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Note 6 - Stockholders' Equity, Stock Plans and Stock-based Compensation Expense

12 Months Ended

Dec. 31, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

NOTE 6—STOCKHOLDERS’ EQUITY, STOCK PLANS AND STOCK-BASED COMPENSATION EXPENSE

As of December 31, 2014, the Company had the following stock-based employee compensation plans:

2004 Equity Incentive Plan and 1998 Stock Plan

In 1998, the Company adopted the 1998 Stock Plan, or 1998 Plan, under which 4,650,000 shares of the Company’s common stock were reserved for issuance to employees, directors and consultants.

On January 12, 2004, the Board of Directors adopted the 2004 Equity Incentive Plan. A total of 1,750,000 shares of common stock were originally reserved for issuance pursuant to the 2004 Equity Incentive Plan. In addition, the shares reserved for issuance under the 2004 Equity Incentive Plan included shares reserved but un-issued under the 1998 Plan and shares returned to the 1998 Plan as the result of termination of options or the repurchase of shares. In 2012 the stockholders approved a “fungible share” provision whereby each full-value award issued under the 2004 Equity Incentive Plan results in a requirement to subtract 2.12 shares from the shares reserved under the Plan.

Options granted under the 1998 Plan and 2004 Equity Incentive Plan may be incentive stock options or non-statutory stock options. Stock purchase rights may also be granted under the 2004 Equity Incentive Plan. Incentive stock options may only be granted to employees. The Board of Directors determines the period over which options become exercisable. Options granted under the Plan to employees generally vest over a four year term from the vesting commencement date and become exercisable 25% on the first anniversary of the vesting commencement date and an additional 1/48th on the last day of each calendar month until all of the shares have become exercisable. During 2013 and 2012 the officers of the Company were granted options that vest over a three year term at the rate of 1/3^rd on the one year anniversary of the vesting commencement date and 1/36^th thereafter. In 2014 the officers of the Company were granted RSUs and PSUs but were not granted any options. The contractual term of the options granted in 2013 and 2012 was seven years.

In accordance with the 2004 Equity Incentive Plan, prior to 2012, the Company’s non-employee directors were granted $60,000 of grant date fair value, fully vested, stock awards annually on the date of the Company’s Annual Meeting of stockholders. Commencing with 2012, the Company’s non-employee directors get $60,000 of RSUs annually that cliff-vest on the one year anniversary of the grant date. In the years ended December 31, 2014, 2013 and 2012, the Company issued 38,688, 40,674 and 52,938 shares of stock to its non-employee directors, respectively.

In the years ended December 31, 2014 and 2013, the Company’s Board of Directors granted 211,250 and 148,004, respectively, of RSUs to its executive officers and certain members of the Company’s management. The RSUs granted to the employees vest at the rate of one-fourth on the one-year anniversary of the grant date, and one-fourth in each of the subsequent three years. The RSUs granted to the executive officers vest at the rate of one-third on the one-year anniversary of the grant date, and one-third in each of the subsequent two years. The Company measured the fair market values of the underlying stock on the dates of grant and recognizes the stock-based compensation expense using the straight-line method over the vesting period.

In addition, in the years ended December 31, 2014 and 2013 the Company’s Board of Directors granted its executive officers and certain senior management employees 105,000 and 33,751 of PSUs that had a vesting date of June 30, 2015, and June 1, 2014, respectively, subject to the recipient’s continued service through that date and achievement of the pre-established performance objectives. At the vest date, the Company issues fully-paid up common stock, based on the degree of achievement towards pre-established targets. The Company’s targets were based on revenue and operating loss improvements, compared to the same period in the prior year. The Company recognizes stock based compensation expense over the requisite services period if it is probable that the performance goals will be met.

2004 Employee Stock Purchase Plan

On January 12, 2004, the Board of Directors adopted the 2004 Employee Stock Purchase Plan. Under the 2004 Employee Stock Purchase Plan, or 2004 ESPP, eligible employees are permitted to purchase common stock at a discount through payroll deductions. The 2004 ESPP offering and purchase periods are for approximately six months. The 2004 ESPP has an evergreen provision based on which shares of common stock eligible for purchase are increased on the first day of each fiscal year by an amount equal to the lesser of:

i.

600,000 shares;

ii.

2.0% of the outstanding shares of common stock on such date; or

iii.

an amount as determined by the Board of Directors.

The Company’s Board of Directors did not increase the shares available for future grant on January 1, 2014, 2013, 2012 and 2011. The price of the common stock purchased is the lower of 85% of the fair market value of the common stock at the beginning or end of a six month offering period. In the years ended December 31, 2014 and 2013, under the 2004 ESPP, the Company issued 52,759 and 51,338 shares, respectively. At December 31, 2014, 905,857 shares remained available for future issuance.

Option Activity

Activity under the 1998 Plan and 2004 Equity Incentive Plan is summarized as follows:

				Options Outstanding
	Shares Available For Grant			Number of Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in $ millions)⁽¹⁾
Balances as of December 31, 2011		474,537			3,549,022		$	9.92		4.6		0.4
Additional shares reserved⁽²⁾		1,910,000			—			—
Options granted		(921,500	)		921,500		$	7.04
Options exercised		—			(211,551	)	$	7.00
Options cancelled (expired or forfeited)		470,732			(470,732	)	$	9.45
Stock awards granted		(314,159	)		—			—
Stock awards cancelled (expired or forfeited)		24,746			—			—
Balances as of December 31, 2012		1,644,356			3,788,239		$	9.44		4.3	$	2.6
Options granted		(1,007,166	)		1,007,166		$	8.97
Options exercised		—			(612,210	)	$	8.16
Options cancelled (expired or forfeited)		391,033			(391,033	)	$	10.37
Stock awards granted		(399,997	)		—			—
Stock awards cancelled (expired or forfeited)		81,257			—			—
Balances as of December 31, 2013		709,483			3,792,162		$	9.42		4.2	$	5.1
Additional shares reserved⁽³⁾		200,000			—			—
Options granted		(486,300	)		486,300		$	9.78
Options exercised		—			(396,970	)	$	8.33
Options cancelled (expired or forfeited)		418,925			(418,925	)	$	11.15
Stock awards granted		(764,394	)		—			—
Stock awards cancelled (expired or forfeited)		52,046			—			—
Balances as of December 31, 2014		129,760			3,462,567		$	9.39		3.4	$	5.7
Exercisable as of December 31, 2014					2,330,762		$	9.62		2.7	$	3.7
Expected to vest, net of estimated forfeitures, as of December 31, 2014					909,562		$	8.86		4.96	$	1.7

(1)	Based on the closing stock price of the Company’s stock of $10.68 on December 31, 2014, $10.18 on December 31, 2013, $9.00 on December 30, 2012 and $7.45 on December 31, 2011.
(2)	Approved by stock holders in 2012.
(3)	Approved by Board of Directors in 2014, subject to stock holder’s approval in 2015.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the Company’s closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2014. The aggregate intrinsic amount changes based on the fair market value of the Company’s common stock. Total intrinsic value of options exercised in 2014, 2013 and 2012 was $824,000, $2.1 million, and $397,000, respectively. The options outstanding and exercisable at December 31, 2014 were in the following exercise price ranges:

		Options Outstanding			Options Exercisable
Range of Exercise Price		Number Outstanding	Weighted-Average Remaining Contractual Life (in years)		Number Outstanding		Weighted-Average Exercise Price
$	6.54	17,125		1.30		17,125	$	6.54
$	6.88	460,530		4.37		278,266		6.88
$	7.11–$ 8.66	442,525		1.63		428.942		8.53
$	8.72	473,989		3.21		431,615		8.72
$	8.80	553,795		5.08		196,926		8.80
$	8.81–$9.65	432,778		5.47		114,960		9.15
$	9.74–$10.03	183,000		4.66		28,000		9.74
$	10.24	441,325		2.21		441,325		10.24
$	10.32–$14.78	354,500		1.36		290,603		11.14
$	16.25–$25.73	103,000		0.81		103,000		20.93
$	6.54–$25.73	3,462,567		3.42		2,330,762	$	9.62

As of December 31, 2013 there were 2,221,657 options that were exercisable at a weighted average exercise price of $10.14.

Stock Awards(RSU and PSU)Activity Table

Information with respect to restricted stock units’ and performance stock units’ activity is as follows (in thousands):

	Number of Shares			Weighted-Average Grant- Date Fair Value		Aggregate Fair Value⁽¹⁾ (in thousands)			Aggregate Intrinsic Value⁽²⁾ (in thousands)
Outstanding at December 31, 2011		55,253		$	9.55				$	412
Granted		148,188		$	6.85
Vested ⁽³⁾		(41,522	)	$	9.79	$	279	⁽⁴⁾
Forfeited		(13,210	)	$	7.39
Outstanding at December 31, 2012		148,709		$	6.99				$	1,338
Granted		188,678		$	8.94
Vested ⁽³⁾		(119,505	)	$	7.68	$	1,091	⁽⁵⁾
Forfeited		(38,417	)	$	8.11
Outstanding at December 31, 2013		179,465		$	8.34				$	1,827
Granted		360,563		$	9.72
Vested ⁽³⁾		(81,157	)	$	8.62	$	777	⁽⁶⁾
Forfeited		(24,550	)	$	8.14
Outstanding at December 31, 2014		434,321		$	9.31				$	4,639

(1)	Represents the value of the Company’s stock on the date that the restricted stock units vest.
(2)	Based on the closing stock price of the Company’s stock of $10.68 on December 31, 2014, $10.18 on December 31, 2013, $9.00 on December 30, 2012 and $7.45 on December 31, 2011.
(3)	The number of restricted stock units vested includes shares that the Company withheld on behalf of the employees to satisfy the statutory tax withholding requirements.
(4)	On the grant date, the fair value for these vested awards was $407,000.
(5)	On the grant date, the fair value for these vested awards was $917,000.
(6)	On the grant date, the fair value for these vested awards was $699,000.

Performance Stock Units

In 2014 and 2013, the Company granted its executive officers and certain senior management 105,000 and 33,751 PSUs that vest on June 30, 2015 and June 1, 2014, respectively, subject to the recipient’s continued service through that date. At the vest date, the Company issues fully-paid up common stock based on the percentage achievement of each performance goal. For the July 1, 2014 to June 30, 2015 PSUs, there are three performance goals. For the June 1, 2013 to May 30, 2014 PSUs, there were also three performance goals, related to Company revenue and profitability targets, based on which the Company issued 5,625 shares of common stock on June 1, 2014.

Stock-Based Compensation

Stock-based compensation expense for stock options, restricted stock units, stock awards and ESPP shares for the year ended December 31, 2014, 2013 and 2012 was as follows (in thousands):

	Year Ended December 31,
	2014		2013		2012
Stock options	$	1,811	$	2,201	$	2,421
RSUs		875		631		501
PSUs		455		162		138
ESPP		158		116		100
Total stock-based compensation expense	$	3,299	$	3,110	$	3,160

As of December 31, 2014, the unrecognized compensation cost, net of expected forfeitures, was $4.9 million for stock options and stock awards, which will be recognized using the straight-line attribution method over an estimated weighted-average remaining amortization period of 2.31 years. For the ESPP, the unrecognized compensation cost, net of expected forfeitures, was $59,000, which will be recognized using the straight- line attribution method over an estimated weighted-average amortization period 0.33 years.

The Company issues new shares of common stock upon the exercise of stock options, vesting of RSUs and PSUs, and the issuance of ESPP shares. The amount of cash received from these issuances, net of taxes withheld and paid, in 2014, 2013 and 2012 was $3.6 million, $5.2 million and $1.7 million. The total direct tax benefit realized, including the excess tax benefit, from stock-based award activity was $6,000 in 2012. There was no direct tax benefit (deficit) in 2013 or 2014. The Company elected to account for the indirect effects of stock-based awards—primarily the research and development tax credit—through the Statement of Operations.

Total stock-based compensation expense recorded by department during the year ended December 31, 2014, 2013 and 2012 was as follows (in thousands):

	Year Ended December 31,
	2014		2013		2012
Cost of revenue	$	560	$	638	$	658
Sales and marketing		641		744		657
Research and development		581		397		514
General and administrative		1,517		1,331		1,331
Total stock-based compensation expense	$	3,299	$	3,110	$	3,160

Valuation Assumptions and Fair Value of Stock Options and ESPP Grants

The Company uses the Black-Scholes option pricing model to estimate the fair value of options granted under its equity incentive plans and rights to acquire stock granted under its employee stock purchase plan. The Company based the weighted average estimated values of employee stock option grants and rights granted under the employee stock purchase plan, as well as the weighted average assumptions used in calculating these values, on estimates at the date of grant, as follows:

	Stock Options									Stock Purchase Plan
	2014			2013			2012			2014			2013			2012

Expected term (in years)⁽¹⁾		4.18			4.30			4.17			0.50			0.50			0.50
Risk-free interest rate⁽²⁾		1.31	%		1.13	%		0.45	%		0.06	%		0.08	%		0.15	%
Volatility⁽³⁾		41	%		43	%		44	%		37	%		44	%		43	%
Dividend yield⁽⁴⁾		—	%		—	%		—	%		—	%		—	%		—	%

Weighted average estimated fair value at grant date	$	3.36		$	3.22		$	2.47		$	2.65		$	2.84		$	2.16

(1)	The expected term represents the period during which the Company’s stock-based awards are expected to be outstanding. The estimated term is based on historical experience of similar awards, giving consideration to the contractual terms of the awards, vesting requirements, and expectation of future employee behavior, including post-vesting terminations.
(2)	The risk-free interest rate is based on U.S. Treasury debt securities with maturities close to the expected term of the option as of the date of grant.
(3)	Estimated volatility is based on historical volatility. The Company also considers implied volatility when there is sufficient volume of freely traded options with comparable terms and exercise prices in the open market.
(4)	The Company has not historically issued any dividends and does not expect to do so in the foreseeable future.

The Company periodically estimates forfeiture rates based on its historical experience within separate groups of employees and adjusts the stock-based payment expense accordingly.

RSU Withholdings

For RSUs granted to employees, the number of shares issued on the date the RSUs vest is net of the tax withholding requirements paid on behalf of the employees. In 2014, 2013 and 2012, the Company withheld 15,769, 24,249, and 14,974 shares of common stock, respectively, to satisfy its employees’ tax obligations of $156,000, $222,000, and $101,000, respectively. The Company paid this amount in cash to the appropriate taxing authorities. Although shares withheld are not issued, they are treated as common stock repurchases for accounting and disclosure purposes, as they reduce the number of shares that would have been issued upon vesting.

Share Repurchase Program

On August 5, 2013, the Company’s Board of Directors modified Cutera, Inc.’s stock buyback program, originally adopted in November 2012, to permit an additional $10 million of its issued and outstanding common shares to be repurchased. As modified, the stock buyback program permits the Company to purchase an aggregate of $20 million of its common stock through a 10b5-1 program based on predetermined pricing and volume as well as open-market purchases that are subject to management discretion and regulatory restrictions

In the year ended December 31, 2013, the Company repurchased 1,060,447 shares of its common stock at an average price of $9.43 per share, for approximately $10.0 million. The Company did not repurchase any shares of its common stock in 2014. As of December 31, 2014, there remained an additional $10.0 million of the Company's common stock to be purchased under the modified stock buyback program. The number of shares to be repurchased and the timing of such repurchases will be based on several factors, including the price of the Company's common stock, regulatory restrictions, and general market and business conditions.

On February 18, 2015, the Company announced that its Board of Directors approved the expansion of its Stock Repurchase Program from $10 million to $40 million, under which the Company is authorized to repurchase shares of its common stock. The Company plans to make the repurchases from time to time through open market transactions at prevailing prices and/ or through privately-negotiated transactions, and/ or through a pre-arranged Rule 10b5-1 trading plan.

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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