NOTE

—SUMMARY OF SIGNIFICANT ACCOUTING POLICIES

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and

its wholly owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of Consolidated Financial Statements in conformity with generally accepted accounting principles in the Un

ited States of America (“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 consolidated financial statements, and the reported amounts of revenue and expenses during the reported periods. Actual results could differ materially from those estimates.

On an ongoing basis, the Company evaluates their estimates, including those related to warranty obligation,

sales commission, accounts receivable and sales allowances, valuation of inventories, fair values of acquired intangible assets, useful lives of intangible assets and property and equipment, assumptions regarding variables used in calculating the fair value of the Company's equity award, fair value of investments, contingent liabilities, recoverability of deferred tax assets, and effective income tax rates, among others. Management bases their 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.

Risks and Uncertainties

The Company's future results of operations involve a number of risks and uncert

ainties. 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 world financial markets, management of international activities, competition from substitute products and larger companies, ability to obtain regulatory approval, government regulations, patent and other litigations, ability to protect proprietary technology from counterfeit versions of the Company's products, strategic relationships and dependence on key individuals. If the Company fails to adhere to ongoing Food and Drug Administration, or FDA, Quality System Regulation, the FDA

may

withdraw its market clearance or take other action. The Company's manufacturers and suppliers

may

encounter supply interruptions or problems during manufacturing due to a variety of reasons, including failure to comply with applicable regulations, including the FDA's Quality System Regulation, equipment malfunction and environmental factors, any of which could delay or impede the Company's ability to meet demand.

Cash and Cash Equivalents, and Marketable Investments

The Company invests it

s cash primarily in money market funds and in highly liquid debt instruments of U.S. federal and municipal governments and their agencies, commercial paper and corporate debt securities. 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 its 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 pur

chase 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. Investments with remaining maturities 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 Consolidated Balance Sheets. Investments in marketable securities are carried at fair value, with the unrealized gains and losses reported as a component of stockholders’ equity. Any realized gains or losses on the sale of marketable securities are determined on a specific identification method, and such gains and losses are reflected as a component of interest and other income, net.

Fair Value Measurements

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. 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. Carrying amounts of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate their fair values as of the balance sheet dates because of their generally short maturities.

The fair value hierarchy distin

guishes between (

) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (

) 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

) and the lowest priority to unobservable inputs (Level

). The

three

levels of the fair value hierarchy are described below in accordance to ASC

820:

	●	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 i ncludes 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 inp

uts and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

Impairment of Marketable Investments

After determining the fair value of available-for-sales debt

instruments, gains or losses on these securities are recorded to other comprehensive income (loss), until either the security is sold or the Company determines that the decline in value is other-than-temporary. The primary differentiating factors that the Company considers in classifying impairments as either temporary or other-than-temporary impairments are the Company’s intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value or the maturity of the investment, the length of the time and the extent to which the market value of the investment has been less than cost and the financial condition and near-term prospects of the issuer. There were

other-than-temporary impairments in the years ended

December 31, 2017,

2016,

and

2015

Allowance for Sales Returns and Doubtful Accounts

The allowance for sales returns is based on the Company

’s estimates of potential future product returns and other allowances related to current period product revenue. The Company analyzes historical returns, current economic trends and changes in customer demand and acceptance of the Company's products. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts and the aging of the related invoices, and represents the Company's best estimate of probable credit losses in its existing trade accounts receivable. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that

may

affect a customer’s ability to pay.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of risk consist principally of cash, cash equivalents, marketable investments and accounts receivable. The Company

’s cash and cash equivalents are primarily invested in deposits and money market accounts with

three

major financial institutions in the U.S. In addition, the Company has operating cash balances in banks in each of the international locations in which it operates. Deposits in these banks

may

exceed the amount of insurance provided on such deposits, if any. Management believes that these financial institutions are financially sound and, accordingly, believes that minimal credit risk exists. To date, the Company has

not

experienced any losses on its deposits of cash and cash equivalents.

The Company invests in debt instruments, including bonds of the U.S. Government, its agencies and municipalities. The Company has also invested in other high grade investments

such as commercial paper and corporate bonds. The Company has established guidelines relative to credit ratings, diversification and maturities that seek to maintain safety and liquidity. By policy, the Company restricts its exposure to any single issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, the Company maintains investments at an average maturity of generally less than

eighteen

months.

Accounts receivable are recorded net of an allowance for

doubtful accounts, and are typically unsecured and are derived from revenue earned from worldwide customers. The Company controls credit risk through credit approvals, credit limits, and monitoring procedures. The Company performs credit evaluations of its customers and maintains reserves for potential credit losses

. As of

December 31, 2017

and

2016,

there was

one

customer who represented

12%

of the Company’s net accounts receivable. During the years ended

December 31, 2017,

2016,

and

2015,

domestic revenue accounted for

62%,

55%,

and

52%,

respectively, of total revenue, while international revenue accounted for

38%,

45%,

and

48%,

respectively, of total revenue.

single customer represented more than

10%

of total revenue for any of the years ended

December 31, 2017,

2016,

and

2015

Inventories

Inventories are stated at the lower of cost and net realizable value, cost being determined on a standard cost basis which approximates actual cost on a

first

-in,

first

-out basis.

Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The cost basis of the Company’s inventory is reduced for any products that are considered excessive or obsolete based upon assumptions about future demand and market conditions.

The Company includes

demonstration units within inventories. Demonstration units are carried at cost and amortized over an estimated economic life of

two

years. Amortization expense related to demonstration units is recorded in Products cost of revenue or in the respective operating expense line based on which function and purpose for which the demonstration units are being used. Proceeds from the sale of demonstration units are recorded as revenue and all costs incurred to refurbish the systems prior to sale are charged to cost of revenue.

As of

December 31, 2017

and

2016,

demonstration inventories, net of accumulated depreciation, included in finished goods inventory balance was

$1.

million and

$2.4

million, respectively.

Property and Equipment

Property and equipment ar

e stated at cost, net of accumulated depreciation. Depreciation recognized is recognized on a straight-line basis over the estimated useful lives of the assets, generally as follows:

		Useful Lives
Leasehold improvements		Lesser of useful life or term of lease
Office equipment and furniture (in years)		3
Machinery and equipment (in years)		3

Upon sale or retirement of property and equipment, the costs and related accumulated depreciation and amortization are removed from the balance sheet

and the resulting gain or loss is reflected in operating expenses. Maintenance and repairs are charged to operations as incurred.

Depreciation expense related to property and equipment for

201

2016

and

2015,

was

$1.0

million

, $

0.8

million and $

0.7

million respectively. Amortization expense for vehicles leased under capital leases is included in depreciation expense.

Goodwill and

Other

Intangible Assets

Goodwill and intangible assets with indefinite useful lives are

not

amortized, but are tested

for impairment, applying a fair-value based test, at least annually during the

fourth

fiscal quarter, or if circumstances indicate their value

may

longer be recoverable. Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets. The Company continues to operate in

one

segment, which is considered to be the sole reporting unit and, therefore, goodwill was tested for impairment at the enterprise level. As of

December 31, 2017,

there has been

impairment of goodwill. All acquired intangible assets have been fully amortized as of

December 31, 2017.

Warranty Obligations

The Company provides a standard

one

-year warranty on all systems sold to end-customers. Warranty coverage provided is for

labor and parts necessary to repair the systems during the warranty period. For sales to distributors, the Company generally provides a

month warranty for parts only, with labor being provided to the end customer by the distributor.

The Company

accounts for the estimated warranty cost of the standard warranty coverage as a charge to costs of revenue when revenue is recognized. Factors that affect the Company’s warranty reserves include the number of units sold, historical product performance, and anticipated rates of warranty repairs and the cost per repair. The Company periodically assesses the adequacy of the warranty reserve and adjusts the amount as necessary.

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.

Revenue Recognition

Products revenue is recognized when

title and risk of ownership has been transferred, provided that:

	●	Persuasive evidence of an arrangement exists;
	●	The price is fixed or determinable;
	●	Delivery has occurred or services have been rendered; and
	●	Collectability is reasonably a ssured.

Transfer of title and risk of ownership occurs when the product is shipped to the customer or when the customer receives the product, depending on the nature of the arrangement. Revenue is recorded net of customer and distributor discounts. When

collectability is

not

reasonably assured, the Company recognizes revenue upon receipt of cash payment. Sales to customers and distributors do

not

include any return or exchange rights. In addition, the Company’s distributor agreements obligate the distributor to pay the Company for the sale regardless of whether the distributor is able to resell the product. Shipping and handling charges are invoiced to customers based on the amount of products sold. Shipping and handling fees are recorded as revenue and the related expense as a component of Products cost of revenue.

Multiple-element

rrangements

A multiple-element arrangement includes the sale of

one

or more tangible product offerings with

one

or more associated services offerings, each of which are individually considered separate units of accounting. The Company determined that its multiple-ele

ment arrangements are generally comprised of the following elements that are recognized as separate units of accounting: Product, service contracts

training, and in some cases, marketing support and installation.

For multiple-element arrangements, judgments are required as to the allocation of the proceeds received from an arrangement to the multiple elements of the arrangement. For multiple element arrangements the Company allocates revenue to all deliverables based on

their relative selling prices in accordance with the Financial Accounting Standards (“FASB”) Accounting Standards Codification (“ASC”)

605

25.

Because the Company has neither vendor-specific objective evidence (“VSOE”) nor

third

-party evidence of selling price (“TPE”) for the Company's systems, the allocation of revenue has been based on the Company's best estimate of selling prices (“BESP”). The objective of BESP is to determine the price at which the Company would transact a sale if the product or service was sold on a stand-alone basis. The Company determines BESP for the Company's deliverables by considering multiple factors including, but

not

limited to, features and functionality of the system, geographies, type of customer and market conditions

With respect to the sale of its

earlier generation of the

truSculpt

product, the Company includes unlimited refills as part of the

truSculpt

standard warranty and the Company does

not

account for the

truSculpt

warranty as a separate deliverable under the multiple-element arrangement revenue guidance. Upon a

truSculpt

sale, the Company recognizes the estimated costs which will be incurred under the warranty obligation in Products cost of revenue. In

May 2017,

the Company launched a more advanced version of its body system called

truSculpt

ustomers are required to purchase hand piece refills as needed on a

truSculpt

. Revenue from the sale of such refills is recorded as Product revenue in the period in which such sales are made.

Customer Marketing Arrangements

The Company has

a customer marketing and incentive program called “Cutera Bucks” for its North America customers through which it offers various sales incentives and discounts and pays or reimburses customers for qualifying expenses associated with practice set-up, advertising procedures related to the system purchased, and other expenses. The Company records such incentives as a reduction of revenue at the time when the sale of the system is recorded.

Service Revenue

The Company also offers customers extended service contracts. Revenue under service contracts is recognized on a straight-line basis over the per

iod of the applicable service contract.

Revenue from services performed in the absence of a

service contract, including installation and training revenue, is recognized when the related services are performed and collectability is reasonably assured

Service revenue billed on a time and material basis, from customers whose systems are

not

under a service contact, is recognized as the services are provided. Service revenue for the years ended

December 31,

201

2016,

and

2015

was

$18.8

million,

$19.0

million, and

$17.7

million, respectively.

Bill and Hold Arrangement

2017

the Company segregated certain products for

one

order at the request of a customer for a limited period of time at a

third

-party storage facility (“bill -and -hold”). Revenue recognition for the bill-and-hold transaction requires consideration of, among other things, whether the customer has made a written fixed commitment to purchase the product; the existence of a substantial business purpose for the arrangement; the bill-and-hold arrangement is at the request of the customer; the scheduled delivery date must be reasonable and consistent with the buyer's business purpose; title and risk of ownership must pass to the customer and

additional performance obligations exist by the Company, at the time of the bill-and-hold the product is complete and ready for shipment and the product has been segregated from the Company's inventory.

The Company recognized revenue of

$938,000

for a bill-and-hold transaction in

2017.

There were

such transactions in

2016

and

2015.

Cost of Revenue

Cost of revenue consists primarily of material, finished and semi-finished products purchased from

third

-party manufacturers, labor, stock-based compensation expenses, overhead inv

olved in the Company's internal manufacturing processes, technology license amortization and royalties, costs associated with product warranties and any inventory or intangible write-downs.

The Company's system sales include a control console, universal graphic us

er interface, control system software, high voltage electronics and a combination of applications (referred to as hand pieces). Hand pieces are programmed to have a limited number of uses to ensure the safety of the device to patients. The Company sells refurbished hand pieces, or "refills," of its

Titan

and

truSculpt

products and provides for the cost of refurbishment of these hand pieces as part of cost of revenue. When customers purchase a replacement hand piece (or “refill”) or are provided a replacement hand piece under a warranty or service contract, the Company ships the customer a previously refurbished unit. Upon the receipt of the expended hand piece from the customer

, the Company capitalizes the expended hand piece as inventory at the estimated fair value. Cost of revenue includes the costs incurred to refurbish hand pieces.

Research and Development Expenditures

Research and development costs are expensed as incurred and include costs related to research, design, development, testing

of products, salaries, benefits and other headcount related costs, facilities, material,

third

party contractors, regulatory affairs, clinical and development costs

Advertising Costs

Advertising costs are included as part of sales and marketing expens

e and are expensed as incurred. Advertising expenses for

2017,

2016

and

2015

were

$1.8

million,

$1.3

million and

$1.2

million, respectively.

Stock-based Compensation

The Company accounts for share-based compensation costs in accordance with the accounting standards for share-based compensation, which require that all share-based payments to employees

and non-employees be recognized in the consolidated statements of operations based on their fair values.

●

The fair value of stock options ("options") on the grant date is estimated using the Black-Scholes option-pricing model using the single-option approach. The Black-Scholes option pricing model requires the use of highly

subjective and complex assumptions, including the option's expected term and the price volatility of the underlying stock, to determine the fair value of award. The Company recognizes the expense associated with options using a single award approach over the requisite service period.

The Company accounts for all stock options awarded to non-employees at the fair value of the consideration received or the fair

value of the equity instrument issued, as calculated using the Black-Scholes model. The Company subjects stock options granted to non-employees to periodic revaluation at

each reporting date as the underlying equity instruments vest

	●	The fair value of Restricted Stock Units ("RSUs") is based on the stock price on the grant date using a single-award approach. The RSUs are subject to a service vesting condition and are recognized on a straight-line basis over the requisite service period. For RSUs to non-employees, the Company recognizes expense on an accelerated attribution method and these equity awards are re-measured at fair value at the end of each reporting period, with the changes in fair value recorded to stock-based compensation expense in the period in which the change occurs.
	●	The fair value of Performance Stock Units (“PSUs”) that have operational measurement goals, are measured at the market price of the Company’s stock on the date of grant. PSUs with market-based measurement goals are valued using the Monte-Carlo simulation option-pricing model. The Monte-Carlo simulation option-pricing model uses the same input assumptions as the Black-Scholes model, however, it further incorporates into the fair-value determination the possibility that the market condition may not be satisfied. Stock-based compensation expense for market-based PSU awards is recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided. For PSUs provided to non-employees, the Company recognizes expense on an accelerated attribution method and these equity awards are re-measured at fair value at the end of each reporting period, with the changes in fair value recorded to stock-based compensation expense in the period in which the change occurs.

The Company recognizes share-based compensation expense for the portion of the equity award that is expected to vest over the requisite service period for those awards and develops an estimate of the number of s

hare-based awards which will ultimately vest, primarily based on historical experience. The estimated forfeiture rate is reassessed periodically throughout the requisite service period. Such estimates are revised if they differ materially from actual forfeitures. As required, the forfeiture estimates will be adjusted to reflect actual forfeitures when an award vests. For the award types discussed above, if an employee terminates employment prior to being vested in an award, then the award is forfeited.

r RSUs and PSUs, the Company issues shares on the vesting dates, net of applicable tax withholding requirements to be paid by the Company on behalf of its employees and non-employees. As a result, the actual number of shares issued will be fewer than the actual number of RSUs and PSUs that vest. The Company records the liability for withholding amounts to be paid by the Company as a reduction to additional paid-in capital when the shares are issued.

Cash flows resulting from the tax benefits due to tax de

ductions in excess of the compensation cost recognized for stock-based awards for options exercised and for RSUs and PSUs vested during the period (excess tax benefits), are classified as operating cash flows.

Income Taxes

The Company account for

income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date

For deferred tax assets which are

not

subject to a valuation allowance, the Company has determined that its future taxable i

ncome will be sufficient to recover all of the deferred tax assets. However, should there be a change in the recoverability of the deferred tax assets, the Company could be required to record a valuation allowance against the net carrying value of its deferred tax assets. This would result in an increase to the Company’s tax provision in the period in which they determined that the recovery was

not

probable.

The Company recognizes deferred tax assets to the extent that the Company believes these assets are more likely than n

ot to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The measurement of deferred taxes often involves an exercise of judgment related to the computation and realization of tax basis. The deferred tax assets and liabilities reflect management’s assessment that tax positions taken, and the resulting tax basis, are more likely than

not

to be sustained if they are audited by taxing authorities. Also, assessing tax rates that the Company expects to apply and determining the years when the temporary differences are expected to affect taxable income requires judgment about the future apportionment of the Company’s income among the states in which the Company operates. These matters, and others, involve the exercise of significant judgment. Any changes in the Company’s practices or judgments involved in the measurement of deferred tax assets and liabilities could materially impact the Company’s financial condition or results of operations.

Valuation allowances are established when necessary to reduce deferred income tax assets to amounts that the Company

believes are more likely than

not

to be recovered. The Company evaluates its deferred tax assets quarterly to determine whether adjustments to the Company’s valuation allowance are appropriate. In making this evaluation, the Company relies on its

three

year cumulative profit, estimated timing of future deductions and benefits represented by the deferred tax assets, and its forecasts of future earnings, the latter

two

of which involve the exercise of significant judgment.

The Company

establishes reserves for uncertain tax positions in accordance with Income Taxes subtopic of ASC

740

on the basis of a

two

-step process whereby (

) it determines whether it is more likely than

not

that the tax positions will be sustained on the basis of the technical merits of the position and (

) for those tax positions that meet the more-likely-than-

not

recognition threshold, it recognize the largest amount of tax benefit that is more than

percent likely to be realized upon ultimate settlement with the related tax authority

The impact of an uncertain income tax position on income tax expense must be recognized at the largest amount that is more

likely than

not

to be sustained. An uncertain income tax position will

not

be recognized if it has less than a

50%

likelihood of being sustained. The Company has provided taxes and related interest and penalties due for potential adjustments that

may

result from examinations of open U.S. Federal, state and foreign tax years. The Company will reverse the liability and recognize a tax benefit during the period in which the Company makes the determination that the tax position is effectively settled through examination, negotiation, or litigation, or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired. The Company will record an additional charge in the Company’s provision for taxes in the period in which the Company determines that the recorded tax liability is less than the Company expects the ultimate assessment to be.

mprehensive

Income (

Loss

)

Comprehensive

income (loss) includes all changes in stockholders’ equity except those resulting from investments or contributions by stockholders. For the periods presented, the accumulated other comprehensive income (loss) consisted solely of the unrealized gains or losses on the Company's available-for-sale investments, net of tax.

Foreign Currency

The U.S. Dollar is the functional currency of the Company

’s subsidiaries. Monetary assets and liabilities are re-measured into U.S. Dollars at the applicable period end exchange rate. Sales and operating expenses are re-measured at average exchange rates in effect during each period. Gains or losses resulting from foreign currency transactions are included in net income (loss) and are insignificant for each of the

three

years ended

December 31, 2016.

The effect of exchange rate changes on cash and cash equivalents was insignificant for each of the

three

years presented in the period ended

December 31, 2017.

Segments

The Company operates in

one

segment. Management uses

one

measuremen

t of profitability and does

not

segregate its business for internal reporting. As of

December 31, 2017

and

2016,

substantially all long-lived assets were maintained in the U.S. See Note

for details relating to revenue by geography.

Recent Accounting Pr

onouncements

Not

Yet Adopted

New Revenue Standard

May 2014,

the Financial Accounting Standards Board (“

FASB”) issued ASU

No.

2014

09,

Revenue from Contracts with Customers, which sets forth a single, comprehensive revenue recognition model for all contracts with customers to improve comparability. Subsequently, the FASB has issued several standards related to ASU

2014

(collectively, the “New Revenue Standard”). The New Revenue Standard requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. In addition, the New Revenue Standard requires expanded disclosures. This New Revenue Standard permits the use of either the full retrospective or modified retrospective method (also referred to as the cumulative effect transition method) when adopted. The New Revenue Standard becomes effective for the Company in the

first

quarter of fiscal year

2018.

The New Revenue

Standard’s core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying this new guidance to contracts within its scope, an entity will:

(

)

identify the contract(s) with a customer;

(

)

identify the performance obligation in the contract;

(

)

determine the transaction price;

(

)

allocate the transaction price to the

performance obligations in the contract; and

(

)

recognize revenue when (or as) the entity satisfies a performance obligation.

The Company will adopt the New Revenue Standard in the

first

quarter of fiscal year

2018

using the modified retrospective method.

Upon adoption, the Company expects to record an adjustment to retained earnings for the following items in the

first

quarter of

2018:

●

Adjustment to its deferred revenue balance for the differences in the amount of revenue recognition for the Company

’s revenue streams as a result of allocation of revenue based on standalone selling prices to the Company’s various performance obligations.

●

Adjustment for capitalizing the incremental contract acquisition costs

, such as sales commissions paid in connection with system sales with multi-year service contracts. These contract acquisition costs will be capitalized and amortized over the estimated customer life under the New Revenue Standard. Under the prior guidance, the Company expensed such costs when incurred.

●

Adjustment for accru

ing financing costs for multi-year post-warranty service for customers who pay more than

one

year in advance of receiving the service. The Company will estimate interest expense for such advance payment under the New Revenue Standard going forward.

Impact of the adoption of the New Revenue Standard is expected to result in a net increase in the Company's retained earnings by approximately

$4.8

million -

$5.5

million, majority of which relates to the capitalization of contract acquisition costs. The Company's evaluation of the adjustment will be completed in the

first

quarter of fiscal year

2018.

In pr

eparation of adopting the New Revenue Standard, the Company has implemented additional internal controls and is enhancing its processes to enable future preparation of financial information in accordance with the New Revenue Standard. The New Revenue Standard requires significantly expanded disclosures about revenue in the Company’s financial statement beginning with the

first

quarter of

2018.

These expanded disclosures will include quantitative and qualitative disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers.

Pursuant to ASC paragraphs

606

through

and ASC paragraph

460

the Company will continue to account for standard warranty coverage as it has historically.

The New Revenue Standard is principle based and interpretation of those principles

may

vary from company to company based on their unique circumstances. It is possible that interpretation, industry practice, and guidance

may

evolve as companies and the ac

counting profession work to implement this new standard. While substantially complete, the Company is still in the process of finalizing its evaluation of the effect of the New Revenue Standard and will finalize its accounting assessment and quantitative impact of the adoption of the New Revenue Standard during the

first

quarter of fiscal year

2018.

As the Company completes its evaluation of this new standard, new information

may

arise that could change the Company’s current understanding of the impact to revenue and expense recognized. Additionally, the Company will continue to monitor industry activities and any additional guidance provided by regulators, standards setters, or the accounting profession and adjust the Company’s assessment and implementation plans accordingly.

Other Accounting

Pronouncements

February 2016,

the FASB issued ASU

No.

2016

02,

Leases (Topic

842

), which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). The new standard also requires expanded disclosures regarding leasing arrangements. The new standard becomes effective for the Company in the

first

quarter of fiscal year

2019

and early adoption is permitted. The new standard is required to be adopted using the modified retrospective approach and requires application of the new standard at the beginning of the earliest comparative period presented. The Company finances its fleet of vehicles used by its field sales and service employees and has facility leases. Several of the Company

’s customers finance purchases of its system products through

third

party lease companies and

not

directly with the Company. The Company does

not

believe that the new standard will change customer buying patterns or behaviors for its products. The Company will adopt the new standard effective

January 1, 2019.

The Company expects that upon adoption, right-of-use assets and lease liabilities will be recognized in the balance sheet in amounts that will be material.

August 2016,

the FASB issued ASU

2016

15,

Statement of Cash Flows (Topic

230

), which intends to reduce diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. This guidance will be effective for the Company in the

first

quarter of

2018.

The Company is still assessing the impact of the adoption of this guidance to the consolidated financial statements

October 2016,

the FASB issued ASU

No.

2016

16,

Income Taxes (Topic

740

): Intr

a-Entity Transfer of Assets Other than Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This ASU will be effective for the Company in the

first

quarter of

2018.

This ASU is required to be adopted using the modified retrospective approach, with a cumulative catch-up adjustment to retained earnings in the period of adoption. The Company does

not

believe that adopting this ASU will have a material impact on the consolidated financial Statements.

November 2016,

the FASB issued ASU

2016

18,

Statement of Cash Flows (Topic

320

), which amended the guidance on the classification and presentation of restricted cash in the statement of cash flow. The

amendment requires entities to include restricted cash and restricted cash equivalents in its cash and cash equivalents in the statement of cash flow. The amendment will be effective for the Company in the

first

quarter of

2018

and is required to be adopted retrospectively. The Company does

not

expect that the adoption of this guidance will have a material impact on its consolidated financial statements.

January 2017,

the FASB clarified its guidance to simplify the measurement of goodwill by eliminating

the Step

impairment test. The new guidance requires companies to perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The amendment will be effective for the Company beginning in its

first

quarter of fiscal year

2021.

The amendment is required to be adopted prospectively. Early adoption is permitted. The Company does

not

expect that the adoption of this guidance will have a material impact on its consolidated financial statements.

Recently Adopte

d Accounting Standards

January 2017, the Company

adopted Accounting Standards Update (“

ASU”)

2015

11,

Simplifying the Measurement of Inventory

." The guidance requires that inventory that is measured on a FIFO or average cost basis be measured at lower of cost and net realizable value, as opposed to the lower of cost or market. The Company applied this guidance prospectively and there was

material impact on the Company's financial condition, results of operations or cash flows as a result of adoption.