type:

Product and Upgrade Revenue
As explained in more detail in the Products section of the Executive Summary above, some of our products consist of a configurable system platform that includes a console and one or more hand pieces. Each product is configured to give our customers the ability to select the combination of platform and hand pieces that provides the applications that best fit their practice.

Product and upgrade revenue decreased by $61,000 or 1% in the three-month period ended March 31, 2013, compared to the same period in 2012. This resulted primarily due to an increase in our ExcelV and truSculpt product revenue, which was partly offset by declines in some of legacy products and upgrades.

Service Revenue
Our worldwide Service revenue increased by $571,000, or 15%, in the three-month period ended March 31, 2013, compared to the same period in 2012. This increase was primarily the result of Service revenue from the Iridex business acquisition in February 2012.

 
Titan and truSculpt Hand Piece Refill Revenue
Our Titan and truSculpt hand piece refill revenue increased by $60,000 or 5% in the three-month period ended March 31, 2013, compared to the same period in 2012. This increase was due primarily to the truSculpt refill revenue that started from the third quarter ended September 30, 2012.

Dermal Filler and Cosmeceuticals Revenue
Our dermal filler and cosmeceuticals revenue decreased by $330,000 or 23%, in the three-month period ended March 31 2013, compared to the same period in 2012. This decrease was due primarily to the weakening Japanese Yen, versus the U.S. Dollar, and some volume discounting.

Discussion of Revenue by Geography:

U.S. Revenue
Our U.S. revenue increased by $177,000, or 3%, in the three-month period ended March 31, 2013, compared to the same period in 2012. This increase was primarily attributable to our recent new product introductions − ExcelV and truSculpt − and the acquisition of Iridex’s aesthetic business in February 2012 that resulted in incremental Service revenue, which was partially offset by a decline in revenue of some of our other products.

International Revenue
International revenue increased by $63,000, or 1%, in the three-month period ended March 31, 2013, compared to the same period in 2012. This increase resulted primarily from higher revenue from our direct operations in France, several of our Asian distributor countries, offset by declines in revenue from Canada and Japan which was due in part to the decline in their currencies versus the US Dollar.

Gross Profit
 
 
Three Months Ended March 31,
 
(Dollars in thousands)
 
2013
 
 
% Change
 
 
2012
 
Gross profit
 
$
8,550
 
 
 
8
%
 
$
7,882
 
As a percentage of total net revenue
 
 
54
%
 
 
 
 
 
 
50
%

Our cost of revenue consists primarily of material, personnel expenses, royalty expense, warranty, amortization of intangibles and manufacturing overhead expenses.

Gross margin (which is gross profit divided by net revenue) was 54% in the three-month period ended March 31, 2013, compared to 50% for the same period in 2012. This improvement was due primarily to an improved Service margin as a result of a favorable impact of the non-recurring nature of the acquisition integration expenses incurred in the first quarter 2012.

Sales and Marketing
 
Three Months Ended March 31,
 
(Dollars in thousands)
2013
   
% Change
 
2012
 
Sales and marketing
  $ 6,456       (13 )%   $ 7,437  
As a percentage of total net revenue
    41 %             47 %

Sales and marketing expenses consist primarily of personnel expenses, expenses associated with customer-attended workshops and trade shows, post-marketing studies, and advertising. Sales and marketing expenses decreased by $981,000, and represented 41% of total net revenue, in the three-month period ended March 31, 2013, compared to 47% in the same period in 2012. The $981,000 decrease was due primarily to:

 
·
$353,000 of lower international expenses attributable to the closure of our Spain and U.K. offices;
 
·
$265,000 of decreased North American sales commission expenses; and
 
·
$190,000 of decreased Japan expenses resulting primarily from the appreciation of the U.S. Dollar against the Japanese Yen.
 
Research and Development (R&D)
 
 
Three Months Ended March 31,
 
(Dollars in thousands)
 
2013
 
 
% Change
 
 
2012
 
Research and development
 
$
2,121
 
 
 
(4
)%
 
$
2,216
 
As a percentage of total net revenue
 
 
13
%
 
 
 
 
 
 
14
%

R&D expenses consist primarily of personnel expenses, clinical research, regulatory and material costs. R&D expenses decreased by $95,000, and represented 13% of total net revenue, in the three-month period ended March 31, 2013, compared to 14% for the same period in 2012. The decrease was due primarily to $110,000 of lower personnel costs.

 
General and Administrative (G&A)
 
 
Three Months Ended March 31,
 
(Dollars in thousands)
 
2013
 
 
% Change
 
 
2012
 
General and administrative
 
$
2,289
 
 
 
(35
)%
 
$
3,495
 
As a percentage of total net revenue
 
 
14
%
 
 
 
 
 
 
22
%

General and administrative expenses consist primarily of personnel expenses, legal fees, accounting, audit and tax consulting fees, U.S. medical device excise tax (from January 1, 2013) and other general and administrative expenses. G&A expenses decreased $1.2 million, and represented 14% of total net revenue, in the three-month period ended March 31, 2013, compared to 22% for the same period in 2012. This decrease was due primarily to $559,000 of non-recurring acquisition related expenses incurred in first quarter of 2012, $541,000 of decreased accounting and legal fees, partially offset by a $71,000 increase in expenses due to the commencement of the U.S. medical device excise tax from January 1, 2013.

Interest and Other Income, Net

Interest and other income, net consist of the following:
 
 
Three Months Ended March 31,
 
(Dollars in thousands)
 
2013
 
 
% Change
 
 
2012
 
Interest income
 
$
109
 
 
 
(15
)%
 
$
128
 
Other income (expense), net
 
 
26
 
 
 
181
%
 
 
(32
)
Total interest and other income, net
 
$
135
 
 
 
40
%
 
$
96
 

Interest and other income, net, increased $39,000 for the three-month period ended March 31, 2013, compared to the same period in 2012. This increase was primarily attributable to a $55,000 increase in net foreign exchange gains, offset by a $19,000 decrease in interest income resulting from reduced yields.

Provision (Benefit) for Income Taxes
 
 
Three Months Ended March 31,
 
(Dollars in thousands)
 
2013
 
 
% Change
 
 
2012
 
Loss before income taxes
 
$
(2,181
)
 
 
(58
)%
 
$
(5,170
)
Provision (benefit) for income taxes
 
 
(18
)
 
 
NA
 
 
 
97
 

We recorded an income tax benefit of $18,000 for the three-month period ended March 31, 2013, compared to an income tax provision of $97,000 for the three-month period ended March 31, 2012. Our income tax benefit for the three-month period ended March 31, 2013 was primarily attributable to the release of uncertain tax position liabilities resulting from the statutes relating to these positions lapsing, which was offset partially by income taxes for our international operations. The income tax expense for the three-month period ended March 31, 2012 was primarily attributable to income taxes for our international operations, offset by benefits for income taxes related to net gains on marketable and long term investments recorded in our ‘Other comprehensive loss.’

Liquidity and Capital Resources

Liquidity is the measurement of our ability to meet potential cash requirements, fund the planned expansion of our operations and acquire businesses. Our sources of cash include operations and stock option exercises. We actively manage our cash usage and investment of liquid cash to ensure the maintenance of sufficient funds to meet our daily needs. The majority of our cash and investments are held in U.S. banks and our foreign subsidiaries maintain a limited amount of cash in their local banks to cover their short-term operating expenses.
 
 
Cash and Cash Equivalents, Marketable Investments and Long-Term Investments Summary
 
The following table summarizes our cash and cash equivalents, marketable investments and long-term investments:

(Dollars in thousands)
 
March 31,
2013
 
 
December 31,
2012
 
 
Change
 
Cash and cash equivalents
 
$
17,272
 
 
$
23,546
 
 
$
(6,274
)
Marketable investments
 
 
70,821
 
 
 
62,026
 
 
 
8,795
 
Total
 
$
88,093
 
 
$
85,572
 
 
$
2,521
 

Cash Flows

 
 
Three Months Ended
March 31,
 
(Dollars in thousands)
 
2013
 
 
2012
 
Net cash flow provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
(543
)
 
$
(4,873
)
Investing activities
 
 
(9,448
)
 
 
3,054
 
Financing activities
 
 
3,717
 
 
 
586
 
Net increase (decrease) in cash and cash equivalents
 
$
(6,274
)
 
$
(1,233