UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2011
OR
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period _____ to_____.
Commission file number: 000-50644
Cutera, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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77-0492262
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. employer identification no.)
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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):
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Large accelerated filer ¨
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Accelerated filer x
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Non-accelerated filer ¨
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Smaller reporting company ¨
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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 July 26, 2011 was 13,857,137.
FORM 10-Q
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Page
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PART I
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FINANCIAL INFORMATION
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Item 1
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1
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1
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2
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3
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4
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Item 2
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13
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Item 3
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22
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Item 4
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22
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PART II
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OTHER INFORMATION
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Item 1
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23
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Item 1A
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23
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Item 2
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33
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Item 3
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33
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Item 4
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33
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Item 5
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33
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Item 6
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34
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35
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PART I. FINANCIAL INFORMATION
CUTERA, INC.
(in thousands)
(unaudited)
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June 30, 2011
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December 31, 2010
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Assets
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Current assets:
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Cash and cash equivalents
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$
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17,483
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$
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12,519
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Marketable investments
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73,557
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77,484
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Accounts receivable, net
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3,279
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4,208
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Inventories, net
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8,301
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6,448
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Deferred tax asset
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20
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63
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Other current assets and prepaid expenses
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2,042
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2,740
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Total current assets
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104,682
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103,462
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Property and equipment, net
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771
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597
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Long-term investments
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3,908
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6,784
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Intangibles, net
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541
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637
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Deferred tax asset, net of current portion
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328
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325
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Total assets
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$
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110,230
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$
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111,805
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Liabilities and Stockholders' Equity
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Current liabilities:
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Accounts payable
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$
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2,180
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$
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1,296
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Accrued liabilities
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6,909
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6,194
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Deferred revenue
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5,474
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5,633
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Total current liabilities
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14,563
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13,123
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Deferred rent
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1,455
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1,501
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Deferred revenue, net of current portion
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898
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1,287
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Income tax liability
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494
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477
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Total liabilities
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17,410
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16,388
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Commitments and Contingencies (Note 8)
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Stockholders’ equity:
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Convertible preferred stock, $0.001 par value; authorized: 5,000,000 shares; none issued and outstanding
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Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 13,857,137 and 13,629,713 shares at June 30, 2011 and December 31, 2010, respectively
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14
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14
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Additional paid-in capital
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93,515
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90,423
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Retained earnings
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425
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6,736
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Accumulated other comprehensive loss
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(1,134
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)
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(1,756
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)
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Total stockholders’ equity
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92,820
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95,417
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Total liabilities and stockholders’ equity
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$
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110,230
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$
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111,805
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CUTERA, INC.
(in thousands, except per share data)
(unaudited)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2011
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2010
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2011
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2010
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Net revenue
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$ |
14,895 |
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$ |
12,217 |
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$ |
26,516 |
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25,966 |
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Cost of revenue
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6,476 |
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5,335 |
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11,700 |
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11,164 |
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Gross profit
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8,419 |
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6,882 |
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14,816 |
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14,802 |
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Operating expenses:
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Sales and marketing
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6,348 |
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6,452 |
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12,294 |
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12,813 |
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Research and development
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2,346 |
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1,506 |
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4,476 |
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2,960 |
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General and administrative
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2,588 |
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2,744 |
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4,916 |
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4,986 |
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Total operating expenses
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11,282 |
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10,702 |
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21,686 |
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20,759 |
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Loss from operations
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(2,863 |
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(3,820 |
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(6,870 |
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(5,957 |
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Interest and other income, net
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199 |
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141 |
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383 |
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307 |
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Loss before income taxes
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(2,664 |
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(3,679 |
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(6,487 |
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(5,650 |
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(Benefit) provision for income taxes
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(208 |
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82 |
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(176 |
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129 |
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Net loss
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$ |
(2,456 |
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$ |
(3,761 |
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$ |
(6,311 |
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$ |
(5,779 |
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Net loss per share:
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Basic and Diluted
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$ |
(0.18 |
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$ |
(0.28 |
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$ |
(0.46 |
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$ |
(0.43 |
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Weighted-average number of shares used in per share calculations:
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Basic and Diluted
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13,765 |
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13,501 |
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13,716 |
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13,473 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Six Months Ended
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June 30,
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2011
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2010
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Cash flows from operating activities:
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Net income (loss)
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$ |
(6,311 |
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$ |
(5,779 |
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Adjustments to reconcile net income (loss) to net cash used in operating activities:
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Stock-based compensation
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2,211 |
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2,589 |
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Tax benefit from stock-based compensation
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16 |
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—
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Excess tax benefit related to stock-based compensation
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(16 |
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—
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Depreciation and amortization
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319 |
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393 |
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Provision for excess and obsolete inventroies
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(174 |
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86 |
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Provision for doubtful accounts receivable
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(7 |
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(84 |
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Change in deferred tax asset net of valuation allowance
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40 |
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(10 |
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Gain on sale of marketable investments, net
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—
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(66 |
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Tax benefit on unrealized gains on marketable and long term investments
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(68 |
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—
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Changes in assets and liabilities:
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Accounts receivable
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936 |
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(413 |
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Inventories
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(1,679 |
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(633 |
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Other current assets and prepaid expenses
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1,439 |
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1,073 |
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Accounts payable
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884 |
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414 |
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Accrued liabilities
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675 |
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(3,206 |
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Deferred rent
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(6 |
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(110 |
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Deferred revenue
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(548 |
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(857 |
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Income tax liability
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17 |
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(17 |
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Net cash used in operating activities
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(2,272 |
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(6,620 |
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Cash flows from investing activities:
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Acquisition of property and equipment
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(397 |
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(158 |
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Proceeds from sales of marketable and long-term investments
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10,441 |
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29,701 |
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Proceeds from maturities of marketable investments
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28,436 |
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19,325 |
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Purchase of marketable and long-term investments
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(32,125 |
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(33,733 |
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Net cash provided by investing activities
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6,355 |
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15,135 |
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Cash flows from financing activities:
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Proceeds from exercise of stock options and employee stock purchase plan
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865 |
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353 |
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Excess tax benefit related to stock-based compensation
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16 |
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—
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Net cash provided by financing activities
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881 |
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|
353 |
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| |
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Net increase in cash and cash equivalents
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4,964 |
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8,868 |
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Cash and cash equivalents at beginning of period
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12,519 |
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22,829 |
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Cash and cash equivalents at end of period
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$ |
17,483 |
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$ |
31,697 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CUTERA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Description of Operations and Principles of Consolidation.
Cutera, Inc. (Cutera or the Company) is a global provider of laser and light-based aesthetic systems for practitioners worldwide. The Company designs, develops, manufactures, and markets the CoolGlide, Xeo, Solera, GenesisPlus and Excel V product platforms for use by physicians and other qualified practitioners to allow its customers to offer safe and effective aesthetic treatments to their customers. The Xeo and Solera platforms 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 hand piece refills, and dermal fillers and cosmeceuticals.
Headquartered in Brisbane, California, the Company has wholly-owned subsidiaries in Australia, Canada, France, Japan, Spain, Switzerland and United Kingdom that market, sell and service its products outside of the United States. The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All inter-company transactions and balances have been eliminated.
Business Segment
In accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 280 guidance on disclosures about segments of an enterprise and related information, operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. Our chief decision maker, as defined under the FASB’s ASC 280 guidance, is a combination of the Chief Executive Officer; and the Executive Vice President and Chief Financial Officer. To date, the Company has viewed its operations, managed its business, and used one measurement of profitability for the one operating segment – the sale of aesthetic medical equipment and services, and distribution of cosmeceuticals and dermal filler products, to qualified medical practitioners. In addition, substantially all of the Company’s long-lived assets are located in one facility in the United States. As a result, the financial information disclosed in the Company’s Condensed Consolidated Financial Statements represents all of the material financial information related to the Company’s operating segment.
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, 2010 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, 2010 filed with the Securities and Exchange Commission, or SEC, on March 15, 2011.
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 and long-term 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.
Significant Accounting Policies
The Company’s significant accounting policies are disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 15, 2011, and have not changed significantly as of June 30, 2011, except for the accounting standard on revenue recognition explained below.
Revenue Recognition
The FASB amended the accounting standards for multiple deliverable revenue arrangements to:
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provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;
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require an entity to allocate revenue in an arrangement using estimated selling price (ESP) of deliverables if a vendor does not first have vendor-specific objective evidence (VSOE) of selling price or secondly does not have third-party evidence (TPE) of selling price; and
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eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.
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Multiple-element arrangements - 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 determination of the Company’s units of accounting did not change with the adoption of the new revenue recognition guidance and as such the Company allocates revenue to each element in a multiple-element arrangement based upon the relative selling price of each deliverable. When applying the relative selling price method, the Company determines the selling price for each deliverable using VSOE of selling price, if it exists, or TPE of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, the Company uses its best estimate of selling price for that deliverable. Revenue allocated to each element is then recognized when the other revenue recognition criteria are met for each element.
The above mentioned update was effective for the Company from January 1, 2011 and the Company elected to apply it prospectively to new or materially modified revenue arrangements after its effective date. It did not have a material impact on the Company’s financial position or results of operations for the three and six-month periods ended June 30, 2011 and does not change the units of accounting for its revenue transactions.
The new accounting standard, if applied to the year ended December 31, 2010, would not have had a material impact on our revenue for that year.
Recent Accounting Pronouncements
On January 1, 2011, the Company adopted changes issued by the FASB to the classification of certain employee share-based payment awards. These changes clarify that there is not an indication of a condition that other than market, performance or service if an employee share-based payment award’s exercise price is denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade and differs from the functional currency of the employer entity or payroll currency of the employee. An employee share-based payment award is required to be classified as a liability if the award does not contain a market, performance or service condition. Prior to this guidance, the Company did not consider the difference between the currency denomination of an employee share-based payment award’s exercise price and the functional currency of the employer entity or payroll currency of the employee in determining the proper classification of the share-based payment award. The adoption of these changes had no impact on the Company's financial statements.
On January 1, 2011, the Company adopted changes issued by the FASB to disclosure requirements for fair value measurements. Specifically, the changes require a reporting entity to disclose, in the reconciliation of fair value measurements using significant unobservable inputs (Level 3), separate information about purchases, sales, issuances and settlements, i.e., on a gross basis rather than as one net number. These changes were applied to the disclosure in the Fair Value of Financial Instruments section of Note 2 to the Condensed Consolidated Financial Statements. The adoption of these changes had no impact on our financial statements.
In May 2011, the FASB issued ASU No. 2011-04 “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards”. Some of the amendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company is still evaluating the potential future effects of this guidance.
In June 2011, the FASB amended its authoritative guidance on the presentation of comprehensive income. Under the amendment, an entity will have the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This amendment, therefore, eliminates the currently available option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendment does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The Company will adopt this amended guidance for the fiscal year beginning January 1, 2012. As this guidance relates to presentation only, the adoption of this guidance will not have any other effect on the Company's financial statements.
As discussed in detail in the Revenue Recognition section above, the Company adopted prospectively from January 1, 2011 the FASB amended standards for multiple deliverable revenue arrangements.
Note 2. Balance Sheet Details
Cash and Cash Equivalents, Marketable Investments and Long-Term Investments:
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” and in long term assets as “Long-term investments.”
The following tables summarize cash, cash equivalents, marketable investments and long-term investments (in thousands):
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,044
|
|
|
$
|
1,989
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
8,440
|
|
|
|
8,330
|
|
|
Commercial paper
|
|
|
6,999
|
|
|
|
2,200
|
|
|
Total cash and cash equivalents
|
|
|
17,483
|
|
|
|
12,519
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable investments:
|
|
|
|
|
|
|
|
|
|
U.S. government notes
|
|
|
3,670
|
|
|
|
2,070
|
|
|
U.S. government agencies
|
|
|
26,017
|
|
|
|
24,087
|
|
|
Municipal securities
|
|
|
6,780
|
|
|
|
15,011
|
|
|
Commercial paper
|
|
|
10,940
|
|
|
|
11,465
|
|
|
Corporate debt securities
|
|
|
26,150
|
|
|
|
24,851
|
|
|
Total marketable investments
|
|
|
73,557
|
|
|
|
77,484
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments in Auction Rate Securities (ARS)
|
|
|
3,908
|
|
|
|
6,784
|
|
|
Total cash, cash equivalents, marketable investments and long-term investments
|
|
$
|
94,948
|
|
|
$
|
96,787
|
|
The following table summarizes unrealized gains and losses related to our marketable investments and long-term investments, both designated as available-for-sale (in thousands):
|
June 30, 2011
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Market Value
|
|
|
Cash and cash equivalents
|
|
$
|
17,483
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government notes
|
|
|
3,658
|
|
|
|
12
|
|
|
|
—
|
|
|
|
3,670
|
|
|
U.S. government agencies
|
|
|
25,977
|
|
|
|
40
|
|
|
|
—
|
|
|
|
26,017
|
|
|
Municipal securities
|
|
|
6,739
|
|
|
|
41
|
|
|
|
—
|
|
|
|
6,780
|
|
|
Commercial paper
|
|
|
10,934
|
|
|
|
6
|
|
|
|
—
|
|
|
|
10,940
|
|
|
Corporate debt securities
|
|
|
26,093
|
|
|
|
59
|
|
|
|
(2
|
)
|
|
|
26,150
|
|
|
Total marketable investments
|
|
|
73,401
|
|
|
|
158
|
|
|
|
(2
|
)
|
|
|
73,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investment in ARS
|
|
|
4,900
|
|
|
|
—
|
|
|
|
(992
|
)
|
|
|
3,908
|
|
|
Total cash, cash equivalents, marketable investments and long-term investments
|
|
$
|
95,784
|
|
|
$
|
158
|
|
|
$
|
(994
|
)
|
|
$
|
94,948
|
|
|
December 31, 2010
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Market Value
|
|
|
Cash and cash equivalents
|
|
$
|
12,519
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government notes
|
|
|
2,069
|
|
|
|
1
|
|
|
|
—
|
|
|
|
2,070
|
|
|
U.S. government agencies
|
|
|
24,088
|
|
|
|
17
|
|
|
|
(18
|
)
|
|
|
24,087
|
|
|
Municipal securities
|
|
|
15,029
|
|
|
|
2
|
|
|
|
(20
|
)
|
|
|
15,011
|
|
|
Commercial Paper
|
|
|
11,459
|
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
11,465
|
|
|
Corporate debt securities
|
|
|
24,825
|
|
|
|
55
|
|
|
|
(29
|
)
|
|
|
24,851
|
|
|
Total marketable investments
|
|
|
77,470
|
|
|
|
82
|
|
|
|
(68
|
)
|
|
|
77,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investment in ARS
|
|
|
8,325
|
|
|
|
—
|
|
|
|
(1,541
|
)
|
|
|
6,784
|
|
|
Total cash, cash equivalents, marketable investments and long-term investments
|
|
$
|
98,314
|
|
|
$
|
82
|
|
|
$
|
(1,609
|
)
|
|
$
|
96,787
|
|
The following table summarizes the estimated fair value of our marketable investments and long-term investments classified by the contractual maturity date of the security as of June 30, 2011 (in thousands):
|
|
|
Amount
|
|
|
Due in less than one year
|
|
$
|
39,650
|
|
|
Due in 1 to 3 years
|
|
|
33,907
|
|
|
Due in 3 to 5 years
|
|
|
—
|
|
|
Due in 5 to 10 years
|
|
|
—
|
|
|
Due in greater than 10 years
|
|
|
3,908
|
|
|
|
|
$
|
77,465
|
|
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 June 30, 2011, 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):
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
Cash equivalents
|
|
$
|
17,483
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,483
|
|
|
Short-term marketable investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
—
|
|
|
|
73,557
|
|
|
|
—
|
|
|
|
73,557
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale ARS
|
|
|
—
|
|
|
|
—
|
|
|
|
3,908
|
|
|
|
3,908
|
|
|
Total assets at fair value
|
|
$
|
17,483
|
|
|
$
|
73,557
|
|
|
$
|
3,908
|
|
|
$
|
94,948
|
|
The Company’s Level 1 financial assets are money market funds, highly liquid debt instruments of U.S. federal and municipal governments and their agencies and commercial paper with stated maturities of three months or less from the date of purchase, whose fair values are based on quoted market prices. The Company’s Level 2 financial assets are highly liquid debt instruments of U.S. federal and municipal governments and their agencies, as well as commercial paper and corporate bonds. These securities have stated maturities of greater than three months, whose fair values are obtained from readily-available pricing sources for the identical underlying security that may, or may not, be actively traded.
At June 30, 2011, observable market information was not available to determine the fair value of the Company’s ARS investments. Therefore, the fair value was based on valuation models that relied on Level 3 inputs including those that are based on expected cash flow streams and collateral values, assessments of counterparty credit quality, default risk underlying the security, market discount rates and overall capital market liquidity. The valuation of the Company’s ARS investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact the valuations in the future include changes to credit ratings of the securities, as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity. These financial instruments are classified within Level 3 of the fair value hierarchy.
The table presented below summarizes the change in carrying value associated with Level 3 financial assets, which represents the Company’s investment in ARS for the six months ended June 30, 2011 (in thousands):
|
|
|
June 30, 2011 |
|
|
Balance at December 31, 2010
|
|
$ |
6,784 |
|
|
Total gains or losses (realized or unrealized):
|
|
|
|
|
|
Included in earnings (or changes in net assets)
|
|
|
— |
|
|
Included in other comprehensive income (loss)
|
|
|
549 |
|
|
Purchases and issuances
|
|
|
— |
|
|
Settlements
|
|
|
(3,425 |
) |
|
Transfers in and/or out of Level 3
|
|
|
— |
|
|
Balance at June 30, 2011
|
|
$ |
3,908 |
|
Inventories:
Inventories consist of the following (in thousands):
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
Raw materials
|
|
$
|
5,323
|
|
|
$
|
4,204
|
|
|
Finished goods
|
|
|
2,978
|
|
|
|
2,244
|
|
|
Total
|
|
$
|
8,301
|
|
|
$
|
6,448
|
|
Intangible Assets:
Intangible assets comprise a patent sublicense acquired from Palomar in 2006 and a technology sublicense acquired in 2002. The components of intangible assets were as follows (in thousands):
|
|
|
June 30, 2011 |
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
Amount
|
|
|
Net Carrying
Amount
|
|
|
Patent sublicense
|
|
$
|
1,218
|
|
|
$
|
724
|
|
|
$
|
494
|
|
|
Technology sublicense
|
|
|
538
|
|
|
|
491
|
|
|
|
47
|
|
|
Total
|
|
$
|
1,756
|
|
|
$
|
1,215
|
|
|
$
|
541
|
|
|
|
|
December 31, 2010
|
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
Amount
|
|
|
Net Carrying
Amount
|
|
|
Patent sublicense
|
|
$
|
1,218
|
|
|
$
|
656
|
|
|
$
|
562
|
|
|
Technology sublicense
|
|
|
538
|
|
|
|
463
|
|
|
|
75
|
|
|
Total
|
|
$
|
1,756
|
|
|
$
|
1,119
|
|
|
$
|
637
|
|
Amortization expense for intangible assets was $96,000 for the six-month period ended June 30, 2011 and $96,000 for the six-month period ended June 30, 2010.
Based on intangible assets recorded at June 30, 2011, and assuming no subsequent additions to, or impairment of the underlying assets, the remaining estimated annual amortization expense is expected to be as follows (in thousands):
|
Fiscal Year Ending December 31,
|
|
Amount
|
|
|
2011 (remainder)
|
|
$
|
96
|
|
|
2012
|
|
|
158
|
|
|
2013
|
|
|
138
|
|
|
2014
|
|
|
138
|
|
|
2015
|
|
|
11
|
|
|
Thereafter
|
|
|
—
|
|
|
Total
|
|
$
|
541
|
|
Note 3. Warranty and Service Contract
Warranty Obligations
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 six-month period ended June 30, 2011 and 2010 (in thousands):
|
|
|
June 30,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Beginning Balance
|
|
$
|
796
|
|
|
$
|
1,049
|
|
|
Add:Accruals for warranties issued during the period
|
|
|
1,873
|
|
|
|
987
|
|
|
Less:Settlements made during the period
|
|
|
(1,760
|
)
|
|
|
(1,308
|
)
|
|
Ending Balance
|
|
$
|
909
|
|
|
$
|
728
|
|
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 six-month period ended June 30, 2011 and 2010 (in thousands):
| |
|
June 30,
|
|
| |
|
2011
|
|
2010
|
|
|
Beginning Balance
|
|
$
|
6,765
|
|
|
$
|
8,128
|
|
|
Add: Payments received
|
|
|
4,226
|
|
|
|
3,818
|
|
|
Less: Revenue recognized
|
|
|
(4,749
|
)
|
|
|
(4,778
|
)
|
|
Ending Balance
|
|
$
|
6,242
|
|
|
$
|
7,168
|
|
Costs incurred under service contracts were $2.3 million for the six-month period ended June 30, 2011 and $2.0 million for the six-month period ended June 30, 2010 and are recognized as incurred.
Note 4. Stock-based Compensation Expense
Stock-based compensation expense by department recognized during the three and six-month periods ended June 30, 2011 and 2010 was as follows (in thousands):
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5. 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.
Weighted Average Shares Outstanding
The following table sets forth the computation of basic and diluted net loss and the weighted average number of shares used in computing basic and diluted net loss per share (in thousands):
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss – Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding used in computing basic and diluted net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities
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 |
|
|
Six Months Ended |
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Options to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Income Taxes
The Company’s income tax benefit for the three and six-month periods ended June 30, 2011 was primarily related to the carryback of fiscal year 2010 federal losses to obtain a $246,000 refund of alternative minimum taxes paid for fiscal year 2008, reduced by the tax impact of the Company’s non U.S. operations. The Company’s income tax provision for the three and six-month periods ended June 30, 2010, was primarily related to applicable U.S. federal and state income taxes and the tax impact of the Company’s non U.S. operations, reduced primarily by tax exempt interest income. We have recorded a 100% valuation allowance against our U.S. deferred tax assets and as such we do not record any income tax benefit related to our U.S. 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 June 30, 2011 and December 31, 2010, 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 carryback 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.
As of June 30, 2011, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined and disclosed pursuant to FASB ASC Topic 740 as of December 31, 2010.
Note 7. Comprehensive Loss
Comprehensive loss generally represents all changes in stockholders’ equity except those resulting from investments or contributions by stockholders. The Company’s unrealized gain and loss, net on marketable investments represents the only component of other comprehensive loss that is excluded from net loss. The changes in components of comprehensive loss for the periods presented were as follows (in thousands):
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Net loss
|
|
$
|
(2,456
|
)
|
|
$
|
(3,761
|
)
|
|
$
|
(6,311
|
)
|
|
$
|
(5,779
|
)
|
|
Net change in unrealized gain (loss) on available-for sale-securities, net of tax
|
|
|
442
|
|
|
|
(22
|
)
|
|
|
622
|
|
|
|
(88
|
)
|
|
Comprehensive loss
|
|
$
|
(2,014
|
)
|
|
$
|
(3,783
|
)
|
|
$
|
(5,689
|
)
|
|
$
|
(5,867
|
)
|
Note 8. Commitments and Contingencies
Facility Leases
The Company leases its Brisbane, California, office and manufacturing facility under a non-cancelable operating lease which expires on December 31, 2017. In addition, the Company has leased office facilities in certain international countries, including: Japan, Switzerland, France, and Spain. As of June 30, 2011, the Company was committed to minimum lease payments for facilities and other leased assets under long-term non-cancelable operating leases as follows (in thousands):
|
Fiscal Year Ending December 31,
|
|
Amount
|
|
|
2011 (remainder)
|
|
$
|
854
|
|
|
2012
|
|
|
1,528
|
|
|
2013
|
|
|
1,285
|
|
|
2014
|
|
|
1,232
|
|
|
2015
|
|
|
1,269
|
|
|
Thereafter
|
|
|
2,653
|
|
|
Future minimum rental payments
|
|
$
|
8,821
|
|
Purchase Commitments
The Company maintains certain open inventory purchase commitments with its suppliers to ensure a smooth and continuous supply for key components. The Company’s liability in these purchase commitments is generally restricted to a forecasted time-horizon as agreed between the parties. These forecasted time-horizons can vary among different suppliers. The Company’s open inventory purchase commitments were not material at June 30, 2011.
Litigation
The Company is named from time to time as a party to product liability and other claims and lawsuits in the normal course of its business. As of June 30, 2011, the Company was not a party to any material pending litigation.
Indemnifications
In the normal course of business, the Company enters into agreements that contain a variety of representations, warranties, and indemnification obligations. For example, the Company has entered into indemnification agreements with each of its directors and executive officers. The Company’s exposure under its various indemnification obligations is unknown and not reasonably estimable as they involve future claims that may be made against the Company. As such, the Company has not accrued any amounts for such obligations.
Note 9. Subsequent Events
Management evaluated all activity of the Company through August 1, 2011 and concluded that no subsequent events have occurred that would require recognition in the Condensed Consolidated Financial Statements or disclosure in Notes to Condensed Consolidated Financial Statements as of June 30, 2011.
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
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, 2010 as contained in our annual report on Form 10-K filed with the SEC on March 15, 2011. 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 23, 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.
|
|
|
·
|
Recent Accounting Pronouncements. This section describes the issuance and effect of new accounting pronouncements that may be applicable to us.
|
|
|
·
|
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 global medical device company specializing in the design, development, manufacture, marketing and servicing of laser and light-based aesthetics systems for practitioners worldwide. We offer easy-to-use products based on five platforms — CoolGlide®, Xeo®, Solera®, GenesisPlusTM and Excel VTM — each of which enables physicians and other qualified practitioners to perform safe and effective aesthetic procedures for their customers. 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, Titan hand piece refills, and 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. In the United States, we market, sell and service our products through direct sales and service employees, and a distribution relationship with PSS World Medical Shared Services, Inc. (“PSS”), a wholly owned subsidiary of PSS World Medical which has over 700 sales representatives serving physician offices throughout the United States. We also sell certain items such as our Titan hand piece refills and marketing brochures online.
International sales are generally made through direct sales employees and a worldwide distributor network in over 35 countries. Outside of the United States, we have a direct sales presence in Australia, Canada, France, Japan, Spain, Switzerland and the United Kingdom.
Products
Our revenue is derived from the sale of Products, Upgrades, Service, Titan hand piece refills, and Dermal fillers and cosmeceutical products. 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 light-based module, control system software and high voltage electronics; as well as one or more hand pieces. However, depending on the application, the laser or light-based module is sometimes contained in the hand piece such as with our Pearl and Pearl Fractional applications instead of within the console.
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. This provides customers the flexibility to upgrade their systems whenever they want and provides us with a source of recurring revenue which we classify as Upgrade revenue. Service revenue relates to amortization of pre-paid service contract revenue and receipts for time and materials services on out-of-warranty products. Titan hand piece refill revenue is associated with our Titan hand piece which requires replacement of the optical source after a set number of pulses have been used. In Japan, we distribute BioForm, Inc.’s (BioForm) Radiesse® dermal filler product and Obagi’s cosmeceutical products.
Significant Business Trends
Growth
We believe that our ability to grow revenue will be primarily dependent on the following:
|
|
·
|
Continuing to expand our product offerings.
|
|
|
·
|
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).
|
|
|
·
|
Customer demand for our products.
|
|
|
·
|
Consumer demand for the application of our products.
|
|
|
·
|
Marketing to physicians in the core dermatology and plastic surgeon specialties, as well as outside those specialties.
|
|
|
·
|
Generating ongoing revenue from our growing installed base of customers through the sale of Service, Upgrade, Titan hand piece refills, and Dermal fillers and cosmeceutical products.
|
U.S. Revenue
Our U.S. revenue increased by $913,000, or 19%, in the three-month period ended June 30, 2011 and by $573,000, or 6%, in the six-month period ended June 30, 2011, compared to the same periods in 2010, respectively. This increase was primarily attributable to an increase in product revenue due to the FDA clearance of our GenesisPlus system for onychomycosis, or toenail fungus in April 2011; and the commencement of Excel V shipments in the second quarter of 2011.
International Revenue
International revenue increased by $1.8 million, or 24%, in the three month period ended June 30, 2011, compared to the same period in 2010. This increase was primarily attributable to:
|
|
·
|
Higher product revenue from Canada, Australia and our distributor network in Europe and Asia Pacific markets. These improvements were partly attributable to an improved economic environment, compared to the same period in 2010; and
|
|
|
·
|
An increase in our Dermal filler and cosmeceuticals revenue due primarily to sales of our distributed Obagi products in Japan. In the second quarter of 2010, revenue from Obagi products was in the initial stages of ramping up;
|
International revenue slightly decreased by $23,000 in the six-month period ended June 30, 2011, compared to the same period in 2010. This decrease was primarily attributable to lower product revenue, due primarily to the catastrophe in Japan in March 2011; lower upgrade revenue (see explanation above); which was partly offset by an increase in our Dermal filler and cosmeceuticals revenue in Japan.
Voluntary Titan XL Recall
In 2010, we initiated a voluntary recall of our Titan XL hand pieces. As part of the voluntary recall program, we provided our customers with a fully “refilled” Titan XL hand piece. In our results of operations for the three and six months ended June 30, 2010, we recorded an expense of $62,000 and $487,000, respectively, for the estimated cost of this voluntary recall. These factors adversely affected the revenue from Titan hand piece refills since the announcement of the recall, as well as our cost of revenue for the three and six months ended June 30, 2010.
Factors that May Impact Future Performance.
Our industry is impacted by numerous competitive, regulatory and other significant factors. The March 2011 earthquake and tsunami in Japan had a negative impact on our Japanese business and operations. As a result, our future business may be impacted by how fast the Japanese economy, infrastructure and consumer sentiments return to their pre-catastrophe levels. 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 generally accepted accounting principles in the United States, or 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 Securities and Exchange Commission (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, 2010 filed with SEC on March 15, 2011. There have been no significant changes to the accounting policies and estimates disclosed in our Form 10-K.
Recent Accounting Pronouncements
For a full description of recent accounting updates, including the respective expected dates of adoption and effects on results of operations and financial condition see Note 1 “Summary of Significant Accounting Policies – Recent Accounting Updates” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
Results of Operations
The following table sets forth selected consolidated financial data for the periods indicated, expressed as a percentage of total revenue, net.
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30,
|
|
|
June 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Operating Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
Cost of revenue
|
|
|
43 |
% |
|
|
44 |
% |
|
|
44 |
% |
|
|
43 |
% |
|
Gross margin
|
|
|
57 |
% |
|
|
56 |
% |
|
|
56 |
% |
|
|
57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
43 |
% |
|
|
53 |
% |
|
|
46 |
% |
|
|
49 |
% |
|
Research and development
|
|
|
16 |
% |
|
|
12 |
% |
|
|
17 |
% |
|
|
11 |
% |
|
General and administrative
|
|
|
17 |
% |
|
|
22 |
% |
|
|
19 |
% |
|
|
19 |
% |
|
Total operating expenses
|
|
|
76 |
% |
|
|
87 |
% |
|
|
82 |
% |
|
|
79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(19 |
)% |
|
|
(31 |
)% |
|
|
(26 |
)% |
|
|
(22 |
)% |
|
Interest and other income, net
|
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
Loss before income taxes
|
|
|
(18 |
)% |
|
|
(30 |
)% |
|
|
(25 |
)% |
|
|
(21 |
)% |
|
(Benefit) provision for income taxes
|
|
|
(2 |
)% |
|
|
1 |
% |
|
|
(1 |
)% |
|
|
1 |
% |
|
Net loss
|
|
|
(16 |
)% |
|
|
(31 |
)% |
|
|
(24 |
)% |
|
|
(22 |
)% |
Percentages in this table and throughout our discussion and analysis of financial condition and results of operations may reflect rounding adjustments.
Total Net Revenue
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
(Dollars in thousands)
|
|
2011
|
|
|
% Change
|
|
|
2010
|
|
|
2011
|
|
|
% Change
|
|
|
2010
|
|
Revenue mix by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States as a percentage of total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International as a percentage of total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue mix by product category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dermal fillers and cosmeceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discussion of Revenue by Product Type:
Products 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.
Products revenue increased by $2.5 million or 43% in the three-month period ended June 30, 2011 compared to the same period in 2010, and by $366,000 or 3% in the six-month period ended June 30, 2011 compared to the same period in 2010. These increases in revenue were due primarily to the FDA clearance of our GenesisPlus system for toenail fungus in April 2011; the commencement of Excel V shipments in the second quarter of 2011, offset in the six month period ended June 30, 2011 by the impact of the catastrophe in Japan in the first quarter of 2011.
Upgrades Revenue
As explained in more detail in the Products section of the Executive Summary above, our configurable system platforms allow customers to add applications to their existing systems to meet the changing needs of their practices. In some cases, when certain applications are desired that are only available on a platform other than the one owned by the customer, the upgrades revenue will include a platform exchange and additional hand pieces.
Upgrades revenue decreased by $482,000, or 36%, in the three-month period ended June 30, 2011 compared to the same period in 2010, and by $864,000, or 34%, in the six-month period ended June 30, 2011, compared to the same period in 2010. In the past, we introduced new products that allowed existing customers to upgrade their previously purchased systems to take benefit of the additional capabilities, which drove our Upgrade revenue. However, recently we have stand alone products (GenesisPlus and Excel V) versus products that can be an upgrade to an existing system, which has resulted in a decline of our upgrade revenue.
Service Revenue
Our worldwide service revenue increased by $157,000 or 5% in the three-month period ended June 30, 2011 compared to the same period in 2010, and by $171,000 or 3% in the six-month period ended June 30, 2011, compared to the same period in 2010. This increase was the result of improved international service revenue being partially offset by a decline in U.S. service revenue. The increase in international service revenue is due to an increased installed base and a higher number of purchased service contracts. The decline in our U.S. service revenue was primarily attributable to lower contract amortizations as a result of fewer customers purchasing extended service contracts.
Titan Hand Piece Refill Revenue
Our Titan hand piece refill revenue increased by $289,000 or 30% in the three-month period ended June 30, 2011 compared to the same period in 2010, and by $24,000 or 1% in the six-month period ended June 30, 2011, compared to the same period in 2010. This increase was due primarily to the recovery of our Titan refill revenue following the voluntary recall of our Titan XL hand piece commencing in the second quarter of 2010, in which we provided our eligible customers with a fully “refilled” Titan XL hand piece, which delayed their purchase of a refill.
Dermal Filler and Cosmeceuticals Revenue
Our Dermal fillers and cosmeceuticals revenue increased by $248,000 or 31% in the three-month period ended June 30, 2011, compared to the same period in 2010, and by $853,000 or 67% in the six-month period ended June 30, 2011, compared to the same period in 2010. This increase was due primarily to sales of our distributed Obagi products in Japan. In the second quarter of 2010, revenue from Obagi products was in the initial stages of ramping up.
Discussion of Revenue by Geography:
U.S. Revenue
Our U.S. revenue increased by $913,000, or 19%, in the three-month period ended June 30, 2011 and by $573,000, or 6%, in the six-month period ended June 30, 2011, compared to the same periods in 2010, respectively. This increase was primarily attributable to an increase in product revenue due to the FDA clearance of our GenesisPlus system for onychomycosis, or toenail fungus in April 2011; and the commencement of Excel V shipments in the second quarter of 2011.
International Revenue
International revenue increased by $1.8 million, or 24%, in the three month period ended June 30, 2011, compared to the same period in 2010. This increase was primarily attributable to:
|
|
·
|
Higher product revenue from Canada, Australia and our distributor network in Europe and Asia Pacific markets. These improvements were partly attributable to an improved economic environment, compared to the same period in 2010; and
|
|
|
·
|
An increase in our Dermal filler and cosmeceuticals revenue due primarily to sales of our distributed Obagi products in Japan. In the second quarter of 2010, revenue from Obagi products was in the initial stages of ramping up;
|
International revenue slightly decreased by $23,000 in the six-month period ended June 30, 2011, compared to the same period in 2010. This decrease was primarily attributable to lower product revenue, due primarily to the catastrophe in Japan in March 2011; lower upgrade revenue (see explanation above); which was partly offset by an increase in our Dermal filler and cosmeceuticals revenue in Japan.
Gross Profit
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
(Dollars in thousands)
|
|
2011
|
|
|
% Change
|
|
|
2010
|
|
|
2011
|
|
|
% Change
|
|
|
2010
|
|
|
|
|
$ |
8,419 |
|
|
|
22 |
% |
|
$ |
6,882 |
|
|
$ |
14,816 |
|
|
|
— |
% |
|
$ |
14,802 |
|
As a percentage of total net revenue
|
|
|
57 |
% |
|
|
|
|
|
|
56 |
% |
|
|
56 |
% |
|
|
|
|
|
|
57 |
% |
Our cost of revenue consists primarily of material, personnel expenses, royalty expense, warranty and manufacturing overhead expenses.
Gross margin was 57% in the three-month period ended June 30, 2011, compared to 56% for the same period in 2010. Gross margin declined to 56% in the six-month period ended June 30, 2011, compared to 57% for the same period in 2010. Our gross margins were impacted primarily by the following factors:
|
|
·
|
They improved in the three and six month periods ended June 30, 2011 due to the leverage of our relatively fixed manufacturing costs as a result of higher revenue volume;
|
|
|
·
|
Our Titan refill gross margin was favorably impacted given we did not incur any expenses related to the voluntary Titan XL recall in the three and six months ended June 30, 2011. In the three and six months ended June 30, 2010, there was approximately $62,000 and $487,000, respectively, of expenses related to the Titan XL recall program.
|
|
|
·
|
Higher direct revenue as a percentage of total revenue, in the three and six months ended June 30, 2011, compared to the same periods in 2010, resulted in an improvement of our margins because direct business has a better gross margin than our distributor business; and
|
|
|
·
|
Our gross margins in the three and six months ended June 30, 2011, compared to the same periods in 2010, were adversely impacted due to higher service related expenses and costs associates with the initial set-up of our manufacturing for the Excel V product.
|
Sales and Marketing
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
(Dollars in thousands)
|
|
2011
|
|
|
% Change
|
|
|
2010
|
|
|
2011
|
|
|
% Change
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total net revenue
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $104,000 and represented 43% of total net revenue in the three-month period ended June 30, 2011, compared to 53% in the same period in 2010. This decrease was due primarily to: (i) reduced promotional and marketing related spending of approximately $276,000; offset by (ii) an increase in commission expenses of $334,000 due to higher revenue.
Sales and marketing expenses decreased $519,000 and represented 46% of total net revenue in the six-month period ended June 30, 2011, compared to 49% in the same period in 2010. This decrease was due primarily to: (i) reduced promotional and marketing related spending of approximately $639,000; offset by (ii) an increase in commission expenses of $116,000 due to higher revenue.
Research and Development (R&D)
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
(Dollars in thousands)
|
|
2011
|
|
|
% Change |
|
|
2010
|
|
|
2011
|
|
|
% Change |
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D expenses consist primarily of personnel expenses, clinical research, regulatory and material costs. R&D expenses increased by $840,000 to 16% of total net revenue in the three-month period ended June 30, 2011, compared to 12% for the same period in 2010. The increase in expenses was due primarily to: (i) higher personnel expenses of $389,000 due to higher headcount and temporary staffing to ramp up the development of our new products; (ii) higher material expenses of $154,000 related to spending on prototype product development; and (iii) higher consulting services related to our product development efforts of $122,000.
R&D expenses increased by $1.5 million in the six-month period ended June 30, 2011, compared to the same period in 2010. R&D expenses, as a percentage of total net revenue, increased to 17% for the six-month period ended June 30, 2011, compared to 11% for the same period in 2010. The increase in expenses was due primarily to: (i) higher personnel expenses of $830,000 due to higher headcount and temporary staffing to ramp up the development of our new products; and (ii) higher material expenses of $398,000 related to spending on prototype product development.
General and Administrative (G&A)
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
(Dollars in thousands)
|
|
2011
|
|
|
% Change
|
|
|
2010
|
|
|
2011
|
|
|
% Change
|
|
|
2010
|
|
General and Administrative
|
|
$ |
2,588 |
|
|
|
(6 |
%) |
|
$ |
2,744 |
|
|
$ |
4,916 |
|
|
|
(1 |
%) |
|
$ |
4,986 |
|
As a percentage of total net revenue
|
|
|
17 |
% |
|
|
|
|
|
|
22 |
% |
|
|
19 |
% |
|
|
|
|
|
|
19 |
% |
General and administrative expenses consist primarily of personnel expenses, legal fees, accounting, audit and tax consulting fees, and other general and administrative expenses. G&A expenses decreased $156,000 in the three-month period ended June 30, 2011, compared to the same period in 2010. This decrease was primarily attributable to lower personnel expenses of $194,000. G&A expenses remained relatively flat in the six-month period ended June 30, 2011, compared to the same period in 2010.
G&A expenses, as a percentage of net revenue, decreased to 17% for the three-month period ended June 30, 2011, compared to 22% for the same period in 2010. This decrease was due primarily to a higher revenue base in the three-month period ended June 30, 2011, compared to the same period in 2010. G&A expenses, as a percentage of net revenue, remained flat at 19% for the six-month periods ended June 30, 2011 and 2010.
Interest and Other Income, Net
Interest and other income, net consist of the following:
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(Dollars in thousands)
|
|
2011
|
|
|
% Change
|
|
|
2010
|
|
|
2011
|
|
|
% Change
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
38
|
|
|
|
111%
|
|
|
|
18
|
|
|
|
65
|
|
|
|
1,525%
|
|
|
|
4
|
Total Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income, net, increased $58,000 for the three-month period ended June 30, 2011, compared to the same period in 2010 and increased $76,000 for the six-month period ended June 30, 2011 compared to the same period in 2010. These increases were primarily a result of improved interest yields in 2011, compared to 2010.
(Benefit) provision for Income Taxes
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
(Dollars in thousands)
|
|
2011
|
|
|
% Change
|
|
|
2010
|
|
|
2011
|
|
|
% Change
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded an income tax benefit of $208,000 for the three-month period ended June 30, 2011, compared to an income tax provision of $82,000 for the same period in 2010. We recorded an income tax benefit of $176,000 for the six-month period ended June 30, 2011, compared to an income tax provision of $129,000 for the same period in 2010. Our income tax benefit for the three and six-month periods ended June 30, 2011 was primarily related to the carryback of fiscal year 2010 federal losses to obtain a $246,000 refund of alternative minimum taxes paid for fiscal year 2008, reduced by the tax impact of the Company’s non U.S. operations. Our income tax provision for the three and six-month periods ended June 30, 2010 was primarily related to applicable U.S. federal and state income taxes and the tax impact of the Company’s non U.S. operations, reduced primarily by tax exempt interest income. We have recorded a 100% valuation allowance against our U.S. deferred tax assets and as such we do not record any income tax benefit related to our U.S. loss.
Net Loss per Diluted Share