PARTFORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” that involve risks and uncertainties. The Company’s actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “might,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” or variations of these terms and similar expressions, or the negative of these terms or similar expressions intended to identify forward-looking statements. Forward-looking statements are necessarily based on estimates and assumptions that, while considered reasonable by Cutera and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. Forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included under Part I, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
The following discussion and analysis should be read in conjunction with and are qualified in their entirety by reference to the discussions included in Item 1A - Risk Factors, Item 7 - Management’s Discussion & Analysis of Financial Condition and Results of Operations, and elsewhere in this Annual Report on Form 10-K.
In this Annual Report on Form 10-K, unless the context otherwise requires, references to the “Company,” “Cutera,” “we,” “us” and “the Company’s” refers to Cutera, Inc.
PART I
ITEM1. |
We In this Annual Report on Form 10-K, “Cutera,” “the Company,” “we,” “us” and “the Company’s” refer to Cutera, Inc. and its consolidated subsidiaries. Cutera®,AccuTip®, CoolGlide®, CoolGlide excel®, enlighten®, excel HR®, excel V®, excel V+®, LimeLight®, MyQ®, Pearl®, PicoGenesis™, ProWave®,Solera®, Titan®, truSculpt®, truSculpt® flex, Vantage®, and xeo®®are a global medical device company foundedtrademarks for the systems and ancillary products of the Company.
Company Background
Cutera was formed in 1988 as a Delaware corporation in 1998 and have our headquarters in Brisbane, California. We specialize in the design, development, manufacture, marketing and servicingis a global provider of laser and other energy based aestheticsenergy-based aesthetic systems for practitioners worldwide. WeThe Company designs, develops, manufactures, distributes and markets light and energy-based product platforms for use by physicians and other qualified practitioners (collectively, “practitioners”), enabling them to offer safe and effective aesthetic treatments to their customers. In addition, the Company distributes third-party manufactured skincare products. The Company currently offers easy-to-use products based on the following key product platforms:en enlighten, excellightenTM,excel HRTM,truSculptTM,excelVTM, andxeo®, JulietTM,and SecretTMRF— each of which enables physicians and other qualified practitioners to perform safe and effective aesthetic procedures, including treatment for their customers. Eachbody contouring, skin resurfacing and revitalization, tattoo removal, removal of our laserbenign pigmented lesions, vascular conditions, hair removal, toenail fungus and other energy-basedwomen's health. The Company’s platforms consists of one or moreare designed to be easily upgraded to add additional applications and hand pieces, which provide flexibility for the Company’s customers as they expand their practices. The Company’s ongoing research and development activities primarily focus on developing new products, as well as improving and enhancing the Company’s portfolio of existing products. The Company also explores ways to expand the Company’s product offerings through alternative arrangements with other companies, such as distribution arrangements. The Company introduced Juliet, a console that incorporates an intuitive user interface,product for women’s health, in December 2017, Secret RF, a laser or other energy-based module, control system softwarefractional RF microneedling device for skin revitalization, in January 2018, enlighten SR in April 2018, truSculpt iD in July 2018, excel V+ in February 2019 and high voltage electronics. However, depending on the application, the laser or other energy-based module is sometimes contained truSculptflex in the hand piece itself.June 2019.
OurThe Company’s trademarks include: "Cutera,"“Acutip”Cutera,”“AcuTip,”“CoolGlide,”“CoolGlide excel,”“enlighten,” “excel “excelHR,” “excel “excelV,”“excelGenesisPlus,V+,”,“LimeLight,”‘myQ,”“Pearl,”“PicoGenesis,” “solera,“ProWave770,” “titan,“Solera,” “truSculpt,“Titan,”“truSculpt,”“truSculpt flex,”“Vantage”and“xeo.” OurThe Company’s logo and our other trade names, trademarks and service marks appearing in this document are ourthe Company’s property. Other trade names, trademarks and service marks appearing in this annual reportAnnual Report on Form 10-K are the property of their respective owners. Solely for convenience, ourthe Company’s trademarks and trade names referred to in this annual reportAnnual Report on Form 10-K appear without the ™ or®symbols, but those references are not intended to indicate, in any way, that wethe Company will not assert, to the fullest extent under applicable law, ourthe Company’s rights, or the right of the applicable licensor to these trademarks and trade names.
A description of each of ourthe Company’s hand pieces, and the aesthetic conditions they are designed to treat, is contained in the section below entitled “Products” and a summary of the features of ourthe Company’s primary productsplatforms is as follows:
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| ● truSculpt |
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flex – In June 2019 the Company introduced the truSculpt flex for the muscle-sculpting market. This product is a bio-electrical muscle stimulation device designed to strengthen, firm and tone the abdomen, buttocks, and thighs, and can treat patients at all fitness levels. The truSculpt flex delivers Multi-Direction Stimulation with truControl, inducing muscle hypertrophy. Johari (the Company’s contract manufacturing organization) received 510(k) clearance from the United States (“U.S.”) Food and Drug Administration (“FDA”) for muscle conditioning in 2013. It is sold in the USA, Japan, certain APAC markets, and the EU and is expected to be sold to a broader international customer base upon required regulatory approvals. The truSculptflexincludes a consumable hand piece that needs to be "refilled" after a set number of treatments are performed, resulting in recurring revenue.
Other
● truSculptiD–In July 2018 the Company introduced a hands-free version of the Company’s truSculpt platform, the truSculptiD, for the non-surgical body sculpting market. It includes consumable cycles that need to be ordered by the practitioner after a set number of treatments are performed, resulting in recurring revenue. This product is a high-powered RF system designed for body contouring, lipolysis and deep tissue heating, and is able to treat all body and skin types. The truSculptiDdelivers targeted energy at 2 MHz, causing lipolysis of the subcutaneous adipose tissue. The Company received 510(k) clearance from the United States (“U.S.”) Food and Drug Administration (“FDA”) for lipolysis of abdominal fat in 2018. It was primarily sold in the U.S.,Canada and Europe in 2018 and was sold to a broader international customer base in 2019. Prior truSculptplatforms include the truSculpt3D, a 2 MHZ device for tissue heating and temporary reduction of fat in the abdomen, and the original truSculptplatform which was launched in August 2012 and delivered treatments at 1 MHz. In December 2016, the Company received 510(k) clearance from the FDA to market the truSculptplatform for the temporary reduction in circumference of the abdomen. The truSculpt3Dincludes a consumable hand piece that needs to be “refilled" after a set number of treatments are performed, resulting in recurring revenue.
● Juliet– In December 2017, the Company introduced the Julietlaser for women’s intimate health. Julietis a versatile multi-application platform utilizing an Er:YAG laser with the 2940 nm wavelength. This Erbium wavelength produces noticeable results due to its high peak absorption in water. Additionally, Juliet’sErbium technology allows for a controlled thermal delivery to tissue, keeping the procedure safe for patients while minimizing downtime. Julietdelivers two passes of energy to the target area during treatment. The first pass uses ablation to vaporize the tissue and create micro-channels of injury. The second pass uses coagulation to deliver a thermal injury to the area, which further stimulates the body's normal wound healing process, revitalizing, and remodeling damaged tissue and introducing the formation of new blood vessels. Julietalso has a disposable tip, which must be changed for every procedure. As a result, the replacement of the tips results in recurring revenue. Cutera is the distributor of Juliet. All regulatory activities are managed by Asclepion laser technologies gmbh, the legal manufacturer.
● SecretRF–In January 2018, the Company introduced a new fractional radio frequency (“RF”) microneedling device that delivers heat into the deeper layers of the skin using controlled RF energy. The targeted energy revitalizes, rebuilds and firms up tissue, effectively remodeling collagen, improving mild wrinkles and diminishing scars while leaving the outer layer of skin intact, minimizing downtime. Each time a procedure is performed, it requires the physician to use a new hand piece tip. The sale of the replacement tip results in recurring revenue. Cutera is the distributor of Secret RF. All regulatory activities are managed by Ilooda Co. Ltd.
● enlighten– In December 2014, the Company introduced the enlightenlaser platform with a dual wavelength (1064 nanometer, or “nm” + 532 nm) and in December 2016, we introduced a three wavelength model (1064 nm + 532 nm + 670 nm),enlightenIII.The enlightensystem is a dual pulse duration (750 picosecond, or “ps,” and 2 nanosecond, or “ns”) laser system and is cleared for multi-colored tattoo removal and for the treatment of benign pigmented lesions and acne scars. In 2018, the Company introduced an expanded performance enlightenIIIand in April 2018, the Company introduced enlightenSR,which is a lighter version of enlightenwith reduced optical performance. Clinical studies were conducted to support an FDA clearance in October 2018 for treatment of acne scars on patients with Fitzpatrick skin types II-V when used with the Micro Lens Array (MLA) hand piece attachment.
● excelHR– In June 2014, the Company introduced the excelHRplatform, a premium hair removal solution for all skin types, combining Cutera’s proven long-pulse 1064 nm Nd:YAG laser and a high-power 755 nm Alexandrite laser with sapphire contact cooling.
● excelV+– In March 2019, the Company introduced the excelV+, a new iteration of the excelVvascular platform originally introduced in 2011. T h e excelV+, is a high-performance, vascular and benign pigmented lesion treatment platform designed specifically for the core-market of dermatologists and plastic surgeons. The excelV+has 50% more power than its predecessor and provides a greater range of parameters for faster more customizable treatments. The excelVand excelV+are solid-state laser platforms providing a combination of the 532 nm green laser with 1064 nm Nd:YAG technology, to provide a single, compact and efficient system that treats the entire range of cosmetic vascular and benign pigmented lesion conditions.
● xeo– In 2003, the Company introduced the xeo platform, which combines intense pulsed light technology with laser applications in a single system. The xeois a multi-application platform on which a customer can purchase hand piece applications for the removal of unwanted hair, treatment of vascular lesions, and skin revitalization by treating discoloration, fine lines and laxity.
In addition to the above mentioned fiveseven primary systems, we continuethe Company continues to generate revenue from ourits legacy products such asGenesisPlus,TM,CoolGlide®,solera®, and the distribution of skincare products, a product manufactured by a third-party, sourced system calledmyQTM forand sold in the Japanese market.market produced by our distribution partner, ZO. The Company also generates revenue from the sale of post-warranty services, as well as the sales of Titanhand piece refills.
We offer ourThe Company offers its customers the ability to select the systems and applications that best fit their practice and to subsequently upgrade their systems to add new applications. This upgrade path allows ourthe Company’s customers to cost-effectively build their aesthetic practices and provides us with a source of incremental revenue.
In addition to systems and upgrades, we generate revenue from the sale of post-warranty services, Titan hand piece refills, and skincare products (Japanese market only).
The Structure of Skin and Conditions that Affect Appearance
The skin is the body’s largest organ and is comprised of two layers called the epidermis and dermis. The epidermis is the outer layer, and serves as a protective barrier for the body. It contains cells that determine pigmentation, or skin color. The underlying layer of skin, the dermis, contains hair follicles and large and small blood vessels that are found at various depths below the epidermis. Collagen, also found within the dermis, provides strength and flexibility to the skin.
Many factors, including advancing age, smoking, and sun damage, can result in aesthetically unpleasant changes in the appearance of the skin. These changes can include:
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In addition to these skin conditions, people seek removal of unwanted tattoos as well as removal of fat in certain body areas in order to improve their appearance and confidence.
The Market for Non-Surgical Aesthetic Procedures
The market for non-surgical aesthetic procedures has grown significantly over the past several years. Medical Insight, an independent industry research and analysis firm, estimated thatAccording to data presented at the IMCAS Global Market Summit in 2015 total salesFebruary 2020, the medical aesthetic global market is expected to grow at 11.5% from 2019 to reach $22.2 billion by 2025. The body contouring market is expected to grow to 1.1 billion by 2022 at annual growth rate of products in the global aesthetic market exceeded $7 billion and indicated that total sales should increase 11.8% annually through 2019. For North America, the American Society of Plastic Surgeons estimates that in 2015 there were over 14.2 million minimally-invasive aesthetic procedures performed, a 2% increase over 2014 and a 158% increase over 2000.7.9%.
We believe
The Company believes there are several factors contributing to the global growth of aesthetic treatment procedures and aesthetic laser equipment sales, including:
● ImprovedEconomicEnvironmentandExpandedPhysicianBase–The improvements in overall global economic conditions since the last recession have created increased demand for aesthetic procedures, which in turn has resulted in an expanding practitioner base to satisfy the demand. ● AgingDemographicsofIndustrializedCountries–The aging population of industrialized countries, the amount of discretionary income available to the “baby boomer” demographic segment ─ ages 55 to 73 as of 2019 ─ and their desire to retain a youthful appearance, contribute to the increased demand for aesthetic procedures. ● BroaderRangeofSafeandEffectiveTreatments–Technical developments, as well as an increase in treatable conditions due to new product introductions, lead to safe, effective, easy-to-use and low-cost treatments with fewer side effects, resulting in broader adoption of aesthetic procedures by practitioners. In addition, technical advancements enable practitioners to offer a broader range of treatments. These technical developments reduce treatment and recovery times, which in turn lead to greater patient demand. ● BroaderBaseofCustomers–Managed care and government payor reimbursement restrictions motivate physicians to establish, or seek to expand, their elective aesthetic practices with procedures that are paid for directly by patients. As a result, in addition to core practitioners such as dermatologists and plastic surgeons, many other practitioners, such as gynecologists, family practitioners, primary care physicians, physicians performing aesthetic treatments in non-medical offices, and other qualified practitioners (“non-core practitioners”) expand their practices and offer aesthetic procedures. ● ReductionsinCostperProcedure–Due in part to increased competition in the aesthetic market, the cost per procedure has been reduced in the past few years. This attracts a broader base of customers and patients seeking aesthetic procedures. ● WideAcceptanceofAestheticProceduresandIncreasedFocusonBodyImageandAppearance–According to the American Society for Aesthetic Plastic Surgery survey in 2018 both surgical and non-surgical procedures increased compared to 2014. Surgical procedures increased by 21.5%, while non-surgical procedures increased by 30.5% over this 4year period. |
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Non-Surgical Aesthetic Procedures for Improving theBody and/orSkin’s Appearance and Their Limitations
Many alternative therapies are available for improving a person’s appearance by treating specific structures within the skin. These procedures utilize injections or abrasive agents to reach different depths of the dermis and the epidermis. In addition, non-invasive and minimally invasive treatments have been developed that employ laser and other energy-based technologies to achieve similar therapeutic results. Some of these common therapiesaesthetic procedures and their limitations are described below.
technologies including radio frequency, laser, cooling and ultrasound. Procedures address reduction of unwanted fat on the abdomen, flanks, arms, thighs, submentum and back, and can require one or more treatments. Systems with the ability to induce non-invasive lipolysis (breakdown of fat) offer a more permanent solution with an average fat reduction of more than than 20%. Side effects to this approach may include nodules that typically resolve over time, and the risk of burning the treatment area.
Tattooremoval-–The onlymost effective way to remove tattoos on the body is to utilize laser systems that deliver very short pulse durations with high peak power intensity in order to break up the ink particles that comprise tattoos.
The tattoo removal market was valued at $11.6 billion in 2017, and is projected to reach at $27.3 nbllion by 2023 growing at 12.7% from 2017 to 2023. According to a Tattoo Incidence Study published in ORC International in June 2015, upthe market research, people tend to 27%get rid of Americanstheir tattoos due to career purposes, social conditions, personal situations, and more, which have one or more tattoos, and that 1 in 4been the key drivers for the tattoo bearing American adults have “tattoo regret”.removal market. Despite the effectiveness of lasers for tattoo removal, common complaints concerning laser tattoo removal include a low rate of complete clearance (sometimes no better than 50% after several treatments) as well as the high number of treatments for satisfactory clearance (often 10 or more treatments spaced four to eight weeks apart). TheHowever, the latest generation of tattoo removal lasers produce picosecond pulse duration lasers, pulses in the trillionthsdurations, (a trillionth of a second,second) and thereby, can meaningfully improve tattoo clearance as well as a reduction inand reduce the total number of treatments.
Hair
Hair Removal-Removal–Techniques for hair removal include waxing, depilatories, tweezing, shaving, electrolysis, and laser andas well as other energy-based hair removal.removal modalities. The only techniques that provide a long-lasting solution are electrolysis, laser, and other energy-based hair removal.technology such as an Intense Pulsed Light (“IPL”). Electrolysis is usually painful, time-consuming and expensive for large areas, but is the most common method for removing light-colored hair. During electrolysis, an electrologist inserts a needle directly into a hair follicle and activates an electric current in the needle. Since electrolysis only treats one hair follicle at a time, the treatment of an area as small as an upper lip may require numerous visits and many hours of treatment. In addition, electrolysis can cause blemishes and infection related to needle use. In comparison, lasers can quickly treat large areas with a high degree of safety and efficacy.
Skin
Non-Invasive Body Contouring.Revitalization
Our radio-frequency (“RF”) technology basedtruSculpt system is designed for the non-invasive body contouring market. In performing the procedure, energy is applied to heat the dermis of the skin with the goal of shrinking and tightening collagen fibers. In addition, the RF energy procedure can be used for treating fat, due to its selectivity for heating subcutaneous adipose tissue while modestly heating the overlying skin. In December 2016 we received 510(k) clearance from the FDA to markettruSculpt for the temporary reduction in circumference of the abdomen. Non-invasive procedures result in a more subtle and incremental change to the skin, than for example a surgical facelift or a lipolysis procedure. Drawbacks to this approach may include surface irregularities that may resolve over time, and the risk of burning the treatment area.
–Skin Rejuvenation- Skin rejuvenationrevitalization treatments include a broad range of popular alternatives, including Botox and collagen injections, chemical peels, microdermabrasions,peel, microdermabrasion, radio frequency treatmentstreatment and laserslaser and other energy-based treatments. With these treatments, patients hope to improve overall skin tone and texture, reduce pore size, tighten skin and remove other signs of aging, including mottled pigmentation, diffuse redness and wrinkles. All of these procedures are temporary solutions and must be repeated within several weeks or months to sustain their effect, thereby increasing the cost and inconvenience to patients. For example, the body absorbs Botox and collagen, and patients require supplemental injections every three to six months to maintain the benefits of these treatments.
Some
Other skin rejuvenationrevitalization treatments, such as chemical peels and microdermabrasion, can have undesirable side effects. Chemical peels use acidic or caustic solutions to peel away the epidermis, and microdermabrasion generally utilizes sand crystals to resurface the skin. These techniques can lead to stinging, redness, irritation and scabbing. In addition, more serious complications, such as changes in skin color, can result from deeper chemical peels. Patients who undergo these deep chemical peels are also advised
Microneedling– Also known as collagen induction therapy, microneedling is a minimally invasive revitalization treatment that involves using fine needles to avoid exposure tocreate hundreds of tiny, invisible puncture wounds in the sun for several months followingtop layer of the procedure. The American Society of Plastic Surgeons estimates thatskin, which stimulates the body's natural wound healing processes, resulting in 2015, approximately 6.8 million injections of Botoxcell turnover and 2.4 million injections ofincreased collagen and other soft-tissue fillers were administered;elastin production. In January 2018, the Company introduced Secret RF product, a RF fractional microneedling system that helps deliver tailored energy to improve fine lines, wrinkles, and 1.3 million chemical peels and 800,000 microdermabrasion procedures were performed.scars from the inside out.
Women’s Intimate Health –Lasers and RF technology have emerged as a treatment for issues unique to women's health such as vulvar vaginal atrophy and genitourinary symptoms of menopause. The condition causes vaginal dryness, inflammation and irritation, which can lead to painful or frequent urination. Traditional treatments use estrogen therapy to combat vulvar vaginal atrophy and genitourinary symptoms of menopause to restore vaginal health, but not all women suffering from the symptoms are candidates. Lasers have been shown to ablate the vaginal tissue generating a healing response that may lead to symptomatic improvement.
Leg and Facial Veins-andFacialVeins–Current aesthetic treatment methods for leg and facial veins include sclerotherapy, andas well as laser and other energy-based treatments. With these treatments, patients seek to eliminate visible veins, and improve overall skin appearance. Sclerotherapy requires a skilled practitioner to inject a saline or detergent-based solution into the target vein, which breaks down the vessel causing it to collapse and be absorbed into the body. The need to correctly position the needle on the inside of the vein makes it difficult to treat smaller veins, which limits the treatment of facial vessels and small leg veins. The American Society of Plastic Surgeons estimates that approximately 322,000 sclerotherapy procedures were performed in 2015.
Laser and other energy-based non-surgical treatments for hair removal, veins, skin rejuvenationrevitalization and body contouring are discussed in the following section and in the section entitled “Our“The Company’s Applications and Procedures” below.
Laser and Other Energy-Based Aesthetic Treatments
Laser and other energy-based aesthetic treatments can achieve therapeutic results by affecting structures within the skin. The development of safe and effective aesthetic treatments has createdresulted in a well-established market for these procedures.
Ablative skin resurfacing is a method of improving the appearance of the skin by removing the outer layers of the skin. Ablative skin resurfacing procedures are considered invasive or minimally invasive, depending on how much of the epidermis is removed during a treatment. Non-ablative skin resurfacing is a method of improving the appearance of the skin by treating the underlying structure of the skin without damaging the outer layers of the skin. Practitioners can use laser and other energy-based technologies to selectively target hair follicles, veins or collagen in the dermis, as well as cells responsible for pigmentation in the epidermis, without damaging surrounding tissue. Practitioners can also use these technologies to safely remove portions of the epidermis and deliver heat to the dermis as a means of generating new collagen growth. Ablative skin resurfacing improves the appearance of the skin by removing the outer layers of the skin. Ablative skin resurfacing procedures are considered invasive or minimally invasive, depending on how much of the epidermis is removed during a treatment. Non-ablative skin resurfacing improves the appearance of the skin by treating the underlying structure of the skin.
Safe and effective laser and energy-based treatments require an appropriate combination of the following four parameters:
● | Energy |
● | Pulse |
● | Spot |
● | Wavelength |
For example, in the case of hair removal, by utilizing the correct combination of these parameters, a practitioner can use a laser or other light source to selectively target melanin within the hair follicle to absorb the laser energy and destroy the follicle, without damaging other delicate structures in the surrounding tissue. Wavelength and spot size permit the practitioner to target melanin in the base of the hair follicle, which is found in the dermis. The combination of pulse duration and energy level may vary, depending upon the thickness of the targeted hair follicle. A shorter pulse length with a high energy level is optimal to destroy fine hair, whereas coarse hair is best treated with a longer pulse length with lower energy levels. If treatment parameters are improperly set, non-targeted structures within the skin may absorb the energy, thereby eliminating or reducing the therapeutic effect. In addition, improper setting of the treatment parameters or failure to protect the surface of the skin may cause burns, which can result in blistering, scabbing and skin discoloration.
Technology and Design of Ourthe Company’s Systems
Our uniqueThe Company’s enlighten,truSculpt,excelHR,excelV,Juliet,SecretRF,truSculpt,andxeo, andGenesisPlusplatforms provide the long-lasting benefits of laser and other energy-basedenergy- based aesthetic treatments. OurThe Company’s technology allows for a combination of a wide variety of applications available in a single system. Key features of ourthe Company’s solutions include:
● MultipleApplicationsAvailableinaSingleSystem–Many of the Company’s platforms feature multiple-applications that enable practitioners to perform a variety of aesthetic procedures using a single device. These procedures include hair removal, vascular treatments and skin revitalization, which address discoloration, fine lines, and uneven texture. Because practitioners can use the Company’s systems for multiple indications, the investment in a unit is spread across a greater number of patients and procedures, and the acquisition cost may be more rapidly recovered. |
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Strategy● TechnologyandDesignLeadership–The Company’s innovative laser technology combines multiple wavelengths, adjustable energy levels, variable spot sizes and a wide range of pulse durations, allowing practitioners to customize treatments for each patient and condition. The Company’s proprietary pulsed light hand pieces for the treatment of discoloration, hair removal and vascular treatments optimize the wavelength used for treatments and incorporate a monitoring system to increase safety. The Company’s Titanhand piece utilizes a novel light source not previously used for aesthetic treatments. The Company’s Pearland PearlFractionalhand pieces, with proprietary YSGG technology, represent the first application of the 2790 nm wavelength for minimally invasive cosmetic dermatology.
Our● UpgradeablePlatform–Some of the Company’s products allow the Company’s customers to upgrade their system to the Company’s newest technologies or add new applications to their system, each of which provide us with a source of incremental revenue. The Company believes that product upgradeability allows customers to take advantage of the Company’s latest product offerings and provide additional treatment options to their patients, thereby expanding the opportunities for their aesthetic practices.
● TreatmentsforBroadRangeofSkinTypesandConditions–For hair removal, the Company’s products are safe and effective on patients of all skin types, including harder-to-treat patients with dark or tanned skin. In addition, the wide parameter range of the Company’s systems allows practitioners to effectively treat patients with both fine and coarse hair. Practitioners may use the Company’s products to treat spider veins on the leg; to treat facial veins; and perform skin revitalization procedures for discoloration, texture, fine lines and wrinkles on any type of skin. The ability to customize treatment parameters based on skin type enables practitioners to offer safe and effective therapies to a broad base of their patients.
● EaseofUse–The Company designs its products to be easy to use. The Company’s proprietary hand pieces are lightweight and ergonomic, minimize user fatigue, and facilitate clear views of the treatment area, reducing the possibility of unintended damage and increasing the speed of application. The Company’s control console contains an intuitive user interface with simple, independently adjustable controls from which to select a wide range of treatment parameters to suit each patient’s profile. For instance, the clinical navigation user interface on the xeoplatform provides recommended clinical treatment parameter ranges based on patient criteria entered. The Company’s Pearland PearlFractionalhand pieces include a scanner with multiple scan patterns to allow simple and fast treatments of the face. Finally, the Company’s truSculptiDembodies the best of many of the above features. Unlike other body sculpting treatments on the market that require certain body types, or pinchable fat, truSculptiDis "body agnostic" with the ability to customize treatments to the patient's needs and body type. In addition, the Company’s proprietary algorithms and navigation enable the practitioner to treat a 300cm2 area in only 15 minutes.
Business Strategy
The Company’s goal is to maintain and expand ourits position as a leading worldwide provider of light and energy-based aesthetic devices and complementary aesthetic products by executing the following strategies:
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Products
OurCoolGlide● Continue,toxeo,soleraExpand,GenesisPlus,the Company’sProductOffering–Though the Company believes that its current portfolio of products is comprehensive, the Company’s research and development group has a pipeline of potential products under development. The Company launched excel V, in 2011, truSculpt,myQ, in 2012, ProWave LX in 2013, and excel HR andenlighten in 2014. In addition, the Company continues to expand offerings on the Company’s current platforms with further enhancement such as the enlighten III launched in 2016, truSculpt 3D launched in 2017, enlighten SR launched in April 2018, truSculpt iD launched in July 2018, excel V+ launched in February 2019 and truSculpt flex launched in June 2019. The Company also introduced Juliet, a product for women’s health, in December 2017, and Secret RF, a fractional RF microneedling device for skin revitalization, in January 2018. These products allow the Company to leverage existing customer call points, and create new customer call points
● IncreaseRevenueandImproveProductivity–The Company believes that the market for aesthetic systems will continue to offer growth opportunities. The Company continues to build brand recognition, add additional products to the Company’s international distribution channel, and focus on enhancing the Company’s global distribution network, all of which the Company expects will contribute to increased revenue.
● IncreaseFocusonPractitionerswithEstablishedMedicalOffices–The Company believes there is growth opportunity in targeting the Company’s products to a broad customer base. The Company also believes that its customers’ success is largely dependent upon having an existing medical practice, for which the Company’s systems provide incremental revenue sources to augment a customer’s existing practice revenue.
● Leveragethe Company’sInstalledBase– With the introduction of enlighten,excelV, excelHRand truSculpt,the Company is able to effectively offer additional platforms into the existing installed base. In addition, each of these platforms allows for potential future upgrades that offer additional capabilities. The Company believes this program aligns the Company’s interest in generating revenue with the Company’s customers’ interest in improving the return on their investment by expanding the range of treatments that can be performed in their practice.
● GenerateRevenuefromServicesandRefillable,Consumable,HandPieces–The Company’s Titan,truSculpt3D,truSculptiD, and truSculptflex and pulsed-light hand pieces are refillable products, while the Company’s Julietand SecretRFtips are consumable products. Each provides us with the opportunity to participate in the procedure based revenue from the Company’s existing customers. The Company offers post-warranty services to its customers either through extended service contracts to cover preventive maintenance or through direct billing for parts and labor. These post-warranty services serve as additional sources of revenue.
Products
The Company’s excelV,excelHR,enlighten,Juliet,SecretRF,truSculpt,xeo,CoolGlide, and myQplatforms allow for the delivery of multiple laser and energy-based aesthetic applications from a single system. With ourthe Company’s xeo andsolera platforms,platform, practitioners can purchase customized systems with a variety of ourthe Company’s multi-technology applications.
The following table lists our currently offered products and each checked box represents the applications that were included in the product in the years noted.
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Energy Sources:
(a). 1064nm Nd:YAG laser;
(b). Flashlamp;
(c). Infrared laser;
(d). 2790 nm YSGG laser;
(e). Combined frequency-doubled 532 nm and 1064 nm Nd:YAG laser;
(f).Radio frequency at 1 MHz
(g)Combined frequency 755 nm Alexandrite laser and 1064 nm Nd:YAG laser;
(h)Dual wavelength 532 nm and 1064 ND: Yag laser;
(i) Three wavelength 532 nm, 670 nm, and 1064 ND: Yag laser
*Our CE Mark allows us to market truSculpt in the European Union, Australia and certain other countries outside the U.S. for fat reduction, body shaping and body contouring. In the U.S. we have 510(k) clearance for the temporary reduction in circumference Each of the abdomen andelevating tissue temperature for the treatment of selected medical conditions such as relief of pain, muscle spasms, increase in local circulation, and the temporary improvement in the appearance of cellulite.
Each of ourCompany’s products consists of a control console and one or more hand pieces, depending on the model.
Control ConsoleThe following table lists the Company’s currently offered products. Each checked box represents the applications included in the product in the years noted.
Our control console includes an intuitive user interface, control system software and high voltage electronics. AllCoolGlide systems,GenesisPlus,excel V and some models of thexeo platform include our laser module which consists of electronics, a visible aiming beam, a focusing lens, and an Nd:YAG and/or flashlamp laser that functions at wavelengths that permit penetration over a wide range of depths and is effective across all skin types. The interface allows the practitioner to set the appropriate laser or flashlamp parameters for each procedure through a user-friendly format. The control system software ensures that the operator’s instructions are properly communicated from the graphic user interface to the other components within the system. Our high voltage electronics produce over 10,000 watts of peak laser energy, which permits therapeutic effects at short pulse durations. Oursolera console platform comes in two configurations—Opus andTitan—both of which include an intuitive user interface, control system software and high voltage electronics. Thesolera Opus console is designed specifically to drive our flashlamp hand pieces while thesolera Titan console is designed specifically to drive theTitan hand pieces. The control system software is designed to ensure that the operator’s instructions are properly communicated from the graphical user interface to the other components within the system and includes real-time calibration to control the output energy as the pulse is delivered during the treatment. OurtruSculpt control console includes a high-powered, mono-polar RF generator at 1MHz capable of delivering up to 300 watts of energy. ThetruSculpt system dynamically adjusts current, voltage and power during treatment as needed to reach and maintain the appropriate treatment levels.
Hand Pieces
enlighten Hand Piece- Theenlightenhand piecedelivers 532 nm, 670 nm (in enlighten III only), and 1064 nm laser energy to treat benign pigmented lesions and the removal of multi-color tattoos.enlighten’s single hand piece consists of an energy-delivery component housing a motorized focus lens assembly connected to an articulated arm. The hand piece features spot size adjustability from 2 to 8mm, adjustable in 1 mm increments. As with all Cutera laser and light-based systems, the hand piece does not require manual power calibration through a separate calibration port. The power calibration is automatic and built into the laser system.
excel HR Hand Piece- The dual wavelengthexcelHR system introduced in June 2014 delivers 1064 nm and 755 nm laser energy to the treatment area for hair removal.excelHR’s single hand piece consists of an energy-delivery component housing an optical fiber and lens. The hand piece features a sapphire window and peripheral cooling plate with temperature monitoring. The sapphire window allows for 30 watts of temperature regulation with user selectable settings ranging from 4 to 20 degrees centigrade and provides cooling of the skin before, during, and immediately after each laser pulse. This “pre, parallel, and post” cooling provides an anesthetic benefit that makes treatments more comfortable than systems without contact cooling, and also increases the safety profile of treatments by reducing the chances of burning skin. The hand piece has a wide spot-size range between 3 to 18 mm (5 to 18 mm, alexandrite mode).
truSculpt Hand Pieces-ThetruSculpt product introduced in August 2012 is used for thenon-invasive heating of subcutaneous tissue. We sell two differenttruSculpt hand pieces: 40 cm2for larger body parts and the 16cm2for smaller parts of the body. Each of thetruSculpt hand pieces is light weight andergonomically designed for operator comfort, which allows for the uniform heat distribution delivered by the hand pieces. In addition, the hand pieces have a built-in, real time, temperature sensing system to monitor the temperature during the treatment.
excel V Hand Piece- Theexcel V system introduced in February 2011 delivers 1064 nm and 532 nm laser energy to the skin for the treatment of vascular and benign pigmented lesion. Theexcel V system supports two hand pieces, both consisting of an energy-delivery component housing an optical fiber and lens. One hand piece includes a sapphire window cooling plate with temperature monitoring. This hand piece offer a spot size range from 1.5 to 12 mm in 0.1 mm increments, and is capable of delivering either the 1064 nm or 532 nm laser energy. The second hand piece does not have a cooling plate and includes a non-contact temperature sensor to monitor the treatment area temperature. In addition, this second hand piece includes dual aiming beams that facilitate consistent treatments by maintaining the correct distance of the hand piece to the skin to ensure that the fixed 8 mm spot size is maintained.
1064 nm Nd:YAG Hand Piece-Our 1064nm Nd:YAG hand piece delivers laser energy to the treatment area for hair removal, leg and facial vein treatment, and skin rejuvenation procedures to treat skin texture and fine lines. The 1064nm Nd:YAG hand piece consists of an energy-delivery component, consisting of an optical fiber and lens, and a copper cooling plate with embedded temperature monitoring. The hand piece weighs approximately 14 ounces, which is light enough to be held with one hand. The lightweight nature and ergonomic design of the hand piece allows the operation of the device without user fatigue. Its design allows the practitioner an unobstructed view of the treatment area, which reduces the possibility of unintended damage to the skin and can increase the speed of treatment. The 1064nm Nd:YAG hand piece also incorporates our cooling system, providing integrated pre- and post-treatment cooling of the treatment area through a temperature-controlled copper plate to protect the outer layer of the skin. The hand piece is available in either a fixed 10 millimeter spot size for ourCoolGlide CV system, or a user-controlled variable 3, 5, 7 or 10 millimeter spot size for ourCoolGlide Excel andCoolGlide Vantage systems.
GenesisPlus Hand Piece- OurGenesisPlus system launched in 2010 delivers 1064 nm laser energy to the treatment area for the temporary increase of clear nail in patients with onychomycosis and for the treatment of fine wrinkles, diffuse redness and rosacea. This lightweight 1064nm Nd:YAG hand piece consists of an energy-delivery component, housing an optical fiber and lens. The hand piece includes a non-contact temperature sensor to monitor the treatment area temperature. In addition, the hand piece includes dual coaxial aiming beams that facilitate consistent treatments by maintaining the correct distance of the hand piece to the skin. This hand piece offers a single 5 mm spot size.
Pulsed Light Hand Piece- TheLP560,ProWave 770,ProWave LX,AcuTip 500, andLimeLight hand pieces are designed to produce a pulse of light over a wavelength spectrum to treat discoloration such as age and sun spots and other dyschromia. The hand pieces can also be used for hair removal, and treatment of superficial facial vessels. The hand pieces each consist of a custom flashlamp, proprietary wavelength filter, closed-loop power control and embedded temperature monitor, and weigh approximately 13 ounces. The filter in theAcuTip 500 eliminates long and short wavelengths, transmitting only the therapeutic range required for safe and effective treatment. The filter in theLP560,ProWave 770,ProWave LX, andLimeLight eliminates short wavelengths, allowing longer wavelengths to be transmitted to the treatment area. In addition, the wavelength spectrum of theProWave 770 and theLimeLight can be shifted based on the setting of the control console. Our power control includes a monitoring system to ensure that the desired energy level is delivered. The hand pieces protect the epidermis by regulating the temperature of the hand piece window through the embedded temperature monitor. These hand pieces are available on thexeo andsolera platforms.
Titan Hand Piece-TheTitan hand pieces are designed to produce a sustained pulse of light over a wavelength spectrum tailored to induce heating in the dermis. We are aware that some practitioners use theTitanhand piece to treat skin laxity (although the hand piece is cleared in the U.S. by the FDA only for deep dermal heating). The hand piece consists of a custom light source, proprietary wavelength filter, closed-loop power control, sapphire cooling window and embedded temperature monitor, and weighs approximately three pounds. The temperature of the epidermis is controlled by using a sapphire window to provide cooling before, during and after the delivery of energy to the treatment site. We offer two different Titan hand pieces—Titan V andTitan XL.
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| Skin Revitalization | Noninvasive Body Contouring* | Women’s Health | |||||||||||||||||||
System Platforms | Products | Year | Energy Source | Hair Removal | Vascular Lesions | BPL’s Dyschromia & Melasma | Texture, Lines and Wrinkles | Acne Scars | Tattoo Removal | Lipolysis* | Gynecology | |||||||||||
CoolGlide | CV | 2000 | (a) | x | ||||||||||||||||||
Excel | 2001 | (a) | x | x | ||||||||||||||||||
Vantage | 2002 | (a) | x | x | x | |||||||||||||||||
xeo | Nd:YAG | 2003 | (a) | x | x | x | ||||||||||||||||
ProWave 770 | 2005 | (b) | x | |||||||||||||||||||
AcuTip 500 | 2005 | (b) | x | |||||||||||||||||||
Titan V/XL | 2006 | (c) | ||||||||||||||||||||
|
| 2006 | (b) | x | x | |||||||||||||||||
Pearl | 2007 | (d) | x | x | ||||||||||||||||||
Pearl Fractional | 2008 | (d) | x | x | ||||||||||||||||||
ProWave LX | 2013 | (b) | x | |||||||||||||||||||
excel V | 2011 | (e) | x | x | x | x | ||||||||||||||||
myQ | 2011 | (e) | x | x | ||||||||||||||||||
truSculpt | 2012 | (f) | x | |||||||||||||||||||
excel HR | 2014 | (g) | x | x | x | |||||||||||||||||
enlighten(dual wavelength) | 2014 | (h) | x | x | ||||||||||||||||||
enlighten III (MLA) | 2016 | (i) | x | x | x | |||||||||||||||||
truSculpt 3D | 2017 | (f) | x | |||||||||||||||||||
Juliet | 2018 | (j) | x | x | x | |||||||||||||||||
Secret RF | 2018 | (k) | x | |||||||||||||||||||
truSculpt iD | 2018 | (f) | x* | |||||||||||||||||||
truSculpt flex | 2019 | (f) | x* | |||||||||||||||||||
excel V+ | 2019 | (e) | x | x | x | x | ||||||||||||||||
EnergySources:
(a) | 1064nmNd:YAGlaser; |
(b) | Visibleandnear-infraredIntensePulsedLight; |
(c) | InfraredIntensePulsedLight; |
(d) | 2790nmEr:YSGGlaser; |
(e) | Combinedfrequency-doubled532nmand1064nmNd:YAGlaser; |
(f) | Radiofrequencyat1&2MHz–mono-polar |
(g) | Combined755nmAlexandritelaserand1064nmNd:YAGlaser; |
(h) | Dualwavelength532nmand1064nmNd:YAGpicosecondlaser; |
(i) | Threewavelength532nm,670nm,and1064nmNd:YAGpicosecondlaser; |
(j) | 2940nmEr:YAGlaser;and |
(k) | Radiofrequencyat2MHzmono-polar. |
*TheTitan hand pieces can be used on Company’sCEMarkallowsittomarkettruSculptinthexeoEuropeanUnion,Australiaandsolera platforms. TheTitancertain hand piece requires a periodic “refilling” process, which includes othercountriesoutsidethe replacement U.S.forfatreduction,bodyshapingandbodycontouring.IntheU.S.theCompanyhas510(k)clearanceforthereductionincircumferenceofthe optical source, after a set number abdomen,non-invasivelipolysis(breakdownof pulses have been used. This provides us with a source fat)of recurring revenue.theabdomenandelevatingtissuetemperatureforthetreatmentofselectedmedicalconditionssuchasreliefofpain,musclespasms,increaseinlocalcirculation,andthetemporaryimprovementintheappearanceofcellulite.
Upgrade
Pearl Hand Piece- ThePearl hand piece, introduced in 2007, is designed to treat fine lines, uneven texture and dyschromia through the application of proprietary YSGG laser technology. This hand piece can safely remove a small portion of the epidermis, while coagulating the remaining epidermis, leading to new collagen growth. ThePearl hand piece consists of a custom monolithic laser source, scanner and power monitoring electronics. The scanner includes multiple scan patterns to allow simple and fast treatments of the face. The hand piece includes an attachment for a smoke evacuator, allowing the practitioner to use one hand during treatment.
Company’s Pearl Fractional Hand Piece-enlighten, ThePearl Fractional hand piece, introduced in 2008, also uses proprietary YSGG technology and is designed to treat wrinkles and deep dermal imperfections (although it is cleared in the U.S. by the FDA only for skin resurfacing and coagulation). This hand piece penetrates the deep dermis producing a series of micro-columns across the skin, which can result in the removal of damaged tissue and the production of new collagen. ThePearl Fractional hand piece consists of a custom monolithic laser source, scanner and power monitoring electronics. The scanner includes multiple scan patterns to allow simple and fast treatments of the face. The hand piece includes an attachment for a smoke evacuator, allowing the practitioner to use one hand during treatment.
Upgrades
Ourexcel V,truSculpt,and xeoandsoleraplatforms are multi-application products, that are designed to allow our customers to cost-effectively upgrade to ourthe Company’s newest technologies which provide our customers the option toor add applications to their system, and provideseach of which provide us with a source of additional revenue, which we classify as Product revenue.
Extended contract services and support
Service
We offerThe Company offers post-warranty services to ourits customers through extended service contracts that cover preventive maintenance and/or replacement parts and labor for a term of one, two, or by direct billingthree years. The Company also offers services on a time-and-materials basis for systems and detachable hand piece replacements, parts and labor.replacements. Revenue related to services performed on a time-and-materials basis is recognized when performed. These post-warranty services serve as additional sources of recurring revenue from ourthe Company’s installed product base.
Hand Piece RefillsThe Company’s products are engineered to enable quick and efficient service and support. There are several separate components of the Company’s products, each of which can be removed and replaced. The Company believes that quick and effective delivery of service is important to its customers. As of December 31, 2019, the Company had 28 employees and contractors in the Company’s global service department.
We treat our customer’s purchaseIn countries where the Company is represented by distribution partners, customers are serviced through the distributor. Distributors are generally provided 14 to 16 months warranty coverage for parts only, with labor customarily provided to the end customer by the distributor. The Company’s Titan,truSculpt3D, truSculptiD, and truSculpt flex hand pieces generally include a warranty for a set number of shots, instead of for a period of time.
Training
Sales of systems to customers, except system sales through distributors, include training on the use of the system to be provided within 180 days of purchase. Training is also sold separately from systems. The Company recognizes revenue for training when the training is provided. Training is not required for customers to use the systems.
Consumables (Other accessories)
The Company treats its customers' purchases of replacement cycles for truSculpt iD and truSculpt flex, as well as replacement Titan orand truSculpt 3D hand pieces, as “refill”Consumable revenue, which provides usthe Company with a source of recurring revenue from existing customers. FollowingThe Juliet and Secret RF products have single use disposable tips which must be replaced after every treatment. Sales of these consumable tips further enhance the launchCompany’s recurring revenue. Hand piece refills of the Company’s legacy truSculpt product in 2012, we charged customersare accounted for hand piece refills. However, beginning in the third quarter of 2013 we includetruSculpt refills as part of our standard warranty and service contract product offerings.revenue..
Skincare products
We distribute ZO Skin Health, Inc.’s (“ZO”) physician-dispensed, topicalThe Company sells third-party manufactured skincare products. Throughproducts in Japan. The third-party skincare products are purchased from the second quarter of 2014, we also distributed Merz’sRadiesse® dermal filler productthird-party manufacturer and sold to licensed physicians, inand other end users. The Company recognizes revenue for skincare products when it is sold to the Japanese market.customer.
Our Applications and Procedures
OurThe Company’s products are designed to allow the practitioner to select an appropriate combination of energy level, spot size and pulse duration for each treatment. The ability to manipulate the combinations of these parameters allows ourthe Company’s customers to treat the broadest range of conditions available with a single energy-based system.
Tattoo RemovalNon-Invasive- OurenlightenBody system- that delivers thepicosecond and nanosecond pulse duration, as well as ourmyQ Q-switched laser, areused for tattoo removal, the treatment of benign pigmented lesions, and laser skin toning that we refer to as PicoGenesis.
Non-Invasive Body ContouringCont- Ourouring–The Company’s truSculpttechnology allows practitioners to apply a hand piece directly to the skin and deliver high-powered RF energy that results in the deep and uniform heating of the subcutaneous fat tissue at sustained therapeutic temperatures. This heating can cause selective destruction of fat cells, which are eliminated from the treatment area through the body’s natural wound healing processes. The treatment takes approximately 4515 minutes and two or more treatments may be required to obtain the desired aesthetic results. OurThe Company’s CE Mark allows us to market the truSculptin the European Union (“EU”), Australia and certain other countries outside the U.S. for fat reduction, body shaping, body contouring and body contouring.circumferential reduction. In the U.S.,truSculpthas a 510(k) clearance for topical heating for the temporary reduction in circumferencepurpose of the abdomen, and elevating tissue temperature for the treatment of selected medical conditions, such as relief of pain and muscle spasms and increase in local circulation,circulation. Additionally, the 2 MHz setting for the 40 cm2 hand piece is indicated for reduction in circumference of the abdomen and non-invasive lipolysis (breakdown of fat) of the abdomen. The truSculptmassage device is intended to provide a temporary improvementreduction in the appearance of cellulite.
Tattoo Removal–The Company’s enlightensystems, delivering picosecond and nanosecond pulse duration, and the Company’s myQ Q-switched laser are used for tattoo removal, the treatment of benign pigmented lesions, and a laser skin toning procedure that the Company refers to as PicoGenesis.
Hair Removal-Our laser technology allows our customers to treatRemoval–We have two platforms, excelHRand xeo, which address hair removal for all skin types andas well as hair thicknesses. OurThe Company’s xeoplatform allows practitioners to select between the 1064 nm mode for darker, course hair, and the ProWaveLXhand piece designed to address finer, vellus hair. Contact cooling is present on both hand pieces for epidermal protection. excelHRemploys both a 1064 nm Nd:YAG andas well as a 755 nm Alexandrite lasers permits energy to safely penetratefor hair removal. Like the xeo, the 1064 nm wavelength addresses darker, course hair while the 755 nm wavelength is used for finer, lighter hair. Both wavelengths are transmitted through the epidermis of any skin type and intosame CoolViewhand piece with spot sizes up to 20 mm for the dermis where the hair follicle is located. Using the universal graphic user interface on our control console, the practitioner sets parameters to deliver therapeutic energy with a large spot size and variable pulse durations, allowing the practitioner to treat fine or coarse hair. Our 1064nm Nd:YAG and 755 nm Alexandrite wavelength and up to 18 mm for the 1064 nm wavelength. The CoolViewhand pieces allow our customers to treatpiece employs sapphire as a means of contact cooling – epidermal protection. Both platforms are cleared for treating all skin types, while ourProWave 770 andProWave LX hand pieces, with pulsed light technology, treat the majority of skin types quickly and effectively.
For hair removal treatments, the treatment site on the skin is first cleaned and shaved. The practitioner then applies a thin layer of gel to improve contact and aid gliding of the hand piece across the skin. If using theCoolGlide 1064nm Nd:YAG hand piece, the hand piece is applied directly to the skin to cool the area to be treated, then moved and a laser pulse is delivered to the pre-cooled area. To remove hair using theexcel HR, excel V,ProWave 770 andProWave LX hand pieces, cooling is provided by a sapphire window placed directly on the skin, allowing the pulse of light to be applied while the treatment area is being cooled. In the case of both hand pieces, delivery of light which is converted to heat destroys the hair follicles and prevents hair re-growth. This procedure is then repeated at the next treatment site on the body, and can be done in a gliding motion to increase treatment speed. Patients receive three to six treatments on average. Each treatment can take between five minutes to one hour depending on the size of the area and the condition being treated. On average, there are six to eight weeks between treatments.types.
Vascular Lesions- Our laser technology allows our customers to treat the widesttreating a wide range of aesthetic vein conditions, including spider and reticular veins, and small facial veins. OurCoolGlide andxxeoeo 1064nmemploys the LimeLighthand piece for addressing small veins as well as vascular lesions while the Nd:YAG hand piece’sis appropriate for deeper, larger vessels. LimeLightis a fixed spot size IPL while the Nd:YAG has adjustable spot size of 3, 5, 7 or 10 millimeters; thesizes up to 10mm. eexcelxcelVis a dual wavelength laser - 1064 nm and 532 nm hand piece– with adjustable spot sizes ranging from 1.52 mm to 12 mm; and theexcel HR 1064mm. The 532 nm and 755 nm hand pieces with adjustable spot sizes from 3 mm to 18 mm, each allows the practitioner to control treatment depth to target different sized veins. Selection of the appropriate energy level and pulse duration ensures effective treatment of the intended target. OurAcuTip 500 hand piece, with its 6 mm spot size, uses pulsed-light technology and is designed for the treatment of facial vessels.
The vein treatment procedure using the 1064nm Nd:YAG hand piece is performed in a substantially similar manner to the laser hair removal procedure. The laser hand piece iswavelength can be used to cool the treatment area both beforetreat over 20 conditions ranging from small veins and after the laser pulse has been applied. With theexcelV andexcel HR hand pieces, the cooling can be performed before, during and after deliveryvessels to a variety of the laser pulse. With theAcuTip 500 hand piece, the pulse of light is deliveredvascular lesions while the treatment areaNd:YAG is being cooled with the sapphire tip. The delivered energy damages the vein and, over time, it is absorbed by the body. Patientsappropriate for deeper, larger vessels. For both of these devices, patients receive on average between one and six treatments, with six weeks or longer between treatments.
Skin Rejuvenation-OurRevitalization–The Company’s xeo, excelV, excelHRand enlighten platforms, utilizing an Nd:YAG laser, picosecond laser and other energy-based technologies allow ourthe Company’s customers to perform non-invasive and minimally-invasive treatments that reduce redness, dyschromia, fine lines, and wrinkles, improve skin texture, and treat other aesthetic conditions.
Texture, Lines and Wrinkles- When using a 1064nm1064 nm Nd:YAG laser to improve skin texture and treat fine lines, cooling is not applied and the hand piece is held directly above the skin. A large number of pulses are directed at the treatment site, repeatedly covering an area, such as the cheek. By delivering many pulses of laser light to a treatment area, a gentle heating of the dermis occurs and collagen growth is stimulated to rejuvenate the skin and reduce wrinkles. Patients typically receive four to six treatments for this procedure. The treatment typically takes less than a half hour and there are typicallywith a spacing of two to four weeks between treatments.
Texture,LinesandWrinkles–The xeoplatform can address fine lines and wrinkles using the Pearland PearlFractionalhand pieces. When treating fine lines, texture and fine lineswrinkles with aPearlhand piece, the hand piece is held at a controlled distance from the skin and the scanner delivers a preset pattern of spots to the treatment area. Cooling is not applied to the epidermis during the treatment. The energy delivered by the hand piece ablates a portion of the epidermis while leaving a coagulated portion that will gently peel off over the course of a few days. Heat is also delivered into the dermis, which can result in the production of new collagen. Treatment of the full face can usually be performed in 15 to 30 minutes. Patients receive on average between one and three treatments at monthly intervals.
When treating wrinkles and deep dermal imperfectionsThe Company’s Julietlaser is a versatile multi-application platform utilizing an Er:YAG laser with the 2940 nm wavelength. This Erbium wavelength produces noticeable results with fewer side effects, due to its high peak absorption in water. Additionally, Juliet’sErbium technology allows for aPearl Fractional controlled thermal delivery to tissue. The Microspot hand piece the hand piece is held at a controlled distance from the skin and the scanner delivers a preset pattern of spotsfractionated energy to the treatment area. Cooling is not applied to the epidermis during the treatment. The energy delivered by the hand piece penetrates the deep dermis producing a series of micro-columns across the skin, which can result in the removal of damaged tissue and the production of new collagen. Treatment of the full face can usually be performed in less than an hour. Patients receive on average between one and three treatments at monthly intervals.
Our CE Mark allows us to marketPearl Fractional in the European Union, Australia and certain other countries outside the U.S. for the treatment of wrinkles and deep dermal imperfections. However, in the U.S. we have a 510(k) clearance only forinduce skin resurfacing and coagulation.improved skin quality, tone and texture.
Additionally, the Company’s Toenail Fungus-Secret In addition to performing skin rejuvenation, our CE Mark allows us to marketGenesisPlusRFplatformis a Radio Frequency microneedling device that employs fractionated RF energy (2 MHz) delivered at different pre-programmed depths in the European Union, Australiadermis to produce new collagen. The SecretRFcomes with four treatment tips: a 25-pin tip, both insulated and certain other countries outside the U.S. for thesemi-insulated, and a 64-pin tip, both insulated and semi-insulated. The treatment of onychomycosis (“toenail fungus”). Tiny pulses of light from an Nd:YAG laser pass through the toenail to the fungus underneath, which is irradiated without any damage to the surrounding nail or skin. TheGenesisPlushas dual aiming beams that facilitate consistent treatments by maintaining the correct distance of the hand piece to the skin. In addition, during the treatment an integrated sensor is used to actively monitor the temperature of the treatment area. In the U.S. we have 510(k) clearance to marketGenesisPlus for the temporary increase of clear nailminimal side effects, negligible downtime and results in patients with onychomycosis.improved skin tone and texture as well as improvement in acne scars.
Dyschromia-Dyschromia Our–The Company’s pulsed-light technologies allow ourthe Company’s customers to safely and effectively treat red and brown dyschromia (skin discoloration), benign pigmented lesions, and rosacea. The practitioner delivers a narrow spectrum of light to the surface of the skin through ourLP560 orthe Company’s LimeLighthand pieces. These hand pieces include one of ourthe Company’s proprietary wavelength filters, which reduce the energy level required for therapeutic effect and minimize the risk of skin injury.
The 532 nm wavelength green laser option of the excelVand enlightensystems, as well as the 755 nm infrared wavelength of the excelHR,can be used to treat benign pigmented lesions in substantially the same way.
In treating benign pigmented lesions, with a pulsed-light technology, the hand piece is placed directly on the skin and then the light pulse is triggered. The cells forming the pigmented lesion absorb the light energy, darken and then flake off over the course of two to three weeks. Several treatments may be required to completely remove the lesion. The treatment takes a few minutes per area treated and there are typically three to four weeks between treatments.
The 532 nm wavelength green laser option of theexcelVandenlighten systems, as well asthe 755 nm infrared wavelength of theexcel HR, can be used to treat benign pigmented lesions in substantially the same way as described above with the pulsed light devices.
Practitioners can also treat dyschromia and other skin conditions with ourthe Company’s Pearlhand piece. During these treatments, the heat delivered by thePearlhand piece will remove the outer layer of the epidermis while coagulating a portion of the epidermis. That coagulated portion will gently peel off over the course of a few days, revealing a new layer of skin underneath. Treatment of the full face can usually be performed in 15 to 30 minutes. Patients receive on average between one and three treatments at monthly intervals.
Skin Laxity- OurQuality–The Company’s Titantechnology allows ourthe Company’s customers to use deep dermal heating to tighten lax skin. The practitioner delivers a spectrum of light to the skin through ourthe Company’s Titanhand piece. This hand piece includes ourthe Company’s proprietary light source and wavelength filter which tailors the delivered spectrum of light to provide heating at the desired depth in the skin.
In treating compromised skin, laxity, the hand piece is placed directly on the skin and then the light pulse is triggered. A sustained pulse causes significant heating in the dermis. This heating can cause immediate collagen contraction while also stimulating long-term collagen regrowth. Several treatments may be required to obtain the desired degree of tightening of the skin. The treatment of a full face can take over an hour and there are typically four weeks between treatments.
Our
The Company’s CE Mark allows us to market theTitanin the European Union,EU, Australia and certain other countries outside the U.S. for the treatment of wrinkles through skin tightening. However, in the U.S. we have a 510(k) clearance for only deep dermal heating.
Sales and Marketing
InThe Company markets, sells and services the U.S. we market and sell ourCompany’s products primarily through a direct sales organization. Generally, eachand service employees in North America (including Canada), Australia, Belgium, France, Germany, Hong Kong, Japan, Spain, Switzerland and the United Kingdom. International Sales and Services outside of these direct sales employee is assigned a specific territory. As of December 31, 2016, we had a U.S. direct sales force of 52 employees. We internally manage our U.S. and Canadian sales organization as one North American sales region with 58 territories as of December 31, 2016.
International salesmarkets are generally made through a worldwide distributor network of distributors in over 40 countries, as well as a direct international sales force of 34 employees, as of December 31, 2016. As of December 31, 2016, we hadforce.. In the U.S. the Company markets and sells its products through a direct sales offices in Australia, Belgium, Canada, France, Hong Kong, Japan, Spain (until January 2017), Switzerlandorganization. The Company internally manages its U.S. and the United Kingdom. Our international revenueCanadian sales organization as a percentage of total revenue represented 45% in 2016, 48% in 2015 and 55% in 2014.one North American sales region.
WeThe Company also sellsells certain items likeTitan hand piece refills, cycle refills, consumable tips and marketing brochures through the internet.Company’s web site www.cutera.com.
Although specific customer requirements can vary depending on applications, customersCustomers generally demand quality, performance, ease of use, and high productivity in relation to the cost of ownership. We have respondedThe Company responds to these customer demands by introducing new products focused on these requirements in the markets we serve.it serves. Specifically, we believe that we introducethe Company believes it introduces new products and applications that are innovative, address the specific aesthetic procedures in demand, and are upgradeable on ourits customers’ existing systems. In addition, we providethe Company provides attractive upgrade pricing to new product families. To increase market penetration, the Company also markets to non-core practitioners in addition to marketing to the Company’s core specialties of plastic surgeons and dermatologists, we also market to non-core practitioners.dermatologists.
We seekThe Company seeks to establish strong ongoing relationships with ourits customers through the upgradeability of ourthe Company’s products, sales of extended service contracts, the refilling ofTitanhand pieces,piece refills and replacement disposable tips, ongoing training and support, and by distributing (in Japan only) skincare products. Weproducts in Japan. The Company primarily target ourtargets its marketing efforts to practitioners through office visits, workshops, trade shows, webinars and trade journals. WeThe Company also marketmarkets to potential patients through brochures, workshops and ourits website. In addition, we offerthe Company offers clinical forums with recognized expert panelists to promote advanced treatment techniques using ourthe Company’s products to further enhance customer loyalty and uncover new sales opportunities.
Competition
OurThe industry in which the Company operates is subject to intense competition. OurThe Company’s products compete against conventional non-energy-based treatments, such as electrolysis, Botox and collagen injections, chemical peels, microdermabrasion and sclerotherapy. OurThe products also compete against laser and other energy-based products offered by other public companies, such asCynosure (Hologic announced its intent to acquireas Hologic (acquired Cynosure in FebruaryMarch 2017), Elen (in Italy), XIO GroupAllergan (acquired Lumenis in September 2015), Syneron,Zeltiq (Allergan announced its intent to acquire Zeltiq in FebruaryApril 2017), Valeant (acquired Solta in January 2014)Bausch Health (Valeant), Vieve, InMode, as well as private companies, including Alma,Sisram, Syneron Candela (acquired in 2017 by an affiliate of private equity funds advised by Apax Partners), Sciton, BTL Industries and several others. Additionally, in November of 2019, the affiliated private equity funds of Baring Private Equity Asia (“BPEA”) announced the acquisition of Lumenis, a leading provider of specialty energy-based medical devices across the fields of aesthetics, urology, ophthalmology, ENT and gynecology, with an international presence. The transaction remains subject to customary regulatory approvals and is expected to be completed in early 2020. Also in November of 2019, Clayton, Dubilier & Rice announced an agreement under which its-managed funds will acquire Cynosure, LLC, a leader in medical aesthetics systems and technologies, from Hologic, Inc. Cynosure develops, manufactures, and markets medical aesthetic treatment systems for dermatologists, plastic surgeons, medical spas, and other healthcare practitioners, with sales and distribution worldwide.
Competition among providers of laser and other energy-based devices for the aesthetic market is characterized by extensive research and development efforts, and innovative technology. While we attemptthe Company attempts to protect ourits products through patents and other intellectual property rights, there are few barriers to entry that would prevent new entrants or existing competitors from developing products that would compete directly with ours.the Company. There are many companies, both public and private, that are developing innovative devices that use both energy-based and alternative technologies. Some of these competitors have greater resources than we dothe Company does or product applications for certain sub-markets in which we dothe Company does not participate. Additional competitors may enter the market, and we arethe Company is likely to compete with new companies in the future. To compete effectively, we havethe Company has to demonstrate that ourthe Company’s products are attractive alternatives to other devices and treatments by differentiating ourthe Company’s products on the basis of performance, brand name, service and price. We haveThe Company has encountered, and expectexpects to continue to encounter, potential customers who, due to existing relationships with ourthe Company’s competitors, are committed to, or prefer, the products offered by these competitors. Competitive pressures may result in price reductions and reduced margins for ourthe Company’s products.
Research and Development
The Company focuses its research and development efforts on innovation and improvement for products and services that align with its mission. The Company consistently strives to understand its customers’ expectations for total excellence. The Company accomplishes this by its commitment to continuous improvement in design, manufacturing and service, which the Company believes provides for superior products and services to ensure on going customer satisfaction, trust and loyalty. The Company seeks to comply with all applicable domestic and international regulations to maintain the highest quality.
Research and Development
Our research and development group develops new products and applications and builds clinical support to address unmet or underserved market needs. As of December 31, 2016, our2019, the Company’s research and development activities were conducted by a staff of 38 employees with a broad base of experience in lasers, optoelectronics, software, and other fields. We have developedrelated disciplines. The Company develops working relationships with outside contract engineering and design consultants, giving ourthe Company’s team additional technical and creative breadth. We workThe Company works closely with thought leaders and customers, to understand unmet needs and emerging applications in aesthetic medicine. Research
Acquisitions, Investments, and Distribution Agreements
The Company’s strategy of providing a broad range of therapeutic capabilities requires a wide variety of technologies, products and capabilities. The rapid pace of technological development in the aesthetic device industry and the specialized expertise required in different areas make it difficult for the Company to develop a broad portfolio of technological solutions. In addition to internally generated growth through research and development expenses were approximately $11.2 millionefforts, the Company has considered, and expects to continue to consider, acquisitions, investments and distribution agreements to provide access to new products and technologies in 2016, $10.7 million in 2015both new and $10.5 million in 2014.existing markets.
ServiceThe Company expects to further the Company’s strategic objectives and Supportstrengthen its existing businesses by making future acquisitions, investments, or by entering into new distribution agreements in areas that the Company believes it can acquire or stimulate the development of new technologies and products. Mergers and acquisitions of medical technology companies, as well as distribution relationships are inherently risky and no assurance can be given that any acquisition will be successful or will not materially adversely affect the Company’s consolidated operations, financial condition and cash flows.
Our products are engineered to enable quick and efficient service and support. There are several separate components of our products, each of which can easily be removed and replaced. We believe that quick and effective delivery of service is important to our customers. As of December 31, 2016, we had a 47-person global service department. Internationally, we provide direct service support through our Australia, Belgium, Canada, France, Hong Kong, Japan, and Switzerland offices, through third-party service providers in Spain and U.K, and also through a network of distributors in over 40 countries.Manufacturing
We provide a standard one-year warranty coverage for all of our systems. We provide initial warranties on our products to cover parts and service and offer extended service plans that vary by the type of product and the level of service desired. Our standard warranty on system consoles covers parts and service for a standard period of one year. From time to time, we also have promotions whereby we include a post-warranty service contract with the sale of our products. Customers are notified before their initial warranty expires and are able to purchase extended service plans covering replacement parts and labor.
In countries where we are represented by distributor partners, our customers are serviced through the distributor network. Distributors are generally provided 14 to 16 months warranty coverage for parts only, with labor being provided to the end customer by the distributor.
In the event a customer does not purchase an extended service plan, we will offer to service the customer’s system and charge the customer for time and materials. With respect to thetruSculpt and other hand pieces, if a customer’s system is out of warranty, and they have not purchased an extended service contract that covers hand piece replacements, then the customer is charged for their replacement hand piece.
OurTitan hand pieces generally include a warranty for a set number of shots, instead of for a period of time.
Manufacturing
We manufacture ourThe Company manufactures its products with components and subassemblies supplied by vendors. We assemblevendors, and testassembles and tests each of ourits products at ourthe Brisbane, California facility.facility, and at third party contract manufacturers’ facilities. Quality control, cost reduction and inventory management are top priorities of ourthe manufacturing operations.
We purchaseThe Company purchases certain components, subassemblies and subassembliesassembled systems from a limited number of suppliers. We haveThe Company has flexibility with ourits suppliers to adjust the number of components and subassemblies as well as the delivery schedules. The forecasts we use are based on historical demands and sales projections. Lead times for components and subassemblies may vary significantly depending on the size of the order, time required to fabricate and test the components or subassemblies, specific supplier requirements and current market demand for the components and subassemblies. We reduce theThe potential for disruption of supply disruptionis reduced by maintaining sufficient inventories and identifying additional suppliers. The time required to qualify new suppliers for some components, or to redesign them, could cause delays in ourthe Company’s manufacturing. To date, we havethe Company has not experienced significant delays in obtaining any of ourits components or subassemblies.
We use The Company uses small quantities of common cleaning products in ourits manufacturing operations, which are lawfully disposed of through a normal waste management program. We doThe Company does not forecast any material costs due to compliance with environmental laws or regulations.
We are required to manufacture our products in compliance with the FDA’s Quality System Regulation, or QSR. The QSR covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. The FDA enforces the QSR through periodic unannounced inspections. We had an FDA full quality system audit for three weeks during March 2014. There were no significant findings as a result of this audit and our responses have been accepted by the FDA. Our failure to maintain compliance with the QSR requirements could result in the shutdown of our manufacturing operations and the recall of our products, which would have a material adverse effect on our business. In the event that one of our suppliers fails to maintain compliance with our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. We have opted to maintain quality assurance and quality management certifications to enable us to market our products in the U.S., the member states of the European Union, the European Free Trade Association and countries which have entered into Mutual Recognition Agreements with the European Union. In January 2016, we passed our surveillance recertification audit establishing compliance with the most current requirements of EN ISO 13485:2012, CAN/CSA ISO 13485:2003, and MDD 93/42/EEC. Our manufacturing facility is ISO 13485 certified.
Patents and Proprietary Technology
We relyThe Company relies on a combination of patent, copyright, trademark and trade secret laws, and non-disclosure, confidentiality and invention assignment agreements to protect ourthe Company’s intellectual property rights. As of December 31, 2016, weFebruary 28, 2019, the Company had 3432 issued U.S. patents and two5 pending U.S. patent applications. In the U.S. and several foreign countries, we have registered ourThe Company name and several of our product names as trademarks, including Cutera,Acutip 500,CoolGlide,CoolGlide Excel,enlighten, Limelight,myQ,Pearl,ProWave 770,ProWave LX,solera,Titan,xeo andtruSculpt. We may have common law rights in other product names, includingexcelV,Pearl Fractional,solera Titan andexcel HR. We intendintends to file for additional patents and trademarks to continue to strengthen ourthe Company’s intellectual property rights.
We Patents typically have a 20-year term from the application filing date. There can be no assurance that pending patent applications will result in the issuance of patents, that patents issued to or licensed certain patents from Palomar (acquired by Cynosure in 2013) and paid ongoing royalties based on sales of applicable hair-removal products. The royalty rate on these products ranged from 3.75% to 7.50% of revenue. The remaining U.S. patents expired in February 2015 and the remaining international patents expired in February 2016. As a result, all our revenue from February 2016 onwardsCompany will not be subjectchallenged or circumvented by competitors, or that these patents will be found to royalties. Our revenue from systems that do not include hair-removal capabilities (suchbe valid or sufficiently broad to protect the Company’s technology or to provide the Company with a competitive advantage.
The Company has also obtained certain trademarks and trade names for the Company’s products and maintain certain details about the Company’s processes, products and strategies as ourtrade secrets. In the U.S. and several foreign countries, the Company registers its Company name and several of its product names as trademarks, including solera Cutera, AcuTip, CoolGlide, CoolGlideexcel, excel, enlighten,Juliet,LimeLight, myQ, Pearl, ProWave 770, ProWaveLX, SecretRF,Solera(discontinued as of January 2018), Titan,truSculptandxeo SA. The Company may have common law rights in other product names, including excelV,GenesisPlusPearlFractional,myQ,Solera,excel V Titanand enlightenexcel),HR.The Company intends to file for additional patents and trademarks to continue to strengthen the Company’s intellectual property rights.
The Company relies on non-disclosure and non-competition agreements with employees, technical consultants and other revenue from service contracts,Titan, skincare products, were not subjectparties to these royalties. In addition,protect, in 2006 we capitalized $1.2 million as an intangible asset representing the ongoing license for these patents, which was being amortized on a straight-line basis over their expected useful life of 9-10 years.
Our employeespart, trade secrets and technical consultants are required to execute confidentiality agreements in connection with their employment and consulting relationships with us. Weother proprietary technology. The Company also requirerequires them to agree to disclose and assign to us all inventions conceived in connection with the relationship. We cannot provide anyThere can be no assurance that employeesthese agreements will not be breached, that the Company will have adequate remedies for any breach, that others will not independently develop equivalent proprietary information or that third parties will not otherwise gain access to the Company’s trade secrets and consultants will abide by the confidentiality or assignability terms of their agreements. Despite measures taken to protect our intellectual property, unauthorized parties may copy aspects of our products or obtain and use information that we regard as proprietary.proprietary knowledge.
For additional information, please refer to Item 1A. Risk Factors of this Annual Report on Form 10-K, under the section entitled “RiskFactors-Intellectualpropertyrightsmaynotprovideadequateprotectionforsomeorallofthe Company’sproducts,whichmaypermitthirdpartiestocompeteagainstusmoreeffectively, andwemaybeinvolvedinfuturecostlyintellectualpropertylitigation, whichcouldimpactthe Company’sfuturebusinessandfinancialperformance.”
Government Regulation
Our products are medical devices subject to extensive and rigorous regulation by the U.S. Food and Drug Administration, as well as other regulatory bodies. FDA regulations govern the following activities that we perform and will continue to perform to ensure that medical products distributed domestically or exported internationally are safe and effective for their intended uses:United States
TheCompany’sproductsaremedicaldevicessubjecttoregulationbynumerousgovernmentagencies,includingtheFDAandcounterpartagenciesoutsidetheU.S.Tovaryingdegrees,eachoftheseagenciesrequireustocomplywithlawsandregulationsgoverningtheresearch,development,testing,manufacturing,labeling,pre-marketclearanceorapproval,marketing,distribution,advertising,promotion,recordkeeping,reporting,tracking,andimportingandexportingofmedicaldevices.IntheU.S.,FDAregulationsgovernthefollowingactivitiesthattheCompanyperformsandwillcontinuetoperformtoensurethatmedicalproductsdistributeddomesticallyorexportedinternationallyaresafeandeffectivefortheirintendeduses:
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FDA’s Pre-market Clearance and Approval Requirements
Unless an exemption applies, each medical device we wishthe Company wishes to commercially distribute in the U.S. will require either prior 510(k) clearance, or pre-marketde novo approval from the FDA. The FDA classifies medical devices into one of three classes. Devices deemed to pose lower risks are placed in either class I or II. For Class II, which requires the manufacturer to submit to the FDA a pre-market notification requesting permission to commercially distribute the device. This process is generally known as 510(k) clearance. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in class III, requiring more rigorous pre-market approval. All of ourthe Company’s current products are class II devices.
510(k) Clearance Pathway
When a 510(k) clearance is required, wethe Company must submit a pre-market notification demonstrating that ourthe Company’s proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of Pre-Market Approval, or PMA,"PMA", applications. By regulation, the FDA is required to clear or deny a 510(k), pre-market notification within 90 days of submission of the application. As a practical matter, clearance often takesmay take significantly longer. Thelonger, as FDA may require further information, including clinical data, to make a determination regarding substantial equivalence.additional information. Laser devices used for aesthetic procedures, such as hair removal, have generally qualified for clearance under 510(k) procedures.procedures
The following table details the indications for which wethe Company received a 510(k) clearance for ourthe Company’s products and when these clearances were received.
FDA Marketing Clearances: |
| Date Received: |
Laser-based products: |
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- treatment of vascular lesions |
| June 1999 |
- hair removal |
| March 2000 |
- permanent hair reduction |
| January 2001 |
- treatment of benign pigmented lesions and pseudo folliculitis barbae, commonly referred to as razor bumps, and for the reduction of red pigmentation in scars |
| June 2002 |
- treatment of wrinkles |
| October 2002 |
- treatment to increase clear nail in patients with onychomycosis | April 2011 | |
- expanded spot size to 5 mm for clear nail in patients with onychomycosis | May 2013 | |
- addition of Alexandrite 755 nm laser wavelength for hair removal, permanent hair reduction and the treatment of vascular and benign pigmented lesions | December 2013 | |
-enlighten picosecond and nanosecond 532/1064 nm for the treatment of benign pigmented lesions | August 2014 | |
-enlighten picosecond and nanosecond 532/1064 nm for multi-colored tattoo removal | November 2014 | |
-enlighten IIIpicosecond and nanosecond 670 nm wavelength | November 2016 | |
-enlighten picosecond and nanosecond 532/1064 nm higher performance specifications for multi-colored tattoo removal and the treatment of benign pigmented lesions | April 2017 | |
- enlighten III picosecond and nanosecond 532/670/1064 nm for multi-colored tattoo removal, adding 670 nm for the treatment of green and blue tattoo inks, and the treatment of benign pigmented lesions with higher performance specifications | October 2017 | |
- enlighten Micro Lens Array (MLA) for treatment of acne scars | December 2018 | |
Pulsed-light technologies: |
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- treatment of pigmented lesions |
| March 2003 |
- hair removal and vascular treatments |
| March 2005 |
| ||
Infrared Titan technology for deep dermal heating for the temporary relief of minor muscle and joint pain and for the temporary increase in local circulation where applied |
| February 2004 |
| ||
Solera tabletop console: |
| |
- for use with the Titan hand piece |
| October 2004 |
- for use with |
| January 2005 |
| ||
Pearl product for the treatment of wrinkles |
| March 2007 |
| ||
Pearl Fractional product for skin resurfacing and coagulation |
| August 2008 |
truSculpt radio frequency | ||
- | April 2008 | |
- | November 2012 | |
- Product labeling and technology updates for existing clearances | September 2014 | |
- Temporary reduction in circumference of the abdomen | December 2016 | |
-truSculpt 2.0: Hands-free treatment powering sequentially six 40 cm2 puck-style applicators | August 2017 | |
-truSculpt iD: for non-surgical fat-reduction and circumferential reduction procedures | June 2018 | |
-truSculpt flex: for non-surgical fat-reduction and circumferential reduction procedures | June 2019 | |
Pre-Market Approval (“PMA”) Pathway
A PMA must be submitted to the FDA if the device cannot be cleared through the 510(k) process. A PMA must be supported by extensive data, including but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device. No device that we have developed to date has required pre-market approval, although development of future devices or indications may require pre-market approval.
Product Modifications
We have modified aspects of our products since receiving regulatory clearance, but we believe that new 510(k) clearances are not required for these modifications. AfterPursuant to FDA regulations, after a device receives 510(k) clearance, or a PMA, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will requirelabeling, biocompatibility, requires a new clearance or approval.clearance. The FDA requires each manufacturermanufacturers to make this determination initially, but the FDA can review any such decision and canmay disagree with a manufacturer’s determination. To date, the Company has modified aspects of the Company’s products after receiving regulatory clearance, and determined that new 510(k) clearances are not required for these modifications. If the FDA disagrees with ourthe Company’s determination not to seek a new 510(k) clearance, or PMA, the FDA may retroactively require usthe Company to seek 510(k) clearance or pre-market approval. The FDA could also require us to cease marketing and distribution and/or recall the modified device until 510(k) clearance or pre-market approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or penalties.clearance. .
Clinical Trials
When FDA approval of a class I, class II or class III device requires human clinical trials, and if the device presents a “significant risk,” as defined by the FDA, to human health, the device sponsor is required to file an Investigational Device Exemption, or IDE, application with the FDA and obtain IDE approval prior to commencing the human clinical trial. If the device is considered a “non-significant” risk, IDE submission to the FDA is not required. Instead, only approval from the Institutional Review Board (“IRB”), is required to proceed with the planned and IRB approved clinical trial/study. .
The Company is required to manufacture the Company’s products in compliance with the FDA’s Quality System Regulation (“QSR”). The QSR covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of the Company’s products. The FDA enforces the QSR through periodic unannounced inspections. The Company had an FDA full quality system audit in March 2017. There were no significant findings or IRB, overseeingobservations as a result of this audit, however the clinical trial is required. Human clinical studies are generally requiredCompany’s failure to maintain compliance with the QSR requirements could result in connection with approvalthe shutdown of class III devices and may be required for class I and II devices. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE must be approved in advance by the FDA for a specified number of patients. Clinical trials for a significant risk device may begin once the application is reviewed and cleared by the FDACompany’s manufacturing operations and the appropriate institutional review boards atrecall of the clinical trial sites. Future clinical trialsCompany’s products, which would have a material adverse effect on the Company’s business. In the event that one of ourthe Company’s suppliers fails to maintain compliance with specified quality requirements, the Company may have to qualify a new supplier and could experience manufacturing delays as a result. The Company has opted to maintain quality assurance and quality management certifications to enable us to market the Company’s products may require that we submitin the U.S., the member states of the EU, the European Free Trade Association and obtain clearancecountries which have entered into Mutual Recognition Agreements with the EU. In January 2018, the Company conducted the Company’s recertification audit to the requirements of an IDEISO 13485:2003 under the Medical Device Single Audit Program (“MDSAP”) for the 5 regulatory jurisdictions signatory to MDSAP (FDA - US, Health Canada - Canada, Therapeutic Goods Administration (“TGA”) - Australia, Pharmaceuticals and Medical Devices Agency (“PMDA”) - Japan, and Agência Nacional de Vigilancia Sanitária (“ANVISA”) - Brazil); and for the EU under Europäische Norm (“EN”) International Standards Organization (“ISO”) 13485:2012 and Medical Device Directive (MDD”) 93/42/EEC. The Company passed the recertification audit establishing compliance with ISO 13485:2003 under MDSAP; EN ISO 13458:2012; and MDD 93/42/EEC. The MDSAP and EU certification can be used to establish compliance with Good Manufacturing Practices (“GMP”), QSR, and Quality Management System (“QMS”) requirements for all six regulatory jurisdictions, replacing routine audits from the FDA prior to commencing clinical trials.each regulatory jurisdiction. The FDA, and the IRB at each institution at which a clinical trialCompany’s manufacturing facility is being performed, may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable health risk.ISO 13485 certified.
Pervasive and Continuing Regulation
After a device is placed on the market, numerous regulatory requirements apply. These include:
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● Quality system regulations, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;
● Labeling regulations and FDA prohibitions against the promotion of products for un-cleared, unapproved or “off-label” uses;
● Medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur; and
● Post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device.
The FDA has broad post-market and regulatory enforcement powers. We areThe Company is subject to unannounced inspections by the FDA and the Food and Drug Branch of the California Department of Health Services or CDHS,(or “CDHS”), to determine ourthe Company’s compliance with the QSR and other applicable regulations, and these inspectionswhich may include the manufacturing facilities of ourthe Company’s subcontractors. In the past, our prior facility has been inspected, and observations were noted. There were no findings that involved a material violation of regulatory requirements. Our responses to these observations have been accepted by the FDA and CDHS, and we believe that we are in substantial compliance with the QSR. OurCompany’s current manufacturing facility has been inspected by the FDA and the CDHS. The FDA and the CDHS noted observations, but there were no findings that involved a material violation of regulatory requirements. OurThe Company’s responses to those observations have been accepted by the FDA and CDHS.
We areThe Company is also regulated under the Radiation Control for Health and Safety Act, which requires laser products to comply with performance standards, including design and operation requirements, and manufacturers to certify in product labeling and in reports to the FDA that their products comply with all such standards. The lawregulations also requires laser manufacturers to file new product and annual reports, maintain manufacturing, testing and sales records, and report product defects. Various warning labels must be affixed and certain protective devices installed, depending on the class of the product.
Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:
● | Warning letters, fines, injunctions, consent decrees and civil penalties; |
● | Repair, replacement, recall or seizure of |
● | Operating restrictions or partial suspension or total shutdown of production; |
● | Refusing |
● | Withdrawing 510(k) clearance |
● | Criminal |
The FDA also has the authority to require usthe Company to repair, replace or refund the cost of any medical device that we haveit has manufactured or distributed. If any of these events were to occur, they could have a material adverse effect on ourthe Company’s business.
We areThe Company is also subject to a wide range of federal, state and local laws and regulations, including those related to the environment, health and safety, land use and quality assurance. We believeThe Company believes that compliance with these laws and regulations as currently in effect will not have a material adverse effect on ourthe Company’s capital expenditures, earnings and competitive and financial position.
International
International sales of medical devices are subject to foreign governmental regulations, which vary substantially from country to country. The time required to obtain clearance or approval by a foreign country may be longer or shorterdifferent than that required for FDA clearance. And the clearance or approval and the requirements may be different.different from those in the U.S.
The primary regulatory environment in EuropeIn Japan, the Company is thatactively seeking approvals for products to supplement the Company’s existing approvals for enlighten,excel V,excel HR, LimeLight, ProWave, Solera,Titan, truSculptiDand xeo.
In the European Economic Area, or EEA, (which is composed of the European Union, which consists of a 28 countries encompassing mostMember States of the major countries in Europe. The member statesEU plus Norway, Liechtenstein and Iceland), a single regulatory approval process exists, and conformity with the legal requirements is represented by the CE mark. While it remains somewhat unresolved, the cabinet of the European Free Trade Association have voluntarily adopted laws and regulationsUnited Kingdom agrees that mirror those of the European UnionUK should maintain conformity with respect to medical devices.the CE mark process following Brexit. Other countries, such as Switzerland, have entered into Mutual Recognition Agreements and allow the marketing of medical devices that meet European UnionEU requirements. The European UnionEU has adopted numerous directives and European Standardization Committees have promulgated voluntary standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear CE conformity marking, indicating that the device conforms withto the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout the member states of the European Union, the member states of the European Free Trade AssociationEEA and countries which have entered into a Mutual Recognition Agreement. The method of assessing conformity varies depending on the type and class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a Notified Body, an independent and neutral institution appointed by a country to conduct the conformity assessment. This third-party assessment may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s device. An assessment by a Notified Body in one member state of the European Union, the European Free Trade AssociationEEA, or one country which has entered into a Mutual Recognition Agreement is required in order for a manufacturer to commercially distribute the product throughout these countries. ISO 9001 and ISO 13845 certification are voluntary harmonized standards. Compliance establishes the presumption of conformity with the essential requirements for a CE Marking. In February 2000, ourthe Company’s facility was awarded the ISO 9001 and EN 46001 certification. In March 2003, wethe Company received ourthe Company’s ISO 9001 updated certification (ISO 9001:2000) as well as ourthe Company’s certification for ISO 13485:1996 which replaced ourthe Company’s EN 46001 certification. In March 2004, wethe Company received ourthe Company’s ISO 13485:2003 certification and in March 2006, March 2010, February 20112009, and January 2012 we passed ISO 13485 recertification audits. Our most recentIn January 2015, the Company passed a recertification audit occurred in January 2015. We passed the audit establishing compliance with the most current requirements of EN ISO 13485:2012, CAN/CSA ISO 13485:2003, and MDD 93/42/EEC. In January 2018, the Company conducted the Company’s recertification audit to the requirements of ISO 13485:2003 under the Medical Device Single Audit Program (MDSAP) for the 5 regulatory jurisdictions signatory to MDSAP (FDA - US, Health Canada - Canada, TGA - Australia, PMDA - Japan, and ANVISA - Brazil); and for the EU under EN ISO 13485:2012 and MDD 93/42/EEC. The Company passed the recertification audit establishing compliance with ISO 13485:2003 under MDSAP; EN ISO 13458:2012; and MDD 93/42/EEC. In January 2019, the Company passed the upgrade audit establishing compliance with ISO 13485:2016 and the surveillance audit under MDSAP. The MDSAP and EU certification can be used to establish compliance with GMP/QSR/QMS requirements for all six regulatory jurisdictions, replacing routine audits from each regulatory jurisdiction. For cause audits can still occur.
Applicability of Anti-Corruption Laws and Regulations
The Company’s worldwide business is subject to the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”), the United Kingdom Bribery Act of 2010 (the “UK Bribery Act”) and other anti-corruption laws and regulations applicable in the jurisdictions where the Company operates. The FCPA can be used to prosecute companies in the U.S. for arrangements with physicians, or other parties outside the U.S., if the physician or party is a government official of another country and the arrangement violates the law of that country. The UK Bribery Act prohibits both domestic and international bribery, as well as bribery across both public and private sectors. There are similar laws and regulations applicable to Cutera outside the U.S., all of which are subject to evolving interpretations. For additional information, please refer to Item 1A. Risk Factors of this Annual Report on Form 10-K, under the sections entitled “Risk Factors – the Company’s failure to comply with rules relating to bribery, foreign corrupt practices, and privacy and security laws may subject the Company to penalties and adversely impact the Company’s reputation and business operations.”
Patient Privacy and Security Laws
Various laws worldwide protect the confidentiality of certain patient health and other consumer information, including patient medical records, and restrict the use and disclosure of patient health information by healthcare providers. Privacy standards in Europe and Asia are becoming increasingly strict, enforcement action and financial penalties related to privacy in the EU are growing, and new laws and restrictions are being passed. The management of cross-border transfers of information among and outside of EU member countries is becoming more complex, which may complicate the Company’s clinical research and commercial activities, as well as product offerings that involve transmission or use of data. The Company will continue its efforts to comply with those requirements and to adapt the Company’s business processes to those standards.
In the U.S., the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology and Clinical Health Act (“HITECH”) and their respective implementing regulations, including the final omnibus rule published on January 25, 2013, imposes specified requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business associates,” defined as independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys new general authority to file civil actions for damages or injunctions in federal court to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways, thus complicating compliance efforts. The Company potentially operates as a business associate to covered entities in a limited number of instances. In those cases, the patient data that the Company receives may include protected health information, as defined under HIPAA. Enforcement actions can be costly and interrupt regular operations of its business. While the Company has not been named in any such actions, if a substantial breach or loss of data from the Company’s records were to occur, the Company could become a target of such litigation.
In the EU, Regulation 2016/679 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data (“General Data Protection Regulation” or “GDPR”) came into effect on May 25, 2018. The GDPR replaces Directive 95/46/EC (“Data Protection Directive”). While many of the principles of the GDPR reflect those of the Data Protection Directive, for example in relation to the requirements relating to the privacy, security and transmission of individually identifiable health information, there are a number of changes. In particular: (1) pro-active compliance measures are introduced, such as the requirement to carry out a Privacy Impact Assessment and to appoint a Data Protection Officer where health data is processed on a “large scale;” and (2) the administrative fines that can be levied are significantly increased, the maximum being the higher of
€20 million, or 4%, of the total worldwide annual turnover of the group in the previous financial year. While we believe we are compliant with GDPR, the recent implementation of regulation, coupled with the early limited enforcement action make it difficult to assess.
Environmental Health and Safety Laws
The Company is also subject to various environmental health and safety laws and regulations worldwide. Like other medical device companies, the Company’s manufacturing and other operations involve the use and transportation of substances regulated under environmental health and safety laws including those related to the transportation of hazardous materials. To the best of the Company’s knowledge at this time, the Company does not expect that compliance with environmental protection laws will have a material impact on the Company’s consolidated results of operations, financial position or cash flows.
Employees
As of December 31, 2016, we2019, the Company had 297447 employees, compared to 262387 employees as of December 31, 2015. Of the 297 employees at December 31, 2016, 122 were in sales and marketing, 69 in manufacturing operations, 47 in technical service, 38 in research and development and 21 in general and administrative. We believe2018. The Company believes that ourits future success will depend in part on ourthe Company’s continued ability to attract, hire and retain qualified personnel. None of ourthe Company’s employees are represented by a labor union, and we believe ourthe Company believes its employee relations are good.
Available Information
We are subject toThe Company makes its periodic and current reports, including the reporting requirements under the Securities Exchange Act of 1934. Consequently, we are required to file reports and information with the Securities and Exchange Commission, or SEC, including reports on the following forms: annual reportCompany's Annual Reports on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, current reportsCurrent Reports on Form 8-K, and any amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.1934, as well as its charters for the Company's Audit and Compensation Committees and its Code of Ethics, available free of charge, on the Company’s website as soon as practicable after such material is electronically filed or furnished with the Securities and Exchange Commission (the “SEC”). The Company’s website address is www.cutera.comand the reports are filed under “SEC Filings,” under “Financials” on the Investor Relations portion of the Company’s website. These reports and other information concerning the companyCompany may be accessed through the SEC’s website at www.sec.gov. Such filings, as well as our charters for our Audit, Compensation, and Nominating and Corporate Governance Committees and our Code of Ethics are available on our website at www.cutera.com. In the event that we grant a waiver under our Code of Ethics to any of our officers and directors, we will publish it on our website. Information contained on, or that can be accessed through, our website does not constitute part of this report and inclusions of our website address in this report are inactive textual references only.www.sec.gov.
ITEM 1A. RISK FACTORS |
We operateThe Company operates in a rapidly changing economic and technological environment that presents numerous risks, many of which are driven by factors that wethe Company cannot control or predict. OurThe Company’s business, financial condition and results of operations may be impacted by a number of factors. In addition to the factors discussed elsewhere in this report, the following risks and uncertainties could materially harm ourthe Company’s business, financial condition or results of operations, including causing ourthe Company’s actual results to differ materially from those projected in any forward-looking statements. The following list of significant risk factors is not all-inclusive or necessarily in order of importance. Additional risks and uncertainties not presently known to us,the Company, or that wethe Company currently deemdeems immaterial, also may materially adversely affect us in future periods. You should carefully consider these risks and uncertainties before investing in ourthe Company’s securities.
The Company’s annual and quarterly operating results may fluctuate in the future, which may cause the Company’s share price to decline.
The Company’s net sales, expenses and operating results may vary significantly from year to year and quarter to quarter for several reasons, including, without limitation:
● | the ability of the Company’s sales force to effectively market and promote the Company’s products, and the extent to which those products gain market acceptance; |
● | the inability to meet the Company's debt repayment obligations under the Loan and Security Agreement with Wells Fargo Bank, N.A. as amended (the “Revised Revolving Line of Credit”) due to insufficient cash; |
● | the possibility that cybersecurity breaches, data breaches, and other disruptions could compromise the Company’s information or result in the unauthorized disclosure of confidential information; |
● | the existence and timing of any product approvals or changes; |
● | the rate and size of expenditures incurred on the Company’s clinical, manufacturing, sales, marketing and product development efforts; |
● | the Company’s ability to attract and retain personnel; |
● | the availability of key components, materials and contract services, which depends on the Company’s ability to forecast sales, among other things; |
● | investigations of the Company’s business and business-related activities by regulatory or other governmental authorities; |
● | variations in timing and quantity of product orders; |
● | temporary manufacturing interruptions or disruptions; |
● | the timing and success of new product and new market introductions, as well as delays in obtaining domestic or foreign regulatory approvals for such introductions; |
● | increased competition, patent expirations or new technologies or treatments; |
● | impact of the FDA communication letter regarding “vaginal rejuvenation” procedures using energy-based devices on sales of the Company's products; |
● | product recalls or safety alerts; |
● | litigation, including product liability, patent, employment, securities class action, stockholder derivative, general commercial and other lawsuits; |
● | volatility in the global market and worldwide economic conditions; |
● | changes in tax laws, including changes domestically and internationally, or exposure to additional income tax liabilities; |
● | the impact of the new EU privacy regulations (GDPR) on the Company’s resources; |
● | the financial health of the Company’s customers and their ability to purchase the Company’s products in the current economic environment; and |
● | other unusual or non-operating expenses, such as expenses related to mergers or acquisitions, may cause operating results to vary. |
● | a pandemic of the coronavirus disease has spread from China to many other parts of the world and may adversely affect our business, operations and financial condition. |
As a result of any of these factors, the Company’s consolidated results of operations may fluctuate significantly, which may in turn cause its share price to fluctuate.
WeIf defects are discovered in the Company’s products, the Company may incur additional unforeseen costs, customers may not purchase the Company’s product and the Company’s reputation may suffer.
The Company’s success depends on the quality and reliability of its products. While the Company’s subject components are sources and products manufactured to stringent quality specifications and processes, the Company’s products incorporate different components including optical components, and other medical device software, any of which may contain errors or exhibit failures, especially when products are first introduced. In addition, new products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only after commercial shipment. Because the Company’s products are designed to be used to perform complex surgical procedures, due to the serious and costly consequences of product failure, the Company and its customers have an increased sensitivity to such defects. In the past, the Company has voluntarily recalled certain products. Although the Company’s products are subject to stringent quality processes and controls, the Company cannot provide assurance that its products will not experience component aging, errors, or performance problems. If the Company experiences product flaws or performance problems, any or all of the following could occur:
● | delays in product shipments; |
● | loss of revenue; |
● | delay in market acceptance; |
● | diversion of the Company’s resources; |
● | damage to the Company’s reputation; |
● | product recalls; |
● | regulatory actions; |
● | increased service or warranty costs; or |
● | product liability claims. |
Costs associated with product flaws or performance problems could have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows.
A pandemic of the coronavirus disease has spread from China to many other parts of the world and may adversely affect our business, operations and financial condition.
A pandemic of the coronavirus disease is ongoing in China and other parts of the world, including Italy, South Korea, Japan, France and many other countries. As the outbreak is still evolving, much of its impact remains unknown. It is impossible to predict the effect and continued spread of the coronavirus globally. Should the coronavirus continue to spread globally or not be contained to countries with current outbreaks, our business operations could be delayed or interrupted. China and other countries have implemented travel bans to contain the coronavirus, and some countries have expanded screenings of travelers. If bans are implemented and extended to additional countries, our business operations could be adversely affected.
The success and continuing development of the Company’s products depends, in part, upon maintaining strong relationships with physicians and other healthcare professionals.
If the Company fails to maintain the Company’s working relationships with physicians and other ancillary healthcare and aesthetic professionals, the Company’s products may not be developed and marketed in line with the needs and expectations of the professionals who use and support the Company’s products. Physicians assist us as researchers, marketing consultants, product consultants, and public speakers, and the Company relies on these professionals to provide us with considerable knowledge and experience. If the Company is unable to maintain profitability.these strong relationships, the development and marketing of the Company’s products could suffer, which could have a material adverse effect on the Company’s consolidated financial condition and results of operations.
Although we had profitable third and fourth quarters in 2016 and gave financial guidance that we expect to be profitable for the full year of 2017, there can be no assurance that we will be able to maintain profitability. Given our recent operating history of very few profitable quarters, we cannot be certain that we will be able to maintain profitability in the future and you should not rely on our operating results for any prior quarterly or annual periods as an indication of our future operating performance. Any predictions about the performance of our operations in the future may not be as accurate as they could be if we had a longer history of profitability.
Revenue growth in our business is driven by several factors and one such factor is new product introductions. Our ability to sustain profitability depends on our ability to introduce new products that are adopted by our customers and on the extent to which we can increase revenue and control our costs to be able to leverage our expenses. In addition, we need to be able to counter any unforeseen difficulties, complications, product delays or other unknown factors that may require additional expenditures. Because of the numerous risks and uncertainties associated with our growth prospects, product development, sales and marketing and other efforts, unforeseen litigation expenses, etc., we are unable to predict the extent of our future profitability or losses.
We relyThe Company relies heavily on ourits sales professionals to market and sell ourits products worldwide. If we arethe Company is unable to hire, effectively train, manage, improve the productivity of, and retainour the Company’s sales professionals, ourthe Company’s business will be harmed, which would impair ourits future revenue and profitability.
OurThe Company’s success largely depends on ourthe Company’s ability to hire, train, manage, train, and improve the productivity levels of ourthe Company’s sales professionals worldwide. Because of ourthe Company’s focus on non-core practitioners in the past, several of ourits sales professionals do not have established relationships with the core market, consisting of dermatologists and plastic surgeons, or where those relationships exist, they are not veryappropriately strong.
We have experienced direct sales employee and sales management turnover in North America, Japan, and Europe. Competition for sales professionals who are familiar with, and trained to sell in, the aesthetic equipment market continues to be strong.robust. As a result, we have lost some of ourthe Company occasionally loses the Company’s sales people to our competitors. OurThe Company’s industry is characterized by a few established companies that compete vigorously for talented sales professionals. Further, as the economy in North America has rebounded from the recent recession, someSome of thoseits sales professionals have left our companyleave the Company for jobs that they perceive to be better opportunities, both within and outside of the aesthetic industry. For instance, in the first quarter of 2020, the Company experienced significant turnover of the Company’s sales professionals, including several people in key sales leadership positions. Most of these sales professionals went to work for a competitor. The Company believes the loss of these sales professionals may negatively impacted the Company’s sales performance in the first half of 2020. The Company believes it has adequate measures in place to protect the Company’s proprietary and confidential information when employees leave the Company, however the ability to enforce these measures varies from jurisdiction to jurisdiction and we must make a case-by-case decision regarding legal enforcement action. For instance, covenants not-to-compete are not allowed in many states, and if allowed, difficult to enforce in many jurisdictions. Furthermore, such legal enforcement actions are expensive and we cannot give any assurance that these enforcement actions will be successful.
However, we havethe Company also hired a record number ofcontinues to hire and train new sales people, including several from ourthe Company’s competitors. Several of ourthe Company’s sales employees and sales management have beenare recently hired or recently transferred into different roles, and it will take time for them to be fully trained to improve their productivity. In addition, due to the competition for sales professionals in ourthe Company’s industry, we have recruitedthe Company also recruits sales professionals from outside the industry. Sales professionals from outside the industry typically take longer to train and to become familiar with ourthe Company’s products and the procedures in which they are used. As a result of a lack of industry knowledge, these sales professionals may take longer to become productive members of ourthe Company’s sales force.
We train ourThe Company trains its existing and recently recruited sales professionals to better understand ourthe Company’s existing and new product technologies and how they can be positioned against ourthe Company’s competitors’ products. These initiatives are intended to improve the productivity of ourthe Company’s sales professionals and ourthe Company’s revenue and profitability. It takes time for the sales professionals to become productive following their training and there can be no assurance that the recentlynewly recruited sales professionals will be adequately trained in a timely manner, or that ourthe Company direct sales productivity will improve, or that wethe Company will not experience significant levels of attrition in the future.
Measures we implementthe Company implements in an effort to recruit, retain, train and manage ourthe Company’s sales professionals, strengthen their relationships with core market physicians, and improve their productivity may not be successful and may instead contribute to instability in ourits operations, additional departures from ourthe Company’s sales organization, or further reduce ourthe Company’s revenue and harm ourthe Company’s business. If we arethe Company is not able to improve the productivity and retention of ourthe Company’s North American and international sales professionals, then ourthe Company’s total revenue, profitability and stock price may be adversely impacted.
The aesthetic equipment market is characterized by rapid innovation. To compete effectively, wethe Company must develop and/or acquire new products, seek regulatory clearance, market them successfully, and identify new markets for ourthe Company’s technology.
We haveThe aesthetic light and energy-based treatment system industry is subject to continuous technological development and product innovation. If the Company does not continue to innovate and develop new products and applications, the Company’s competitive position will likely deteriorate as other companies successfully design and commercialize new products and applications or enhancements to the Company’s current products. The Company created products to apply ourthe Company’s technology to body contouring, hair removal, treatment of veins, tattoo removal, and skin rejuvenation,revitalization, includingthe treatment of diffuse redness, skin laxity, fine lines, wrinkles, skin texture, pore size and benign pigmented lesions, etc. For example, in the fourth quarter of 2014, we launchedCompany introduced enlightenJuliet, a dual wavelength, dual pulse duration tattoo removalproduct for women’s health, in December 2017, Secret RF, a fractional RF microneedling device for skin revitalization, in January 2018, enlighten SR in April 2018, truSculpt iD in July 2018, excel V+ in February 2019 and benign pigmented lesions treatment system featuring picosecond technology.truSculptflex in June 2019. To grow in the future, wethe Company must continue to develop and/or acquire new and innovative aesthetic products and applications, identify new markets, and successfully launch the newly acquired or developed product offerings.
To successfully expand ourthe Company’s product offerings, wethe Company must, among other things:
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Historically, product introductions have been a significant component of ourthe Company’s financial performance. To be successful in the aesthetics industry, we needthe Company believes it needs to continue to innovate. OurThe Company’s business strategy has therefore beenis based, in part, on ourits expectation that wethe Company will continue to increase ouror enhance its product offerings. We needThe Company needs to continue to devote substantial research and development resources to make new product introductions, which can be costly and time consuming to ourits organization.
WeThe Company also believebelieves that, to increase revenue from sales of new products, we needthe Company needs to continue to develop ourits clinical support, further expand and nurture relationships with industry thought leaders, and increase market awareness of the benefits of ourits new products. However, even with a significant investment in research and development, wethe Company may be unable to continue to develop, acquire or effectively launch and market new products and technologies regularly, or at all. If we failthe Company fails to successfully commercialize new products ouror enhancements, its business may be harmed.
While we attemptthe Company attempts to protect ourits products through patents and other intellectual property, there are few barriers to entry that would prevent new entrants or existing competitors from developing products that compete directly with ours. We expectthe Company’s. The Company expects that any competitive advantage wethe Company may enjoy from current and future innovations may diminish over time as companies successfully respond to our,the Company’s, or create their own, innovations. Consequently, we believethe Company believes that weit will have to continuously innovate and improve ourthe Company’s products and technology to compete successfully. If we arethe Company is unable to innovate successfully, ourits products could become obsolete and ourits revenue could decline as ourits customers and prospects purchase ourits competitors’ products.
Demand for ourthe Company’s products in any of ourthe Company’s markets could be weakened by several factors, including:
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If we dothe Company does not achieve anticipated demand for ourthe Company’s products, there could be a material adverse effect on ourits total revenue, profitability, employee retention and stock price.
We depend on skilled and experienced personnel to operate ourglobalbusiness effectively.Changes to management orin the inability torecruit, hire, train and retainqualified personnel, could harm our ability to successfully manage, develop and expand our business, which would impair our future revenue and profitability.
Our success largely depends on the skills, experience and efforts of our officers and other key employees. The loss of anycomposition of our executive officers could weaken our management expertise and harm our business, and we may not be able to find adequate replacements on a timely basis, or at all. Except for Change of Control and Severance Agreements for our executive officers and a few key employees, we do not have employment contracts with anyteam, including the recent hiring of our officers or other key employees. AnyChief Executive Officer (“CEO”), the recent resignation of our officersChief Financial Officer (“CFO”), the subsequent appointment of an interim CFO and other key employeesthe ongoing search for a permanent CFO, may terminate their employment at any timecause uncertainty regarding the future of the Company’s business, impact employee hiring and their knowledge of our businessretention, increase the volatility in the Company’s stock price, and industry would be difficult to replace. We do not have a succession plan in place for each of our officersadversely impact the Company’s revenue, operating results, and key employees. In addition, we do not maintain “key person” life insurance policies covering any of our employees.financial condition.
WeThe Company recently hired a new Chief Executive Officer, and President (“CEO”),David H. Mowry, who was also iselected to serve on ourthe Company’s Board of Directors. His prior experience is primarily with medical device companies, but not within ouroutside of the aesthetics industry specifically.industry. In addition, he has never been a public company CEO. Recentlyrecently hired executives may view the business differently than prior members of management, and over time may make changes to the existing personnel and their responsibilities, ourthe Company’s strategic focus, operations or business plans. WeThe Company can give no assurances that weit will be able to properly manage any such shift in focus, or that any changes to ourits business, would ultimately prove successful. In addition, leadership transitions and management changes can be inherently difficult to manage and may cause uncertainty or a disruption to ourthe Company’s business or may increase the likelihood of turnover in key officers and employees. OurThe Company’s success depends in part on having a successful leadership team. If wethe Company cannot effectively manage the leadership transitions and management changes, it could make it more difficult to successfully operate ourits business and pursue ourits business goals. We cannot ensure
On November 1, 2019, Sandra A. Gardiner, the Company's Executive Vice President and CFO, resigned. On November 15, 2019, the Company appointed Fuad Ahmad, a partner at FLG Partners, LLC, a chief financial officer services and board advisory consulting firm, as Interim CFO. The Board is conducting a search for a permanent Chief Financial Officer. The Board’s search for a permanent CFO, and any related speculation and uncertainty regarding the Company’s future business strategy and direction in connection with the search and the appointment of a permanent CFO, may cause or result in:
●Disruption of the Company’s business or distraction of the Company’s employees and management;
●Difficulty recruiting, hiring, motivating and retaining talented and skilled personnel, including a permanent CFO;
●Departures of other members of management;
●Increased stock price volatility; and
●Difficulty in establishing, maintaining or negotiating business or strategic relationships or transactions.
If the Company is unable to mitigate these or other potential risks related to the appointment and transition of a permanent CFO, it may disrupt the Company’s business or adversely impact its revenue, operating results, and financial condition. Further, there can be no assurance that wethe Company will be able to attract and hire a qualified permanent CFO on acceptable terms.
Exposure to United Kingdom political developments, including the effect of its withdrawal from the European Union, could be costly and difficult to comply with and could seriously harm the Company’s business.
In June 2016, a referendum was passed in the United Kingdom to leave the European Union, commonly referred to as “Brexit.” This decision created an uncertain political and economic environment in the United Kingdom and other European Union countries. The United Kingdom formally left the European Union on January 31, 2020, and is now in a transition period through December 31, 2020. Although the United Kingdom will remain in the European Union single market and customs union during the transition period, the long-term nature of the United Kingdom’s relationship with the European Union is unclear and there is considerable uncertainty as to when any agreement will be reached and implemented. The political and economic instability created by Brexit has caused and may continue to cause significant volatility in global financial markets and uncertainty regarding the regulation of data protection in the United Kingdom. In particular, although the United Kingdom enacted a Data Protection Act in May 2018 that is consistent with the EU General Data Protection Regulation, uncertainty remains regarding how data transfers to and from the United Kingdom will be regulated. Brexit could also have the effect of disrupting the free movement of goods, services, capital, and people between the United Kingdom, the European Union, and elsewhere. The full effect of Brexit is uncertain and depends on any agreements the United Kingdom may make with the European Union and others. Consequently, no assurance can be given about the impact of the outcome and the Company’s business, including operational and tax policies, may be seriously harmed or require reassessment
The Company depends on skilled and experienced personnel to operate its global business effectively. Changes to management or the inability to recruit, hire, train and retain qualified personnel, could harm the servicesCompany’s ability to successfully manage, develop and expand its business, which would impair the Company’s future revenue and profitability.
The Company’s success largely depends on the skills, experience and efforts of the Company’s officers and other key employees. The loss of any members of ourthe Company’s executive officers could weaken its management expertise and harm the Company’s business, and it may not be able to find adequate replacements on a timely basis, or at all. Except for Change of Control and Severance Agreements for the Company’s executive officers and a few key employees, the Company does not have employment contracts with any of its officers or other key employees. If we doAny of the Company’s officers and other key employees may terminate their employment at any time and their knowledge of the Company’s business and industry may be difficult to replace. For instance, Larry Laber, recently resigned his position as Executive Vice President, Sales, North America, effective on January 17, 2020, and Cutera reassigned his duties to Mr. Jason Richey, President of the Company and to additional members of the North America sales team. The Company does not succeedhave a succession plan in attracting well-qualified employees, retainingplace for each of its officers and motivating existing employees or integrating new executives and employees, our business could be materially and adversely affected. key employees. In addition, the Company does not maintain “key person” life insurance policies covering any of the Company’s employees.
Our2020 the Company experienced a few turnover of its sales professionals, including several people in key sales leadership positions. Most of these sales professionals went to work for a competitor. The Company believes the loss of these sales professionals may negatively impact the Company’s sales performance in the first quarter of 2020. Additionally, the Company’s product development plans depend, in part, on the Company’s ability to attract and retain our skilled labor forceengineers with experience in medical devices. Attracting and our success in attracting and hiring new skilled employees are critical factors in determining whether weretaining qualified personnel will be successful incritical to the future. WeCompany’s success, and competition for qualified personnel is intense. The Company may not be able to meet our future hiring needsattract and retain personnel on acceptable terms given the competition for such personnel among technology and healthcare companies and universities. The loss of any of these persons or retain existing personnel. The staff we hire to perform administrative functions may become stretched due to our increased growth and they may not be able to perform their jobs effectively or efficiently as a result.
We may face particularly significant challenges and risks in hiring, training, managing and retaining engineering and sales and marketing employees. Failurethe Company’s inability to attract, train and retain qualified personnel particularly technicalcould harm the Company’s business and sales and marketing personnel, would materially harm ourthe Company’s ability to compete effectively and grow our business.become profitable.
Security breaches, cyber-security incidents and other disruptions could compromise the Company’s information and impact the Company’s business, financial condition or results of operations.
Thelease forourcorporate headquarters Company relies on networks, information management software and other technology, or information systems, including the Internet and third-party hosted services, to support a variety of business processes and activities, including procurement and supply chain, manufacturing, facilitydistribution, invoicing, order processing and collection of payments. The Company uses information systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. In addition, the Company depends on information systems for digital marketing activities and electronic communications among the Company’s locations around the world and between company personnel as well as customers and suppliers. Because information systems are critical to many of the Company’s operating activities, the Company’s business processes may be impacted by system shutdowns or service disruptions. These disruptions may be caused by failures during routine operations such as system upgrades or user errors, as well as network or hardware failures, malicious or disruptive software, computer hackers, geopolitical events, natural disasters, failures or impairments of telecommunications networks, or other catastrophic events. These events could result in California, U.S.A.,expires on December 31, 2017. We cannot provide assuranceunauthorized disclosure of material confidential information. If the Company’s information systems suffer severe damage, disruption or shutdown and the Company business continuity plans do not effectively resolve the issues in a timely manner, we could experience delays in reporting the Company’s financial results and we may lose revenue and profits as a result of the Company’s inability to timely manufacture, distribute, invoice and collect payments. Misuse, leakage or falsification of information could result in a violation of data privacy laws and regulations and damage the Company’s reputation and credibility, and could expose us to liability. The Company may also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and information systems. Like most major corporations, the Company’s information systems are a target of attacks.
A cyber security attack or other incident that we will be able to renew our lease for this facility atbypasses the Company’s information systems security could cause a reasonable increased rate, and if not, that we will be able torelocatesecurity breach which may lead to a new facility that meets our needs upon terms that we find acceptable.
We occupy office space inmaterial disruption to the Company’s information systems infrastructure or business and may involve a significant loss of business or patient health information. If a cyber security attack or other unauthorized attempt to access the Company’s systems or facilities leased from a commercial landlord, and we cannot provide any assurance that we will be able to remainwere successful, it could result in the same space after our lease expires on December 31, 2017. There is significant demand for leasedtheft, destructions, loss, misappropriation or release of confidential information or intellectual property, and could cause operational or business delays that may materially impact the Company’s ability to provide various healthcare services. Any successful cyber security attack or other unauthorized attempt to access the Company’s systems or facilities also could result in negative publicity which could damage the Company’s reputation or brand with the Company’s patients, referral sources, payors or other third parties and could subject us to a number of adverse consequences, the vast majority of which are not insurable, including but not limited to disruptions in the San Francisco Bay areaCompany’s operations, regulatory and leasing costs haveother civil and criminal penalties, fines, investigations and enforcement actions (including, but not limited to, those arising from the SEC, Federal Trade Commission, Office of Civil Rights, the OIG or state attorneys general), fines, private litigation with those affected by the data breach, loss of customers, disputes with payors and increased significantly over the last few years. We can provide no assurance that we will be able to renew our lease for this facility at a reasonable increased rate,operating expense, which either individually or that we will be able to relocate to a new facility that meets our needs and upon terms that we find acceptable. Whether we remain in our current facility or move to a new facility, we expect to pay more per square foot for space than we are currently paying.
If we move to a new facility, we anticipate that it will be in the same general vicinity as our current location. However, we may experience loss of key employees, incur relocation costs and capital expenditures relating to the process of evaluating our options, negotiating a new lease, moving, and purchasing furniture, fixtures and equipment. Searching for a new facility and managing a relocation process will require expense, time and attention from members of management. Further, we may incur related expenses, such as those associated with regulatory approvals or clearances to manufacture our products, and may encounter disruption of operations related to the move, all of whichaggregate could have a material adverse effect on ourthe Company’s business, financial position, results of operations and liquidity.
As of December 2019, the Company has not had any disruptions to its information systems that have materially affected its business, financial condition or results of operations. However, there can be no assurance that such disruptions may occur and have a material adverse effect on us in the future.
Changes in accounting standards and estimates could have a material adverse effect on the Company’s results of operations and financial position.
Generally accepted accounting principles and the related authoritative guidance for many aspects of the Company’s business, including revenue recognition, inventories, warranties, leases, income taxes and stock-based compensation, are complex and involve subjective judgments. Changes in these rules or changes in the underlying estimates, assumptions or judgments by the Company’s management could have a material adverse effect on the Company’s results of operations and may retroactively affect previously reported results. For example, recently issued authoritative guidance for credit losses may result in a significant impact to allowance for doubtful accounts.
The Company's ability to access credit on favorable terms, if necessary, for the funding of the Company’s operations and capital projects may be limited due to changes in credit markets.
During 2018 and 2019, the Company recently revised its Revolving Credit Facility with Wells Fargo Bank, N.A. (“Wells Fargo”). The Original Revolving Line of Credit contained financial and other covenants as well as the maintenance of a leverage ratio not to exceed 2.5 to 1.0 and a TTM adjusted EBITDA of not less than $10 million.
During the third quarter of 2018, the Company received notice that it was in violation of certain financial covenants in the Original Revolving Line of Credit and entered into discussions with Wells Fargo to amend and revise certain terms of the Original Revolving Line of Credit.
On or about November 2, 2018, the Company entered into a First Amendment and Waiver to the Loan and Security Agreement with Wells Fargo (the “First Amended Revolving Line of Credit”). The First Amended Revolving Line of Credit provided for a principal amount of $15 million, with the ability to request an additional $10 million, and a waiver of any existing defaults under the Original Revolving Line of Credit as long as the Company is in compliance with the terms of the First Amended Revolving Line of Credit.
On or about March 11, 2019, the Company entered into a Second Amendment and Waiver to the Loan and Security Agreement with Wells Fargo (the “Second Amended Revolving Line of Credit”). The Second Amended Revolving Line of Credit required the Company to maintain a minimum cash balance of $15 million at Wells Fargo, but removed all other covenants so long as no money is drawn on the line of credit. The Company may draw down on the line of credit at the time it reaches and maintains TTM adjusted EBITDA of not less than $10 million, and a leverage ratio not to exceed 2.5 to 1.0.
A violation of any of the covenants could result in a default under the Second Amended Revolving Line of Credit that would permit Wells Fargo to restrict the Company’s ability to further access the revolving line of credit for loans and letters of credit and require the immediate repayment of any outstanding loans under the Third Amended Revolving Line of Credit.
Additionally, although the Company does not currently carry any debt, in the past, the credit markets and the financial services industry have experienced disruption characterized by the bankruptcy, failure, collapse or sale of various financial institutions, increased volatility in securities prices, diminished liquidity and credit availability and intervention from the U.S. and other governments. Continued concerns about the systemic impact of potential long- term or widespread downturn, energy costs, geopolitical issues, the availability and cost of credit, the global commercial and residential real estate markets and related mortgage markets and reduced consumer confidence have contributed to increased market volatility. The cost and availability of credit has been and may continue to be adversely affected by these conditions. The Company cannot be certain that funding for the Company’s capital needs will be available from the Company’s existing financial institutions and the credit markets if needed, and if available, to the extent required and on acceptable terms. The Revolving Credit Facility terminates on May 30, 2021 and if the Company cannot renew or refinance this facility or obtain funding when needed, in each case on acceptable terms, such conditions may have an adverse effect on the Company’s revenues and results of operations until weoperations.
The Company’s ability to report timely and accurate information could be negatively impacted by its plan to implement a new accounting and enterprise resource planning (“ERP”) system.
The Company is in the process of implementing a new accounting and ERP system. The Company has not previously had a comprehensive ERP system and to date has relied on a myriad of non-integrated systems, as well as manual processes. A system implementation of this magnitude entails a significant degree of inherent risk. The key elements of this implementation include the conversion of data from existing systems to the new system and the design of the new system to process and report financial and other transactions in an accurate and complete manner. If these, or other aspects of the implementation are fully operationalnot executed successfully, then its ability to report timely and accurate information could be negatively impacted. Failure to report required information in a timely and accurate fashion could result in financial penalties, fines and other administrative actions. Such events could have a material adverse effect on the Company’s total enterprise value and stock price. Additionally, the process of implementing a new facility.ERP system is capital intensive and includes the inherent risk of incurring significant additional costs should the time and resources requirements of the implementation be greater than what the Company currently anticipates.
Macroeconomic political and market conditions, and catastrophic events may adversely affect ourthe Company’s business, results of operations, financial condition and stock price.
OurThe Company’s business is influenced by a range of factors that are beyond ourthe Company’s control, including:
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Macroeconomic developments, like global recessions and financial crises could negatively affect ourthe Company’s business, operating results or financial condition which, in turn, could adversely affect ourthe Company’s stock price. A general weakening of, and related declining corporate confidence in, the global economy or the curtailment in government or corporate spending could cause current or potential customers to reduce their budgets or be unable to fund product or upgrade application purchases, which could cause customers to delay, decrease or cancel purchases of ourthe Company’s products and services or cause customers not to pay us or to delay paying us for previously purchased products and services.
In addition, political unrest in regions like the Middle East, terrorist attacks around the globe and the potential for other hostilities in various parts of the world, potential public health crises and natural disasters continue to contribute to a climate of economic and political uncertainty that could adversely affect ourthe Company’s results of operations and financial condition, including ourthe Company’s revenue growth and profitability.
Macroeconomic declines, negative political developments, adverse market conditions and catastrophic events may cause a decline in ourthe Company’s revenue, negatively affect ourthe Company’s operating results, adversely affect ourthe Company’s cash flow and could result in a decline in ourthe Company’s stock price.
A pandemic of the coronavirus disease has spread from China to many other parts of the world and may adversely affect our business, operations and financial condition.
A pandemic of the coronavirus disease is ongoing in China and other parts of the world, including Italy, South Korea, Japan, France and many other countries. As the outbreak is still evolving, much of its impact remains unknown. It is impossible to predict the effect and continued spread of the coronavirus globally. Should the coronavirus continue to spread globally or not be contained to countries with current outbreaks, our business operations could be delayed or interrupted. China and other countries have implemented travel bans to contain the coronavirus, and some countries have expanded screenings of travelers. If bans are implemented and extended to additional countries, our business operations could be adversely affected.
The price of ourthe Company’s common stockhas increased by over 85% in the six months ended February 28, 2017 andmay fluctuate substantially due to several factors, some of which are discussed below. Further, we havethe Company has a relatively limited number of shares of common stock outstanding, a large portion of which is held by a small number of investors, which could result in the increase in volatility of ourits stock price.
TheThere has been volatility in the price of ourthe Company’s common stock has increased by over 85% in the six months endedsince December 1, 2019, decreasing from $37 per share to$24 per share as of end of February 28, 20172020. The Company believes this is due in part to our recent improved revenue and profitability performance, the purchase of two of our competitors (Cynosure and Zeltiq) in February 2017, the financial guidance we communicated to the investor community in February 2017, repurchases of our stock, the overall rise in the stock market following the conclusionsignificant turnover of the U.S. presidential election in November 2016Company’s North America sales team and other factors. As of December 31, 2016, approximately 50% of our outstanding shares of common stock were held by 10 institutional investors. As a result of ourthe Company’s relatively smalllimited public float, ourits common stock may be less liquid than the stock of companies with broader public ownership. Among other things, trading of a relatively small volume of ourthe Company’s common stock may have a greater impact on the trading price for ourthe Company’s shares than would be the case if ourthe Company’s public float were larger. The public market price of ourthe Company’s common stock has in the past fluctuated substantially and, due to the current concentration of stockholders, may continue to do so in the future.
The market price for ourthe Company’s common stock could also be affected by a number of other factors, including:
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Actual or perceived instability and / or volatility in ourthe Company’s stock price could reduce demand from potential buyers of ourthe Company’s stock, thereby causing ourthe Company’s stock price to either remain depressed or to decline further.
In addition, if the market for medical-device company stocks or the stock market in general experiences a loss of investor confidence, the trading price of ourthe Company’s common stock could decline for reasons unrelated to ourthe Company’s business, results of operations or financial condition. The trading price of ourthe Company’s common stock might also decline in reaction to events that affect other companies in ourthe Company’s industry even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Any future securities litigation could result in substantial costs and divert ourthe Company’s management’s attention and resources from ourthe Company’s business. This could have a material adverse effect on ourthe Company’s business, results of operations and financial condition.
WeThe Company may fail to meet ourits publicly announced guidance or other expectations about ourits business and future operating results, which wouldcould cause ourits stock price to decline.
WeThe Company started providing, and may continue to provide, financial guidance about ourits business and future operating results in February 2017.results. In developing this guidance, ourthe Company’s management must make certain assumptions and judgments about ourits future operating performance, including but not limited to projected hiring of sales professionals, continued growth of revenue in the aesthetic device market, continue to increase ouror decrease of its market share, reduce costs of production of ourits recently introduced products, and continued stability of the macro-economic environment in ourthe Company’s key markets. Furthermore, analysts and investors may develop and publish their own projections of ourthe Company’s business, which may form a consensus about ourthe Company’s future performance. OurThe Company’s business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of ourthe Company’s control, and which could adversely affect ourits operations and operating results. Furthermore, if we makethe Company makes downward revisions of ourthe Company’s previously announced guidance, or if ourthe Company’s publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of ourthe Company’s common stock wouldcould decline.
To successfully market and sell ourthe Company’s products internationally, wethe Company must address many issues that are unique to ourthe Company's international business. Furthermore, international expansion is a key component of the Company’s growth strategy, although the Company’s international operations and foreign transactions expose us to additional operational challenges that the Company might not otherwise face.
The Company is focused on international expansion as a key component of its growth strategy and have identified specific areas of opportunity in various international markets. International revenue is a material component of ourthe Company’s business strategy, and represented 45%42% of ourits total revenue in 20162019 compared to 48%37% of ourthe Company’s total revenue in 2015. In addition, while our international revenue in 2015 increased by 8% compared to 2014, it was negatively impacted by the appreciation of the U.S. Dollar versus the major currencies in which we transact. We depend2018. The Company depends on third-party distributors and a direct sales force to sell ourits products internationally, and if they underperform, wethe Company may be unable to increase or maintain ourits level of international revenue. For example, our direct business in Japan declined in 2015, due in part to the negative impact of foreign exchange and employee turnover, which negatively impacted our revenue from international operations.
We haveThe Company has experienced significant turnover of our Europeanthe Company’s North America sales team inteam. For instance, the past.Company announced on January 21, 2020, that Larry Laber, resigned his position as Executive Vice President, Sales, North America, effective on January 17, 2020. Cutera reassigned Mr. Laber’ duties to Mr. Jason Richey, President of the Company, and to additional members of the North America sales team. Though their departures did not have an adverse effect on the Company's international sales, it has added additional pressure on the sales team. While we continuethe Company continues to have a direct sales and service organization in Australia, Japan, France, Belgium, Spain, Germany, Switzerland and the United Kingdom, a significant portion of our Europeanits international revenue is generated through ourits network of distributors. Though we continuethe Company continues to evaluate and replace non-performing distributors, and havehas recently brought greater focus on collaborating with our distributorits distribution partners, there can be no assurance given that these initiatives will result in improved European-sourcedinternational revenue or profitability in the future.
To grow ourthe Company’s business, we will needit is essential to improve productivity in current sales territories and expand into new territories. However, direct sales productivity may not improve and distributors may not accept ourthe Company’s business or commit the necessary resources to market and sell ourthe Company’s products toat the level of ourCompany’s expectations. If we arethe Company is not able to increase or maintain international revenue growth, ourthe Company’s total revenue, profitability and stock price may be adversely impacted.
We believe, as we continue to manage ourEconomic and other risks associated with international sales and operations could adversely affect the Company’s business.
In 2019, 42% of the Company’s total revenue was from customers outside of North America. The Company expects its sales from international operations and develop opportunitiesexport sales to continue to be a significant portion of the Company’s revenue. The Company has placed a particular emphasis on increasing its growth and presence in additional international territories, ourmarkets. The Company’s international revenue will beoperations and sales are subject, in varying degrees, to a number of risks including:inherent in doing business outside the U.S. These risks include:
● | changes in trade protection measures, including embargoes, tariffs and other trade barriers, and import and export regulations and licensing requirements; |
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● | possibility of unfavorable circumstances arising from host country laws or regulations, including those related to infrastructure and data transmission, security and privacy; |
● | currency exchange rate fluctuations and restrictions on currency repatriation; |
● | difficulties and expenses related to implementing internal control over financial reporting and disclosure controls and procedures; |
● | disruption of sales from labor and political disturbances; |
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● | increased costs and risks in developing, staffing and simultaneously managing global sales operations as a result of distance as well as language and cultural differences; |
● | increased management, travel, infrastructure and legal compliance costs associated with having multiple international operations; |
● | lengthy payment cycles and difficulty in collecting accounts receivable; |
● | preference for locally-produced products, as well as protectionist laws and business practices that favor local companies; and |
● | outbreak or escalation of insurrection, armed conflict, terrorism or war |
Changes in the geopolitical or economic environments in the countries in which the Company operates could have a material adverse effect on the Company’s financial condition, results of operations or cash flows. For example, changes in U.S. policy regarding international trade, including import and export regulation and international trade agreements, could also negatively impact the Company’s business. In 2018, the U.S. imposed tariffs on certain goods imported from China and certain other countries, which has resulted in retaliatory tariffs by China and other countries. Additional tariffs imposed by the U.S. on a broader range of imports, or further retaliatory trade measures taken by China or other countries in response, could adversely impact the Company’s financial condition and results of operations.
The Company’s global operations are required to comply with the U.S. Foreign Corrupt Practices Act of 1977, as amended (“FCPA”), Chinese anti- corruption laws, U.K. Bribery Law, and similar anti-bribery laws in other jurisdictions, and with U.S. and foreign export control, trade embargo and customs laws. If one or morethe Company fails to comply with any of these risks were realized, itlaws, the Company could require ussuffer civil and criminal sanctions.
Additionally, the Company continues to dedicate significant resourcesmonitor Brexit and its potential impacts on the Company’s results of operations and financial condition. Volatility in foreign currencies is expected to remedycontinue as the situation;United Kingdom executes its exit from the EU. If the United Kingdom's membership in the EU terminates without an agreement (referred to as a “hard Brexit”), there could be increased costs from re-imposition of tariffs on trade between the United Kingdom and if we were unsuccessful at finding a solution, we may not be ableEU, increased transportation costs, shipping delays because of the need for customs inspections and procedures and shortages of certain goods. The United Kingdom will also need to sell our productsnegotiate its own tax and trade treaties with countries all over the world, which could take years to complete and could result in a particular marketmaterial impact to the Company’s consolidated revenue, earnings and as a result, our revenuecash flow.
In addition to the general risks that the Company faces outside the U.S., the Company’s operations in emerging markets could involve additional uncertainties for us, including risks that governments may decline.impose withholding or other taxes on remittances and other payments to us, or the amount of any such taxes may increase; governments may seek to nationalize the Company’s assets; or governments may impose or increase investment barriers or other restrictions affecting the Company’s business. In addition, emerging markets pose other uncertainties, including the difficulty of enforcing agreements, challenges collecting receivables, protection of the Company’s intellectual property and other assets, pressure on the pricing of the Company’s products and services, higher business conduct risks, ability to hire and retain qualified talent and risks of political instability. The Company cannot predict the impact such events might have on the Company’s business, financial condition and results of operations.
In addition, compliance with laws and regulations applicable to ourthe Company’s international operations increases ourthe Company’s cost of doing business in foreign jurisdictions. WeThe Company may be unable to keep current with changes in foreign government requirements and laws as they change from time to time. Failure to comply with these regulations could have adverse effects on ourthe Company’s business. In many foreign countries it is common for others to engage in business practices that are prohibited by ourthe Company’s internal policies and procedures or United StatesU.S. regulations applicable to us. In addition, although we havethe Company has implemented policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of ourthe Company’s employees, contractors, distributors and agents will comply with these laws and policies. Violations of laws or key control policies by ourthe Company’s employees, contractors, distributors or agents could result in delays in revenue recognition, financial reporting misstatements, fines, penalties, or the prohibition of the importation or exportation of ourthe Company’s offerings and could have a material adverse effect on ourthe Company’s business operations and financial results.
To successfully market and sell third party products internationally, wethe Company must address many issues that are unique to the related distribution arrangements which could reduce ourthe Company’s available cash reserves and negatively impact ourthe Company’s profitability.
We haveThe Company has entered into distribution arrangements pursuant to which we utilize ourthe Company utilizes its sales force and distributors to sell products manufactured by other companies. In Japan, we havethe Company has a non-exclusive right to distribute a Q-switched laser product manufactured by a third party OEM. WeThe Company also havehas an exclusive agreement with ZO to distribute certain of their proprietary skincare products in Japan. Each of these agreements requires us to purchase annual minimum dollar amounts of their products. Additionally, the Company has entered into distribution arrangements with other companies to promote and sell the SecretRFand Julietproducts.
Each of these distribution agreements presents its own unique risks and challenges. For example, to sell skincare products we needthe Company needs to invest in creating a sales structure that is experienced in the sale of such products and not in capital equipment. We needThe Company needs to commit resources to train ourthe Company’s sales force, obtain regulatory licenses, in Japan and develop new marketing materials to promote the sale of skincarethese products. In addition, the minimum commitments and other costs of distributing products manufactured by these companies may exceed the incremental revenue that we derivethe Company derives from the sale of their products, thereby negatively impacting ourthe Company’s profitability and reducing ourthe Company’s available cash reserves.
If we dothe Company does not make the minimum purchases required in the distribution contracts, or if the third party manufacturer revokes ourthe Company’s distribution rights, wethe Company could lose the distribution rights of the products, to physicians in Japan, which would adversely affect ourthe Company’s future revenue, results of operations, cash flows and ourits stock price.
We offerThe Company offers credit terms to some qualified customers and also to leasing companies to finance the purchase of ourits products. In the event that any of these customers default on the amounts payable to us, ourits earnings may be adversely affected.
WeThe Company generally offeroffers credit terms of 30 to 90 days to qualified customers. In addition, from time to time, we offerit offers certain key international distributors, with whom we havethe Company has had an extended period of relationship and payment history, payment terms that are significantly longer than the regular 30 to 90 day terms. This allows such international distributordistribution partners to have ourits products in stock and provide ourits products to customers on a timely basis. As of December 31, 2016,2019, one international distributordistribution partner accounted for 12%3.1% of ourthe Company’s outstanding accounts receivable balance.
While we believe we havethe Company believes it has an adequate basis to ensure that we collect ourit collects its accounts receivable, wethe Company cannot provide any assurance that the financial position of customers to whom we haveit has provided payment terms will not change adversely before we receivethe Company receives payment. In the event that there is a default by any of the customers to whom we havethe Company has provided credit terms, wethe Company may recognize a bad debt charge in ourthe Company’s general and administrative expenses. If this bad debt charge is material, it could negatively affect ourthe Company’s future results of operations, cash flows and our stock price.
We are subject to fluctuations in the exchange rate of the U.S. Dollar and foreign currencies.
Foreign currency fluctuations could result in volatility of our revenue. We do not actively hedge our exposure to currency rate fluctuations. While we transact business primarily in U.S. Dollars, and a significant proportion of our revenue is denominated in U.S. Dollars, a portion of our costs and revenue is denominated in other currencies, such as the Euro, Japanese Yen, Australian Dollar and Canadian Dollar. As a result, changes in the exchange rates of these currencies to the U.S. Dollar will affect our results from operations. For example, in 2016 the U.S. Dollar devalued against the Japanese Yen by approximately 10%, which had a significant positive foreign exchange impact on our revenue − both from a re-measurement gain upon the conversion of our Japanese Yen denominated revenue as well as the additional positive revenue impact due to the effective price decrease for the local customers importing our U.S. Dollar denominated systems into Japan. However in 2015, as a result of the strengthening of the U.S. Dollar, relative to many other major currencies, our products priced in U.S. Dollars became more expensive relative to products of our foreign competitors. In addition, our revenue earned in foreign currencies, such as our locally generated revenue in Japan, was negatively impacted upon translation into U.S. Dollars. Both these factors had a negative impact on our international revenue in 2015, compared to 2014. Future foreign currency fluctuations could adversely impact and increase the volatility of our revenue, profitability andits stock price.
Additionally, in the event of deterioration of general business conditions or the availability of credit, the financial strength and stability of the Company’s customers and potential customers may deteriorate over time, which may cause them to cancel or delay their purchase of its products. In addition, the Company may be subject to increased risk of non-payment of its accounts receivables. The Company may also be adversely affected by bankruptcies or other business failures of the Company’s customers and potential customers. A significant delay in the collection of funds or a reduction of funds collected may impact the Company’s liquidity or result in bad debts.
OurThe Company’s ability to effectively compete and generate additional revenue from new and existing products depends upon ourthe Company’s ability to distinguish our companythe Company and ourits products from ourthe competitors and their products, and to develop and effectively market new and existing products. OurThe Company’s success is dependent on many factors, including the following:
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To compete effectively, we havethe Company has to demonstrate that ourits new and existing products are attractive alternatives to other devices and treatments, by differentiating ourthe Company’s products on the basis of such factors as innovation, performance, brand name, service, and price. This is difficult to do, especially in a crowded aesthetic market. Some of ourthe Company’s competitors have newer or different products and more established customer relationships than we do,the Company does, which could inhibit ourthe Company’s market penetration efforts. For example, we havethe Company has encountered, and expectexpects to continue to encounter, situations where, due to pre-existing relationships, potential customers decideddecide to purchase additional products from ourthe Company’s competitors. Potential customers also may need to recoup the cost of products that they have already purchased from ourthe Company’s competitors and may decide not to purchase ourthe Company’s products, or to delay such purchases. If we arethe Company is unable to increase ourthe Company’s market penetration or compete effectively, ourits revenue and profitability will be adversely impacted.
We competeThe Company competes against companies that offer alternative solutions to ourits products, or have greater resources, a larger installed base ofcustomers and broader product offerings than ours.the Company’s. In addition, increased consolidation in ourthe Company’s industry may lead to increased competition.If we arethe Company is not able to effectively compete with these companies, it may harm ourits business.
Our industry is subject to intense competition. OurThe medical technology and aesthetic product markets are highly competitive and dynamic and are characterized by rapid and substantial technology development and product innovations. The Company’s products compete against conventional non-energy-based treatments, such as electrolysis, Botox and collagen injections, chemical peels, microdermabrasion and sclerotherapy. OurThe Company’s products also compete against laser and other energy-basedenergy- based products offered by public companies, such as Cynosure (Hologic announced its intent to acquire Cynosure in February 2017), Elen (in Italy), XIO Group (acquired Lumenis in September 2015), Syneron, Zeltiq (Allergan announced its intent to acquire Zeltiq in February 2017), Valeant (acquired Solta in January 2014), as well as private companies, including Alma, Sciton, and several others.companies. Further, other companies could introduce new products that are in direct competition with ourthe Company’s products. Competition with these companies could result in reduced selling prices, reduced profit margins and loss of market share, any of which would harm ourthe Company’s business, financial condition and results of operations.
Recently, there has been consolidation in the aesthetic industry leading to companies combining their resources, which increases competition and could result in increased downward pressure on ourthe Company’s product prices. For example, Allergan acquired Zeltiq in FebruaryApril 2017, Allergan announced its intent to acquire of Zeltiq and Hologic announced its intent to acquireacquired Cynosure in March 2017, XIO Group acquired Lumenis in September 2015, and Valeant acquired Solta in January 2014. These consolidations have resulted in increased competition and pricing pressure, as thecreated newly-combined entities havewith greater financial resources, deeper sales channels and greater pricing flexibility than we do.the Company. Rumored or actual consolidation of ourthe Company’s partners and competitors will likelycould cause uncertainty and disruption to ourthe Company’s business and can cause ourthe Company’s stock price to fluctuate.
The energy-based aesthetic market faces competition from non-energy-based medical products, such as Botox and collagen injections. Other alternatives to the use of ourthe Company’s products include electrolysis, a procedure involving the application of electric current to eliminate hair follicles, and chemical peels. WeThe Company may also face competition from manufacturers of pharmaceutical and other products that have not yet been developed.
If there is not sufficient consumer demand for the procedures performed with ourthe Company’s products, practitioner demand for ourits products could be inhibited, resulting in unfavorable operating results and reduced growth potential.
Continued expansion of the global market for laser and other-energy-based aesthetic procedures is a material assumption of ourthe Company’s business strategy. Most procedures performed using ourthe Company’s products are elective procedures not reimbursable through government or private health insurance, with the costs borne by the patient. The decision to utilize ourthe Company’s products may therefore be influenced by a number of factors, including:
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If, as a result of these factors, there is not sufficient demand for the procedures performed with ourthe Company’s products, practitioner demand for ourthe Company’s products could be reduced, which could have a material adverse effect on ourthe Company’s business, financial condition, revenue and result of operations.
If we failthe Company fails to comply with applicable regulatory requirements, it could result in enforcement action by the U.S. Food and Drug Administration (the “FDA,”), federal and state agencies or international regulatory bodies.bodies and the Company’s commercial operations would be harmed.
The Company’s products are medical devices that are subject to extensive regulation in the U.S. by the FDA for manufacturing, labeling, sale, promotion, distribution and shipping. The FDA, state authorities and international regulatory bodies have broad enforcement powers. If we failthe Company fails to comply with any U.S. law or any of the applicable regulatory requirements of the FDA, or federal or state agencies, or one of the international regulatory bodies, it could result in enforcement action by the agencies, which may include any of the following sanctions:
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If we fail to obtain or maintain necessary FDA clearances for our products and indications, if clearances for future products and indications are delayed or not issued, if there are federal or state level regulatory changes or if we are found to have violated applicable FDA marketing rules, our commercial operations would be harmed.
Our products are medical devices that are subject to extensive regulation in the U.S. by the FDA for manufacturing, labeling, sale, promotion, distribution and shipping. Before a new medical device, or a new use of or labeling claim for an existing product, can be marketed in the U.S., it must first receive either 510(k) clearance or pre-market approval from the FDA, unless an exemption applies. Either process can be expensive and lengthy. In the event that we do not obtain FDA clearances or approvals for our products, our ability to market and sell them in the U.S. and revenue derived from the U.S. market may be adversely affected.
Medical devices may be marketed in the U.S. only for the indications for which they are approved or cleared by the FDA. If we fail to comply with these regulations, it could result in enforcement action by the FDA which could lead to such consequences as warning letters, adverse publicity, criminal enforcement action and/or third-party civil litigation, each of which could adversely affect us.
We have obtained 510(k) clearance for the indications for which we market our products. However, our clearances can be revoked if safety or effectiveness problems develop. We also are subject to Medical Device Reporting regulations, which require us to report to the FDA if our products cause or contribute to a death or serious injury, or malfunction in a way that would likely cause or contribute to a death or serious injury. Our products are also subject to state regulations, which, in many instances, change frequently. Changes in state regulations may impede sales. For example, federal regulations allow our products to be sold to, or on the order of, “licensed practitioners,” as determined on a state-by-state basis. As a result, in some states, non-physicians may legally purchase our products. However, a state could change its regulations at any time, thereby prohibiting sales to particular types of end users. We cannot predict the impact or effect of future legislation or regulations at the federal or state levels.
Federal regulatory reforms and changes occurring at the FDA could adversely affect ourthe Company’s ability to sell ourits products profitably and financial condition.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of a device. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.
In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect ourthe Company’s business and ourthe Company’s products. Changes in FDA regulations may lengthen the regulatory approval process for medical devices and require additional clinical data to support regulatory clearance for the sale and marketing of ourthe Company’s new products. In addition, it may require additional safety monitoring, labeling changes, restrictions on product distribution or use, or other measures after the introduction of ourthe Company’s products to market. Either of these changes lengthen the duration to market, increase ourthe Company’s costs of doing business, adversely affect the future permitted uses of approved products, or otherwise adversely affect the market for ourits products.
For instance, on or about July 30, 2018, the FDA issued a public statement and sent letters to a number of companies in the medical aesthetics industry expressing concerns regarding “vaginal revitalization” procedures using energy-based devices. The Company’s Julietdevice is promoted and used by physicians in procedures that are the subject of the FDA’s public warning. However, neither the Company nor its distribution partner were named in the announcement, and neither the Company nor its distribution partner have received a letter from the agency as of the date of this filing. Working with the Company’s distribution partner and the FDA, the Company is assessing the potential parameters of an additional study regarding the Company’s Julietdevice to address the concerns highlighted in the FDA’s statement. However, there can be no assurances that we will reach an agreement with the Company’s distribution partner on the execution details of such a study, or that such a study will be successful in addressing the FDA’s safety concerns with the Company’s Julietdevice.
The Company saw a significant slowdown in the sales of Julietin the third and fourth quarters of 2018 and through 2019. The Company believes this relates to the safety letter, given the timing. The Company supports any action that helps ensure patient safety going forward. The Company has a robust, multi-functional process that reviews its promotional claims and materials to ensure they are truthful, not misleading, fair and balanced, and supported by sound scientific evidence.
If we failthe Company fails to comply with the FDA’s Quality System Regulation and laser performance standards, ourthe Company’s manufacturing operations could be halted, and ourits business would suffer.
We areThe Company is currently required to demonstrate and maintain compliance with the FDA’s Quality System Regulation (the “QSR”). The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of ourthe Company’s products. Because ourthe Company’s products involve the use of lasers, ourthe Company’s products also are covered by a performance standard for lasers set forth in FDA regulations. The laser performance standard imposes specific record-keeping, reporting, product testing and product labeling requirements. These requirements include affixing warning labels to laser products, as well as incorporating certain safety features in the design of laser products.
The FDA enforces the QSR and laser performance standards through periodic unannounced inspections. We haveThe Company has had multiple quality system audits by the FDA, ourthe Company’s Notified Body, and other foreign regulatory agencies, with the most recent inspection by the FDA occurring over three weeks in March, 2014.2017. There were no significant findings and only one observationor observations as a result of this audit. Our response to this observation was accepted by the FDA. Failure to take satisfactory corrective action in response to an adverse QSR inspection or ourits failure to comply with applicable laser performance standards could result in enforcement actions, including a public warning letter, a shutdown of ourthe Company’s manufacturing operations, a recall of ourits products, civil or criminal penalties, or other sanctions, such as those described in the preceding paragraph, which would cause ourits sales and business to suffer.
We areThe Company is a sponsor of Biomedical Research. As such, we arethe Company is also subject to FDA regulations relating to the design and conduct of clinical trials. We areThe Company is subject to unannounced BIMO audits, with the most recent inspection by FDA occurring over 5 days in August 2016. There were no significant findings and only two observations as a result of this audit. OurThe Company’s responses to these observations were accepted by the FDA. Failure to take satisfactory corrective action in response to an adverse BIMO inspection or ourthe Company’s failure to comply with Good Clinical Practices could result in us no longer being able to sponsor Biomedical Research, the reversal of 510(k) clearances previously granted based on the results of clinical trials conducted to gain clinical data to support those 510(k) clearances, or enforcement actions, including a public warning letter, civil or criminal penalties, or other sanctions, such as those described in the preceding paragraph, which would cause ourthe Company’s sales and business to suffer.
If we modifythe Company modifies one of our FDA-approvedits FDA-cleared devices, weit may need to seek re-approval,a new clearance, which, if not granted, would prevent usthe Company from selling ourits modified products or cause usit to redesign ourits products.
Any modifications to an FDA-cleared device that would significantly affect its safety or effectiveness or that would constitute a major change in its intended use would require a new 510(k) clearance or possibly a pre-market approval. WeThe Company may not be able to obtain additional 510(k) clearance or pre-marketpremarket approvals for new products or for modifications to, or additional indications for, ourits existing products in a timely fashion, or at all. Delays in obtaining future clearance would adversely affect ourits ability to introduce new or enhanced products in a timely manner, which in turn would harm ourits revenue and future profitability.
We haveThe Company has made modifications to ourits devices in the past and may make additional modifications in the future that we believeit believes do not or will not require additional clearance or approvals. If the FDA disagrees, and requires new clearances or approvals for the modifications, wethe Company may be required to recall and to stop marketing the modified devices, which could harm ourthe Company’s operating results and require usit to redesign ourits products.
WeThe Company may be unable to obtain or maintain international regulatory qualifications or approvals for ourits current or future products and indications, which could harm ourits business.
Sales of ourthe Company’s products outside the U.S. are subject to foreign regulatory requirements that vary widely from country to country. In addition, exports of medical devices from the U.S. are regulated by the FDA. Complying with international regulatory requirements can be an expensive and time-consumingtime- consuming process and approval is not certain. The time required for obtaining clearance or approvals, if required by other countries, may be longer than that required for FDA clearance or approvals, and requirements for such clearances or approvals may significantly differ from FDA requirements. WeThe Company may be unable to obtain or maintain regulatory qualifications, clearances or approvals in other countries. WeThe Company may also incur significant costs in attempting to obtain and in maintaining foreign regulatory approvals or qualifications. If wethe Company experience delays in receiving necessary qualifications, clearances or approvals to market ourits products outside the U.S., or if we failthe Company fails to receive those qualifications, clearances or approvals, wethe Company may be unable to market ourits products or enhancements in international markets effectively, or at all, which could have a material adverse effect on ourthe Company’s business and growth strategy.
Any defects in the design, material or workmanship of ourits products may not be discovered prior to shipment to customers, which could materially increase ourits expenses, adversely impact profitability and harm ourits business.
The design of ourthe Company’s products is complex. To manufacture them successfully, wethe Company must procure quality components and employ individuals with a significant degree of technical expertise. If ourthe Company’s designs are defective, or the material components used in ourits products are subject to wearing out, or if suppliers fail to deliver components to specification, or if ourits employees fail to properly assemble, test and package ourits products, the reliability and performance of ourits products willcould be adversely impacted.
If ourthe Company’s products contain defects that cannot be repaired easily, inexpensively, or on a timely basis, wethe Company may experience:
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The occurrence of any one or more of the foregoing could materially increase expenses, adversely impact profitability and harm ourthe Company’s business.
Product liability suits could be brought against usthe Company due to a defective design, material or workmanship or misuse of ourits products and could result in expensive and time-consuming litigation, payment of substantial damages and an increase in ourits insurance rates.
If ourthe Company’s products are defectively designed, manufactured or labeled, contain defective components or are misused, wethe Company may become subject to substantial and costly litigation by ourthe Company’s customers or their patients. Misusing ourthe Company’s products or failing to adhere to operating guidelines could cause significant eye and skin damage, and underlying tissue damage. In addition, if ourits operating guidelines are found to be inadequate, wethe Company may be subject to liability. We haveThe Company has been involved, and may in the future be involved, in litigation related to the use of ourits products. Product liability claims could divert management’s attention from ourits core business, be expensive to defend and result in sizable damage awards against us. Wethe Company. The Company may not have sufficient insurance coverage for all future claims. WeThe Company may not be able to obtain insurance in amounts or scope sufficient to provide usthe Company with adequate coverage against all potential liabilities. Any product liability claims brought against us,the Company, with or without merit, could increase ourthe Company’s product liability insurance rates or prevent us from securing continuing coverage, could harm ourits reputation in the industry and could reduce product sales. In addition, wethe Company historically experienced steep increases in ourits product liability insurance premiums as a percentage of revenue. If ourits premiums continue to rise, wethe Company may no longer be able to afford adequate insurance coverage.
The Company is currently involved in litigation that could adversely affect the Company’s business and financial results, divert management’s attention from the Company’s business, and subject the Company to significant liabilities.
As described under “Note 11- Commitments and Contingencies - Contingencies” in the Company’s consolidated financial statements included in this Annual Report on Form 10-K, the Company is involved in various litigation, which may adversely affect the Company’s financial condition and may require us to devote significant resources to the Company’s defense of these claims.
Although the Company is defending these matters vigorously, the Company cannot predict with certainty the outcome or effect of any claim or other litigation matter, and there can be no assurance as to the ultimate outcome of any litigation or proceeding. Litigation may have a material adverse effect on the Company because of potential adverse outcomes, defense costs, the diversion of the Company’s management's resources, availability of insurance coverage and other factors.
If customers are not trained and/or ourthe Company’s products are used by non-physicians, it could result in product misuse and adverse treatment outcomes, which could harm ourthe Company’s reputation, result in product liability litigation, distract management and result in additional costs, all of which could harm ourthe Company’s business.
Because we dothe Company does not require training for users of ourits products, and sell ourits products at times to non-physicians, there exists an increased potential for misuse of ourthe Company’s products, which could harm ourthe Company’s reputation and ourthe Company’s business. U.S. federal regulations allow us to sell ourthe Company’s products to or on the order of “licensed practitioners.” The definition of “licensed practitioners” varies from state to state. As a result, ourthe Company’s products may be purchased or operated by physicians with varying levels of training, and in many states, by non-physicians, including nurse practitioners, chiropractors and technicians. Outside the U.S., many jurisdictions do not require specific qualifications or training for purchasers or operators of ourits products. We doThe Company does not supervise the procedures performed with ourthe Company’s products, nor do wedoes the Company require that direct medical supervision occur. Weoccur—that is determined by state law. The Company and ourits distributors generally offer but do not require product training to the purchasers or operators of ourthe Company’s products. In addition, wethe Company sometimes sell oursells its systems to companies that rent ourits systems to third parties and that provide a technician to perform the procedures. The lack of training and the purchase and use of ourits products by non-physicians may result in product misuse and adverse treatment outcomes, which could harm ourthe Company’s reputation and ourits business, and, in the event these result in product liability litigation, distract management and subject us to liability, including legal expenses.
Adverse conditions in the global banking industry and credit markets may adversely impact the value of ourthe Company’s marketable investments or impair ourthe Company’s liquidity.
We invest ourThe primary objective of most of the Company’s investment activities is to preserve principal. To achieve this objective, the Company invests its excess cash primarily in money market funds and in highly liquid debt instruments of the U.S. government and its agencies and U.S. municipalities, in commercial paper and high grade corporate debt. As of December 31, 2016, our2019, the Company’s balance in marketable investments was $40$7.6 million. The longer the duration of a security, the more susceptible it is to changes in market interest rates and bond yields. As yields increase, those securities with a lower yield-at-cost show a mark-to-market unrealized loss. For example, assuming a hypothetical increase in interest rates of one percentage point, there would not have any adverse impact the fair value of our total investment portfolio as of December 31, 2016 would have potentially decreased by approximately $198,000, resulting in an unrealized loss that would subsequently adversely impact ourCompany’s earnings. As a result, changes in the market interest rates will affect ourits future net income (loss).
OurThe Company’s manufacturing operations are dependent upon third-party suppliers, making usits vulnerable to supply shortages and price fluctuations, which could harm ourits business.
Many of the components and materials that comprise ourits products areis currently manufactured by a limited number of suppliers. A supply interruption or an increase in demand beyond ourthe Company’s current suppliers’ capabilities could harm ourits ability to manufacture ourthe Company’s products until a new source
of supply is identified and qualified. OurThe Company’s reliance on these suppliers subjects us to a number of risks that could harm ourits business, including:
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Any interruption in the supply of components or materials, or ourthe Company’s inability to obtain substitute components or materials from alternate sources at acceptable prices in a timely manner, could impair ourits ability to meet the demand of ourthe Company’s customers, which would have an adverse effect on ourthe Company’s business.
the components and raw materials used in manufacturing these products from numerous suppliers in various countries. Any problem affecting a supplier (whether due to external or internal causes) could have a negative impact on us.
In a few limited cases, specific components and raw materials are purchased from primary or main suppliers (or in some cases, a single supplier) for reasons related to quality assurance, cost-effectiveness ratio and availability. While the Company works closely with its suppliers to ensure supply continuity, the Company cannot guarantee that its efforts will always be successful. Moreover, due to strict standards and regulations governing the manufacture and marketing its products, it may not be able to quickly locate new supply sources in response to a supply reduction or interruption, with negative effects on its ability to manufacture its products effectively and in a timely fashion.
The Company’s manufacturing is currently conducted at a single site, and the occurrence of a catastrophic disaster or other similar event could cause damage to its facilities and equipment, which might require the Company to cease or curtail operations.
The Company is vulnerable to damage from various types of disasters, including fires, earthquakes, terrorist acts, floods, power losses, communications failures and similar events. If any such disaster were to occur, the Company may not be able to operate the Company’s business at the Company’s facility in Brisbane, California. The Company’s manufacturing facilities require FDA approval, which could result in significant delays before the Company could manufacture products from a replacement facility. The insurance the Company maintains may not be adequate to cover the Company’s losses resulting from disasters or other business interruptions. Therefore, any such catastrophe could seriously harm the Company’s business and consolidated results of operations.
Intellectual property rights may not provide adequate protection for some or all of ourthe Company’s products, which may permit third parties tocompete against us more effectively.
We relyThe Company relies on patent, copyright, trade secret and trademark laws and confidentiality agreements to protect ourthe Company’s technology and products. At December 31, 2016, we2019, the Company had 34 issued U.S. patents.patents and pending U.S. patent applications. Some of ourthe Company’s components, such as ourthe Company’s laser module, electronic control system and high-voltage electronics, are not, and in the future may not be, protected by patents. Additionally, ourthe Company’s patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Any patents we obtainthe Company obtains may be challenged, invalidated or legally circumvented by third parties. Consequently, competitors could market products and use manufacturing processes that are substantially similar to, or superior to, ours. Wethe Company’s. The Company may not be able to prevent the unauthorized disclosure or use of ourthe Company’s technical knowledge or other trade secrets by consultants, vendors, former employees or current employees, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures of ourthe Company’s intellectual property is difficult, and we dothe Company does not know whether the steps we haveit has taken to protect ourthe Company’s intellectual property will be effective. Moreover, the laws of many foreign countries will not protect ourthe Company’s intellectual property rights to the same extent as the laws of the U.S.
The absence of complete intellectual property protection exposes us to a greater risk of direct competition. Competitors could purchase one of ourthe Company’s products and attempt to replicate some or all of the competitive advantages we derivethe Company derives from ourthe Company’s development efforts, design around ourthe Company’s protected technology, or develop their own competitive technologies that fall outside of ourthe Company’s intellectual property rights. If ourthe Company’s intellectual property is not adequately protected against competitors’ products and methods, ourthe Company’s competitive position and ourits business could be adversely affected.
WeThe Company may be involved in future costly intellectual property litigation, which could impact ourits future business and financial performance.
OurThe Company’s competitors or other patent holders may assert that ourthe Company’s present or future products and the methods we employthe Company employs are covered by their patents. In addition, we dothe Company does not know whether ourits competitors own or will obtain patents that they may claim prevent, limit or interfere with ourthe Company’s ability to make, use, sell or import ourthe Company’s products. Although wethe Company may seek to resolve any potential future claims or actions, weit may not be able to do so on reasonable terms, or at all. If, following a successful third-party action for infringement, wethe Company cannot obtain a license or redesign ourthe Company’s products, weit may have to stop manufacturing and selling the applicable products and ourthe Company’s business would suffer as a result. In addition, a court could require us to pay substantial damages, and prohibit us from using technologies essential to ourthe Company’s products, any of which would have a material adverse effect on ourthe Company’s business, results of operations and financial condition.
WeThe Company may become involved in litigation not only as a result of alleged infringement of a third party’s intellectual property rights but also to protect ourthe Company’s own intellectual property. For example, we havethe Company has been and may hereafter become, involved in litigation to protect the trademark rights associated with ourits company name or the names of ourits products. Infringement and other intellectual property claims, with or without merit, can be expensive and time-consumingtime- consuming to litigate, and could divert management’s attention from ourits core business.
The expense and potential unavailability of insurance coverage for ourthe Company’s customers could adversely affect ourits ability to sell ourits products, and therefore adversely affect ourits financial condition.
Some of ourthe Company’s customers and prospective customers have had difficulty procuring or maintaining liability insurance to cover their operation and use of ourits products. Medical malpractice carriers are withdrawing coverage in certain states or substantially increasing premiums. If this trend continues or worsens, ourthe Company’s customers may discontinue using ourthe Company’s products and potential customers may opt against purchasing laser-based products due to the cost or inability to procure insurance coverage. The unavailability of insurance coverage for ourthe Company’s customers and prospects could adversely affect ourits ability to sell ourits products, and that could harm ourits financial condition.
From time to time wethe Company may become subject to income tax audits or similar proceedings, and as a result wethe Company may incur additional costs and expenses or owe additional taxes, interest and penalties that may negatively impact ourits operating results.
We areThe Company is subject to income taxes in the United StatesU.S. and certain foreign jurisdictions where we operateit operates through a subsidiary, including Australia, Belgium, Canada, France, Germany, Hong Kong, Japan, Spain, Switzerland, Italy and the United Kingdom. OurThe Company’s determination of ourits tax liability is subject to review by applicable domestic and foreign tax authorities.
We are currently under The Company underwent an audit for our California salesits German (“Cutera GmbH”) and use tax returnsJapanese subsidiaries for the period July 2013tax years December 31, 2011 through June 2016, and are uncertain of the potential outcome of 2018. Although this audit. Also,audit did not result in June 2016, we underwent an audit of our Canadian goods and services tax and harmonized sales tax returns for the period January 2013 to July 2015. Although this audit resulted in immaterialany adjustments, the final timing and resolution of any future tax examinations are subject to significant uncertainty and could result in ourthe Company’s having to pay amounts to the applicable tax authority in order to resolve examination of our its tax positions, which could result in an positions. An increase or decrease of our current estimate of unrecognized tax benefitsrelated to tax examination resolution could result in a change in the Company’s income tax accrual and maycould negatively impact ourits financial position, results of operations or cash flows.
WeThe Company may be adversely affected by changes in U.S. taxU.S .tax laws,, importation taxes and other changes that may be imposed by the current administrationadministration..
Congress and the current administration have indicated a desireThe Company is subject to reformtaxes in the U.S. corporate income tax. As partand other jurisdictions. Tax rates in these jurisdictions may be subject to significant change due to economic and/or political conditions. A number of any tax reform, it is possible thatother factors may also impact the current corporate incomeCompany’s future effective tax rate may be reduced,including:
● | the jurisdictions in which profits are determined to be earned and taxed; |
● | the resolution of issues arising from tax audits with various tax authorities |
● | changes in valuation of the Company’s deferred tax assets and liabilities; |
● | increases in expenses not deductible for tax purposes, including write-offs and impairment of goodwill in connection with acquisitions; |
● | changes in availability of tax credits, tax holidays, and tax deductions; |
● | changes in share-based compensation; and |
● | changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles. |
In the U.S., the Patient Protection and there may beAffordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “Affordable Care Act”), for example, has the potential to significantly impact the pharmaceutical and medical device industries. The Affordable Care Act imposed, among other potential changes including limitingthings, an annual excise tax of 2.3% on any entity that manufactures or eliminating various other deductions, credits orimports medical devices offered for sale in the U.S. Due to subsequent legislative amendments the excise tax preferences. In addition, ifhas been suspended for the current administration starts levying import taxesperiod January 1, 2016 to December 31, 2019. The excise tax was repealed at the end of 2019. The Company is currently assessing what the impact the repeal will have on products being sourced from Mexicothe Company’s financial condition and other international locations from where we source components for building our products, this could adversely affect our cost of producing our products and profitability.cash flows.
At this time, it is not possible to measure the potential impact on the value of our business, prospects or results of operations that might result upon enactment of U.S tax laws and other changes.
Any acquisitions that we makethe Company makes could result in operating difficulties, dilution, and other consequences that may adversely impact ourthe Company’s business and results of operations.
While wethe Company from time to time evaluateevaluates potential acquisitions of businesses, products and technologies, and anticipateanticipates continuing to make these evaluations, we havethe Company has no present understandings, commitments or agreements with respect to any material acquisitions or collaborative projects Weprojects. The Company may not be able to identify appropriate acquisition candidates or strategic partners, or successfully negotiate, finance or integrate any businesses, products or technologies that wethe Company acquire.
We haveThe Company has limited experience as a team with acquiring companies and products. Furthermore, the integration of any acquisition and management of any collaborative project may divert management’s time and resources from ourthe Company’s core business and disrupt ourthe Company’s operations and weit may incur significant legal, accounting and banking fees in connection with such a transaction. Acquisitions could diminish ourthe Company’s available cash balances for other uses, result in the incurrence of debt, contingent liabilities, or amortization expenses, and restructuring charges. Also, the anticipated benefits or value of ourits acquisitions or investments may not materialize and could result in an impairment of goodwill and/or purchased long-lived assets, similar to the $650,000 charge we recorded in the fourth quarter of 2014 related to an acquisition completed in 2012.assets.
OurThe Company’s failure to address these risks or other problems encountered in connection with ourthe Company’s past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm ourthe Company’s business and ourthe Company’s financial condition or results.
The Company’s failure to comply with rules relating to bribery, foreign corrupt practices, and privacy and security laws may subject the Company to penalties and adversely impact its reputation and business operations.
Anti-takeover provisions in our AmendedThe Company’s business is subject to regulation and Restated Certificate of Incorporation and Bylaws, and Delaware law, contain provisions that could discourage a takeover.
Our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware law, contain provisions that might enable our management to resist a takeover, and might make it more difficult for an investor to acquire a substantial block of our common stock. These provisions include:oversight worldwide including:
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● the FCPA, which prohibits corporations and individuals from paying, offering to pay or authorizing the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity;
These provisions,● the UK Bribery Act, which prohibits both domestic and international bribery, as well as Changebribery across both public and private sectors; and bribery provisions contained in the German Criminal Code, which, pursuant to draft legislation being prepared by the German government, may make the corruption and corruptibility of Controlphysicians in private practice and Severance Agreements entered into withother healthcare professionals a criminal offense;
● Health Insurance Portability and Accountability Act of 1996, as amended by The Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information; and
● analogous state and foreign law equivalents of each of our executive officersthe above laws, such as state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government; and state laws governing the privacy and security of health information in certain key employees, might discourage, delay or prevent a changecircumstances, many of which differ from each other in controlsignificant ways and may not have the same effect, thus complicating compliance efforts.
The risk of being found in our management. The existenceviolation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of the Company’s business activities, including the Company’s relationships with practitioners and thought leaders worldwide, some of whom recommend, purchase and/or use the Company’s devices, as well as the Company’s sales agents and distributors, could adversely affectbe subject to challenge under one or more of such laws. The Company is also exposed to the voting powerrisk that the Company’s employees, independent contractors, principal investigators, consultants, vendors, independent sales agents and distributors may engage in fraudulent or other illegal activity. While the Company has policies and procedures in place prohibiting such activity, misconduct by these parties could include, among other infractions or violations, intentional, reckless and/or negligent conduct or unauthorized activity that violates FDA regulations, including those laws that require the reporting of holderstrue, complete and accurate information to the FDA, manufacturing standards, laws that require the true, complete and accurate reporting of common stockfinancial information or data or other commercial or regulatory laws or requirements. It is not always possible to identify and limitdeter misconduct by the price that investors mightCompany’s employees and other third parties, and the precautions the Company takes to detect and prevent this activity may not be willingeffective in controlling unknown or unmanaged risks or losses or in protecting the Company from governmental investigations or other actions or lawsuits stemming from a failure to paybe in compliance with such laws or regulations.
There are similar laws and regulations applicable to us outside the future for sharesU.S., all of our common stock. In addition, as a Delaware corporation, wewhich are subject to Section 203evolving interpretations. Global enforcement of anti- corruption laws, including but not limited to the UK Bribery Act, the Brazil Clean Companies Act, and continued enforcement in the Europe, Middle East and Asia Pacific has increased substantially in recent years, with more frequent voluntary self-disclosures by companies, aggressive investigations and enforcement proceedings by governmental agencies, and assessment of significant fines and penalties against companies and individuals. The Company’s operations create the risk of unauthorized payments or offers of payments by one of its employees, consultants, sales agents, or distributors because these parties are not always subject to its control. It is the Company’s policy to implement safeguards to discourage these practices; however, its existing safeguards and any future improvements may prove to be less than effective, and its employees, consultants, sales agents, or distributors may engage in conduct for which the Company might be held responsible. Any alleged or actual violations of these regulations may subject us to government scrutiny, severe criminal or civil sanctions and other liabilities, and could negatively affect its business, reputation, operating results, and financial condition.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. These reforms may cause LIBOR to cease to exist, new methods of calculating LIBOR to be established or the establishment of an alternative reference rate(s). These consequences cannot be entirely predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by the Company. Changes in market interest rates may influence returns on financial investments and could reduce our earnings and cash flows.
While the Company believes it has a strong culture of compliance and adequate systems of control, and it seeks continuously to improve its systems of internal controls and to remedy any weaknesses identified, there can be no assurance that the policies and procedures will be followed at all times or will effectively detect and prevent violations of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15%applicable laws by one or more of our outstanding voting stock, from mergingits employees, consultants, agents or combining with us forpartners and, as a certain periodresult, the Company may be subject to penalties and material adverse consequences on its business, financial condition or results of time. Any of these provisions could, under certain circumstances, depress the market price of our common stock.operations.
ITEM 1B. |
Not applicable.
ITEM 2. |
Our corporate headquarters and U.S. operations are located in an approximatelyThe Company occupies 66,000 square foot facilityfeet for its U.S. Corporate office in Brisbane, California. We lease these premisesCalifornia, under a non-cancelable operating lease which expiresextends through January 31, 2023. The original lease expired on December 31, 2017. 2017, and the Company entered into a Second Amendment on July 6, 2017 that extended the term of the lease from December 31, 2017 to January 31, 2023. Pursuant to the terms of the Second Amendment to the Lease Agreement, the Company has the option to extend the term of the lease by an additional 60 months. Additionally, the Company also has a one-time option to terminate the amended lease early effective as of December 31, 2020, in return for payment of a termination fee.
In addition, we havethe Company has leased office facilities in certain countries as follows:
Country | Square Footage |
| Lease termination or Expiration | ||
Japan | Approximately 5,896 | Two leases, one of which | |||
France | Approximately 2,239 | One lease which expires in October | |||
Spain | Approximately 3,584 | One lease signed effective February 1, 2018, which expires in January 31, 2021. | |||
Belgium | Approximately 14 | One lease signed effective March 1, 2020, which expires in February 28, 2021. |
We believeThe Company believes that these facilities are suitable and adequate for ourits current and future needs for at least the next twelve months.
ITEM 3. | LEGALPROCEEDINGS |
We were notFrom time to time, the Company may be involved in legal and administrative proceedings and claims of various types. For a party to anydescription of material pending litigation that we believe will have a material impact to our results of operationslegal and regulatory proceedings and settlements as of December 31, 2016.
2019, please see Note 11 to the Company’s consolidated financial statements entitled “Commitments and Contingencies,” Part II Item 8, included in this Annual Report on Form 10-K.
ITEM 4. | MINESAFETY DISCLOSURES |
Not applicable.
PARTII
ITEM 5. | MARKETFOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Stock Exchange Listing
OurThe Company’s common stock trades on The NASDAQ Global Select Market under the symbol “CUTR.” As of February 28, 2017,March 1, 2020, the closing sale price of ourits common stock was $20.40$24.38 per share.
Common Stockholders
WeThe Company had 95 stockholders of record as of February 28, 2017.March 1, 2020. Since many stockholders choose to hold their shares under the name of their brokerage firm, we estimatethe Company estimates that the actual number of stockholders was over 2,000 shareholders.
Stock Prices
The following table sets forth quarterly high and low closing sales prices of our common stock for the indicated fiscal periods:
Common Stock | ||||||||||||||||
2016 | 2015 | |||||||||||||||
High | Low | High | Low | |||||||||||||
4th Quarter | $ | 17.50 | $ | 11.94 | $ | 14.52 | $ | 11.99 | ||||||||
3rd Quarter | 12.25 | 10.52 | 15.60 | 13.07 | ||||||||||||
2nd Quarter | 12.15 | 10.00 | 15.98 | 12.87 | ||||||||||||
1st Quarter | 12.87 | 10.43 | 14.26 | 10.86 | ||||||||||||
Issuer Purchases of Equity Securities
The following table summarizesThere were no repurchases of the activity related to stock repurchases for the years ended December 31, 2016 and 2015(in thousands except per share data):
Period | Total Number | Average Price Paid per Share | Total Number of Purchased Publicly Announced Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs | |||||||||||||||
As of December 31, 2014 | — | $ | — | — | $ | 10,000 | |||||||||||||
Additional amount approved February 18, 2015 | — | $ | — | — | $ | 40,000 | |||||||||||||
February18-28, 2015 | 56 | $ | 12.85 | 56 | $ | 39,276 | |||||||||||||
March 1-31, 2015 | 330 | $ | 13.55 | 330 | $ | 34,806 | |||||||||||||
April 1-30, 2015 | 284 | $ | 13.57 | 284 | $ | 30,946 | |||||||||||||
May 1-31, 2015 | 296 | $ | 14.38 | 296 | $ | 26,693 | |||||||||||||
June 1-30, 2015 | 298 | $ | 14.75 | 298 | $ | 22,294 | |||||||||||||
July 1-31, 2015 | 95 | $ | 14.94 | 95 | $ | 20,878 | |||||||||||||
August 1-31, 2015 | 1,040 | $ | 14.41 | 1,040 | $ | 5,898 | |||||||||||||
September 1-30, 2015 | 210 | $ | 14.44 | 210 | $ | 2,860 | |||||||||||||
October 1-31, 2015 | 209 | $ | 13.70 | 209 | — | ||||||||||||||
As of December 31, 2015 | 2,818 | $ | 14.19 | 2,818 | $ | — | |||||||||||||
Additional amount approved February 8, 2016 | $ | 10,000 | |||||||||||||||||
March 1-31, 2016 | 28 | $ | 10.89 | 28 | $ | 9,695 | |||||||||||||
April 1-30, 2016 | 11 | $ | 10.91 | 11 | $ | 9,572 | |||||||||||||
May 1-31, 2016 | 123 | $ | 10.35 | 123 | $ | 8,298 | |||||||||||||
June 1-30, 2016 | 117 | $ | 10.64 | 117 | $ | 7,060 | |||||||||||||
July 1-31, 2016 | 74 | $ | 10.87 | 74 | $ | 6,258 | |||||||||||||
August 1-31, 2016 | 62 | $ | 10.86 | 62 | $ | 5,576 | |||||||||||||
September 1-30, 2016 | 40 | $ | 10.89 | 40 | $ | 5,141 | |||||||||||||
As of December 31, 2016 | 455 | $ | 10.67 | 455 | $ | 5,141 | |||||||||||||
As of December 31, 2014, there was $10.0 million authorized for the repurchase of ourCompany’s common stock under the Company’s Stock Repurchase Program. On February 18, 2015, our Board of Directors approved the expansion of our Stock Repurchase Program from $10 million to $40 million, under which we were authorized to repurchase shares of our common stock. In the year ended December 31, 2015, we repurchased 2,818,038 shares of our common stock for approximately $40.0 million.in 2019.
On February 8, 2016, our Board of Directors approved the expansion of our Stock Repurchase Program by an additional $10 million. In the year ended December 31, 2016, we repurchased 455,311 shares of our common stock for approximately $4.9 million. As of December 31, 2016, there remained an additional $5.1 million to be purchased. On February 13, 2017 our Board of Directors approved the expansion of our Stock Repurchase Program by an additional $5 million. We plan to make the repurchases from time to time through open market transactions at prevailing prices and/or through privately-negotiated transactions, and/or through a pre-arranged Rule 10b5-1 trading plan.
Sales of Unregistered Securities
WeThe Company did not sell any unregistered securities during the period covered by this Annual Report on Form 10-K.
Dividends
For a discussion regarding the Company’s intentions with respect to dividends, see the section titled “Stock-based Compensation Expense” set forth inPart II Item 7 of this Annual Report on Form 10-K.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this Item regarding equity compensation plans is incorporated by reference to the information set forth in Part III Item 12 of this Annual Report on Form 10-K.
Performance Graph
Below is aThe graph showingbelow compares Cutera, Inc.'s cumulative 5-Year total shareholder return on common stock with the cumulative total return to our stockholders during the period from December 31, 2011 through December 31, 2016 in comparison to the cumulative return onreturns of the NASDAQ Composite Index (U.S.)index and the NASDAQ Medical Equipment Index during that same period.index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from 12/31/2014 to 12/31/2019.
TheIn accordance with SEC rules, the information contained under “Performance Graph” isshall not be deemed filedto be “soliciting material,” or to be “filed” with the SEC or subject to the SEC’s Regulation 14A or 14C, other than as provided under Item 201(e) of Regulation S-K, or to the liabilities of Section 18 of the Securities and Exchange Commission and is notAct of 1934, as amended, except to the extent that we specifically request that the information be incorporatedtreated as soliciting material or specifically incorporate it by reference in any of our filingsinto a document filed under the Securities Act, of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this 10-K and irrespective of any general incorporation language in those filings.
Dividend Policy
We have never paid a cash dividend and have no present intention to pay cash dividends in the foreseeable future. We intend to retain any future earnings for use in our business.amended.
ITEM 6. | SELECTEDFINANCIAL DATA |
The table set forth below contains certain consolidated financial data for each of our last five fiscal years. The following selected consolidated financial data should be read in conjunction with Item 7the Company’s Consolidated Financial Statements and the accompanying Notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report. The selected data in this section is not intended to replace the Consolidated Financial Statements.
Year Ended December 31, | ||||||||||||||||||||
Consolidated Statements of Operations Data (in thousands, except per share data): | 2019* | 2018* | 2017 | 2016 | 2015 | |||||||||||||||
Net revenue | $ | 181,712 | $ | 162,720 | $ | 151,493 | 118,056 | $ | 94,761 | |||||||||||
Cost of revenue | 83,549 | 82,338 | 65,383 | 49,921 | 40,478 | |||||||||||||||
Gross profit | 98,163 | 80,382 | 86,110 | 68,135 | 54,283 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Sales and marketing | 71,109 | 58,420 | 52,070 | 41,563 | 35,942 | |||||||||||||||
Research and development | 15,085 | 14,359 | 12,874 | 11,232 | 10,733 | |||||||||||||||
General and administrative | 24,033 | 20,995 | 14,090 | 12,943 | 12,129 | |||||||||||||||
Lease termination income | -- | -- | (4,000) |
| -- | -- | ||||||||||||||
Total operating expenses | 110,227 | 93,774 | 75,034 | 65,738 | 58,804 | |||||||||||||||
Income (loss) from operations | (12,064 | ) | (13,392) |
| 11,076 | (2,397) |
| (4,521) |
| |||||||||||
Interest and other income, net | (199 | ) | (123) |
| 884 | 323 | 293 | |||||||||||||
Income (loss) before income taxes | (12,263 | ) | (13,515) |
| 11,960 | (2,720) |
| (4,228) |
| |||||||||||
Income tax (benefit) provision | 85 | 17,255 | (18,033) |
| 143 | 212 | ||||||||||||||
Net income (loss) | $ | (12,348 | ) | $ | (30,770) |
| $ | 29,993 | $ | (2,557) |
| $ | (4,440) |
| ||||||
Net income (loss) per share: | ||||||||||||||||||||
Basic | $ | (0.88 | ) | $ | (2.23) |
| $ | 2.16 | $ | (0.19 | ) | $ | (0.32) |
| ||||||
Diluted | $ | (0.88 | ) | $ | (2.23) |
| $ | 2.04 | $ | (0.19 | ) | $ | (0.32) |
| ||||||
Weighted-average number of shares used in per share calculations: | ||||||||||||||||||||
Basic | 14,096 | 13,771 | 13,873 | 13,225 | 13,960 | |||||||||||||||
Diluted | 14,096 | 13,771 | 14,728 | 13,753 | 13,960 | |||||||||||||||
As of December 31, | ||||||||||||||||||||
Consolidated Balance Sheet Data (in thousands): | 2019* | 2018* | 2017 | 2016 | 2015 | |||||||||||||||
Cash, cash equivalents and marketable investments | $ | 33,921 | $ | 35,575 | $ | 35,912 | $ | 54,074 | $ | 48,407 | ||||||||||
Working capital (current assets less current liabilities) | 36,424 | 39,578 | 45,063 | 59,460 | 49,398 | |||||||||||||||
Total assets | 113,738 | 97,637 | 111,238 | 91,854 | 77,518 | |||||||||||||||
Retained earnings (accumulated deficit) | (36,358) | (24,010) | 2,947 | (27,046) | (29,672) | |||||||||||||||
Total stockholders’ equity | 45,942 | 46,386 | 64,893 | 61,010 | 50,034 | |||||||||||||||
* Financial results for year ended December 31, 2019 and our consolidated financial statements2018, as compared to the years ended December 31, 2017, 2016,and 2015 reflect the effects of adopting ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” and the related notes appearingamendments (ASC 606), which provided a new basis of accounting for our revenue arrangements during fiscal year 2018. The adoption of ASC 606 limits the comparability of revenue and operating expenses, presented in the statement of operations, for the years ended December 31, 2019 and 2018 when compared to the years ended December 31, 2017, 2016, and 2015. The adoption of ASC 606 also limits the comparability of certain balance sheet items, including total assets, for the years ended December 31, 2019 and 2018 when compared to the years ended December 31, 2017, 2016, and 2015. See Note 1, “Revenue Recognition” to the Consolidated Financial Statements set forth in Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Year Ended December 31, | ||||||||||||||||||||
Consolidated Statements of Operations Data (in thousands, except per share data): | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Net revenue | $ | 118,056 | $ | 94,761 | $ | 78,138 | $ | 74,594 | $ | 77,277 | ||||||||||
Cost of revenue | 49,921 | 40,478 | 34,765 | 32,712 | 35,737 | |||||||||||||||
Gross profit | 68,135 | 54,283 | 43,373 | 41,882 | 41,540 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Sales and marketing | 41,563 | 35,942 | 32,246 | 27,984 | 28,664 | |||||||||||||||
Research and development | 11,232 | 10,733 | 10,543 | 9,216 | 8,427 | |||||||||||||||
General and administrative | 12,943 | 12,129 | 11,203 | 9,938 | 11,276 | |||||||||||||||
Total operating expenses | 65,738 | 58,804 | 53,992 | 47,138 | 48,367 | |||||||||||||||
Income (loss) from operations | 2,397 | (4,521 | ) | (10,619 | ) | (5,256 | ) | (6,827 | ) | |||||||||||
Interest and other income, net | 323 | 293 | 226 | 455 | 497 | |||||||||||||||
Income (loss) before income taxes | 2,720 | (4,228 | ) | (10,393 | ) | (4,801 | ) | (6,330 | ) | |||||||||||
Income tax (benefit) provision | 143 | 212 | 219 | (54 | ) | 218 | ||||||||||||||
Net income (loss) | $ | 2,557 | $ | (4,440 | ) | $ | (10,612 | ) | $ | (4,747 | ) | $ | (6,548 | ) | ||||||
Net income (loss) per share: | ||||||||||||||||||||
Basic | $ | 0.19 | $ | (0.32 | ) | $ | (0.74 | ) | $ | (0.33 | ) | $ | (0.46 | ) | ||||||
Diluted | $ | 0.19 | $ | (0.32 | ) | $ | (0.74 | ) | $ | (0.33 | ) | $ | (0.46 | ) | ||||||
Weighted-average number of shares used in per share calculations: | ||||||||||||||||||||
Basic | 13,225 | 13,960 | 14,254 | 14,421 | 14,089 | |||||||||||||||
Diluted | 13,753 | 13,960 | 14,254 | 14,421 | 14,089 | |||||||||||||||
Financial results for year ended December 31, 2019, as compared to the years ended December 31, 2018, 2017,2016,and 2015 also reflect the effects of adopting ASU 2016-02, "Leases," (also known as ASC Topic 842) which requires, among other items, lease accounting to recognize most leases as assets and liabilities on the balance sheet. The adoption of ASC 842 limits the comparability of certain balance sheet items for the year ended December 31, 2019 when compared to the years ended December 31, 2018, 2017, 2016, and 2015. For additional information regarding the impact from adoption of this accounting standard, See Note 1, “Leases” to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.
As of December 31, | ||||||||||||||||||||
Consolidated Balance Sheet Data (in thousands): | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Cash, cash equivalents and marketable investments | $ | 54,074 | $ | 48,407 | $ | 81,146 | $ | 83,073 | $ | 85,572 | ||||||||||
Working capital (current assets less current liabilities) | 59,460 | 49,398 | 81,900 | 84,654 | 88,788 | |||||||||||||||
Total assets | 91,854 | 77,518 | 108,913 | 108,669 | 112,794 | |||||||||||||||
Retained earnings (accumulated deficit) | (27,046 | ) | (29,672 | ) | (25,232 | ) | (14,620 | ) | (9,873 | ) | ||||||||||
Total stockholders’ equity | 61,010 | 50,034 | 80,508 | 84,265 | 90,774 | |||||||||||||||
ITEM 7. | MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Thefollowingdiscussionshouldbereadinconjunctionwiththe Company’sauditedfinancialstatementsandnotestheretoforthefiscalyearendedDecember31,2019.ThisAnnualReportonForm10-K,includingthefollowingsections,containsforward-lookingstatementswithinthe meaningofthePrivateSecuritiesLitigationReformActof1995.ThroughoutthisReport,andparticularlyinthisItem7,theforward-lookingstatementsarebaseduponthe Company’scurrentexpectations,estimatesandprojectionsandthatreflectthe Company’sbeliefsandassumptionsbaseduponinformationavailabletousatthedateofthisReport.Insomecases,youcanidentifythesestatementsbywordssuchas“may,”“might,” “could,”“will,”“should,”“expects,” “plans,”“anticipates,”“likely,” “believes,”“estimates,”“intends,” “forecasts,” “foresees,” “predicts,”“potential”or“continue,”andothersimilarterms.Theseforward-lookingstatementsarenotguaranteesoffutureperformanceandaresubjecttorisks,uncertainties, andassumptionsthataredifficulttopredict.TheCompany’sactualresults,performanceorachievementscoulddiffermateriallyfromthoseexpressedorimpliedbytheforward-lookingstatements.Theforward-lookingstatementsinclude,butarenotlimitedto,statementsrelatingtothe Company’sfuturefinancialperformance,theabilitytogrowthe Company’sbusiness,increasethe Company’srevenue,manageexpenses,generateadditionalcash,achieveandmaintainprofitability,developandcommercializeexistingandnewproductsandapplications,improvetheperformanceof the Company’sworldwidesalesanddistributionnetwork,andtotheoutlookregardinglongtermprospects.TheCompanycautionsyounottoplaceunduerelianceontheseforward-lookingstatements,whichreflectmanagement’sanalysisonlyasof thedateof thisAnnualReportonForm10-K.The following discussion should be read in conjunction with our audited financial statements and notes thereto for the fiscal year endedDecember 31, 2016. This Annual Report on Form 10-K, 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 7, the forward-looking statements are based upon our current expectations, estimates and projections and that 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. The 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, improve the performance of our worldwide sales and distribution network, and to the outlook regarding long term prospects. We caution you not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K.
Some of the important factors that could cause our results to differ materially from those in our forward-looking statements, and a discussion of other risks and uncertainties, are discussed in Item 1A—Risk Factors commencing on page17.Company We encourage you undertakesnoobligationto read updateforward-lookingstatementstoreflecteventsorcircumstancesoccurringafterthedateofthisForm10-K.
Someoftheimportantfactorsthat section carefully as well as other risks detailed couldcausetheCompany’sresultstodiffermateriallyfrom time to time thosein our filings with the Company’sforward-lookingstatements,andadiscussionofotherrisksanduncertainties,arediscussedinItem1A—RiskFactors.TheCompanyencouragesyoutoreadthatsectioncarefullyaswellasother risksdetailedfromtimetotimeinthe Company’sfilingswiththeSEC.
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 |
● | CriticalAccountingPoliciesandEstimates.This section describes the key accounting policies that are affected by critical accounting estimates. |
● | RecentAccountingGuidance.This section describes the issuance and effect of new accounting pronouncements that are or may be applicable to us. |
● | ResultsofOperations.This section provides |
● | LiquidityandCapital |
Executive Summary
Company Description
We areThe Company is a leading medical device company specializing in the research, development, manufacture, marketing and servicing of laserlight and other energy-basedenergy based aesthetics systems for practitioners worldwide. We offerIn addition to internal development of products, the Company distributes third party sourced products under the Company’s own brand names. The Company offers easy-to-use products which enable physicians and other qualified practitioners to perform safe and effective aesthetic procedures, including treatment of vascular conditionsfor body contouring, skin resurfacing and revitalization, tattoo removal, removal of benign pigmented lesions, hair-removal, skin rejuvenation, body contouring, skin resurfacing, tattoovascular conditions, hair removal, toenail fungus and toenail fungus. Ourwomen's intimate health. The Company’s platforms are designed to be easily upgraded to add additional applications and hand pieces, which provide flexibility for ourthe Company’s customers as they expand their practices. In addition to systems and upgrade revenue, we generatethe Company generates revenue from the sale of post warranty service contracts, providing services for products that are out of warranty, hand piece refills and other per procedure related revenue on select systems, and distribution of third-party manufactured skincare products. In the second quarter of 2014, we terminated our agreement with Merz for the distribution of itsRadiesse dermal filler product.
OurThe Company’s ongoing research and development activities primarily focus on developing new products, as well as improving and enhancing the Company’s portfolio of existing products. The Company also explores ways to expand the Company’s product offerings through alternative arrangements with other companies, such as distribution arrangements. The Company introduced Juliet, a product for women’s intimate health, in December 2017, SecretRF, a fractional RF microneedling device for skin revitalization, in January 2018, enlightenSRin April 2018, truSculptiDin July 2018, excel V+ in February 2019 and truSculpt flex in June 2019.
The Company’s corporate headquarters and U.S. operations are located in Brisbane, California, from where we conduct ourthe Company conducts manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. We market, sellThe Company markets, sells and service ourservices the Company’s products through direct sales and service employees in the U.S.North America (including Canada), Australia, Austria, Belgium, Canada, France, Germany, Hong Kong, Japan, Spain, (until January 2017), Switzerland and the United Kingdom. Sales and ServiceServices outside of these direct markets are made through a worldwide distributor network in over 40 countries. As of December 31, 2016, we had a U.S. direct sales force of 52 employees and a direct international sales force of 34 employees.
Products Revenueand Services
Our ProductsThe Company derives revenue is derived from the sale of Products Hand piece refills, and Skincare products.Services. Product revenue representsincludes revenue from the sale of a system.systems, hand pieces and upgrade of systems (collectively “Systems” revenue), replacement hand pieces, truSculptiDcycle refills, and truSculpt flexcycle refills, as well as single use disposable tips applicable to Julietand SecretRF(“Consumables” revenue), and the sale of skincare products (“Skincare” revenue). A system consists of a console that incorporates a universal graphic user interface, a laser and/orand (or) other energy based module, control system software and high voltage electronics;electronics, as well as one or more hand pieces. However, depending on the application, the laser or other energy based module is sometimes contained in the hand piece such as with our the Company’s PearlandPearlFractionalapplications instead of within the console.
We offer ourThe Company offers customers the ability to select the system that best fits their practice at the time of purchase and then to cost-effectively add applications to their system as their practice grows. This provides customers the flexibility to upgrade their systems whenever they choose and provides usthe Company with a source of additional revenue, which we treat as ProductSystems revenue. The Company’s primary system platforms include: excel,enlighten,Juliet,SecretRF,truSculptand xeo.
For our Titan hand pieces, after a set number of treatments have been performed, the customer is required to send the hand piece back to the factory for refurbishment, which we refer to as ”refilling” the hand piece and is classified as Hand piece revenue.
Skincare revenue relates to the distribution of ZO’s skincare products in Japan, and through the second quarter of 2014, also included Merz Pharma GmbH’s (“Merz”)Radiesse dermal filler product.
Service RevenueJapan.
Service revenue relates to amortization ofincludes prepaid service contracts, direct billings for detachable hand piece replacements and revenue for partsenlighteninstallation, customer marketing support and labor on out-of-warranty products.
Significant Business Trends We believe.
The Company believes that ourthe ability to grow revenue will be primarily dependent onimpacted by the following:
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For a detailed discussion of the significant business trends impacting ourthe Company’s business, please see“Results the section titled “Results of Operations”Operations” below.
Factors that May Impact Future Performance
Our industry is impacted by numerous competitive, regulatoryCritical accounting policies, significant judgments and other significant factors. Our industry is highly competitive and our future performance depends on our ability to compete successfully. Additionally, our future performance is dependent upon our ability to continue to expand our product offerings with innovative technologies, obtain regulatory clearances for our products, protect the proprietary technologyuse 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 I, Item 1A “Risk Factors.”
Critical Accounting Policies and Estimatesestimates
The preparation of our Consolidated Financial Statementsthe Company’s audited consolidated financial statements and related disclosures in conformity with generally accepted accounting principles innotes requires the U.S. (“GAAP”) requires usCompany to make judgments, estimates judgments and assumptions that affect the reported amounts of assets, liabilities, revenuerevenues and expenses. Theseexpenses, and related disclosure of contingent assets and liabilities. The Company has based its estimates judgments and assumptions are based on historical experience and on various other factorsassumptions that we believe arethe Company believes to be reasonable under the circumstances. WeThe Company periodically review ourreviews its estimates and makemakes adjustments when facts and circumstances dictate. To the extent that there are material differences between these estimates and actual results, ourits financial condition or results of operations will be affected.
CriticalAn accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates as defined by the Securities and Exchange Commission (“SEC”), are those that are most importantreasonably likely to occur periodically, could materially impact the portrayalconsolidated financial statements. The Company believes that its critical accounting policies reflect the more significant estimates and assumptions used in the preparation of ourits audited consolidated financial condition and results of operations and require our management’s most difficult and subjectivestatements. The critical accounting policies, judgments and estimates of matters that are inherently uncertain. Our critical accounting estimates are as follows:
Revenue Recognition
We earn revenue from the sale of Products, Hand piece refills, Skincare products and Service. We recognize revenue when persuasive evidence of an arrangement exists, transfer of title to the customer has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. We defer revenue in the event that any of these revenue recognition criteria is not met.
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Multiple-Element Arrangements
For Product revenue, all of the tangible products, including the embedded software, are delivered to the customer at the time of sale. In some circumstances,should be read in conjunction with the purchase of a system or upgrade, customers purchase service contracts for one or more years to cover their products. For these transactions,Company’s audited consolidated financial statements and the following multiple-element arrangement exists: a tangible product delivered to the customer at the inception of the revenue arrangement;notes thereto and a service contract for delivery of services to the customer over a contractually stated period of time definedother disclosures included in the service contract.this report.
For multiple-element arrangements, judgments are required asan analysis of the Company’s Critical Accounting Policies and Estimates please refer to Note 1 “Summary of significant accounting policies” to the allocationCompany’s audited consolidated financial statements included in Part II, Item 8 of this report.
The Company believes the following critical accounting policies, estimates and assumptions may have a material impact on reported financial condition and operating performance and may involve significant levels of judgment to account for highly uncertain matters or are susceptible to significant change:
Revenue Recognition
See "Part II, Item 8. Revenue Recognition, Notes 1" to the consolidated financial statements for the year ended December 31, 2019, included in this Annual Report on Form 10-K for additional information about the Company’s revenue recognition policy, significant judgement and criteria for recognizing revenue.
The Company enters into contracts with multiple performance obligations where customers purchase a combination of systems and services. Determining whether systems and services are considered distinct performance obligations that should be accounted for separately requires judgment. The Company determines the transaction price for a contract based on the consideration it expects to receive in exchange for the transferred goods or services. To the extent the transaction price includes variable consideration, such as expected price adjustments for returns, the Company applies judgment when estimating variable consideration and when estimating the extent to which the transaction price is subject to the constraint on variable consideration. The Company evaluates constraints based on its historical and projected experience with similar customer contracts.
The Company allocates revenue to each performance obligation in proportion to the relative standalone selling prices and recognize revenue when control of the proceeds received from an arrangement torelated goods or services is transferred for each performance obligation.
The Company utilizes the multiple elements of the arrangement. For multiple element arrangements we allocate revenue to all deliverables based on their relative selling prices. Because we have neither vendor-specific objective evidence (“VSOE”) nor third-party evidence ofobservable standalone selling price (“TPE”)when available, which represents the price charged for our systems, the allocation of revenue has been based on our best estimate ofperformance obligation when sold separately. When standalone selling prices (“BESP”). The objective of BESP is to determinefor systems or services are not directly observable the price at which we would transact a sale ifCompany determines the product or service was sold on a stand-alone basis. We determine BESP for our deliverables by considering multiple factorsstandalone selling prices using relevant information available and applies suitable estimation methods including, but not limited to, featuresthe cost plus a margin approach.
The Company determines the standalone selling price (“SSP”) for systems based on directly observable sales in similar circumstances to similar customers.. The SSPs for training, extended contract services and functionalityinstallation are based on observable prices when sold on a standalone basis. The SSP for customer marketing support is estimated based on cost plus a margin.
Under the Company’s loyalty program, customers accumulate points based on their purchasing levels. Once a loyalty program member achieves a certain tier level, the member earns a reward such as the right to attend the Company’s advanced training event for truSculpt, or a ticket for the Company’s annual forum. A customer’s account must be in good standing to receive the benefits of the system, geographies, typerewards program. Rewards are earned on a quarterly basis and must be used in the following quarter. Customers receive a notification regarding their rewards tier by the fifth day of customerthe following quarter. All unused rewards are forfeited. The fair value of the reward earned by loyalty program members is included in accrued liabilities and market conditions.recorded as a reduction of net revenue at the time the reward is earned.
Revenue under service contracts isIncremental costs of obtaining a contract, including sales commissions, are allocated to the distinct goods and services to which they relate based on the relative stand-alone selling prices. Incremental costs related to obligations delivered at inception are recognized at contract inception. Those related to obligations delivered over time are capitalized and amortized on a straight-line basis over the expected customer relationship period if the Company expects to recover those costs. The Company uses the portfolio method to recognize the amortization expense related to these capitalized costs related to initial contracts and such expense is recognized over a period associated with the revenue of the applicablerelated portfolio, which is generally two to three years for the Company’s product and service contract. Service revenue,arrangements.
Valuation of Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net identifiable assets and liabilities. If a quoted price in an active market for the identical asset is not underreadily available at the measurement date, the fair value of the intangible asset is estimated based on discounted cash flows using market participant assumptions, which are assumptions that are not specific to the Company.
Goodwill is initially valued based on the excess of the purchase price of a business combination over the fair value of acquired net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized.
Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually, at the reporting unit level, in the fourth quarter and whenever events or circumstances indicate impairment may exist. An impairment charge is recorded for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. See "Part II, Item 8. Financial Statements, Note 1" in the accompanying Notes to consolidated financial statements for more information.
Capitalized Cloud Computing Costs
The Company capitalizes costs incurred related to implementation costs incurred in a hosting arrangement that is a service contract to develop or obtain internal-use software in accordance with ASU No. 2018-15, "Intangibles (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The capitalized implementation costs are then amortized over the term of the hosting arrangement inclusive of expected contract renewals, which is generally three to five years. See "Part II, Item 8. Financial Statements, Note 1" in the accompanying Notes to consolidated financial statements for more information.
Leases
The Company is a party to certain operating and finance leases for vehicles, office space and storages. The Company’s material operating leases consist of office space, as well as storage facilities. The Company’s leases generally have remaining terms of 1 to 10 years, some of which include options to renew the leases for up to 5 years.
The Company adopted ASC Topic 842 on January 1, 2019, applying the modified retrospective method to all leases existing at the date of initial application. The comparative information has not been adjusted and continues to be reported under the accounting standards in effect for the prior period.
The Company determines if a contract contains a lease at inception. Right of Use Assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, the Company estimates the incremental secured borrowing rates corresponding to the maturities of the leases. The Company based the rate estimates on prevailing financial market conditions, credit analysis, and management judgment.
The Company recognizes expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.
See "Part II, Item 8. Financial Statements, Notes 1 and 12" in the accompanying Notes to consolidated financial statements for more information.
Valuation of 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 the Company’s business, less reasonably predictable costs of completion, disposal, and transportation. Standard costs are monitored and updated quarterly or as necessary, to reflect changes in raw material costs, labor to manufacture the product and overhead rates.
The cost basis of the Company’s inventory is reduced for any products that are considered excess or obsolete based upon assumptions about future demand and market conditions. The Company provides for excess and obsolete inventories when conditions indicate that the inventory cost is not recoverable due to physical deterioration, forecast usage, obsolescence, reductions in estimated future demand and reductions in selling prices. Inventory provisions are measured as the services are provided.difference between the cost of inventory and net realizable value to establish a lower cost basis for the inventories. The Company balances the need to maintain strategic inventory levels with the risk of obsolescence due to changing technology, timing of new product introductions and customer demand levels.
Hand Piece Refills
When customers purchase a hand piece refill, we ship a previously refurbished unitThe Company includes demonstration units within inventories. Demonstration units are carried at cost and recognizeamortized over an estimated economic life of two years. Amortization expense related to demonstration units is recorded in Products cost of revenue upon shipment. With respect to ourtruSculpt hand pieces, we include unlimited hand piece replacementsor in thetruSculpt standard warranty contract respective operating expense line based on which function and recognize the revenue under the warranty model, inpurpose for which the demonstration units are being used. Proceeds from the sale of demonstration units are recorded as revenue forand all costs incurred to refurbish the systemsystems prior to sale was recognized up-front along with an estimate of the costs which will be incurred under the warranty obligation recorded inare charged to cost of revenue.
Shipping andHandlingCosts
We expense shipping and handling costs as incurred and include them in cost of revenue. In those cases where we bill shipping and handling costs to customers, we classify the amounts billed as revenue.
See "Part II, Item 8. Financial Statements, Note 1" in the accompanying Notes to consolidated financial statements for more information.
Stock-based Compensation ExpenseValuation of Inventories
StockOptions
We account for stock-based compensationInventories 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 accordance with the fair value recognition provisionsordinary course of U.S. GAAP. To value options, we use the Black-Scholes option-pricing model, which requiresCompany’s business, less reasonably predictable costs of completion, disposal, and transportation. Standard costs are monitored and updated quarterly or as necessary, to reflect changes in raw material costs, labor to manufacture the input of highly subjective assumptions. These assumptions include:
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The assumptions for expected volatilityproduct and expected term are the two assumptions that significantly affect the grant date fair value.overhead rates.
The expected term represents the weighted-average period that our stock options are expected to be outstanding. The expected term is based on the observed and expected time to post-vesting exercise of options by employees. We use historical exercise patterns of previously granted options in relation to stock price movements to derive an employee behavioral pattern used to forecast expected exercise patterns.
We estimate volatility based on historical volatility and we also consider implied volatility when there is sufficient volume of freely traded options with comparable terms and exercise prices in the open market.
Changes in expected risk-free interest rate and dividend rate do not significantly impact the calculation of fair value, and determining this input is not highly subjective.
Changes in the subjective assumptions of expected term, volatility and forfeiture rate can materially affect the estimate of fair value of stock-based compensation and, consequently, the related amount recognized on our Consolidated Statements of Operations.
Restricted Stock Units
We grant restricted stock unit (“RSU”) awards to our management employees, officers and directors. RSUs are measured based on the fair market valuescost basis of the underlying stock on the dates of grantCompany’s inventory is reduced for any products that are considered excess or obsolete based upon assumptions about future demand and the stock-based compensation expense is recognized over the vesting period. Shares are issued on the vesting dates net of the minimum statutory tax withholding requirements to be paid by us on behalf of our employees. As a result, the actual number of shares issued will be fewer than the actual number of RSUs outstanding. Furthermore, we record the obligationmarket conditions. The Company provides for withholding amounts to be paid by us as a reduction to additional paid-in capital.
Performance Stock Units
Performance stock unit (“PSU”) awards are granted to our officersexcess and other members of management. The final number of shares of common stock issuable at the end of the performance measurement period, subject to the recipient’s continued service through that date, is determined based on the degree of achievement of the performance goals. The fair value of PSUs that have operational goals is measured based on the market price of our stock on the date of grant, whereas PSUs with market-based measurement goals are measured using a 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 also further incorporates into the fair-value determination the possibility that the market condition may not be satisfied.
Stock-based compensation expense for PSUs with operational goals is recognized based on the expected degree of achievement of the performance goals over the vesting period. However, stock-based compensation expense for market-based PSU awards are recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided.
On the vesting date of PSU awards, we issue fully-paid up common stock, net of the minimum statutory tax withholding requirements to be paid by us and record the obligation for withholding amounts as a reduction to additional paid-in capital.
ForfeitureRates
In accounting for share-based compensation expenses, we are required to develop an estimate of the number of share-based awards that will be forfeited due to employee turnover. Adjustments in the estimated forfeiture rates can have a significant effect on our reported share-based compensation, as we recognize the cumulative effect of the rate adjustments for all expense amortization in the period the estimated forfeiture rates were adjusted. We estimate and adjust forfeiture rates based on a periodic review of recent forfeiture activity and expected future employee turnover. If a revised forfeiture rate is higher than previously estimated forfeiture rate, we may make an adjustment that will result in a decrease to the expense recognized in the financial statements during the periodobsolete inventories when the rate was changed. Adjustments in the estimated forfeiture rates could also cause changes in the amount of expense that we recognize in future periods.
Intangible Assets
Our intangible assets include identifiable intangibles and goodwill. Identifiable intangibles include sub-licenses, rights acquired from a former distributor and those acquired in conjunction with an acquisition in 2012. All of our identifiable intangibles have finite lives.
In February 2012, we acquired the global aesthetic business unit of IRIDEX Corporation, which included various laser systems (such as theVariLite andGemini) and an installed base of customers, whose products are being serviced by us. This acquisition was considered a business combination for accounting purposes, and as such, in addition to valuing all the assets, we recorded goodwill associated with the expected synergies from leveraging the customer relationships and integrating new product offerings into our business. The fair values of the assets acquired were determined to be $4.8 million of net tangible and intangible assets and $1.3 million of goodwill.
Identifiable intangible assets with finite lives are subject to impairment testing and are reviewed for impairment when events or circumstances indicate that such assets may not be recoverable at their carrying value. We evaluate the recoverability of the carrying value of these identifiable intangibles based on estimated undiscounted cash flows to be generated from such assets. If the cash flow estimates or the significant operating assumptions upon which they are based change in the future, we may be required to record additional impairment charges. When events or changes in circumstancesconditions indicate that the carrying amountinventory cost is not recoverable due to physical deterioration, forecast usage, obsolescence, reductions in estimated future demand and reductions in selling prices. Inventory provisions are measured as the difference between the cost of long-lived assets may not be recoverable, we recognize such impairment ininventory and net realizable value to establish a lower cost basis for the eventinventories. The Company balances the net book valueneed to maintain strategic inventory levels with the risk of such assets exceeds the future undiscounted cash flows attributableobsolescence due to such assets.changing technology, timing of new product introductions and customer demand levels.
The valuationCompany includes demonstration units within inventories. Demonstration units are carried at cost and classificationamortized over an estimated economic life of intangible assets and goodwill and the assignment of useful amortization lives for the intangible assets involves judgments and the use of estimates. The evaluation of these intangibles and goodwill for impairment under established accounting guidelinestwo years. Amortization expense related to demonstration units is required on a recurring basis. Changesrecorded in business conditions could potentially require future adjustments to asset valuations. If we determine that the remaining useful lives of assets are shorter than we had originally estimated, we accelerate the rate of amortization over the assets’ new, shorter useful lives. A considerable amount of judgment is required in assessing impairment, which includes financial forecasts. Should conditions be different from management’s current estimates, material write-downs of long-lived assets may be required, which would adversely affect our operating results.
As of December 31, 2014, we evaluated the recoverability of our long-lived assets. Relating to the purchased intangible assets associated with the Iridex acquisition in 2012, due to the discontinuation of the manufacture and sale of all products acquired, reduction in projected future service revenue, and reduction in projected revenue expected from the distributor relationships acquired, we determined based on an undiscounted cash flow model that the remaining carrying value of these assets was impaired. Based on a discounted cash flow model, we measured the impairment of the purchased intangible assets and recorded an impairment charge of $650,000 inProducts cost of revenue or in the year ended December 31, 2014. Our valuation model reliedrespective operating expense line based on unobservable inputs, referredwhich 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 as Level 3refurbish the systems prior to sale are charged to cost of revenue.
See "Part II, Item 8. Financial Statements, Note 1" in the fair value hierarchy, that are supported by little or no market activity and reflect the use of significant management judgment and included expected future cash flow streams as well as a market discount rate. Our valuation model is subjectaccompanying Notes to uncertainties that are difficult to predict. As of December 31, 2016 and December 31, 2015 we determined that there was no impairment to our long-lived assets.consolidated financial statements for more information.
Valuation of Inventories
We state our inventoriesInventories are stated at the lower of cost or market, computedand net realizable value, cost being determined on a standard cost basis which approximates actual cost on a first-in, first-out basisbasis. Net realizable value is the estimated selling prices in the ordinary course of the Company’s business, less reasonably predictable costs of completion, disposal, and market being determined as the lower of replacement cost or net realizable value.transportation. Standard costs are monitored and updated quarterly or as necessary, to reflect changes in raw material costs, labor to manufacture the product and overhead rates. We provide
The cost basis of the Company’s inventory is reduced for any products that are considered excess or obsolete based upon assumptions about future demand and market conditions. The Company provides for excess and obsolete inventories when conditions indicate that the inventory cost is not recoverable due to physical deterioration, forecast usage, obsolescence, reductions in estimated future demand and reductions in selling prices. Inventory provisions are measured as the difference between the cost of inventory and estimated marketnet realizable value and charged to cost of revenue to establish a lower cost basis for the inventories. We balanceThe Company balances the need to maintain strategic inventory levels with the risk of obsolescence due to changing technology, timing of new product introductions and customer demand levels. Unfavorable changes in market conditions may result in a need for additional inventory provisions that could adversely impact our gross margins. Conversely, favorable changes in demand could result in higher gross margins when product that had previously been written down is sold.
Warranty Obligations
We provide a one-year standard warranty on all systems. Warranty coverage providedThe 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 for labor and parts necessary to repair the systems during the warranty period. For sales to distributors, we generally provide a 14 to 16 month warranty for parts only, with labor being provided to the end customer by the distributor.
We provide for the estimated future costs of warranty obligationsrecorded in Products cost of revenue whenor in the relatedrespective 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.
See "Part II, Item 8. Financial Statements, Note 1" in the accompanying Notes to consolidated financial statements for more information.
Stock-based Compensation Expense
The Company’s equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests. In June 2019, stockholders approved an amendment and restatement of the Amended and Restated 2004 Equity Incentive Plan (the “Prior Plan”) as the 2019 Equity Incentive Plan (the “2019 Plan”) and approved an additional 700,000 shares, available for future grants (in addition to the 9,701,192 shares provided under the Prior Plan). The 2019 Plan provides for the grant of incentive stock options, non-statutory stock options, RSAs, restricted stock units (“RSUs”), stock appreciation rights, performance stock units (“PSUs”), performance shares, and other stock or cash awards.
The Company accounts for stock-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 Company uses the Black- Scholes option-pricing model using the single-option approach to determine the fair value of options granted. Option-pricing models require the input of highly subjective assumptions, particularly for the expected stock price volatility and the expected term of options. The risk-free interest rate is recognized.based on the U.S. Treasury yield for a duration similar to the expected term at the date of grant. The accrued warranty costs represent our bestCompany has never paid any cash dividends on its common stock and it has no intention to pay a dividend at this time; therefore, the Company assumes that no dividends will be paid over the expected terms of option awards. The Company determines the assumptions to be used in the valuation of option grants as of the date of grant. As such, the Company uses different assumptions during the year if it grants options at different dates. The Company did not grant incentive stock options or non-statutory stock options in 2019.
The assumptions used in the Black-Scholes-option pricing model to determine the fair value of award include the following:
Expected Term: The expected term represents the weighted-average period that the stock options are expected to be outstanding prior to being exercised. The Company determines expected term based on historical exercise patterns and its expectation of the time it will take for employees to exercise options still outstanding.
Expected Volatility: For the underlying stock price volatility of the Company’s stock, the Company estimates volatility based on a 50-50 blend of the Company’s historical volatility and the implied volatility of freely traded options of the Company’s stock in the open market.
Forfeitures: The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. Under ASC 718, the Company has made an accounting policy to estimate forfeitures at the time awards are granted and revises, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. treasury yield curve in effect at the time of sale, and as reviewed and updated quarterly,grant for the expected term of the total costs that we expectstock option.
The Company grants RSUs to incur during the warranty periodCompany’s directors, officers and management employees and non-employees. The fair value of RSUs is based on the stock price on the grant date using a single-award approach. The RSUs are subject to repair or replace product parts that fail, includinga service vesting condition and are recognized on a straight-line basis over the refurbishmentrequisite service period. Shares are issued on the vesting dates, net of anytruSculpt refills included as partapplicable tax withholding requirements to be paid by the Company on behalf of the original sale. Accrued warranty costs include costsrecipient. As a result, the actual number of material, technical support, labor and associated overhead. The amountshares issued will be fewer than the actual number of accrued estimated warranty costsRSUs outstanding. Furthermore, the Company records the obligation for establishedwithholding amounts to be paid by us as a reduction to additional paid-in capital.
Performance stock units are granted to the Company’s officers and management employees and non-employees. PSU’s with operational measurement goals are measured at the market price of the Company’s stock on the date of grant, whereas PSUs with market-based measurement goals are measured using a 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 also further incorporates into the fair-value determination the possibility that the market condition may not be satisfied. The final number of shares of common stock issuable at the end of the performance measurement period, subject to the recipient’s continued service through that date, is determined based on the expected degree of achievement of the performance goals. Stock-based compensation expense for PSUs is recognized based on the expected degree of achievement of the performance goals over the vesting period. However, stock-based compensation expense for market-based PSU awards are recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided. On the vesting date of PSU awards, the Company issues fully-paid up common stock, net of the minimum statutory tax withholding requirements to be paid by the Company and records the obligation for withholding amounts as a reduction to additional paid-in capital.
During 2019, The Company’s Board granted to executive officers, senior management and certain employees PSUs that vest subject to the recipients’ continued service and to the achievement of certain operational goals for the Company’s 2019 fiscal year which consist of the achievement of revenue targets for consumable products, revenue targets for international revenue, and certain operational milestones related to product performance. During 2019 the Board made a modification to the PSU grants outstanding, such that 15% of the PSUs will now vest upon the achievement of revenue targets for consumable products or revenue targets for international revenue rather than upon the achievement of targets related to IT systems implementation projects.
For a significant majority of the Company’s awards, share-based compensation expense is recognized on a straight-line basis over the requisite service period, which ranges from one to four years, depending on the award. The Company recognizes share-based compensation expense for the portion of the equity award that is expected to vest over the requisite service period and develops an estimate of the number of share-based awards which will ultimately vest, primarily based on historical experience aswithin separate groups of employees and expectations regarding achievement of PSU goals for PSU awards. The forfeiture rates used in 2019 ranged from 0% to 17.7%. The estimated forfeiture rate is reassessed periodically throughout the requisite service period. Such estimates are revised if they differ materially from actual forfeitures. For the award types discussed above, if the employee or non-employee terminates employment prior to being vested in an award, then the award is forfeited.
Modifications of the terms of outstanding awards may result in significant increases or decreases in share-based compensation. During the first quarter of 2019, the Company’s Board granted to executive officers, senior management and certain employees PSUs that vest subject to the recipients’ continued service and to the achievement of certain operational goals for the Company’s 2019 fiscal year which consist of the achievement of revenue targets for consumable products, revenue targets for international revenue, and specific operational milestones related to product failures adjustedperformance and IT systems implementation projects.
During the third quarter of 2019 the Board made a modification to the PSU grants then outstanding such that 15% of the PSUs would vest upon the achievement of revenue targets for current informationconsumable products for U.S. employees, or upon the achievement of international revenue targets for international employees, rather than upon the achievement of targets related to IT systems implementation projects. The modified PSUs were valued at the Company’s share price on repair costs. Actual warranty costs could differ fromthe date of the modification. There were no PSU awards granted to non-employees during 2019. There were no modifications to the terms of outstanding options, and restricted stock units during 2019.
See "Part II, Item 8. Financial Statements, Notes 1 and 6" in the accompanying Notes to consolidated financial statements for more information.
Income Taxes
The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the estimated amounts. On a quarterly basis, we review the accrued balancesfuture tax effects of our warranty obligationstemporary differences between book and update based on historical warranty cost trends. If we were required to accrue additional warranty cost in the future due to actual product failure rates, material usage, service delivery costs or overhead costs differing from our estimates, revisionstax treatment of assets and liabilities and carryforwards to the estimated warranty liability would be required, which would negatively impact our operating results.
Provision for Income Taxesextent they are realizable.
We areThe Company is subject to taxes on earnings in both the U.S. and various foreign jurisdictions. AsOn a global taxpayer, significant judgmentsquarterly basis, the Company assesses its current and estimates are required in evaluating our uncertainprojected earnings by jurisdiction to determine whether or not its earnings during the periods when the temporary differences become deductible will be sufficient to realize the related future tax positions and determining our provision for income taxes on earnings. We perform a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluatebenefits. Should the tax position for recognition by determining if the weight of available evidence indicatesCompany determine that it would not be able to realize all or part of its net deferred tax asset in a particular jurisdiction in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
For those jurisdictions where tax carryforwards are likely to expire unused or the projected operating results indicate that realization is not more likely than not, a valuation allowance is recorded to offset the deferred tax asset within that jurisdiction. In assessing the position willneed for a valuation allowance, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. In the event that Company determines that it would be sustained on audit, including resolutionable to realize its deferred tax assets in the future in excess of related appeals or litigation processes, if any. The second step is to measure the tax benefit asnet recorded amount, a reduction of the largest amount that is more than 50% likely of being realized upon settlement. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision forvaluation allowance would increase income taxes in the period in which such determination iswas made. The provision forLikewise, should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, a reduction to the deferred tax asset would be charged to income taxes includesin the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.period such determination was made.
OurThe Company’s net taxable temporary differences and tax carryforwards are recorded using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. Should the expected applicable tax rates change in the future, an adjustment to our deferred taxes would be credited or charged, as appropriate, to income in the period such determination was made.
The Company’s effective tax rates have differed from the statutory rate primarily due to changes in the valuation allowance, foreign operations, research and development tax credits, state taxes, and certain benefits realized related to stock option activity. OurThe Company’s current effective tax rate does not assume U.S. taxes on undistributed profits of foreign subsidiaries. These earnings could become subject to incremental foreign withholding or U.S. federal and state taxes, should they either be deemed or actually remitted to the U.S. The effective tax rate in 2016, 2015 and 2014 was approximately 5%, (5)%, and (2)%, respectively. OurCompany’s future effective tax rates could be adversely affected by earnings being lower in countries where we havethe Company has lower statutory rates and being higher in countries where we havethe Company has higher statutory rates, or by changes in tax laws, accounting principles, interpretations thereof, net operating loss carryback, research and development tax credits, and due to changes in the valuation allowance of ourapplied to its U.S. deferred tax assets. In addition, we arethe Company is subject to the examination of ourthe Company’s income tax returns by the Internal Revenue Service and other tax authorities. WeThe Company regularly assessassesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of ourthe Company’s provision for income taxes.
AtUndistributed earnings of the Company’s foreign subsidiaries at December 31, 2016, we had an aggregate of approximately $3.1 million of unremitted earnings of foreign subsidiaries that have been, or2019 are intendedconsidered to be indefinitely reinvested and, accordingly, no provision for continued usestate income taxes has been provided thereon. Due to the Transition Tax and Global Intangible Low-Tax Income (“GILTI”) regimes as enacted by the 2017 Tax Act, those foreign earnings will not be subject to federal income taxes when actually distributed in the form of a dividend or otherwise. The Company, however, could still be subject to state income taxes and withholding taxes payable to various foreign operations. Depending on the timing and naturecountries. The amounts of the distribution, if the total undistributed earnings of foreign subsidiaries were remitted whiletaxes which the Company is ablecould be subject to utilize its net operating losses, it is likely there would be noare not material additional tax resulting fromto the distribution.accompanying financial statements.
Our deferredThe Company periodically assesses its exposures related to its global provision for income taxes and believe that it has appropriately accrued taxes for contingencies. Any reduction of these contingent liabilities or additional assessment would increase or decrease income, respectively, in the period such determination was made.
The Company records a liability for uncertain tax assets and liabilities are recognizedpositions that do not meet the more likely than not standard as prescribed by the authoritative guidance for income tax accounting. The Company records tax benefits for only those positions that it believes will more likely than not be sustained. For positions that the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for net operating losses (“NOL”) and tax credit carryforwards. A valuation allowance reduces deferred tax assets to estimated realizable value, which assumesCompany believes that it is more likely than not that weit will prevail, the Company records a benefit considering the amounts and probabilities that could be ablerealized upon ultimate settlement. If the Company judgment as to generate sufficient future taxable income in certain tax jurisdictions to realize the net carrying value. We have fully reserved our U.S. federal and state deferred tax assets due to our history of operating losses.In the future, if we conclude that sufficient positive evidence (including our estimate of future taxable income) exists to support a reversal of all or a portionlikely resolution of the valuation allowance, we expect that a significant portionuncertainty changes, if the uncertainty is ultimately settled or if the statute of any releaselimitation related to the uncertainty expires, the effects of the valuation allowance willchange would be recorded as anrecognized in the period in which the change, resolution or expiration occurs. The Company has included in the Company’s Consolidated Balance Sheet a long-term income tax benefit atliability for unrecognized tax benefits and accrued interest and penalties of $1,461 and $1,563 as of December 31, 2019 and December 31, 2018. See "Part II, Item 8. Financial Statements, Note 11. Income Taxes" in the time of release.accompanying Notes to consolidated financial statements for more information.
Litigation
The utilization of NOL carryforwards and tax credits may be subject to a substantial annual limitation due to the ownership change limitations provided by Section 382 of the U.S. Internal Revenue Code (“IRC” or the “Code”), and similar state provisions. The annual limitation may result in the expiration of NOL carryforwards and tax credits before utilization. We have completed an IRC Section 382 analysis through December 31, 2016 and determined that there were no significant limitations to the utilization of NOL or tax credit carryforwards. As such, the NOL and tax credit carryforwards presented in this Form 10-K are not expected to expire unutilized, unless there is a future ownership change as determined by Section 382 of the IRC.
Litigation
We haveCompany has been, and may in the future become, subject to a number of legal proceedings related toinvolving securities litigation, intellectual property, product liability, claims,intellectual property, contractual disputes, trademark and copyright, and other matters. BasedThe Company records a liability and related charge to earnings in its consolidated financial statements for legal contingencies when the loss is considered probable and the amount can be reasonably estimated. The Company’s assessment is reevaluated each accounting period and is based on all available information, at the balance sheet dates, we assess the likelihoodincluding discussion with any outside legal counsel that represents us. If a reasonable estimate of any adverse judgmentsa known or outcomes for these matters, as well as potential rangesprobable loss cannot be made, but a range of probable loss.losses can be estimated, the low-end of the range of losses is recognized if no amount within the range is a better estimate than any other. If losses area loss is reasonably possible, but not probable and can be reasonably estimable, we record an estimated, liability.
Recent Accounting Guidanceloss is disclosed in the notes to the consolidated financial statements.
For a full descriptionOff-Balance Sheet Arrangements
The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest or special purpose entities, which would have been established for the purpose of recentfacilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2019, the Company was not involved in any unconsolidated transactions.
Recent Accounting Pronouncement
In addition to the impacts from new accounting pronouncements including the respective effective dates of adoption and effects on results of operations and financial conditionincluded above see Note 1 — “Summary of Significant Accounting Policies — Recent Accounting Pronouncements” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. for a complete discussion of recent accounting pronouncements adopted and not adopted.
Results of Operations
The following table sets forth selected consolidated financial data expressed as a percentage of net revenue.
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2019 | 2018 | 2017 | |||||||||||||||||||
Net revenue | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
Cost of revenue | 42 | % | 43 | % | 44 | % | 46 | % | 51 | % | 43 | % | ||||||||||||
Gross profit | 58 | % | 57 | % | 56 | % | 54 | % | 49 | % | 57 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Sales and marketing | 35 | % | 38 | % | 41 | % | 39 | % | 36 | % | 34 | % | ||||||||||||
Research and development | 10 | % | 11 | % | 14 | % | 8 | % | 9 | % | 8 | % | ||||||||||||
General and administrative | 11 | % | 13 | % | 14 | % | 13 | % | 13 | % | 9 | % | ||||||||||||
Lease termination income | - | - | (2 | )% | ||||||||||||||||||||
Total operating expenses | 56 | % | 62 | % | 69 | % | 61 | % | 58 | % | 50 | % | ||||||||||||
Income (loss) from operations | 2 | % | (5 | )% | (13 | )% | (7 | )% | (8 | )% | 7 | % | ||||||||||||
Interest and other income, net | — | % | — | % | — | % | - | % | - | % | 1 | % | ||||||||||||
Income (loss) before income taxes | 2 | % | (5 | )% | (13 | )% | (7 | )% | (8 | )% | 8 | % | ||||||||||||
Income tax provision | — | % | — | % | — | % | ||||||||||||||||||
Income tax (benefit) provision | - | 11 | % | (12 | )% | |||||||||||||||||||
Net income (loss) | 2 | % | (5 | )% | (13 | )% | (7 | )% | (19 | )% | 20 | % | ||||||||||||
Net Revenue
The following table sets forth selected consolidated revenue by major geographic area and product category with changes thereof.
Year Ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2016 | % Change | 2015 | % Change | 2014 | |||||||||||||||
Revenue mix by geography: | ||||||||||||||||||||
United States | $ | 65,513 | 34 | % | $ | 48,916 | 38 | % | $ | 35,494 | ||||||||||
Percent of total | 55 | % | 52 | % | 45 | % | ||||||||||||||
Japan | $ | 14,727 | 28 | % | $ | 11,504 | (14 | )% | $ | 13,328 | ||||||||||
Asia, excluding Japan | 13,445 | (14 | )% | 15,596 | 41 | % | 11,023 | |||||||||||||
Europe | 7,539 | (2 | )% | 7,728 | (1 | )% | 7,792 | |||||||||||||
Rest of the world | 16,832 | 53 | % | 11,017 | 5 | % | 10,501 | |||||||||||||
Total international revenue | 52,543 | 15 | % | 45,845 | 8 | % | 42,644 | |||||||||||||
Percent of total | 45 | % | 48 | % | 55 | % | ||||||||||||||
Total consolidated revenue | $ | 118,056 | 25 | % | $ | 94,761 | 21 | % | $ | 78,138 | ||||||||||
Revenue mix by product category: | ||||||||||||||||||||
Systems – North America | $ | 58,595 | 45 | % | $ | 40,528 | 49 | % | $ | 27,122 | ||||||||||
Systems – International | 34,126 | 11 | % | 30,695 | 18 | % | 25,984 | |||||||||||||
Total Systems | 92,721 | 30 | % | 71,223 | 34 | % | 53,106 | |||||||||||||
Hand Piece Refills | 2,498 | (14 | )% | 2,910 | (22 | )% | 3,714 | |||||||||||||
Skincare | 3,809 | 32 | % | 2,889 | (17 | )% | 3,479 | |||||||||||||
Service | 19,028 | 7 | % | 17,739 | (1 | )% | 17,839 | |||||||||||||
Total consolidated revenue | $ | 118,056 | 25 | % | $ | 94,761 | 21 | % | $ | 78,138 | ||||||||||
Year Ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2019 | % Change | 2018 | % Change | 2017 | |||||||||||||||
Revenue mix by geography: | ||||||||||||||||||||
United States | $ | 106,243 | 4 | % | $ | 101,862 | 8 | % | $ | 94,581 | ||||||||||
International | $ | 75,469 | 24 | % | $ | 60,858 | 7 | % | $ | 56,912 | ||||||||||
Consolidated total revenue | $ | 181,712 | 12 | % | $ | 162,720 | 7 | % | $ | 151,493 | ||||||||||
United States as a percentage of total revenue | 58 | % | 63 | % | 62 | % | ||||||||||||||
International as a percentage of total revenue | 42 | % | 37 | % | 38 | % | ||||||||||||||
Revenue mix by product category: | ||||||||||||||||||||
Systems | ||||||||||||||||||||
- North America | $ | 96,718 | 3 | % | $ | 93,977 | 6 | % | $ | 88,338 | ||||||||||
- Rest of World | 43,760 | 13 | % | 38,618 | 3 | % | 37,544 | |||||||||||||
Total Systems | 140,478 | 6 | % | 132,595 | 5 | % | 125,882 | |||||||||||||
Consumables | 9,648 | 132 | % | 4,162 | 71 | % | 2,436 | |||||||||||||
Skincare | 8,512 | 47 | % | 5,778 | 33 | % | 4,342 | |||||||||||||
Total Products | 158,638 | 11 | % | 142,535 | 7 | % | 132,660 | |||||||||||||
Service | 23,074 | 14 | % | 20,185 | 7 | % | 18,833 | |||||||||||||
Total Net revenue | $ | 181,712 | 12 | % | $ | 162,720 | 7 | % | $ | 151,493 | ||||||||||
Total Net Revenue
The Company’s revenue increased by 12% for the year ended December 31, 2019, compared to 2018, due primarily to stronger growth in the Company’s international business, an increase in consumables sales, and demand for the Company’s recently launched systems, excel V+ and truSculpt flex, offset by softness in the women’s health market overall due to the FDA public statement and letter on Juliet, and competitive trends affecting certain legacy system pricing.
Revenue by Geography:Geography
OurThe Company’s U.S. revenue increased by 34% in 2016,4% for the year ended December 31, 2019, compared to 2015.the same period in 2018. The increase was due primarily to continued demand of the truSculpt portfolio, including the recently launched truSculpt flex, as well as the Company’s excel V+ system.
The Company’s U.S. revenue increased 8% for the year ended December 31, 2018, compared to 2017. The increase was due primarily to the introduction of Secret RF and Juliet during January 2018, and truSculpt iD in July 2018.
The Company’s international revenue increased 24%, for the year ended December 31, 2019, compared to the same period in 2018, driven primarily by increases in service revenue, systems, skincare products and consumables.
The Company’s international revenue increased 7% for the year ended December 31, 2018, compared to 2017. The increase was due to growth in the Company’s business in the Middle East and Asia (excluding Japan).
Revenue by Product Type
SystemsRevenue
Systems revenue in North America increased 3% for the year ended December 31, 2019, compared to the same period in 2018, due primarily to the recently launched excel V+ and truSculpt flex systems. The Rest of the World systems revenue increased 13%, compared to the same periods in 2018. The increase in U.S.Rest of the World revenue was primarily a result ofrevenue generated across all our major platforms, including our recently introducedenlighten andexcel HR products, as well as continued growth of ourexcel V,xeoandtruSculptproducts.
Our U.S. revenue increased by 38% in 2015, compared to 2014. The an increase in U.S. revenue was primarily a result of revenue generated by our most recently introducedenlighten andexcel HR products, continued growth of ourexcel V,xeoandtruSculptproducts, partially offset by declines in revenue from other legacy products.
Our total international revenue increased by 15% in 2016, compared to 2015, and represented 45% of our total revenue. The increase in international revenue was primarily a result of increases in ourthe Company’s direct business in Japan as well as increases in our distributor business in the Middle East, Europe and Asia. This was partially offset by a decline in our direct business in Europe.
Our total international revenue increased by 8% in 2015, compared to 2014, and represented 48% of our total revenue. The increase in international revenue was primarily a result of increases in our distributor business in Asia Pacific and Europe, as well as our direct business in Australia. This was partially offset by a decline in our direct business in Japan and the negative impact associated with the appreciation of the U.S. Dollar against the Euro, Japanese Yen and the Australian Dollar.
Revenue by Product Category:
Our Product revenue increased by 30% in 2016, compared to 2015.This increase in Product revenue was primarily attributable to revenue generated by the most recently launchedenlightenplatform(enlighten IIIwas launched in December 2016)andexcel HR,the continued growth inxeo, excel V andtruSculpt, partially offset by revenue declines in our other legacy products.
Our Product revenue increased by 34% in 2015, compared to 2014.This increase in Product revenue was primarily attributable to revenue generated by our most recently introducedenlightenandexcel HR products, the continued growth inexcel V sales and increases in sales oftruSculpt, partially offset by declines in our legacy products.
OurHand Piece Refills revenue decreased by 14% and 22% in 2016 and 2015, respectively, compared to the respective prior year periods. These decreases were due primarily to declines inTitan hand piece refill revenue caused by reduced utilization.
Our Skincare revenue increased by 32% in 2016, compared to 2015. This increase was primarily due to expanded product offerings of this distributed product, as well as an increase in the valueCompany’s distributor business in the Middle East due to the Company’s expansion to these markets and new products launches.
Systems revenue in North America increased 6%, for the year ended December 31, 2018, compared to 2017, due to sales in the U.S. and the introduction of Secret RF and Juliet during January 2018, and truSculpt iD in July 2018. The Rest of the Japanese Yen versusWorld systems revenue increased 3%, for the U.S Dollar by approximately 10% in 2016, whenyear ended December 31, 2018, compared to 2015. Our Skincare2017. The increase in Rest of the World revenue decreased by 17% in 2015, compared to 2014. This decrease was primarily a result of an increase in the devaluationCompany’s direct business in Asia, excluding Japan, as well as increases in the Company’s distributor business in the Middle East and Europe, partially offset by decreases in the Company’s direct business in Australia and Europe.
ConsumablesRevenue
Consumables revenue increased 132% for the year ended December 31, 2019, compared to the same period in 2018. The increase in consumables revenue was primarily due to the increasing installed base oftruSculpt iD, followed by Secret RF, and truSculpt flex in June 2019 each of which have a consumable element.
Consumables revenue increased 71%, for the year ended December 31, 2018, compared to 2017. The increase in consumables revenue was due to the introduction of SecretRFand Julietduring January 2018, and truSculptiDin July 2018,each of which have consumable elements.
SkincareRevenue
The Company’s revenue from Skincare products in Japan increased 47% for the year ended December 31, 2019, compared to the same period in 2018. This increase was due primarily to increased marketing and promotional activities, and a temporary increase in consumer demand due to changes in the Japanese Yen versusconsumption tax rate from 8% to 10% effective October 1, 2019.
The Company’s revenue from Skincare products in Japan increased 33%, for the U.S. Dollar by approximately 14% in 2015,year ended December 31, 2018, compared to 2014, which had an adverse impact on our revenue.2017. This increase was due primarily to increased marketing and promotional activities.
OurServiceRevenue
The Company’s Service revenue increased by 7% in 2016 and decreased by 1% in 2015,14% for the year ended December 31, 2019, compared to the respective prior year periods. Thesame period in 2018. This increase in 2016, compared to 2015, was due primarily to increased sales of system partsservice contracts, and support and maintenance services provided on a time and materials basis to ourthe Company's network of international distributors.
The Company’s Service revenue increased 7%, for the year ended December 31, 2018, compared to 2017. This increase was due primarily to increased sales of service contracts, time and material to the Company's network of international distributors.
Gross Profit
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2016 | % Change | 2015 | % Change | 2014 | 2019 | % Change | 2018 | % Change | 2017 | ||||||||||||||||||||||||||||||
Gross Profit | $ | 68,135 | 26 | % | $ | 54,283 | 25 | % | $ | 43,373 | $ | 98,163 | 22 | % | $ | 80,382 | (7 | )% | $ | 86,110 | ||||||||||||||||||||
As a percentage of total revenue | 58 | % | 57 | % | 56 | % | 54 | % | 49 | % | 57 | % | ||||||||||||||||||||||||||||
OurThe Company’s cost of revenue consists primarily of material, personnel expenses, royalty expense, product warranty costs, amortization of intangibles and manufacturing overhead expenses. The patents that we licensed for applicable hair-removal products, expiredCompany also continues to make investments in February 2016 andits international direct service support, as a result, all of our revenue from February 2016 onwards was not subject to royalties. well as operational improvement activities.
Gross marginprofit as a percentage of net revenue improved to 58% in 2016,for the twelve months ended December 31, 2019 increased 5%, compared to 57%same period in 2015, which2018. The increase in gross profit as a percentage of revenue was primarily attributablelargely driven by demand for the Company's new products with higher margins, as well as strong growth in consumables and skincare products. The year ended December 31, 2018 also included a $5 million product remediation charge when the Company recognized a liability for a product remediation plan related to of one of its legacy systems. The accrued expense consisted of the estimated cost of materials and labor to replace the component in all units that were under the Company's standard warranty or were covered under existing service contracts.
Gross profit as a percentage of revenue for the year ended December 31, 2018 declined 8%, compared to the following:same period in 2017. The reduced gross profit as a percentage of revenue during 2018 was due primarily to:
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Gross margin as a percentage of net revenue improved to 57% in 2015, compared to 56% in 2014, which was primarily attributable to the following:
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Sales and Marketing
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2016 | % Change | 2015 | % Change | 2014 | 2019 | % Change | 2018 | % Change | 2017 | ||||||||||||||||||||||||||||||
Sales and marketing | $ | 41,563 | 16 | % | $ | 35,942 | 11 | % | $ | 32,246 | $ | 71,109 | 22 | % | $ | 58,420 | 12 | % | $ | 52,070 | ||||||||||||||||||||
As a percentage of total revenue | 35 | % | 38 | % | 41 | % | 39 | % | 36 | % | 34 | % | ||||||||||||||||||||||||||||
Sales and marketing expenses consist primarily of personnel expenses, expenses associated with customer-attended workshops and trade shows, post-marketingpost- marketing studies, advertising and advertising. Salestraining.
The $12.7 million increase in sales and marketing expenses increased by $5.6 million in 2016,for the year ended December 31, 2019 compared to 2015, which2018 was due primarily attributable to the following:to:
● | $ |
● | $0.5 million of higher travel related expenses in North America |
● | $1.2 million increase in software user license fees and other expenses; |
● | $1.9 million increase in consulting and outside professional fees; |
● | $2.4 million increase in stock-based compensation due to increased headcount; and |
● | $6.4 million increase in labor costs due to increased headcount |
The $6.4 million increase in sales and marketing expenses for the year ended December 31, 2018 compared to 2017 was due primarily to:
● | $2.9 million of higher promotional and product demonstration expenses, primarily in North America; |
● | $1.7 million of higher travel related expenses in North America |
● | $ |
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Sales and marketing expenses increased by $3.7 million in 2015, compared to 2014, which was primarily attributable to the following:
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Sales and marketing expenses as a percentage of net revenue, decreased to 35% and 38% in 2016 and 2015, respectively, compared to 38% and 41% in the respective prior year periods. These decreases are attributable to the increased leveraging of our sales and marketing expenses as revenue has increased.
Research and Development (“(“R&D”&D”)
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2016 | % Change | 2015 | % Change | 2014 | 2019 | % Change | 2018 | % Change | 2017 | ||||||||||||||||||||||||||||||
Research and development | $ | 11,232 | 5 | % | $ | 10,733 | 2 | % | $ | 10,543 | $ | 15,085 | 5 | % | $ | 14,359 | 12 | % | $ | 12,874 | ||||||||||||||||||||
As a percentage of total revenue | 10 | % | 11 | % | 14 | % | 8 | % | 9 | % | 8 | % | ||||||||||||||||||||||||||||
Research and developmentR&D expenses consist primarily of personnel expenses, clinical andresearch, regulatory expenses, as well asand material costs. R&D expenses increased $499,000 in 2016,by 5% for the year ended December 31, 2019, compared to 2015, whichthe same period in 2018. The increase in expense of $0.7 million for the year ended December 31, 2019 was due primarily attributableto an increase in stock-based compensation.
R&D expenses increased by $1.5 million or 12% and represented 9% of total net revenue during the year ended December 31, 2018, compared to 8% of total net revenue in 2017. This increase in expense was due primarily to increase in material cost related to ongoing research and development efforts.
General and Administrative (“G&A”)
Year Ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2019 | % Change | 2018 | % Change | 2017 | |||||||||||||||
General and administrative | $ | 24,033 | 14 | % | $ | 20,995 | 49 | % | $ | 14,090 | ||||||||||
As a percentage of total revenue | 13 | % | 13 | % | 9 | % | ||||||||||||||
G&A expenses consist primarily of personnel expenses, legal, accounting, audit and tax consulting fees, as well as other general and administrative expenses. G&A expenses increased 14% for the year ended December 31, 2019, compared to the same period in 2018. The increase in expenses of $3.0 million was due primarily to $1.1 million of personnel related expenses, inclusive of a $1.3 million decrease in stock-based compensation, $0.9 million increase in professional fees, consulting services and legal fees related to the ongoing implementation efforts of a new Enterprise Resource Planning system and $ 0.6 million related to executive severance costs.
G&A expenses increased by $6.9 million, or 49%, and represented 13% of total net revenue during the year ended December 31, 2018, compared to 9% of total net revenue in 2017, due primarily to:
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R&D expenses increased $190,000 in 2015, compared to 2014, which was primarily attributable to:
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General and Administrative (“G&A”)
Year Ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2016 | % Change | 2015 | % Change | 2014 | |||||||||||||||
General and administrative | $ | 12,943 | 7 | % | $ | 12,129 | 8 | % | $ | 11,203 | ||||||||||
As a percentage of total revenue | 11 | % | 13 | % | 14 | % | ||||||||||||||
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 increased by $814,000 in 2016, compared to 2015, which was primarily attributable to:
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G&A expenses increased by $926,000 in 2015, compared to 2014, which was primarily attributable to:
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Interest and Other Income (expense), Net
Interest and other income, net, consists of the following:
The components of “Interest and Other Income, Net” are as follows:
Year Ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2016 | % Change | 2015 | % Change | 2014 | |||||||||||||||
Interest income | $ | 330 | — | % | $ | 330 | (19 | )% | $ | 406 | ||||||||||
Other income (expense), net | (7 | ) | (81 | )% | (37 | ) | (79 | )% | (180 | ) | ||||||||||
Total interest and other income, net | $ | 323 | 10 | % | $ | 293 | 30 | % | $ | 226 | ||||||||||
Year Ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2019 | % Change | 2018 | % Change | 2017 | |||||||||||||||
Total interest and other income (expense), net | $ | (199 | ) | 62 | % | $ | (123 | ) | (114 | )% | $ | 884 | ||||||||
As a percentage of total net revenue | (0.1 | )% | (0.1 | )% | 0.6 | % | ||||||||||||||
InterestNet interest and other income expense was flat in 2016,marginally higher for the year ended December 31, 2019 compared to 2015. Interestthe year ended December 31, 2018. Net interest and other income decreased 19% in 2015,$1.0 million or (114%) for the year ended December 31, 2018, compared to 2014,2017. This decrease was due primarily attributable to decreasesan increase in our cash, cash equivalents and marketable investments balances resulting from repurchasing $40 millioninterest expense related to significant financing components included in the Company’s multi-year post-warranty service contracts for customers who make payment more than one year in advance of our common stock,receiving the service under the new revenue standard effective January 1, 2018, an increase in net foreign exchange losses, as well as decreased yields on our investments. Our cash, cash equivalents anda decrease in interest income from the Company’s marketable investments at December 31, 2016, 2015resulting from a decrease in the investment balance. The Company adopted the new revenue standard under modified retrospective method and 2014 were $54.1 million, $48.4 million and $81.1 million, respectively.so there was no equivalent expense last year.
Income Tax Provision
| Year Ended December 31, |
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(Dollars in thousands) | 2016 |
| $ Change |
| 2015 | $ Change | 2014 |
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Income (loss) before income taxes | $ | 2,720 | $ | 6,948 | $ | (4,228 | ) | $6,165 | $ | (10,393 | ) | |||
Income tax provision |
| 143 |
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| (69 | ) |
| 212 | (7 | ) |
| 219 | ||
Effective tax rate |
| 5 | % |
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| (5 | )% |
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| (2) | % | ||
Year Ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2019 | $ Change | 2018 | $ Change | 2017 | |||||||||||||||
Income (loss) before income taxes | $ | (12,263 | ) | $ | 1,252 | $ | (13,515 | ) | $ | 25,475 | $ | 11,960 | ||||||||
Income tax (benefit) provision | 85 | (17,170 | ) | 17,255 | 35,288 | (18,033 | ) | |||||||||||||
In 2016, 2015 and 2014, we recorded anDuring the year ended December 31, 2019, the Company incurred income tax provision of $143,000, and $212,000 and $219,000, respectively,expense in foreign jurisdictions which was primarilypartially offset by the Company’s release of a reserve related to foreignuncertain tax expenses as wepositions in Germany. During the year ended December 31, 2018, the Company applied a full valuation allowance of $16.9 million against allcertain U.S. federal and state deferred tax assets. In 2017, the Company recorded an income tax benefit of $18.0 million. This tax benefit was primarily related to a ($26.3) million release of the Company’s valuation allowance against certain U.S deferred tax assets, arising during eachwhich was partially offset by $7.3 million for the revised measurement of these years.the Company’s U.S deferred tax assets resulting from the 2017 US Tax Act, $0.7 million current tax expense and $0.3 million of other deferred tax expense.
Liquidity and Capital Resources
LiquiditySources and Uses of Cash
The Company’s principal source of liquidity is cash from maturity and sales of marketable investments and cash generated from the measurementissuance of our ability to meet potential cash requirements, fundcommon stock through exercise of stock options and the planned expansion of our operations and acquire businesses. Our sources of cash include operations, stock option exercises, andCompany’s employee stock purchases. Wepurchasing program. The Company actively manage ourmanages its cash usage and investment of liquid cash to ensure the maintenance of sufficient funds to meet ourits daily needs. The majority of ourthe Company’s cash and investments are held in U.S. banks and ourits foreign subsidiaries maintain a limited amount of cash in their local banks to cover their short-term operating expenses.
As of December 31, 2019 and December 31, 2018, the Company had $39.2 million and $39.6 million of working capital, respectively. Cash and cash equivalents plus marketable investments decreased by $1.7 million to $33.9 million as of December 31, 2019, from $35.6 million as of December 31, 2018, primarily as a result of increased inventory purchases related to the increasing demand of the Company’s products, and an increase in investments in sales, service and other management headcount to facilitate continued revenue expansion.
As of December 31, 2018 and December 31, 2017, the Company had $39.6 million and $45.1 million of working capital, respectively. Cash and cash equivalents plus marketable investments decreased by $0.3 million to $35.6 million as of December 31, 2018, from $35.9 million as of December 31, 2017, primarily as a result of the decline in the Company’s stock price that impacted cash provided by the exercise of stock options and the Company’s employee stock purchasing program, increased inventory purchases related to the increasing demand of the Company’s products, and an increase in investments in sales, service and other management headcount to facilitate continued revenue expansion.
Cash, Cash Equivalents and Marketable Investments
The following table summarizes ourthe Company’s cash and cash equivalents and marketable investments (in thousands):
Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
(Dollars in thousands) | 2016 | 2015 | Change | 2019 | 2018 | Change | ||||||||||||||||||
Cash, cash equivalents and marketable securities: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 13,775 | $ | 10,868 | $ | 2,907 | $ | 26,316 | $ | 26,052 | $ | 264 | ||||||||||||
Marketable investments | 40,299 | 37,539 | 2,760 | 7,605 | 9,523 | (1,918 | ) | |||||||||||||||||
Total | $ | 54,074 | $ | 48,407 | $ | 5,667 | $ | 33,921, | $ | 35,575 | $ | (1,654 | ) | |||||||||||
Consolidated Cash FlowsFlow Data
In summary, ourthe Company’s cash flows were as follows:
Year ended December 31, | ||||||||||||
(Dollars in thousands) | 2016 | 2015 | 2014 | |||||||||
Cash flows provided by (used in): | ||||||||||||
Operating activities | $ | 1,992 | $ | (1,359 | ) | $ | (4,286 | ) | ||||
Investing activities | (3,392 | ) | 32,646 | (5,611 | ) | |||||||
Financing activities | 4,307 | (30,222 | ) | 3,458 | ) | |||||||
Net increase (decrease) increase in cash and cash equivalents | $ | 2,907 | $ | 1,065 | $ | (6,439 | ) | |||||
Year ended December 31, | ||||||||||||
(Dollars in thousands) | 2019 | 2018 | 2017 | |||||||||
Cash flows provided by (used in): | ||||||||||||
Operating activities | $ | (2,217 | ) | $ | 307 | $ | 14,287 | |||||
Investing activities | 1,067 | 10,773 | 17,694 | |||||||||
Financing activities | 1,414 | 788 | (31,572 | ) | ||||||||
Net increase in cash and cash equivalents | $ | 264 | $ | 11,868 | $ | 409 | ||||||
Cash Flows from Operating Activities
Net cash used in operating activities was $2.2 million during 2019, which was due primarily to:
● | $2.7 million net income adjusted for non-cash related items consisting primarily of stock-based compensation expense of $9.8 million, $2.9 million amortization of capitalized contract costs, and $1.5million depreciation and amortization expenses; |
● | $3.4 million cash used to increase long term assets |
● | $1.4 million cash used for increased inventory purchases leading to an increase in accounts payable; |
● | $7.2 million cash generated by an increase in accrued liabilities; |
● | $1.8 million cash used to increase pre-paid expenses and other current assets; |
● | $5.9 million used due to an increase in inventories; |
● | $2.5 million used as a result of increased accounts receivables; |
● | $1.7 million generated as a result of increased deferred revenue; and |
● | $1.2 million cash used as a result of a decrease in extended warranty liabilities. |
We
Net cash provided by operating activities was $0.3 million during 2018, which was due primarily to:
● | $30.8 million net loss as adjusted for non-cash related items consisting primarily of valuation allowance against certain U.S. differed tax assets of $17.4 million (excluding the $1.2 million tax effect of the ASC 606 Adoption), stock-based compensation expense of $7.2 million, $1.3 million provision for doubtful accounts receivable, and $3.0 million depreciation and amortization expenses; |
● | $4.3 million generated from an increase in accounts payable due primarily to increased inventory related purchases; |
● | $3.8 million cash used to settle accrued liabilities; |
● | $3.8 million cash used to increase pre-paid expenses and other long term assets; |
● | $2.5 million generated due to decrease in inventories; |
● | $0.1 million used as a result of increased accounts receivables; and |
● | $0.1 million generated as a result of increased deferred revenue. |
The Company generated net cash of $2.0$14.3 million in operating activities during 2016,2017, which was primarily attributable to:
● | $ |
● | $ |
● | $13.8 million of cash used to increase inventories due primarily to higher raw materials required for future product revenue growth; and |
● | $4.2 million used to increase in accounts receivable. |
Cash Flows from Investing Activities
Net cash provided by investing activities was $1.1 million during 2019, which was attributable primarily to:
● | $14.7 million in net proceeds from the sales and maturities of marketable investments; partially offset by |
● | $ |
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● | $ |
WeNet cash provided by investing activities was $10.8 million during 2018, which was attributable primarily to:
● | $23.1 million in net proceeds from the sales and maturities of marketable investments; partially offset by |
● | $10.9 million of cash used to purchase marketable investments; and |
● | $1.5 million of cash used to purchase property, equipment and software. |
Net cash provided net cash of $1.4$17.7 million from investing activities in operating activities during 2015, which was2017, primarily attributable to:
● | $ |
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● | $ |
Cash Flows from Financing Activities
Net cash provided by financing activities was $1.4 million during 2019, which was primarily due to:
● | $2.9 million proceeds from exercise of |
● | $ |
● | $ |
Cash Flows from Investing Activities
We used netNet cash of $3.4provided by financing activities was $0.8 million in investing activities in 2016,during 2018, which was primarily attributabledue to:
● | $ |
● | $3.1 million of cash used for taxes paid related to |
● | $0.5 million of cash used to |
Net cash used in financing activities in 2017 was $31.6 million, which was primarily due to:
● | $35.2 million used to repurchase the Company’s common stock; |
● | $1.5 million used for taxes paid related to net share settlement of equity awards; offset partially |
● | $ |
We generated net cash of $32.6 million in investing activities in 2015, which was primarily attributable to:
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Cash Flows from Financing Activities
Net cash provided by financing activities in 2016 was $4.3 million, which was primarily due to:
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Net cash used in financing activities in 2015 was $30.2 million, which was primarily due to:
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Adequacy of cash resourcesCash Resources to meet future needsMeet Future Needs
WeThe Company had cash, cash equivalents, and marketable investments of $54.1$33.9 million as of December 31, 2016. We believe2019. The Company’s principal source of liquidity is cash from maturity and sales of marketable investments and cash generated from the issuance of common stock through exercise of stock options and the ESPP. The Company believes that ourthe existing cash resources are sufficient to meet ourthe Company’s anticipated cash needs for working capital and capital expenditures for at least the next several years, but there can be no assurances.
Loan and Security Agreement
On May 30, 2018, the Company and Wells Fargo Bank, N.A. (“Wells Fargo”) entered into a Loan and Security Agreement (the “Original Revolving Line of Credit”) in the original principal amount of $25 million. The Original Revolving Line of Credit terminates on May 30, 2021. As of December 31, 2019, there were no borrowings under the Original Revolving Line of Credit.
Covenants
The Original Revolving Line of Credit contained financial and other covenants as well as the maintenance of a leverage ratio not to exceed 2.5 to 1.0 and a TTM adjusted EBITDA of not less than $10 million. A violation of any of the covenants could result in a default under the Original Revolving Line of Credit that would permit the lenders to restrict the Company’s ability to further access the revolving line of credit for financingloans and letters of credit and require the $10.1 million remaining in our Stock Repurchase Program.immediate repayment of any outstanding loans under the Loan and Security Agreement.
2018, the Company received notice that it was in violation of certain financial covenants in the Original Revolving Line of Credit and entered into discussions with Wells Fargo to amend and revise certain terms of the Original Revolving Line of Credit.
On or about November 2, 2018, the Company entered into a First Amendment and Waiver to the Loan and Security Agreement with Wells Fargo (the “First Amended Revolving Line of Credit”). The First Amended Revolving Line of Credit provided for a principal amount of $15 million, with the ability to request an additional $10 million, and a waiver of any existing defaults under the Original Revolving Line of Credit as long as the Company is in compliance with the terms of the First Amended Revolving Line of Credit.
On or about March 11, 2019, the Company entered into a Second Amendment and Waiver to the Loan and Security Agreement with Wells Fargo (the “Second Amended Revolving Line of Credit”). The Second Amended Revolving Line of Credit requires the Company to maintain a minimum cash balance of $15 million at Wells Fargo, but removes all other covenants so long as no money is drawn on the line of credit. The Company may draw down on the line of credit at the time it reaches and maintains TTM adjusted EBITDA of not less than $10 million, and a leverage ratio not to exceed 2.5 to 1.0.
A violation of any of the covenants could result in a default under the Second Amended Revolving Line of Credit that would permit the lenders to restrict the Company’s ability to further access the revolving line of credit for loans and letters of credit and require the immediate repayment of any outstanding loans under the Second Amended Revolving Line of Credit.
As of December 31, 2019, the Company had not drawn on the Original Revolving Line of Credit and the Company is in compliance with all financial covenants of the Original Revolving Line of Credit, as amended by the First Amended Revolving Line of Credit and the Second Amended Revolving Line of Credit.
Contractual Obligations
The following are ourthe Company’s contractual obligations, consisting of future minimum lease commitments related to facility and vehicle leases as of December 31, 2016:2019:
Payments Due by Period ($’000’s) | Payments Due by Period ($’000’s) | |||||||||||||||||||||||||||||||||||||||
Contractual Obligations | Total | Less Than 1 Year | 1-3Years | 3-5Years | More Than 5 Years | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | ||||||||||||||||||||||||||||||
Operating leases | $ | 2,141 | $ | 1,912 | $ | 229 | $ | — | $ | — | $ | 8,654 | $ | 2,868 | $ | 5,760 | $ | 26 | $ | - | ||||||||||||||||||||
Capital leases | 993 | 367 | 626 | — | — | |||||||||||||||||||||||||||||||||||
Finance leases | 1,212 | 543 | 669 | - | - | |||||||||||||||||||||||||||||||||||
Total leases | $ | 3,134 | $ | 2,279 | $ | 855 | $ | — | $ | — | 9,866 | 3,411 | 6,429 | 26 | $ | - | ||||||||||||||||||||||||
Purchase Commitments
We maintainThe Company maintains certain open inventory purchase commitments with ourits suppliers to ensure a smooth and continuous supply for key components. OurThe Company’s liability in these purchase commitments is generally restricted to a forecasted time-horizon as agreed between the parties. These forecasted time-horizonsan agreed-upon period. Such time periods can vary among different suppliers. OurThe Company’s open inventory purchase commitments were not material at December 31, 2016. As a result, this amount is not included2019. The Company believes it has adequate funds to fulfill any such commitments in the contractual obligations table above.future using the sources discussed in this Item 7 – Management’s Discussion & Analysis of Financial Condition and Results of Operations.
Income Tax LiabilityOther
We have included in our Consolidated Balance Sheet an $82,000 long-term income tax liability for unrecognized tax benefits and accrued interest as of December 31, 2016. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes. As a result, this amount is not included in the contractual obligations table above.
Off-Balance Sheet Arrangements
We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2015, we were not involved in any unconsolidated transactions.
Other
In the normal course of business, we enterthe Company enters into agreements that contain a variety of representations, warranties, and indemnification obligations. For example, we havethe Company has entered into indemnification agreements with each of ourthe Company’s directors and executive officers. OurThe Company’s exposure under the various indemnification obligations is unknown and not reasonably estimable as they involve future claims that may be made against us. As such, we havethe Company has not accrued any amounts for such obligations.
ITEM | QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
InterestRateandMarketRisk
Our exposure to interest rate risk relates primarily to our investment portfolio. Fixed rate securities may have their fair market value adversely impacted due to fluctuations in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. The primary objective of ourthe Company’s investment activities is to preserve principal while at the same time maximizing yieldsthe income the Company receives from investments without significantly increasing risk. To achieve this objective, we investthe Company maintains its portfolio of cash equivalents and short- and long-term investments in a variety of high quality securities, including U.S. treasuries, U.S. government agencies, corporate debt, instruments of the U.S. Government and its agenciescash deposits, money market funds, commercial paper, non-U.S. government agency securities, and municipal bonds,bonds. The securities are classified as available-for-sale and by policy, restrict our exposure to any single typeconsequently are recorded at fair value with unrealized gains or losses reported as a separate component of investment or issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at aaccumulated other comprehensive loss.
The weighted average maturity of generally less than eighteen months. Based on discounted cash flow modeling with respect to our total investmentthe Company’s portfolio as of December 31, 2016, assuming2019 was approximately 0.2 years. If interest rates rise, the market value of our investments may decline, which could result in a realized loss if the Company is forced to sell an investment before its scheduled maturity. A hypothetical increase in interest rates ofrate by one percentage point would not have resulted in a material impact on the fairCompany’s total investment portfolio.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. These reforms may cause LIBOR to cease to exist, new methods of calculating LIBOR to be established or the establishment of an alternative reference rate(s). These consequences cannot be entirely predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by the Company. Changes in market interest rates may influence returns on financial investments and could reduce our total investment portfolio would potentially decline by approximately $198,000.earnings and cash flows.
The uncertain financial markets could result in a tightening in the credit markets, a reduced level of liquidity in many financial markets, and extreme volatility in fixed income and credit markets. The credit ratings of the securities the Company has invested in could further deteriorate and may have an adverse impact on the carrying value of these investments.
Foreign Currency RiskAs of December 31, 2019, the Company had not drawn on the Original Revolving Line of Credit, or any of the amendments. Overall interest rate sensitivity is primarily influenced by any amount borrowed on the line of credit and the prevailing interest rate on the line of credit facility. The effective interest rate on the line of credit facility is based on a floating per annum rate equal to the LIBOR rate. The LIBOR rate was 1.76% as of December 31, 2019, and accordingly the Company may incur additional expenses if the Company has an outstanding balance on the line of credit and the LIBOR rate increases in future periods.
In 2016Inflation
The Company does not believe that inflation has had a material effect on the Company’s business, financial condition, or results of operations. If the Company’s costs were to become subject to significant inflationary pressures, the Company may not be able to fully offset such higher costs through price increases. The Company’s inability or failure to do so could harm the Company’s business, financial condition, and 2015, our internationalresults of operations.
Foreign Exchange Fluctuations
The Company generates revenue was approximately 45% and 48%, respectively, of our total revenue. Approximately 45% and 49%, of our international revenue was denominated in U.S. Dollars. All of the remaining revenue was denominated in Japanese Yen, Euros, Australian Dollars, Canadian Dollars, British Pounds and Swiss Francs. Our Japanese YenAdditionally, a portion of the Company’s operating expenses and assets and liabilities are denominated revenue represents the majorityin each of our foreign currency denominated revenue.
In 2016,these currencies. Therefore, fluctuations in these currencies against the U.S. Dollar devalued againstdollar could materially and adversely affect the Japanese Yen by approximately 10%, which had a significant positive foreign exchange impact on ourCompany’s results of operations upon translation of the Company’s revenue − both from a re-measurement gain upon the conversion of our Japanese Yen denominated revenuein these currencies, as well as the additional positive revenue impact due tore-measurement of the effective price decrease for the local customers importing ourCompany’s international subsidiaries’ financial statements into U.S. Dollar denominated systems into Japan. In addition, the U.S. Dollar devaluation against the Japanese Yen had an unfavorable foreign currency translation impact on our local cost of sales and operating expenses.
In 2015, the Japanese Yen, compared to the U.S. Dollar, devalued by approximately 14%, which had a significant adverse foreign exchange impact on our revenue − both from a re-measurement loss upon the conversion of our Japanese Yen denominated revenue as well as the additional negative revenue impact due to the effective price increase for the local customers importing our U.S. Dollar denominated systems into Japan. In addition, the Japanese Yen devaluation had a favorable foreign currency translation impact on our local cost of sales and operating expenses.
We havedollars. The Company has historically not engaged in hedging activities relating to ourthe Company’s foreign currency denominated transactions, given we have a natural hedge resulting from our foreign cash receipts being utilized to fund our respective local currency expenses.transactions.
ITEM 8. | FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA |
CUTERA,INC.ANDSUBSIDIARYCOMPANIES
ANNUALREPORTONFORM10-K
INDEXTOCONSOLIDATEDFINANCIALSTATEMENTS
The following Consolidated Financial Statements of the Registrant and its subsidiaries are required to be included in Item 8:
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The following Consolidated Financial Statement Schedule of the Registrant and its subsidiaries for the years ended December 31, 2015, 2014 and 2013 is filed as a part of this Report as required to be included in Item 15(a) and should be read in conjunction with the Consolidated Financial Statements of the Registrant and its subsidiaries:
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All other required schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the Consolidated Financial Statements or the Notes thereto.
REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors and Stockholders
Cutera,Inc.
Brisbane, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Cutera, Inc. (the “Company”) as of December 31, 20162019 and 2015, and2018, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. In connection with our audits of2019, and the financial statements, we have also audited the financial statement schedule listed in the accompanying index. These financial statementsrelated notes and schedule are(collectively referred to as the responsibility of the Company’s management. Our responsibility is to express an opinion on these“consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)statements”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cutera, Inc.the Company at December 31, 20162019 and 2015,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, 2015 and 2014,2019, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), Cutera Inc.’sthe Company's internal control over financial reporting as of December 31, 2016 and 2015,2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 16, 2020 expressed an unqualified opinion thereon.
Change in Accounting Principle
As discussed in Notes 1 and 11 to the consolidated financial statements, the Company has changed its accounting method for accounting for leases in fiscal year 2019 due to the adoption of Topic 842: Leases using a modified retrospective approach and changed its method for recognizing revenue in fiscal year 2018 due to the adoption of Topic 606: Revenue from Contracts with Customers.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2014.
San Francisco, California
March 16, 2020
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Cutera, Inc.
Brisbane, California.
Opinion on Internal Control over Financial Reporting
We have audited Cutera, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and schedule and our report dated March 15, 201716, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
San Jose,Francisco, California
March 15, 201716, 2020
CUTERA,CUTERA, INC.
CONSOLIDATEDBALANCE SHEETS
(inthousands,exceptshareandpersharedata)
December 31, | December 31, | |||||||||||||||
2016 | 2015 | 2019 | 2018 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 13,775 | $ | 10,868 | $ | 26,316 | $ | 26,052 | ||||||||
Marketable investments | 40,299 | 37,539 | 7,605 | 9,523 | ||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $21 and $4, respectively | 16,547 | 11,669 | ||||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $1,354 and $1,257, respectively | 21,556 | 19,637 | ||||||||||||||
Inventories | 14,977 | 12,078 | 33,921 | 28,014 | ||||||||||||
Other current assets and prepaid expenses | 2,251 | 1,675 | 5,648 | 3,972 | ||||||||||||
Total current assets | 87,849 | 73,829 | 95,046 | 87,198 | ||||||||||||
Property and equipment, net | 1,907 | 1,473 | 2,817 | 2,672 | ||||||||||||
Deferred tax assets | 377 | 350 | 423 | 457 | ||||||||||||
Intangibles, net | 2 | 143 | ||||||||||||||
Operating lease right-of-use assets | 7,702 | — | ||||||||||||||
Goodwill | 1,339 | 1,339 | 1,339 | 1,339 | ||||||||||||
Other long-term assets | 380 | 384 | 6,411 | 5,971 | ||||||||||||
Total assets | $ | 91,854 | $ | 77,518 | $ | 113,738 | $ | 97,637 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 2,598 | $ | 1,959 | $ | 12,685 | $ | 11,279 | ||||||||
Accrued liabilities | 17,397 | 13,834 | 30,307 | 23,300 | ||||||||||||
Operating lease liabilities | 2,800 | — | ||||||||||||||
Extended warranty liabilities | 1,999 | 3,159 | ||||||||||||||
Deferred revenue | 8,394 | 8,638 | 10,831 | 9,882 | ||||||||||||
Total current liabilities | 28,389 | 24,431 | 58,622 | 47,620 | ||||||||||||
Deferred revenue, net of current portion | 1,705 | 2,287 | 3,391 | 2,684 | ||||||||||||
Income tax liability | 168 | 182 | 93 | 394 | ||||||||||||
Operating lease liabilities, net of current portion | 5,112 | — | ||||||||||||||
Other long-term liabilities | 582 | 584 | 578 | 553 | ||||||||||||
Total liabilities | 30,844 | 27,484 | 67,796 | 51,251 | ||||||||||||
Commitments and contingencies (Note 10) | ||||||||||||||||
Commitments and contingencies (Note 11) | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Convertible preferred stock, $0.001 par value: | ||||||||||||||||
Authorized: 5,000,000 shares;Issued and outstanding: none | — | — | ||||||||||||||
Common stock, $0.001 par value: | ||||||||||||||||
Authorized: 50,000,000 shares;Issued and outstanding: 13,773,389 and 12,980,807 shares at December 31, 2016 and 2015, respectively | 14 | 13 | ||||||||||||||
Common stock, $0.001 par value: Authorized: 50,000,000 shares; Issued and outstanding: 14,315,586 and 13,968,852 shares at December 31, 2019 and 2018, respectively | 14 | 14 | ||||||||||||||
Additional paid-in capital | 88,114 | 79,782 | 82,346 | 70,451 | ||||||||||||
Accumulated deficit | (27,046 | ) | (29,672 | ) | ||||||||||||
Retained earnings (accumulated deficit) | (36,358) | (24,010) | ||||||||||||||
Accumulated other comprehensive loss | (72 | ) | (89 | ) | (60) | (69) | ||||||||||
Total stockholders’ equity | 61,010 | 50,034 | 45,942 | 46,386 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 91,854 | $ | 77,518 | $ | 113,738 | $ | 97,637 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CUTERA, INC.
CONSOLIDATEDSTATEMENTS OF OPERATIONS
(inthousands,exceptpersharedata)
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2019 | 2018 | 2017 | |||||||||||||||||||
Net revenue: | ||||||||||||||||||||||||
Products | $ | 99,028 | $ | 77,022 | $ | 60,299 | $ | 158,638 | $ | 142,535 | $ | 132,660 | ||||||||||||
Service | 19,028 | 17,739 | 17,839 | 23,074 | 20,185 | 18,833 | ||||||||||||||||||
Total net revenue | 118,056 | 94,761 | 78,138 | 181,712 | 162,720 | 151,493 | ||||||||||||||||||
Cost of revenue: | ||||||||||||||||||||||||
Products | 40,149 | 32,402 | 26,796 | 64,693 | 66,843 | 56,363 | ||||||||||||||||||
Service | 9,772 | 8,076 | 7,969 | 18,856 | 15,495 | 9,020 | ||||||||||||||||||
Total cost of revenue | 49,921 | 40,478 | 34,765 | 83,549 | 82,338 | 65,383 | ||||||||||||||||||
Gross profit | 68,135 | 54,283 | 43,373 | 98,163 | 80,382 | 86,110 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Sales and marketing | 41,563 | 35,942 | 32,246 | 71,109 | 58,420 | 52,070 | ||||||||||||||||||
Research and development | 11,232 | 10,733 | 10,543 | 15,085 | 14,359 | 12,874 | ||||||||||||||||||
General and administrative | 12,943 | 12,129 | 11,203 | 24,033 | 20,995 | 14,090 | ||||||||||||||||||
Lease termination income | - | - | (4,000) | |||||||||||||||||||||
Total operating expenses | 65,738 | 58,804 | 53,992 | 110,227 | 93,774 | 75,034 | ||||||||||||||||||
Income (loss) from operations | 2,397 | (4,521 | ) | (10,619 | ) | (12,064) | (13,392) |
| 11,076 | |||||||||||||||
Interest and other income, net | 323 | 293 | 226 | |||||||||||||||||||||
Interest and other income(expense), net | (199) | (123) |
| 884 | ||||||||||||||||||||
Income (loss) before income taxes | 2,720 | (4,228 | ) | (10,393 | ) | (12,263) | (13,515) |
| 11,960 | |||||||||||||||
Income tax provision | 143 | 212 | 219 | |||||||||||||||||||||
Income tax (benefit) provision | 85 | 17,255 | (18,033) | |||||||||||||||||||||
Net income (loss) | $ | 2,577 | $ | (4,440 | ) | $ | (10,612 | ) | $ | (12,348) | $ | (30,770) |
| $ | 29,993 | |||||||||
Net income (loss) per share: | ||||||||||||||||||||||||
Net loss per share: | ||||||||||||||||||||||||
Basic | $ | 0.19 | $ | (0.32 | ) | $ | (0.74 | ) | $ | (0.88 | ) | $ | (2.23 | ) | $ | 2.16 | ||||||||
Diluted | $ | 0.19 | $ | (0.32 | ) | $ | (0.74 | ) | $ | (0.88 | ) | $ | (2.23 | ) | $ | 2.04 | ||||||||
Weighted-average number of shares used in per share calculations: | ||||||||||||||||||||||||
Basic | 13,225 | 13,960 | 14,254 | 14,096 | 13,771 | 13,873 | ||||||||||||||||||
Diluted | 13,753 | 13,960 | 14,254 | 14,096 | 13,771 | 14,728 | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CUTERA,CUTERA, INC.
CONSOLIDATEDSTATEMENTS OFCOMPREHENSIVE INCOME (LOSS)
(inthousands)
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2019 | 2018 | 2017 | |||||||||||||||||||
Net income (loss) | $ | 2,577 | $ | (4,440 | ) | $ | (10,612 | ) | $ | (12,348) | $ | (30,770) |
| $ | 29,993 | |||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||
Available-for-sale investments | ||||||||||||||||||||||||
Net change in unrealized gain (loss) on available-for-sale investments | 30 | (87 | ) | (42 | ) | 9 | 14 | (15) | ||||||||||||||||
Less: Reclassification adjustment for net gains on investmentsrecognized during the year | (3 | ) | (7 | ) | (4 | ) | ||||||||||||||||||
Less: Reclassification adjustment for net losses (gains) on investments recognized during the year | 9 | (5) | ||||||||||||||||||||||
Net change in unrealized gain (loss) on available-for-sale investments | 27 | (94 | ) | (46 | ) | 9 | 23 | (20) | ||||||||||||||||
Tax provision | 10 | — | — | |||||||||||||||||||||
Other comprehensive income (loss), net of tax | 17 | (94 | ) | (46 | ) | 9 | 23 | (20) | ||||||||||||||||
Comprehensive income (loss) | $ | 2,594 | $ | (4,534 | ) | $ | (10,658 | ) | $ | (12,339) | $ | (30,747) | $ | 29,973 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CUTERA,CUTERA, INC.
CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY
(inthousands,exceptshareamounts)
Common Stock | Additional Paid-in | Retained Earnings (Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Deficit) | Income (loss) | Equity | |||||||||||||||||||
Balance at December 31, 2013 | 13,931,833 | $ | 14 | $ | 98,820 | $ | (14,620 | ) | $ | 51 | $ | 84,265 | ||||||||||||
Issuance of common stock for employee purchase plan | 52,759 | — | 451 | — | — | 451 | ||||||||||||||||||
Exercise of stock options | 396,970 | — | 3,307 | — | — | 3,307 | ||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards | 65,388 | — | (156 | ) | — | — | (156 | ) | ||||||||||||||||
Stock-based compensation expense | — | — | 3,299 | — | — | 3,299 | ||||||||||||||||||
Net loss | — | — | — | (10,612 | ) | — | (10,612 | ) | ||||||||||||||||
Net change in unrealized loss on available-for-sale investments | — | — | — | — | (46 | ) | (46 | ) | ||||||||||||||||
Balance at December 31, 2014 | 14,446,950 | 14 | 105,721 | (25,232 | ) | 5 | 80,508 | |||||||||||||||||
Issuance of common stock for employee purchase plan | 55,872 | — | 577 | — | — | 577 | ||||||||||||||||||
Exercise of stock options | 1,141,904 | 2 | 10,500 | — | — | 10,502 | ||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards | 154,119 | — | (1,018 | ) | — | — | (1,018 | ) | ||||||||||||||||
Repurchase of common stock | (2,818,038 | ) | (3 | ) | (40,082 | ) | — | — | (40,085 | ) | ||||||||||||||
Stock-based compensation expense | — | — | 4,084 | — | — | 4,084 | ||||||||||||||||||
Net loss | — | — | — | (4,440 | ) | — | (4,440 | ) | ||||||||||||||||
Net change in unrealized loss on available-for-sale investments | — | — | — | — | (94 | ) | (94 | ) | ||||||||||||||||
Balance at December 31, 2015 | 12,980,807 | 13 | 79,782 | (29,672 | ) | (89 | ) | 50,034 | ||||||||||||||||
Deferred tax relating to adoption of ASU 2016-09 | — | — | — | 49 | — | 49 | ||||||||||||||||||
Issuance of common stock for employee purchase plan | 79,922 | — | 768 | — | — | 768 | ||||||||||||||||||
Exercise of stock options | 1,051,138 | 1 | 9,342 | — | — | 9,343 | ||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards | 116,833 | — | (618 | ) | — | — | (618 | ) | ||||||||||||||||
Repurchase of common stock | (455,311 | ) | — | (4,873 | ) | — | — | (4,873 | ) | |||||||||||||||
Stock-based compensation expense | — | — | 3,713 | — | — | 3,713 | ||||||||||||||||||
Net income | — | — | — | 2,577 | — | 2,577 | ||||||||||||||||||
Net change in unrealized loss on available-for-sale investments | — | — | — | — | 17 | 17 | ||||||||||||||||||
Balance at December 31, 2016 | 13,773,389 | $ | 14 | $ | 88,114 | $ | (27,046 | ) | $ | (72 | ) | $ | 61,010 | |||||||||||
Common Stock | Additional Paid-in | Retained Earnings (Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Deficit) | Income (loss) | Equity | |||||||||||||||||||
Balance at December 31, 2016 | 13,773,389 | $ | 14 | $ | 88,114 | $ | (27,046) |
| $ | (72) |
| $ | 61,010 | |||||||||||
Issuance of common stock for employee purchase plan | 78,479 | - | 1,059 | - | - | 1,059 | ||||||||||||||||||
Exercise of stock options | 488,398 | - | 4,376 | - | - | 4,376 | ||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards | 160,309 | - | (1,469) |
| - | - | (1,469) |
| ||||||||||||||||
Repurchase of common stock | (1,022,602 | ) | (1 | ) | (35,165) |
| - | - | (35,166) |
| ||||||||||||||
Stock-based compensation expense | - | - | 5,110 | - | - | 5,110 | ||||||||||||||||||
Net income | - | - | - | 29,993 | - | 29,993 | ||||||||||||||||||
Net change in unrealized loss on available-for-sale investments | - | - | - | - | (20) |
| (20) |
| ||||||||||||||||
Balance at December 31, 2017 | 13,447,973 | $ | 13 | $ | 62,025 | $ | 2,947 | $ | (92) |
| $ | 64,893 | ||||||||||||
Adjustment to opening balance for ASC 606 adoption | - | - | - | 3,813 | - | 3,813 | ||||||||||||||||||
Issuance of common stock for employee purchase plan | 64,511 | 1 | 1,680 | - | - | 1,680 | ||||||||||||||||||
Exercise of stock options | 271,902 | - | 2,718 | - | - | 2,718 | ||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards | 154,466 | - | (3,128) |
| - | - | (3,128) |
| ||||||||||||||||
Stock-based compensation expense | - | - | 7,157 | - | - | 7,157 | ||||||||||||||||||
Net income | - | - | - | (30,770) |
| - | (30,770) |
| ||||||||||||||||
Net change in unrealized gain on available-for-sale investments | - | - | - | - | 23 | 23 | ||||||||||||||||||
Balance at December 31, 2018 | 13,968,852 | $ | 14 | $ | 70,451 | $ | (24,010) |
| $ | (69) |
| $ | 46,386 | |||||||||||
Issuance of common stock for employee purchase plan | 82,810 | - | 1,281 | - | - | 1,281 | ||||||||||||||||||
Exercise of stock options | 160,798 | - | 1,613 | - | - | 1,613 | ||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards | 103,126 | - | (831) | - | - | (831) |
| |||||||||||||||||
Stock-based compensation expense | - | - | 9,832 | - | - | 9,832 | ||||||||||||||||||
Net loss | - | - | - | (12,348) |
| - | (12,348) |
| ||||||||||||||||
Net change in unrealized gain on available-for-sale investments | - | - | - | - | 9 | 9 | ||||||||||||||||||
Balance at December 31, 2019 | 14,315,586 | $ | 14 | $ | 82,346 | $ | (36,358) |
| $ | (60) |
| $ | 45,942 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CUTERA, INC.
CONSOLIDATEDSTATEMENTS OF CASH FLOWS
(inthousands)
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2019 | 2018 | 2017 | |||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||
Net income (loss) | $ | 2,577 | $ | (4,440 | ) | $ | (10,612 | ) | $ | (12,348) | $ | (30,770) |
| $ | 29,993 | |||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||||||||
Stock-based compensation | 3,713 | 4,084 | 3,299 | 9,832 | 7,157 | 5,110 | ||||||||||||||||||
Depreciation and amortization | 982 | 1,186 | 1,336 | 1,548 | 1,209 | 1,016 | ||||||||||||||||||
Impairment of intangible assets | — | — | 650 | |||||||||||||||||||||
Amortization of contract acquisition costs | 2,915 | 1,834 | - | |||||||||||||||||||||
Change in deferred tax assets | 34 | 17,438 | (18,678) |
| ||||||||||||||||||||
Provision for doubtful accounts receivable | 590 | 1,257 | (1) |
| ||||||||||||||||||||
Other | 15 | 227 | 206 | 127 | 241 | (51) |
| |||||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||||||
Accounts receivable | (4,899 | ) | (536 | ) | (1,460 | ) | (2,509) | (117) |
| (4,229) |
| |||||||||||||
Inventories | (2,899 | ) | (1,090 | ) | (1,982 | ) | (5,907) | 768 | (13,805) |
| ||||||||||||||
Other current assets and prepaid expenses | (432 | ) | 241 | 239 | (1,762) | (1,070) |
| (591) |
| |||||||||||||||
Other long-term assets | 4 | (23 | ) | (37 | ) | (3,355) | (2,754) |
| 6 | |||||||||||||||
Accounts payable | 639 | (1,124 | ) | 1,263 | 1,406 | 4,277 | 4,404 | |||||||||||||||||
Accrued liabilities | 3,461 | 2,687 | 1,650 | 7,157 | (3,781) |
| 9,345 | |||||||||||||||||
Extended warranty liabilities | (1,160) | 3,159 | - | |||||||||||||||||||||
Other long-term liabilities | (329 | ) | (289 | ) | (285 | ) | (140) | 140 | - | |||||||||||||||
Deferred revenue | (826 | ) | (2,319 | ) | 1,410 | 1,656 | 1,305 | 1,557 | ||||||||||||||||
Income tax liability | (14 | ) | 37 | 37 | (301 | ) | 15 | 211 | ||||||||||||||||
Net cash provided by (used in) operating activities | 1,992 | (1,359 | ) | (4,286 | ) | (2,217 | ) | 308 | 14,287 | |||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||
Acquisition of property, equipment and software | (537 | ) | (746 | ) | (734 | ) | (991) | (1,488) |
| (855) |
| |||||||||||||
Disposal of property and equipment | 20 | — | — | 45 | 41 | �� | 53 | |||||||||||||||||
Proceeds from sales of marketable investments | 9,008 | 21,171 | 12,354 | - | 13,044 | 33,640 | ||||||||||||||||||
Proceeds from maturities of marketable investments | 25,810 | 35,918 | 26,915 | 14,700 | 10,050 | 45,812 | ||||||||||||||||||
Purchase of marketable investments | (37,693 | ) | (23,697 | ) | (44,146 | ) | (12,687) | (10,874) |
| (60,956) |
| |||||||||||||
Net cash provided by (used in) investing activities | (3,392 | ) | 32,646 | (5,611 | ) | |||||||||||||||||||
Net cash provided by investing activities | 1,067 | 10,773 | 17,694 | |||||||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||
Repurchase of common stock | (4,873 | ) | (40,085 | ) | — | - | - | (35,167) |
| |||||||||||||||
Proceeds from exercise of stock options and employee stock purchase plan | 10,111 | 11,079 | 3,758 | 2,894 | 4,399 | 5,435 | ||||||||||||||||||
Taxes paid related to net share settlement of equity awards | (618 | ) | (1,018 | ) | (156 | ) | (831) | (3,129) |
| (1,469) |
| |||||||||||||
Payments on capital lease obligation | (313 | ) | (198 | ) | (144 | ) | (649) | (483) |
| (371) |
| |||||||||||||
Net cash provided by (used in) financing activities | 4,307 | (30,222 | ) | 3,458 | 1,414 | 787 | (31,572) |
| ||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 2,907 | 1,065 | (6,439 | ) | ||||||||||||||||||||
Net increase in cash and cash equivalents | 264 | 11,868 | 409 | |||||||||||||||||||||
Cash and cash equivalents at beginning of year | 10,868 | 9,803 | 16,242 | 26,052 | 14,184 | 13,775 | ||||||||||||||||||
Cash and cash equivalents at end of year | $ | 13,775 | $ | 10,868 | $ | 9,803 | $ | 26,316 | $ | 26,052 | $ | 14,184 | ||||||||||||
Supplemental cash flow information: | ||||||||||||||||||||||||
Cash paid for interest | $ | 43 | $ | 20 | $ | 26 | $ | 81 | $ | 85 | $ | 70 | ||||||||||||
Cash paid for income taxes | $ | 222 | $ | 160 | $ | 225 | 59 | $ | 472 | $ | 220 | |||||||||||||
Supplementalnon-cashinvesting and financing activities: | ||||||||||||||||||||||||
Supplemental non-cash investing and financing activities: | ||||||||||||||||||||||||
Assets acquired under capital lease | $ | 801 | $ | 285 | $ | 70 | $ | 738 | $ | 610 | $ | 365 |
| |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CUTERA,CUTERA, INC.
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
NOTE1—SUMMARYOFSIGNIFICANTACCOUNTINGPOLICIES
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 otherprovides energy-based aesthetic systems for practitioners worldwide. The Company designs, develops, manufactures, distributes and markets laser and other energy-based product platforms for use by physicians and other qualified practitioners, which enableenabling them to offer safe and effective aesthetic treatments to their customers. The Company currently markets the following key system platforms:enlightenTM, excel, HRTM,enlighten, Juliet, Secret RF, truSculptTM , excel VTM,andxeo®. The Several of the Company’s systems offer multiple hand pieces and applications, which allowproviding customers the flexibility to upgrade their systems. The sales of (i) systems, system upgrades, and hand pieces (collectively “Systems” revenue); (ii) replacement hand piecepieces, truSculpt iD and truSculpt flex cycle refills, (applicableas well as single use disposable tips applicable toTitanJuliet® andtruSculptSecret RF) (“Consumables” revenue); and (iii) the distribution of third party manufactured skincare products (“Skincare” revenue); are collectively classified as “Products” revenue. In addition to Products revenue, the Company generates revenue from the sale of post-warranty service contracts, parts, detachable hand piece replacements (except forTitan, truSculpt 3D, truSculpt iD andtruSculpt flex) and service labor for the repair and maintenance of products that are out of warranty, all of which isare collectively classified as “Service” revenue.
Headquartered in Brisbane, California, the Company hasoperates wholly-owned subsidiaries that are currently operational in Australia, Belgium, Canada, France, Germany, Hong Kong, Japan, Spain, (until January 2017), Switzerland and the United Kingdom. The Company’s wholly owned subsidiary in Italy is currently dormant. These active subsidiaries market, sell and service the Company’s products outside of the United States. The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All inter-company transactions and balances have been eliminated.
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”)GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported of assets and disclosed inliabilities and disclosure of contingent assets and liabilities at the financial statementsdate of the Consolidated Financial Statements and the accompanying notes.notes, 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 Companymanagement evaluates theirits estimates, including those related to warranty obligation,obligations, sales commission, accounts receivable and sales allowances,allowance for credit losses, valuation of inventories, fair valuesvalue of acquired intangible assets,goodwill, useful lives of intangible assets and property and equipment, fair values of optionsincremental borrowing rates related to purchase the Company’s common stockleases, assumptions regarding variables used in calculating the fair value of the Company's equity awards, expected achievement of performance based vesting criteria, management performance bonuses, fair value of investments, the standalone selling price of the Company's products and other share based awards,services, the period of benefit used to capitalize and amortize contracts acquisition costs, variable consideration, contingent liabilities, recoverability of deferred tax assets, and effective income tax rates, among others.rates. 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 uncertainties. 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 global financial markets, cybersecurity breaches and other disruptions that could compromise the Company’s information or results, management of international activities, competition from substitute products and larger companies, ability to obtain and maintain regulatory approvals, government regulations and oversight, patent and other types of litigation, ability to protect proprietary technology from counterfeit versions of the Company's products, strategic relationships and dependence on key individuals.
Comparability
The Company adopted the new revenue standard effective January 1, 2018, using the modified retrospective method. Prior period financial statements were not retrospectively restated. The financial results for the years ended December 31, 2019 and 2018 reflect the adoption of this accounting standard whereas financial results for the year ended December 31, 2017 were prepared using prior revenue recognition guidance. As a result the consolidated statements of operations for the years ended December 31, 2019 and 2018 are not directly comparable to the consolidated statement of operations for the year ended December 31, 2017.
The Company adopted the new lease standard effective January 1, 2019, using the modified retrospective method. Prior period financial statements were not retrospectively restated. The financial results for the year ended December 31, 2019 were prepared using the new lease accounting standard whereas the financial results for the years ended December 31, 2018 and 2017 were prepared using prior effective guidance. As a result the consolidated balance sheet as of December 31, 2019 is not directly comparable to the balance sheet as of December 31, 2018, and the consolidated statement of operations for the year ended December 31,2019 is not directly comparable to the consolidated statements of operations for the years ended December 31, 2018 and December 31, 2017.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amended guidance, herein referred to as ASC Topic 606, is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted ASC Topic 606, "Revenue from Contracts with Customers," on January 1, 2018, applying the modified retrospective method to all agreements that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior periods. A cumulative catch up adjustment was recorded to beginning retained earnings to reflect the impact of all existing arrangements under ASC Topic 606.
Upon adoption of ASC Topic 606, the Company recorded an increase to retained earnings, net of deferred tax liability, of $3.8 million for contracts still in force as of January 1, 2018 for the following items in the first quarter of 2018:
● | $237,000 reduction in deferred revenue balances for the differences in the amount of revenue recognized 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. |
● | $151,000 increase in deferred revenue balances, related to the accretion of financing costs for multi-year post-warranty service contracts for customers who pay more than one year in advance of receiving the service. The Company estimated interest expense for such advance payments under the new revenue standard. |
● | $210,000 decrease in accrued liabilities. |
● | $4.7 million for the capitalization of the incremental contract acquisition costs, such as sales commissions paid in connection with system sales. These contract acquisition costs were capitalized and are being amortized over the period of anticipated support renewals which is estimated to be approximately 2.5 years. The Company expensed such costs when incurred under the prior guidance. |
● | $1.2 million deferred tax liability related to the direct tax effect of the ASC Topic 606 adoption. |
The following table summarizes the effects of adopting ASC Topic 606 on the Company’s consolidated balance sheet as of December 31, 2018:
As reported under ASC Topic 606 | Adjustments | Balances under Prior GAAP | ||||||||||
(In thousands) | ||||||||||||
Other long-term assets | $ | 5,971 | $ | (5,217) | $ | 754 | ||||||
Deferred revenue | 12,566 | (106) | 12,460 | |||||||||
Retained earnings (deficit) | (24,010 | ) | 4,610 | (19,400 | ) | |||||||
The following table summarizes the effects of adopting ASC Topic 606 on Company’s consolidated income statement for the year ended December 31, 2018:
As reported under Topic 606 | Adjustments | Balances under Prior GAAP | ||||||||||
(In thousands) | ||||||||||||
Products revenue | $ | 142,535 | $ | (274) | $ | 142,261 | ||||||
Service revenue | 20,185 | (280) | 19,905 | |||||||||
Sales and marketing | 58,420 | 540 | 58,960 | |||||||||
Interest and other income, net* | (123 | ) | 297 | 174 | ||||||||
* Included in interest and other income, net, is the estimated interest expense for advance payment related to service contracts under the new revenue standard.
Adoption of the standard had no impact on total net cash from or used in operating, investing, or financing activities within the consolidated statements of cash flows.
As part of the Company's adoption of ASC Topic 606, the Company elected to use the following practical expedients: (i) not to adjust the promised amount of consideration for the effects of a significant financing component when the Company expects, at contract inception, that the period between the Company's transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less; (ii) to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less; (iii) not to recast revenue for contracts that begin and end in the same fiscal year; and (iv) not to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. This standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and requires certain disclosures about stranded tax effects and became effective beginning January 1, 2019 and could be applied either in the period of adoption or retrospectively. The Company adopted the standard in the first quarter of 2019, and the adoption had no impact on our consolidated financial statements and related disclosures.
In July 2018, the FASB issued ASU 2018-09, "Codification Improvements”, which represent changes to clarify, correct errors in, or make minor improvements to the Codification, eliminating inconsistencies and providing clarifications in current guidance. The amendments in this standard include those made to: Subtopic 220-10, Income Statement-Reporting Comprehensive Income-Overall; Subtopic 470-50, Debt-Modifications and Extinguishments; Subtopic 480-10, Distinguishing Liabilities from Equity-Overall; Subtopic 718-740, Compensation-Stock Compensation-Income Taxes; Subtopic 805-740, Business Combinations-Income Taxes; Subtopic 815-10, Derivatives and Hedging-Overall; Subtopic 820-10, Fair Value Measurement-Overall; Subtopic 940- 405, Financial Services-Brokers and Dealers-Liabilities; and Subtopic 962-325, Plan Accounting-Defined Contribution Pension Plans-Investments-Other. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and will be effective upon issuance. However, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. The Company adopted subtopics under the standard that are applicable, including Subtopics 718- 740 and 820-10 in the first quarter of 2019. The adoption of this standard had no impact on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, "Leases," (also known as ASC Topic 842) which requires, among other items, lease accounting to recognize most leases as assets and liabilities on the balance sheet. Qualitative and quantitative disclosures are enhanced to better present the amount, timing and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU 2018-11, "Targeted Improvements," which gives the option to apply the transition provisions of ASU 2016-02 at its adoption date instead of at the earliest comparative period presented in its financial statements. In addition, ASU 2018 2018-11 provides a practical expedient that permits lessors to not separate non-lease components from the associated lease component if certain conditions are met. Also in July 2018, the FASB issued ASU 2018-10, "Codification Improvements to ASC Topic 842, Leases," which clarifies certain aspects of ASU 2016-02.
The Company adopted ASU 2016-02, as of January 1, 2019, using the modified retrospective method, to all leases existing at the date of initial application. The comparative period information has not been restated and continues to be reported under the accounting standards in effect for the period presented. The new standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward the Company’s historical conclusions about lease identification, lease classification and initial direct costs. The Company also elected the practical expedient related to land easements, allowing the Company to carry forward the Company’s accounting treatment for land easements on existing agreements. The Company did not elect the practical expedient to use hindsight in determining the lease term.
The adoption of the new standard resulted in the recording of additional lease assets and lease liabilities of $10.2 million and $10.1 million, respectively, as of January 1, 2019, based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. The difference between the additional lease assets and lease liabilities resulted from rent-free periods which were previously recorded as deferred rent. The Company’s accounting for finance leases remained substantially unchanged. The standard had no material impact on the Company’s consolidated net earnings, results of operations, comprehensive loss, statements of changes in equity, and cash flows.
See below and Note 11 for additional accounting policy and transition disclosures regarding ASC Topic 842.
Effect of Adoption of the New Lease Standard (ASC Topic 842) on Consolidated Financial Statements
The following table summarizes the effects of adopting Topic 842 on the Company’s consolidated balance sheet as of January 1, 2019 (in thousands):
As reported under Topic 842 | Adjustments | Balances under Prior GAAP | ||||||||||
Operating lease right-of-use assets | $ | 10,049 | $ | (10,049 | ) | $ | — | |||||
Operating lease liabilities | (2,430 | ) | 2,430 | — | ||||||||
Other long-term liabilities* | — | 140 | 140 | |||||||||
Operating lease liabilities, net of current portion | (7,759 | ) | 7,759 | — | ||||||||
*Deferred rent included in other long-term liabilities
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326):”Measurement of Credit Losses on Financial Instruments”, which replaces the incurred loss methodology with an expected credit loss methodology that is referred to as the current expected credit loss (CECL) methodology. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The amendments in this update are required to be applied using the modified retrospective method with an adjustment to accumulated deficit and are effective for the Company beginning with fiscal year 2020, including interim periods. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. An entity with trade receivables will be required to use historical loss information, current conditions, and reasonable and supportable forecasts to determine expected lifetime credit losses. Pooling of assets with similar risk characteristics is also required.
The Company adopted ASU 2016-13 on January 1, 2020 on a modified retrospective basis, and is currently evaluating the impact of adoption of the amendments in these updates on the Company’s financial position, results of operations, and related disclosures.
On January 26, 2017, the FASB issued Accounting Standards Update No. 2017-04,” Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The new guidance requires only a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). The new guidance eliminates Step 2 of the current two-step goodwill impairment test, and requires companies to perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Companies will continue to have the option of performing a qualitative assessment of goodwill impairment; however, if a company performs a qualitative assessment of its goodwill and fails, it must proceed with quantitative impairment testing.
The amendment is effective for the Company for its fiscal years beginning after December 15, 2019. The amendment is required to be adopted prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted ASU 2017-04—Intangibles—Goodwill and Other (Topic 350): “Simplifying the Test for Goodwill Impairment, on October 1, 2018. There was no material impact upon adoption of the new standard to the financial statements.
See “Goodwill and Other Intangible Assets” in Note 3 – Balance Sheet Detail.
In June 2018, the FASB issued ASU No. 2018-07, "Compensation -Stock Compensation (Topic 718): Improvement to Nonemployee Share-Based Payment Accounting". The new guidance changes the accounting for nonemployee awards including: (1) equity-classified share-based payment awards issued to nonemployees will be measured on the grant date, instead of the previous requirement to remeasure the awards through the performance completion date, (2) for performance conditions, compensation cost associated with the award will be recognized when the achievement of the performance condition is probable, rather than upon achievement of the performance condition, and (3) the current requirement to reassess the classification (equity or liability) for nonemployee awards upon vesting will be eliminated, except for awards in the form of convertible instruments. The new guidance also clarifies that any share-based payment awards issued to customers should be evaluated under ASC Topic 606. The amendments in the new guidance are effective for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted for public companies, but no earlier than an entity’s adoption date of ASC Topic 606. The Company adopted the new standard effective January 1, 2019 and there was no material impact to the financial statements.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" (ASU No. 2018-15 (Topic 350)), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This standard also requires customers to amortize the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement inclusive of expected contract renewals. The Company adopted this standard effective April 1, 2019, on a prospective basis for applicable implementation costs and there was no material impact to the financial statements. The adoption of this guidance prospectively resulted in the capitalization of costs related to implementation of a new Enterprise Resource Planning and Customer Relationship Management systems. Refer to Cloud Computing Costs below for further disclosure regarding ASU No. 2018-15 (Topic 350).
Recently Issued Accounting Pronouncements Not Yet Adopted by the Company
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement”, to improve the fair value measurement reporting of financial instruments. The amendments in this update require, among other things, added disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update eliminate, among other things, disclosure of the reasons for and amounts of transfers between Level 1 and Level 2 for assets and liabilities that are measured at fair value on a recurring basis and an entity's valuation processes for Level 3 fair value measurements. The amendments in this update will be effective for the Company beginning with fiscal year 2020, with early adoption permitted. Retrospective application is required for all amendments in this update except the added disclosures, which should be applied prospectively. The adoption of the amendments in this update is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
In December 2019, the FASB issued ASU No. 2019-12 “Income Taxes (Topic 740)-Simplifying the Accounting for Income Taxes”, to remove certain exceptions and improve consistency of application, including, among other things, requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this update will be effective for the Company beginning with fiscal year 2021, with early adoption permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The adoption of the amendments in this update is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
Revenue recognition
Effective January 1, 2018, the Company recognized revenue under ASC Topic 606. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are satisfied either over time or at a point in time. Revenue from performance obligations that are transferred to customers over time accounted for approximately 13% and 12%, respectively, of the Company’s total revenue for the years ended December 31, 2019 and 2018.
The Company has certain system sale arrangements that contain multiple products and services. For these bundled sale arrangements, the Company accounts for individual products and services as separate performance obligations if they are distinct. The Company’s products and services are distinct if a customer can benefit from the product or service on its own or with other resources that are readily available to the customer, and if the Company’s promise to transfer the products or service to the customer is separately identifiable from other promises in the sale arrangements. The Company’s system sale arrangements can include all or a combination of the following performance obligations: the system and software license (considered as one performance obligation), system accessories (hand pieces), training, other accessories, extended service contracts, marketing services, and time and materials services.
For the Company’s system sale arrangements that include an extended service contract, the period of service commences at the expiration of the Company’s standard warranty offered at the time of the system sale. The Company considers the extended service contracts terms in the arrangements that are legally enforceable to be performance obligations. Other than extended service contracts and marketing services, which are satisfied over time, the Company generally satisfies all performance obligations at a point in time. Systems, system accessories (hand pieces), service contracts, training, and time and materials services are also sold on a stand-alone basis, and these performance obligations are satisfied at a point in time. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative standalone selling price basis.
Nature of Products and Services
Systems
Systems revenue is generated from the sale of systems and from the sale of upgrades to existing systems. A system consists of a console that incorporates a universal graphic user interface, a laser or other energy based module, control system software and high voltage electronics, as well as one or more hand pieces. In certain applications, the laser or other energy-based module is contained in the hand piece, such as with the Company’s Pearl and Pearl Fractional applications, rather than within the console.
The Company offers customers the ability to select the system that best fits their practice at the time of purchase and then to cost-effectively add applications to their system as their practice grows. This provides customers the flexibility to upgrade their systems whenever they choose and provides the Company with a source of additional Systems revenue.
The system or upgrade and the right to use the embedded software represent a single performance obligation as the software license is integral to the functionality of the system or upgrade.
The Company does not identify calibration and installation services for systems other than enlighten as performance obligations because such services are immaterial in the context of the contract. The related costs to complete calibration and installation for systems other than enlighten are immaterial. Calibration and installation services for enlighten systems are identified as separate performance obligations.
For systems sold directly to end-customers that are credit approved, revenue is recognized when the Company transfers control to the end-customer, which occurs when the product is shipped to the customer or when the customer receives the product, depending on the nature of the arrangement. When collectability is not established in advance of receipt of payment from the customer, revenue is recognized upon the later of the receipt of payment or the satisfaction of the performance obligation. For systems sold through credit approved distributors, revenue is recognized at the time of shipment to the distributor.
The Company typically receives payment for its system consoles and other accessories within 30 days of shipment. Certain international distributor arrangements allow for longer payment terms.
Skincare products
The Company sells third-party manufactured skincare products in Japan. The third-party skincare products are purchased from a third-party manufacturer and sold to licensed physicians. The Company acts as the principal in this arrangement, as it determines the price to charge customers for the skincare products, and controls the products before they are transferred to the customer. Sales of skincare products are typically the subject of contracts in which the skincare products represent the sole performance obligations. The Company recognizes revenue for skincare products at a point in time.
Consumables (Other accessories)
The Company classifies its customers' purchases of replacement cycles for truSculpt iD and truSculpt flex, as well as replacement Titan and truSculpt 3D hand pieces, as Consumable revenue, which provides the Company with a source of recurring revenue from existing customers. The Juliet and Secret RF products have single use disposable tips which must be replaced after every treatment. Sales of these consumable tips further enhance the Company’s recurring revenue. . The Company’s systems offer multiple hand pieces and applications, which allow customers to upgrade their systems. The Company classifies as product revenue the sales of systems, system upgrades, hand pieces, hand piece refills (applicable to Titan® and truSculpt) and the distribution of third-party manufactured skincare products.
Extended contract services
The Company offers post-warranty services to its customers through extended service contracts that cover parts and labor for a term of one, two, or three years. Service contract revenue is recognized over time, using a time-based measure of progress, as customers benefit from the service throughout the service period. The Company also offers services on a time-and-materials basis for systems and detachable hand piece replacements. Revenue related to services performed on a time-and-materials basis is recognized when performed. These post-warranty services serve as additional sources of recurring revenue from the Company’s installed product base.
Training
Sales of systems to customers include training on the use of the system to be provided within 180 days of purchase. The Company considers training a separate performance obligation as customers can immediately benefit from the training together with the customer’s system. Training is also sold separately from systems. The Company recognizes revenue for training when the training is provided. Training is not required for customers to use the systems.
Customer Marketing Support
In North America, the Company offers marketing and consulting phone support to its customers across all system platforms. These customer marketing support services include a practice development model and marketing training, performed remotely with ongoing phone consultations for six months from date of purchase. The Company considers customer marketing support a separate performance obligation, and recognizes revenue over the six-month term of the contracts.
Significant Judgments
The determination of whether two or more contracts entered into at or near the same time with the same customer should be combined and accounted for as one contract may require the use of significant judgment. In making this determination, the Company considers whether the contracts are negotiated as a package with a single commercial objective, have price interdependencies, or promise goods or services that represent a single performance obligation.
While the Company’s purchase agreements do not provide customers with a contractual right of return, the Company maintains a sales allowance to account for potential returns or refunds as a reduction in transaction price at the time of sale. The Company estimates sales returns and other variable consideration based on historical experience.
The Company determines standalone selling price ("SSP") for each performance obligation as follows:
● Systems: The SSPs for systems are based on directly observable sales in similar circumstances to similar customers
● Training: SSP is based on observable price when sold on a standalone basis.
● Extended warranty/Service contracts: SSP is based on observable price when sold on a standalone basis (by customer type).
● Customer Marketing Support: SSP is estimated based on cost plus a margin.
● Set-up /Installation: SSP is based on observable price when sold on a standalone basis.
The calibration and installation service of the enlighten system are treated as separate performance obligations because the Company regularly sells enlighten systems without the calibration and installation service.
Loyalty Program
The Company launched a customer loyalty program during the third quarter of 2018 for qualified customers located in the U.S. and Canada. Under the loyalty program, customers accumulate points based on their purchasing levels. Once a loyalty program member achieves a certain tier level, the member earns a reward such as the right to attend the Company’s advanced training event for truSculpt, or a ticket for the Company’s annual forum. A customer’s account must be in good standing to receive the benefits of the rewards program. Rewards are earned on a quarterly basis and must be used in the following quarter. Customers receive a notification regarding their rewards tier by the fifth day of the following quarter. All unused rewards are forfeited. The fair value of the reward earned by loyalty program members is included in accrued liabilities and recorded as a reduction of net revenue at the time the reward is earned. As of December 31, 2019, the accrual for the loyalty program included in accrued liabilities was $0.2 million.
Revenue recognition- Period before January 1, 2018 - ASC Topic 606 Adoption
The Company recognized revenue under ASC Topic 605 prior to the adoption of ASC Topic 606 effective January 1 2018. Under ASC 605, the Company recognized products revenue when title and risk of ownership was 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 assured.
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 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 Company determined that its multiple-element 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 FASB Accounting Standards Codification (“ASC”) 605-25. Because the Company has neither vendor specific objective evidence (“VSOE”) nor third-party evidence of selling price 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. Revenue from the sale of 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 period 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, 2017 was $18.8 million.
Bill and Hold Arrangement
Under ASC 605 in 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 no 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.
Deferred Sales Commissions
Incremental costs of obtaining a contract, which consist primarily of commissions and related payroll taxes, are capitalized and amortized on a straight-line basis over the expected period of benefit, except for costs that are recognized when product is sold. The Company uses the portfolio method to recognize the amortization expense related to these capitalized costs related to initial contracts and such expense is recognized over a period associated with the revenue of the related portfolio, which is generally two to three years.
Total capitalized costs for the year ended December 31, 2019 and December 31, 2018 were $4.6 million and $5.2 million, respectively, and are included in Other long-term assets in the Company’s consolidated balance sheet. Amortization expense for these assets was $2.9 million and $1.8 million, respectively, during the twelve months ended December 31, 2019 and December 31, 2018 and are included in sales and marketing expense in the Company’s consolidated statement of operations.
Cash Cash Equivalents, and Marketable Investments
The Company invests its cash primarily in money market funds, U.S. Treasury bills 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 itsthe Company's 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 purchase and re-evaluates such designation at each balance sheet date. The Company’s marketable securities have beenare classified and accounted for as available-for-sale.available-for-sale securities. Investments with remaining maturities of 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.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 Measurementsof Financial Instruments
Fair value is defined asan exit price representing the priceamount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants aton the measurement date. The fair value hierarchy contains three levels of inputs that may be used to measure fair value, in accordance with ASC 820, as follows:
● Level 1: inputs, which include quoted prices in active markets for identical assets or liabilities;
● Level 2: inputs, which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. For available-for-sale securities, the Company reviews trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and
● Level 3: inputs, which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies, or similar valuation techniques, as well as significant management judgment or estimation.
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 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:
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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 no other-than-temporary impairments in the years ended December 31, 2016, 2015,2019, 2018, and 2014.2017.
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 ourthe Company's products.
The allowance for doubtful accountsIn cases where the Company is based on the Company’s assessmentaware of the collectability of customer accounts. 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 conditionscircumstances that may affectimpair a specific customer’s ability to pay.meet its obligations to the Company, the Company records a specific allowance against amounts due from the customer, and thereby reduces the net recognized receivable to the amounts it reasonably believes will be collected
Concentration of Credit Risk and Other Risks and Uncertainties
The Company operates in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products or services with new capabilities and other factors could negatively impact the Company’s operating results.
The Company is also subject to risks related to changes in the value of the Company’s significant balance of financial instruments. 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. TheTo 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.debt securities. 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 eighteentwelve 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, 20162019 and 2015, there was one2018, no customer who represented 12% andmore than 10%, respectively, of the Company’s net accounts receivable.
During the years ended December 31, 2016, 2015,2019, 2018, and 2014,2017, domestic revenue accounted for 55%58%, 52%62%, and 45%62%, , respectively, of total revenue, while international revenue accounted for 45%42%, 48%38%, and 55%38%,respectively, of total revenue. No single customer represented more than 10% of total revenue for any of the years ended December 31, 2016, 2015,2019, 2018, and 2014. 2017.
Supplier concentration
The Company is also subjectrelies on third parties for the supply of components of its products, as well as third-party logistics providers. In instances where these parties fail to risks commonperform their obligations, the Company may be unable to companies in the medical device industry, including, but not limitedfind alternative suppliers or satisfactorily deliver its products to new technology innovations, dependenceits customers. The Company relies on key personnel, dependence on key suppliers, protection of proprietary technology, product liability, Food and Drug Administration and/or international regulatory approvals requiredone supplier for new products and compliance with government regulations. its Secret product.
Inventories
Inventories are stated at the lower of cost or market,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 the Company’s 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 being determined as the lower of replacement cost or net realizable value.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 Product cost of revenue.
As of December 31, 20162019 and 2015,2018, demonstration inventories, net of accumulated depreciation, included in Finishedfinished goods inventory balance was $2.4$4.1 million and $2.3$2.9 million, respectively.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation expense recognized is 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 2016, 20152019, 2018 and 2014,2017, was $841,000, $734,000$1.5 million, $1.2 million, and $562,000$1.0 million respectively. Amortization expense for vehicles leased under capital leases is included in depreciation expense.
Capitalized Cloud Computing Set-up Cost
The Company capitalizes certain set-up costs for the Company’s cloud computing arrangements. The capitalized implementation costs are then amortized over the term of the cloud computing arrangement inclusive of expected contract renewals, which are generally three to five years.
Goodwill and Intangible Assets
Goodwill whichand intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually during the fourth quarter of the Company’s fiscal year, or if circumstances indicate their value may no longer be recoverable. Goodwill represents the excess of the purchase price over the fair value of net tangibleidentifiable assets and identifiable intangible assets, is not subject to amortization, but is subject to at least an annual assessment for impairment, applying a fair-value based test.liabilities.
The Company’s intangible assets are comprised of purchased technology sub-licenses, acquired customer relationships, and those assets acquired in conjunction with an asset acquisition in February 2012 including existing customer relationships, product portfolio and a manufacturing process for the products acquired. All identifiable intangibles have finite lives and are carried at cost, net of accumulated amortization. Amortization was recorded using the straight-line method, except for a portion of the purchased intangibles which arebeing amortized on a declining-balance basis, over their respective useful lives, which range from approximately 11 months to 10 years.
Impairment of Long-lived Assets
Goodwill is not amortized, but is tested for impairment at least annually or as circumstances indicate their value may no longer be recoverable. The goodwill impairment test is performed annually during the fourth fiscal quarter (or earlier if impairment indicators arise). 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, 2016,2019, there has been no impairment of goodwill. All acquired intangible assets have been fully amortized as of December 31, 2019.
Warranty Obligations
The Company evaluates the recoverabilityoffers post-warranty services to its customers through extended service contracts that cover replacement parts and labor for a term of its long-lived assets, which include amortizable intangible and tangible assets. Acquired intangible assets with definite useful lives are amortized over their useful lives. The Company evaluates long-lived assets for impairment whenever eventsone, two, or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable. The Company recognizes such impairment in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. In 2014, the Company’s impairment review indicated that certain purchased long-lived assets associated with the Iridex acquisition were impaired and an impairment charge of $650,000 was recognized. No other impairment losses were incurred in the periods presented.
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.three years. For sales to distributors, the Company generally provides a 14 to 16 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. 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.
Revenue Recognition
Products revenue is recognized when title and risk of ownership has been transferred, provided that:
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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 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 Company determined that its multiple-element arrangements are generally comprised of the following elements that are recognized as separate units of accounting: Product and service contracts.
For multiple-element arrangements revenue is allocated to each element based on their relative selling prices. Relative selling prices are based on vendor specified objective evidence (“VSOE”), if available, third-party evidence of selling price (“TPE”) when VSOE does not exist, and on best estimate of selling price (“BESP”) if VSOE and TPE do not exist. Because the Company has neither VSOE nor TPE for its systems and service contracts, the allocation of revenue is based on the Company’s BESPs for each element. 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 its products or services by considering multiple factors including, prices charged for stand-alone sales, features and functionality of the products and services, geographies, type of customer, and market conditions. Revenue allocated to each element is then recognized when the other revenue recognition criteria are met for the element.
With respect to the sale of itstruSculpt product, the Company includes unlimited refills as part of thetruSculpt standard warranty and the Company does not account for thetruSculpt warranty as a separate deliverable under the multiple-element arrangement revenue guidance. Upon atruSculpt sale, the Company recognizes the estimated costs which will be incurred under the warranty obligation in Products cost of revenue.
The Company also offers customers extended service contracts. Revenue under service contractsservices on a time-and-materials basis for detachable hand piece replacements, parts and labor.
Leases
Policy from January 1, 2019
Effective January 1, 2019, the Company adopted ASC 842, which established a right-of-use ("ROU") model requiring lessees to record a right-of-use ("ROU") asset and lease obligations on the balance sheet for all leases with terms longer than 12 months. The Company determines if an arrangement is a lease at inception. Where an arrangement is a lease the Company determines if it is an operating lease or a finance lease. At lease commencement, the Company records a lease liability and corresponding right-of- use ("ROU") asset. Lease liabilities represent the present value of our future lease payments over the expected lease term which includes options to extend or terminate the lease when it is reasonably certain those options will be exercised. The present value of the Company’s lease liability is determined using its incremental collateralized borrowing rate at lease inception. ROU assets represent its right to control the use of the leased asset during the lease and are recognized in an amount equal to the lease liability for leases with an initial term greater than 12 months. Over the lease term (operating leases only), the Company uses the effective interest rate method to account for the lease liability as lease payments are made and the ROU asset is amortized to consolidated statement of operations in a manner that results in straight-line expense recognition. The Company does not apply lease recognition requirements for short-term leases. Instead, the Company recognizes payments related to these arrangements in the consolidated statement of operations as lease costs on a straight-line basis over the periodlease term.
Policy before January 1, 2019
For periods prior to the Company’s adoption of ASC 842 on January 1, 2019, the Company recognized leases as either an operating lease or a capital lease (finance lease). An operating lease records no asset or liability on the financial statements, the amount paid is expensed as incurred. A capital lease is recorded as both an asset and a liability on the Company’s Consolidated Balance Sheets, generally at the present value of the applicable service contract. Service revenue billed onrental payments. The Company uses the guidance provided by FASB to determine if a timelease should be capitalized, and material basis, from customers whose systems are not underif any one of the criteria for capitalization is met, the lease is treated as a service contact, is recognized as the services are provided. Service revenue for the years ended December 31, 2016, 2015, and 2014 was $19.0 million, $17.7 million, and $17.8 million, respectively.capital lease.
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 involved in ourthe Company's internal manufacturing processes, service contracts 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 user interface, control system software, high voltage electronics and a combination of applications (referred to as hand pieces)“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 itsTitan product and truSculpt 3D products and provides for the cost of refurbishment of otherthese hand pieces under warranty or service contracts.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 service revenue includes the costs incurred to refurbish hand pieces.
Research and Development Expenditures
CostsResearch and development costs are expensed as incurred and include costs related to research, design, development, and testing of products, are charged to researchsalaries, benefits and development expense as incurred. Expenses incurred primarily relate to employees,other headcount related costs, facilities, material, third party contractors, andregulatory affairs, clinical and regulatory fees.development costs.
Advertising Costs
Advertising costs are included as part of sales and marketing expense and are expensed as incurred. Advertising expenses for 2016, 20152019, 2018 and 20142017 were $1.3$2.8 million, $1.2$2.8 million, and $1.6$1.8 million, respectively.
Stock-based Compensation
The Company accounts for itsshare-based employee stock options undercompensation plans using the fair value method of accounting using a Black-Scholes valuation model to measure stock option expenserecognition and measurement provisions under U.S. GAAP. The Company’s share-based compensation cost is measured at the grant date, based on the fair value of grant. the award, and is recognized as expense on a straight- line basis over the requisite service period. The Company estimates expected forfeitures at the time of grant and revises, if necessary, in subsequent periods if actual forfeitures differ from those estimated.
Expected Term: The expected term represents the weighted-average period that the stock options are expected to be outstanding prior to being exercised. The Company determines expected term based on historical exercise patterns and its expectation of the time it will take for employees to exercise options still outstanding.
Expected Volatility: The underlying stock price volatility of the Company’s stock. The Company estimates volatility based on a 50-50 blend of the Company’s historical volatility and the implied volatility of freely traded options of the Company’s stock in the open market.
Forfeitures: The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. Under ASC 718 (Stock Based Compensation), the Company has made an accounting policy to estimate forfeitures at the time awards are granted and revises, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. treasury yield curve in effect at the time of grant for the expected term of the stock option.
The fair value of Restricted Stock Unitsstock 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 award issued on the day of the grant.
The fair value of restricted stock units (“RSUs”) granted are measured on the grant date using the closing price of the Company's common shares on the grant date. The quantity of the RSUs units granted is measured atcalculated by dividing a fixed award amount determined by the marketBoard on the grant date by the average closing price of the Company’s common stock over the 50-day period ending on the dateday of the grant.
The fair value of Performance Stock Units (“PSUs”) that have operational measurement goals, are measured aton the marketgrant date using the closing price of the Company's common shares on the grant date. The quantity of the PSUs units granted is calculated by dividing a fixed award amount determined by the Board on the grant date by the average closing price of the Company’s common stock over the 50-day period ending on the dateday 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.grant.
Stock-basedSee Note 6 - Stockholders’ Equity, Stock Plans and Stock-Based Compensation Expense for a detailed discussion of the Company’s stock plans and share-based compensation expense, net of estimated forfeitures, is recognized over the requisite service period.expense.
For RSUs and PSUs, the Company issues shares on the vesting dates, net of the minimum tax withholding requirements to be paid by the Company on behalf of its employees. As a result, the actual number of shares issued will be fewer than the actual number of RSUs and PSUs that vest. Income Taxes
The Company recordsis subject to income taxes in the liabilityUnited States and several foreign jurisdictions. Significant judgment is required in determining our provision (benefit) for withholding amounts to be paid byincome taxes and income tax assets and liabilities, including evaluating uncertainties in the Company as a reduction to additional paid-in capital when the shares are issued.
Cash flows resulting from theapplication of accounting principles and complex tax benefits due to tax deductions 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 Taxeslaws.
The Company recognizesrecords a provision (benefit) for income taxes underfor the anticipated tax consequences of the reported results of operations using the asset and liability method. The Company recognizesUnder this method, we recognize deferred income taxestax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, at enacted statutoryas well as for loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates in effectthat are expected to apply to taxable income for the years in which differencesthose tax assets and liabilities are expected to reverse. The Company recognizesbe realized or settled. We recognize the effect on deferred taxesincome tax effects of a change in tax rates 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 income 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 toenactment. We 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 measurement of deferred taxes often involves an exercise of judgment related to the computation and realization of tax basis. Thereduce our deferred tax assets and liabilities reflect management’s assessmentto the net amount that tax positions taken, and the resulting tax basis, arewe believe is 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.realized.
Valuation allowances are established when necessary to reduce deferred incomeThe Company recognizes tax assets to amountsbenefits from uncertain tax positions if we believe that the Company believes areit is 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 recent history of pre-tax earnings, 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 maintains a full valuation allowance against its U.S. federal and state deferred tax asset due to a history of operating losses.
The Company establishes reserves for uncertain tax positions in accordance with the Income Taxes subtopic of ASC 740. The subtopic prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Additionally, the subtopic provides guidance on de-recognition, measurement, classification, interest and penalties, and transition of uncertain tax positions. 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 will be sustained upon examination by the taxing authorities based on the technical merits of the position. Although we believe we have adequately reserved for our uncertain tax positions (including net interest and penalties), we can provide no assurance that the final tax outcome of these matters will not be different. We make adjustments to these reserves in accordance with income tax accounting guidance when facts and circumstances change, such as the closing of a tax audit. To the extent that the final tax outcome of these matters is effectively settled through examination, negotiation, or litigation, ordifferent from the statute of limitationsamounts recorded, such differences may impact the provision (benefit) 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 forincome taxes in the period in which the Company determines that the recordedsuch determination is made. We record interest and penalties related to our uncertain tax liability is less than the Company expects the ultimate assessment to be.
Comprehensive Losspositions in our provision (benefit) for income taxes.
The Company’s effective tax rates have differed from the statutory rate primarily due to changes in the valuation allowance, foreign operations, research and development tax credits, state taxes, and certain benefits realized related to stock option activity. The Company’s current effective tax rate does not assume U.S. taxes on undistributed profits of foreign subsidiaries. These earnings could become subject to incremental foreign withholding or U.S. federal and state taxes, should they either be deemed or actually remitted to the U.S. The Company’s future effective tax rates could be adversely affected by earnings being lower in countries where the Company has lower statutory rates and being higher in countries where the Company has higher statutory rates, or by changes in tax laws, accounting principles, interpretations thereof, net operating loss carryback, research and development tax credits, and due to changes in the valuation allowance of its U.S. deferred tax assets. In addition, the Company is subject to the examination of the Company’s income tax returns by the Internal Revenue Service and other tax authorities. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of the Company’s provision for income taxes.
Undistributed earnings of the Company’s foreign subsidiaries at December 31, 2019 are considered to be indefinitely reinvested and, accordingly, no provision for state income taxes has been provided thereon. Due to the Transition Tax and Global Intangible Low-Tax Income (“GILTI”) regimes as enacted by the 2017 Tax Act, those foreign earnings will not be subject to federal income taxes when actually distributed in the form of a dividend or otherwise. The Company, however, could still be subject to state income taxes and withholding taxes payable to various foreign countries. The amounts of taxes which the Company could be subject to are not material to the accompanying financial statements.
Computation of Net Income (Loss) per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income per share is computed by dividing net income by the weighted average number of common shares and the dilutive effect of potential future issuances of common stock from outstanding stock options, RSUs, PSUs and employee stock purchase plan contributions for the period outstanding determined by applying the treasury stock method. In accordance with ASC 718, the assumed proceeds under the treasury stock method include the average unrecognized compensation expense of in-the-money stock options, RSUs and PSUs. This results in the assumed buyback of additional shares, thereby reducing the dilutive impact of equity awards
Diluted earnings per share is the same as basic earnings per share for the periods in which the Company had a net loss because the inclusion of outstanding common stock equivalents would be anti-dilutive.
Comprehensive lossIncome (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-saleavailable for- sale investments, net of tax.
Foreign Currency
The financial statements of the Company’s foreign subsidiaries are translated in accordance with ASC 830, Foreign Currency Matters. The U.S. Dollar is the functional currency of the Company’s subsidiaries.subsidiaries and the Company’s reporting currency. 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, 2016.2019. 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, 2016.
Segments2019.
Segments
The Company operates in one segment.segment and reports segment information in accordance with ASC 280, Segment Reporting. Management uses one measurement of profitability and does not segregate its business for internal reporting. As of December 31, 20162019, and 2015, 98%2018, 89.3% and 89.0% of all long-lived assets were maintained in the U.S.United States, respectively. Revenue is attributed to a geographic region based on the location of the end customer. See Note 913 – Segment Information and Revenue by Geography and Products for details relating to revenue by geography.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates (“ASU”) No. 2014-09,Revenue from Contracts with Customers, outlining a single comprehensive model for entities to utilize to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that will be received in exchange for the goods and services. Additional disclosures will also be required to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In 2016, the FASB issued accounting standards updates to address implementation issues and to clarify the guidance for identifying performance obligations, licenses and determining if a company is the principal or agent in a revenue arrangement. In August 2015, the FASB deferred the effective date of this standards update to fiscal years beginning after December 15, 2017, with early adoption permitted on the original effective date of fiscal years beginning after December 15, 2016. The standard permits the use of either a retrospective or modified retrospective application. The Company is evaluating the effects of the new guidance and have not yet selected a transition method or determined the potential effects of adoption on the consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11,Simplifying the Measurement of Inventory. Currently, an entity is required to measure its inventory at the lower of cost or market, whereby market can be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The changes require that inventory be measured at the lower of cost and net realizable value, thereby eliminating the use of the other two market methodologies. Net realizable value is defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. These changes do not apply to inventories measured using LIFO (last-in, first-out) or the retail inventory method. These changes became effective on January 1, 2017 and management does not expect the updated standard to have a material impact on the reported inventory balances in the Consolidated Financial Statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,Leases. This guidance establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated Statement of Operations. The mandatory adoption date of this standard is for fiscal years beginning after December 15, 2018. A modified retrospective transition approach is required for leases existing at, or entered into, after the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company expects that upon adoption, ROU assets and lease liabilities will be recognized in the balance sheet in amounts that will be material.
Adopted Accounting Pronouncements
The Company early adopted ASU 2016-09 in the fourth quarter of 2016. For a detailed discussion of the impact of the adoption, refer to “Note 6—Income Taxes.”
NOTE 2—INVESTMENT2-INVESTMENT SECURITIES
The following tables summarize cash, cash equivalents and marketable securities (in thousands):
December 31, | December 31, | |||||||||||||||
2016 | 2015 | 2019 | 2018 | |||||||||||||
Cash and cash equivalents: | ||||||||||||||||
Cash | $ | 6,672 | $ | 9,830 | $ | 20,005 | $ | 21,969 | ||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | 6,053 | 1,000 | 6,311 | 4,083 | ||||||||||||
Commercial paper | 1,050 | 38 | ||||||||||||||
Total cash and cash equivalents | 13,775 | 10,868 | 26,316 | 26,052 | ||||||||||||
Marketable securities: | ||||||||||||||||
U.S. government notes | 8,398 | 7,779 | 4,114 | 1,397 | ||||||||||||
U.S. government agencies | 3,916 | 12,608 | — | 2,677 | ||||||||||||
Municipal securities | 1,325 | 4,346 | — | 200 | ||||||||||||
Commercial paper | 12,299 | 4,040 | 3,491 | 2,433 | ||||||||||||
Corporate debt securities | 14,361 | 8,766 | — | 2,816 | ||||||||||||
Total marketable securities | 40,299 | 37,539 | 7,605 | 9,523 | ||||||||||||
Total cash, cash equivalents and marketable securities | $ | 54,074 | $ | 48,407 | $ | 33,921 | $ | 35,575 | ||||||||
The following tables summarize the components, and the unrealized gains and losses position, related to the Company’s cash, cash equivalents and marketable investments (in thousands) as of December 31, 2019 and December 31, 2018: (in thousands):
December 31, 2019 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | ||||||||||||
Cash and cash equivalents | $ | 26,316 | $ | - | $ | - | $ | 26,316 | ||||||||
Marketable investments | ||||||||||||||||
U.S. government notes | 4,114 | - | - | 4,114 | ||||||||||||
U.S. government agencies | — | - | - | — | ||||||||||||
Municipal securities | — | - | - | — | ||||||||||||
Commercial paper | 3,491 | - | - | 3,491 | ||||||||||||
Corporate debt securities | — | - | - | — | ||||||||||||
Total marketable securities | 7,605 | - | - | 7,605 | ||||||||||||
Total cash, cash equivalents and marketable securities | $ | 33,921 | $ | - | $ | - | $ | 33,921 | ||||||||
December 31, 2018 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | ||||||||||||
Cash and cash equivalents | $ | 26,052 | $ | - | $ | - | $ | 26,052 | ||||||||
Marketable investments | ||||||||||||||||
U.S. government notes | 1,397 | - | - | 1,397 | ||||||||||||
U.S. government agencies | 2,677 | - | - | 2,677 | ||||||||||||
Municipal securities | 200 | - | - | 200 | ||||||||||||
Commercial paper | 2,433 | - | - | 2,433 | ||||||||||||
Corporate debt securities | 2,825 | - | (9 | ) | 2,816 | |||||||||||
Total marketable securities | 9,532 | (9 | ) | 9,523 | ||||||||||||
Total cash, cash equivalents and marketable securities | $ | 35,584 | $ | (9 | ) | $ | 35,575 | |||||||||
As of December 31 2019 and December 31, 2018, the gross unrealized gains and losses were nil and $(9,000), respectively, and were related to interest rate changes on available-for-sale marketable investments. The Company has concluded that it is more-likely-than-not that the securities will be held until maturity or the recovery of their cost basis. No securities were in an unrealized loss position for more than 12 months. The Company determined these unrealized losses to be temporary. Factors considered in determining whether a loss is temporary included the length of time and extent to which the investment’s fair value has been less than the cost basis; the financial condition and near-term prospects of the investee; extent of the loss related to credit of the issuer; the expected cash flows from the security; the Company’s intent to sell the security; and whether or not the Company will be required to sell the security before the recovery of its amortized cost.
The following table summarizes unrealized gains and losses related tothe contractual maturities of the Company’s available-for-sale securities, classified as marketable investments as of December 31, 2019 (in thousands):
December 31, 2016 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | ||||||||||||
Cash and cash equivalents | $ | 13,775 | $ | — | $ | — | $ | 13,775 | ||||||||
Marketable investments | ||||||||||||||||
U.S. government notes | 8,403 | 4 | (9 | ) | 8,398 | |||||||||||
U.S. government agencies | 3,918 | — | (2 | ) | 3,916 | |||||||||||
Municipal securities | 1,325 | — | — | 1,325 | ||||||||||||
Commercial paper | 12,299 | 2 | (2 | ) | 12,299 | |||||||||||
Corporate debt securities | 14,366 | 3 | (8 | ) | 14,361 | |||||||||||
Total marketable securities | 40,311 | 9 | (21 | ) | 40,299 | |||||||||||
Total cash, cash equivalents and marketable securities | $ | 54,086 | $ | 9 | $ | (21 | ) | $ | 54,074 | |||||||
December 31, 2015 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | ||||||||||||
Cash and cash equivalents | $ | 10,868 | $ | — | $ | — | $ | 10,868 | ||||||||
Marketable investments | ||||||||||||||||
U.S. government notes | 7,780 | 1 | (2 | ) | 7,779 | |||||||||||
U.S. government agencies | 12,630 | 3 | (25 | ) | 12,608 | |||||||||||
Municipal securities | 4,344 | 2 | — | 4,346 | ||||||||||||
Commercial paper | 4,041 | 1 | (2 | ) | 4,040 | |||||||||||
Corporate debt securities | 8,783 | — | (17 | ) | 8,766 | |||||||||||
Total marketable securities | 37,578 | 7 | (46 | ) | 37,539 | |||||||||||
Total cash, cash equivalents and marketable securities | $ | 48,446 | $ | 7 | $ | (46 | ) | $ | 48,407 | |||||||
Amount | ||||
Due in less than one year | $ | 7,605 | ||
Due in 1 to 3 years | — | |||
Total marketable securities | $ | 7,605 | ||
No investments were in a continuous unrealized loss position for longer than 12 months asFair Value Measurements
As of December 31, 2016 and 2015.
The following table summarizes the estimated fair value of the Company’s marketable investments classified by the contractual maturity date of the security as of December 31, 2016(in thousands):
Amount | ||||
Due in less than one year (fiscal year 2017) | $ | 36,796 | ||
Due in 1 to 3 years (fiscal year 2018-2019) | 3,503 | |||
Total marketable securities | $ | 40,299 | ||
Fair Value Measurements
The following table summarizes2019, 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 were as follows (in thousands):
December 31, 2016 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||
December 31, 2019 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||||||||||
Money market funds | $ | 6,053 | $ | — | $ | — | $ | 6,053 | $ | 6,311 | $ | - | $ | - | $ | 6,311 | ||||||||||||||||
Commercial paper | — | 1,050 | — | 1,050 | ||||||||||||||||||||||||||||
Short term marketable investments: | ||||||||||||||||||||||||||||||||
Available-for-sale securities | — | 40,299 | — | 40,299 | 4,114 | 3,491 | - | 7,605 | ||||||||||||||||||||||||
Total assets at fair value | $ | 6,053 | $ | 41,349 | $ | — | $ | 47,402 | $ | 10,425 | $ | 3,491 | $ | - | $ | 13,916 | ||||||||||||||||
December 31, 2015 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||
December 31, 2018* | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||||||||||
Money market funds | $ | 1,000 | $ | — | $ | — | $ | 1,000 | $ | 4,083 | $ | - | $ | - | $ | 4,083 | ||||||||||||||||
Commercial paper | — | 38 | — | 38 | ||||||||||||||||||||||||||||
Short term marketable investments: | ||||||||||||||||||||||||||||||||
Available-for-sale securities | — | 37,539 | — | 37,539 | 4,274 | 5,249 | - | 9,523 | ||||||||||||||||||||||||
Total assets at fair value | $ | 1,000 | $ | 37,577 | $ | — | $ | 38,577 | $ | 8,357 | $ | 5,249 | $ | - | $ | 13,606 | ||||||||||||||||
*The Company’s2018 presentation in the table above has been revised to reflect as Level 1 financial assets are money$4,274 of US Government Notes included within Available for Sale Securities and previously classified as Level 2.
Money market funds withand U.S. Treasury bills are highly liquid investments and are actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair values that are based on quoted market prices. The Company’s Level 2 investments includevalue hierarchy.
Corporate debt, U.S. government-backed securities, and corporatecommercial paper are measured at fair value using Level 2 inputs. The Company reviews trading activity and pricing for these investments as of each measurement date. When sufficient quoted pricing for identical securities that are valued based uponis not available, the Company uses market pricing and other observable market inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sidedfor similar securities obtained from various third party data providers. These inputs represent quoted prices for similar assets in active markets benchmarkor these inputs have been derived from observable market data. This approach results in the classification of these securities bids, offers and reference data including market research publications.as Level 2 of the fair value hierarchy. The average remaining maturity of the Company’s Level 2 investments as of December 31, 20162019 is less than 36 months0.2 years and all of these investments are rated by S&P and Moody’s at A or better.
At December 31, 2014, the The Company evaluated the fair values of its intangible assets, which are classified within Level 3recognizes transfers between levels of the fair value hierarchy. With respect tohierarchy as of the purchased intangible assets associated withend of the Iridex acquisition in 2012,reporting period. There were no transfers within the Company determined that there was impairment inhierarchy during the valueyear ended December 31, 2019 and December 31, 2018.
NOTE 3—BALANCE SHEET DETAIL
Inventories
Valuation adjustments for excess and obsolete inventory, reflected as a reduction of inventory at December 31, 2019 and 2018, were $2.5 million and $1.8 million, respectively. Inventories, net of these intangible assets based on an undiscounted cash flow model. The recorded impairment charge of the purchased intangibles was estimated using a discounted cash flow model. This model relied on Level 3 inputs that included expected future cash flow streams as well as a market discount rate that are subject to uncertainties that are difficult to predict.
NOTE3—BALANCE SHEET DETAIL
Inventories
Inventoriesadjustments, consist of the following (in thousands):
December 31, | ||||||||
2016 | 2015 | |||||||
Raw materials | $ | 10,966 | $ | 7,982 | ||||
Finished goods | 4,011 | 4,096 | ||||||
Total | $ | 14,977 | $ | 12,078 | ||||
December 31, | ||||||||
2019 | 2018 | |||||||
Raw materials | $ | 17,935 | $ | 16,991 | ||||
Work in process | 2,016 | 2,306 | ||||||
Finished goods | 13,970 | 8,717 | ||||||
Total | $ | 33,921 | $ | 28,014 | ||||
Property and Equipment, net
Property and equipment, net, consists of the following (in thousands):
December 31, | December 31, | |||||||||||||||
2016 | 2015 | 2019 | 2018 | |||||||||||||
Leasehold improvements | $ | 652 | $ | 822 | $ | 867 | $ | 660 | ||||||||
Office equipment and furniture | 2,973 | 2,970 | 3,110 | 2,835 | ||||||||||||
Machinery and equipment | 5,435 | 4,662 | 7,805 | 7,304 | ||||||||||||
| 9,060 | 8,454 | 11,782 | 10,799 | |||||||||||||
Less: Accumulated depreciation | (7,153 | ) | (6,981 | ) | (8,965) | (8,127) | ||||||||||
Property and equipment, net | $ | 1,907 | $ | 1,473 | $ | 2,817 | $ | 2,672 | ||||||||
Included in machinery and equipment are financed vehicles used by the Company’s North American sales employees. As of December 31, 20162019 and 2015,2018, the gross capitalized value of the leased vehicles was $1.4$2.0 million and $862,000$1.9 million and the related accumulated depreciation was $492,000$1.1 million and $374,000,$1.1 million, respectively. Included in Property and equipment as of December 31, 2019, is construction in progress of $0.4 million that is yet to be depreciated.
Goodwill and OtherIntangible Assets
Goodwill and other intangible assets comprise a patent sublicense acquired from Palomar in 2006, intangible assets and goodwill related to the acquisition of Iridex’s aesthetic business unit, and, customer relationships in the Benelux countries acquired from a former distributor in 2013. The components of intangible assets at December 31, 20162019 and 20152018 were as follows (in thousands):
Gross Carrying Amount | Accumulated Amortization & Impairment Amount | Net Amount | Gross Carrying Amount | Accumulated Amortization & Impairment Amount | Net Amount | ||||||||||||||||||||||||
December 31, 2016 | |||||||||||||||||||||||||||||
December 31, 2019 | |||||||||||||||||||||||||||||
Patent sublicense | $ | 1,218 | $ | 1,218 | $ | — | $ | 1,218 | $ | 1,218 | $ | - | |||||||||||||||||
Customer relationship intangible related to acquisition | 2,510 | 2,508 | 2 | 2,510 | 2,510 | - | |||||||||||||||||||||||
Other identified intangible assets related to acquisition | 780 | 780 | — | 780 | 780 | - | |||||||||||||||||||||||
Other intangible | 155 | 155 | — | 155 | 155 | - | |||||||||||||||||||||||
Goodwill | 1,339 | — | 1,339 | 1,339 | - | 1,339 | |||||||||||||||||||||||
Total | $ | 6,002 | $ | 4,661 | $ | 1,341 | $ | 6,002 | $ | 4,663 | $ | 1,339 | |||||||||||||||||
December 31, 2015 | |||||||||||||||||||||||||||||
December 31, 2018 | |||||||||||||||||||||||||||||
Patent sublicense | $ | 1,218 | $ | 1,218 | $ | — | $ | 1,218 | $ | 1,218 | $ | - | |||||||||||||||||
Customer relationship intangible related to acquisition | 2,510 | 2,367 | 143 | 2,510 | 2,510 | - | |||||||||||||||||||||||
Other identified intangible assets related to acquisition | 780 | 780 | — | 780 | 780 | - | |||||||||||||||||||||||
Other intangible | 155 | 155 | — | 155 | 155 | - | |||||||||||||||||||||||
Goodwill | 1,339 | — | 1,339 | 1,339 | - | 1,339 | |||||||||||||||||||||||
Total | $ | 6,002 | $ | 4,520 | $ | 1,482 | $ | 6,002 | $ | 4,663 | $ | 1,339 | |||||||||||||||||
As of December 31, 2014, theThe Company evaluated the recoverability of its long-lived assets. Relating to the purchaseddid not incur any amortization expense for intangible assets associated with the Iridex acquisition in 2012, due to the discontinuation of the manufacture and sale of all products acquired, lower than projected future service revenue, and lower than projected revenue expected from the distributor relationships acquired, the Company concluded based on future undiscounted cash flows that the remaining carrying value of these assets was impaired. As a result, the Company recorded an impairment charge of $650,000 in cost of revenue.
2019. Amortization expense (excluding the impairment charge described above) in the 2016, 2015,2018 and 20142017 fiscal years for intangible assets was $141,000, $452,000,$0 and $773,000,$2,000, respectively. Intangible assets were fully amortized and there were no additions as of December 31, 2019.
Based on intangible assets recorded at December 31, 2016, and assuming no subsequent additions to, or impairment of the underlying assets, the remaining annual amortization expense will be as follows (in thousands):
Year ending December 31, | Amount | |||
2017 | $ | 2 | ||
Total | $ | 2 | ||
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
December 31, | ||||||||
2016 | 2015 | |||||||
Accrued payroll and related expenses | $ | 9.036 | $ | 7,726 | ||||
Accrued sales tax | 2,373 | 1,935 | ||||||
Warranty liability | 2,461 | 1,819 | ||||||
Other accrued liabilities | 3,527 | 2,354 | ||||||
Total | $ | 17,397 | $ | 13,834 | ||||
December 31, | ||||||||
2019 | 2018 | |||||||
Accrued payroll and related expenses | $ | 14,341 | $ | 9,377 | ||||
Sales and marketing accruals | 2,527 | 2,379 | ||||||
Accrued sales tax | 3,922 | 2,935 | ||||||
Warranty liability | 4,401 | 4,666 | ||||||
Other accrued liabilities | 5,116 | 3,943 | ||||||
Total | $ | 30,307 | $ | 23,300 | ||||
Product Remediation Liability
During the fourth quarter of 2018, the Company recognized a liability for a product remediation plan related to of one of its legacy systems. This was related to a voluntary action initiated by the Company to replace a component in one of the Company’s legacy products. The developed remediation plan consists primarily of replacement of a component in the system. The accrued liability consisted of cost of materials and labor costs to replace the component in all units that are under the Company's standard warranty or are covered under existing extended warranty contracts. The Company recorded approximately $5.0 million related to this remediation, of which $1.1 million was utilized in the year ended December 31, 2018.
As of December 31, 2019 and 2018, approximately $0.5 million and $0.7 million, respectively, of the total product remediation liability balance was accrued as a component of the Company’s product warranty and included in accrued liabilities, and $2.0 million and $3.2 million, respectively, was separately recorded as Extended warranty liabilities. Total costs incurred related to product warranty and Extended warranty liabilities during the twelve months in December 31, 2019 were $0.2 million and $1.1 million, respectively.
NOTE4— 4— WARRANTY AND SERVICE CONTRACTSEXTENDED SERVICES CONTRACT
The Company has a direct field service organization in the U.S.North America (including Canada). Internationally, the Company provides direct service support through its wholly-owned subsidiaries in Australia, Belgium, Canada, France, Germany, Hong Kong, Japan, and Switzerland, as well as through third-party service providers in Spain and the United Kingdom. In several other countries, where itthe Company does not have a direct presence, the Company provides service through a network of distributors and third-party service providers.
After the original warranty period, maintenance and support are offered on aan extended service contract basis or on a time and materials basis. The Company provides for the estimated cost to repair or replace products under standard warranty at the time of sale. Costs incurred in connection with extended service contracts are recognized at the time when costs are incurred, except the one-time extended service contracts charge of $3.2 million recorded in the year ended December 31, 2018 related to the cost to replace a component in one of the Company's legacy products (Note 3) The following table provides the changes in the product standard warranty accrual for the years ended December 31, 2019 and 2018 (in thousands):
December 31, | ||||||||
2019 | 2018 | |||||||
Balance at beginning of year | $ | 7,827 | $ | 3,508 | ||||
Add: Accruals for warranties issued during the period | 6,467 | 12,364 | ||||||
Less: Warranty related costs during the period | (7,894 | ) | (8,045 | ) | ||||
Balance at end of year | $ | 6,400 | $ | 7,827 | ||||
NOTE 5— DEFERRED REVENUE
Warranty AccrualThe Company records deferred revenue when revenue is to be recognized subsequent to invoicing. For extended service contracts, the Company generally invoices customers at the beginning of the extended service contract term. The Company’s extended service contracts typically have one, two or three year terms. Deferred revenue also includes payments for installation, training and extended marketing support service. Approximately 76% of the Company’s deferred revenue balance of $14.2 million as of December 31, 2019 will be recognized over the next 12 months.
The following table provides changes in the deferred contract revenue balance for the years ended December 31, 2019 and 2018 (in thousands):
December 31, | December 31, | |||||||||||||||
2016 | 2015 | 2019 | 2018* | |||||||||||||
Balance at beginning of year | $ | 1,819 | $ | 1,167 | $ | 12,566 | $ | 11,656 | ||||||||
Add: Accruals for warranties issued during the year | 5,375 | 4,134 | ||||||||||||||
Less: Settlements and expirations made during the year | (4,733 | ) | (3,482 | ) | ||||||||||||
Add: Payments received | 17,127 | 14,883 | ||||||||||||||
| Less: Revenue | (9,451) | (8,206) | ||||||||||||||
Less: Revenue included in the beginning balance and recognized as revenue in the current year | (6,021) | (5,767) | ||||||||||||||
Balance at end of year | $ | 2,461 | $ | 1,819 | $ | 14,222 | $ | 12,566 | ||||||||
Deferred Service Contract Revenue (in thousands)
December 31, | ||||||||
2016 | 2015 | |||||||
Balance at beginning of year | $ | 10,469 | $ | 12,949 | ||||
Add: Payments received | 12,344 | 10,378 | ||||||
Less: Revenue recognized | (13,382 | ) | (12,858 | ) | ||||
Balance at end of year | $ | 9,431 | $ | 10,469 | ||||
*The 2018 presentation in the table above has been revised to include deferred revenue of $11,656 at January 1, 2018 and $12,566 at December 31, 2018 and related changes therein that were previously excluded.
Costs incurred underfor extended service contracts in 2016, 20152019, 2018 and 2014 amounted to $6.7 million, $6.22017 were $9.3million, $7.8 million, and $6.6$6.0 million, respectively, and are recognized as incurred.respectively. The $7.8 million in 2018 includes a one-time extended service contract cost of $3.2 million to replace a component in one of the Company's legacy products (See Note 3).
NOTE5— 6—STOCKHOLDERS’ EQUITY, STOCK PLANS AND STOCK-BASED COMPENSATION EXPENSE
As of December 31, 2016,2019, the Company had one class of issued common stock with a par value of $0.001. Authorized capital stock consists of 55,000,000 shares comprised of two classes: (i) 50,000,000 shares of Common Stock, of which 14,315,586 shares are issued and outstanding as of December 31, 2019, and (ii) 5,000,000 shares of preferred stock, par value $0.001 per share (“Preferred Stock”), of which no shares are issued and outstanding.
As of December 31, 2019, the Company had the following stock-based employee compensation plans:
2004 Equity Incentive Plan and 1998 Stock Plan
In 1998, the Company adopted the 1998 Stock Plan, or 1998 Plan, under which 4,650,000 shares of the Company’s common stock were reserved for issuance to employees, directors and consultants.
On January 12, 2004, the Board of Directors (“the Board”) adopted the 2004 Equity Incentive Plan. A total of 1,750,000 shares of common stock were originally reserved for issuance pursuant to the 2004 Equity Incentive Plan. In addition, the shares reserved for issuance under the 2004 Equity Incentive Plan included shares reserved but un-issued under the 1998 Plan and shares returned to the 1998 Plan as the result of termination of options or the repurchase of shares. In 2012 the stockholders approved a “fungible share” provision whereby each full-value award issued under the 2004 Equity Incentive Plan results in a requirement to subtract 2.12 shares from the shares reserved under the Plan.
Options granted under2019 Equity Incentive Plan
At the 1998Company’s Annual Meeting of Stockholders on June 14, 2019, the Company’s stockholders approved the 2019 Equity Incentive Plan, which is an amendment and restatement of the 2004 Equity Incentive Plan. The 2004 Equity Incentive Plan maywas amended to: (i) increase the number of shares available for future grant by 700,000 (in addition to the 9,701,192 shares provided under the 2004 Equity Incentive Plan; (ii) extend the term of the 2004 Equity Incentive Plan to the date of the Annual Meeting of the Company’s stockholders in 2029; (iii) amend the 2004 Equity Incentive Plan to eliminate the requirement for awards granted on or after June 14, 2019 that any shares subject to awards with an exercise price less than fair market value on the date of such grant will be incentive stock options or non-statutory stock options. Stock purchase rights may alsocounted against the Plan as 2.12 shares for each full value share awarded in accordance with the 2004 Equity Incentive Plan; (iv) amend the 2004 Equity Incentive Plan to remove the requirement that any shares subject to awards with an exercise price less than fair market value on the date of such grant will be counted against the Plan as 2.12 shares for each full value share awarded; (v) amend the 2004 Equity Incentive Plan to remove certain provisions relating to the “performance based compensation” exception under Section 162(m) of the Internal Revenue Code of 1986, as amended; (vi) include a minimum one-year vesting period with respect to awards granted under the 2004 Equity Incentive Plan. Incentive
On June 11, 2019, the Board also approved amended and restated the Company’s Stock Ownership Guidelines adopted on July 28, 2017 in their entirety, to require all officers (as defined by Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) to hold at least 50% of any shares received pursuant to stock options, may only be grantedstock appreciation rights, vested restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance shares or performance units (net of taxes) for a minimum of one year following vesting and delivery.
On June 11, 2019, the Board also adopted a clawback policy to employees. The Boardpermit recovery of Directors determines the period over which options become exercisable. Options granted under the Plancertain compensation paid to employees generally vest over a four year term from the vesting commencement date and become exercisable 25% on the first anniversaryNamed Executive Officers (as defined in Item 402 of the vesting commencement date and an additional 1/48th on the last day of each calendar month until all of the shares have become exercisable. During 2013 and 2012 the officersRegulation S-K) of the Company were granted options that vest over a three year term atif the rate of 1/3rdon the one year anniversaryCompensation Committee of the vesting commencement dateBoard determines that a Named Executive Officer (i) has violated law, the Company’s Code of Business Conduct and 1/36th thereafter. In 2014 the officersEthics, or any significant ethics or compliance policies, and (ii) such conduct results in material financial or reputational harm, or results in a need for a restatement of the Company were grantedCompany’s consolidated financial statements. The Amended and Restated Plan provides for the grant of incentive stock options, non-statutory stock options, RSAs, RSUs, stock appreciation rights, performance units, performance shares, and PSUs but were not granted any options. The contractual termother stock or cash awards.
In accordance with the 2019 and 2004 Equity Incentive Plan,Plans, prior to 2012, the Company’s non-employee directors were granted $60,000 of grant date fair value, fully vested, stock awards annually on the date of the Company’s Annual Meeting of stockholders. Commencing with 2012,The quantity of units granted is determined by dividing the award amount by the 50-day moving average stock price ending on the day of the award. Following Board of Directors action on October 31, 2017, the Company’s non-employeenonemployee directors getreceive $60,000 of RSUs granted annually that cliff-vest on the one yearone-year anniversary of the grant date. Additionally, in 2016, one of our non-employee directors was granted 6,500 RSUs for consulting services rendered to the Company. In the years ended December 31, 2016, 20152019, 2018 and 2014,2017, the Company issued 45,350, 21,02042,236, 13,392, and 38,68821,605 RSUs, respectively, to its non-employee directors.
In the years ended December 31, 2016, 20152019, 2018 and 20142017 the Company’s Board of Directors granted 229,865, 107,417517,402, 210,532, and 211,250270,707 RSUs, respectively, of RSUs to its executive officers and certain members of the Company’s management. The25% of the RSUs granted to the employees vest at the rate of one-fourth on the one-year anniversary of the grant date, and one-fourth in each of the subsequent three years. The RSUs grantedfirst four anniversaries of the vest date subject to the executive officers vest at the rate of one-third on the one-year anniversary of the grant date, and one-third in each of the subsequent two years.recipients’ continued service. The Company measured the fair market values of the underlying stock on the dates of grant and recognizes the stock-based compensation expense over the vesting period. On the vesting date, the Company issues fully paid up common stock, net of stock withheld to settle the recipient’s minimum statutory tax liability.
In the years ended December 31, 2016, 20152019, 2018 and 20142017 the Company’s Board of Directors granted its executive officers and certain senior management employees 204,976, 74,667387,172, 47,824, and 105,000117,418 of PSUs.PSUs, respectively. The PSUs vest over a period of 12 months 8.5 months and 12 months, respectively, subject to the recipient’s continued service and the achievement of pre-established performance goals. The PSUs granted in 2019 vest subject to the pre-establishedrecipients continued service and the achievement of certain performance goals for the Company’s 2019 fiscal year established by the Board and relating to the achievement of revenue targets for consumable products, revenue targets for international revenue, and specific operational goalsmilestones related to product performance and IT systems implementation projects. On September 5, 2019, the Board made a modification to all the PSU grants outstanding as of September 4, 2019, such that 15% of the PSUs would now vest upon the achievement of revenue and operating income improvement. Fortargets for consumable products or revenue targets for international revenue rather than upon the 2015achievement of targets related to IT systems implementation projects. The modified PSUs were valued at the Company’s share price on the date of the modification. As a result of the PSU awards, in addition to operational goals, there was a market-based goal as well. At the vest date,modification the Company issues fully-paid up common stock, based onrecognized an additional $1.0 million of stock-based compensation in during the degree of achievement of the pre-established targets.year ended December 31, 2019.
2004 Employee Stock Purchase PlanDuring the three months ended September 30, 2019 the Company's Board awarded its new CEO, David H. Mowry, 67,897 shares, which are scheduled to vest over 4 years from 2019 through 2022 (the 2019 tranche is 15% of the award, or 10,185 PSUs; the 2020 tranche is 25% of the award, or 16,974 PSUs; the 2021 tranche is 30% of the award, or 20,269 PSUs; and the 2022 tranche is 30% of the award, or 20,269 PSUs). These PSUs are subject to certain performance-based criteria related to achieving financial metrics in the Board approved annual budgets for the years 2019 through 2022. As of December 31, 2019, the Company concluded that only the 2019 tranche of 10,185 PSUs meet the criteria for measurement and recognition (85% of which vested as of December 31, 2019). The 2020 to 2022 tranches do not meet the criteria for measurement and recognition as of December 31, 2019, and will meet the criteria for measurement and commencement of recognition when the Company’s Board of Directors establishes the financial metrics for each fiscal year.
On January 12, 2004, the Board of Directors adopted the 2004 Employee Stock Purchase Plan. Under the 2004 Employee Stock Purchase Plan, or 2004 ESPP, eligible employees are permitted to purchase common stock at a discount through payroll deductions. The 2004 ESPP offering and purchase periods are for approximately six months. The 2004 ESPP has an evergreen provision based on which shares of common stock eligible for purchase are increased on the first day of each fiscal year by an amount equal to the lesser of:
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| 600,000 shares; 2.0% of the outstanding shares of common stock on such date; or an amount as determined by the Board of Directors. |
The Company’s Board of Directors did not increase the shares available for future grant on January 1, 2016, 20152020, 2019 and 2014.2018. The price of the common stock purchased is the lower of 85% of the fair market value of the common stock at the beginning or end of a six month offering period. In the years ended December 31, 2016, 20152019, 2018 and 2014,2017, under the 2004 ESPP, the Company issued 79,922, 55,87282,810, 64,511, and 52,75978,479 shares, respectively. At December 31, 2016, 770,0632019, 761,705 shares remained available for future issuance.
Option Activity
Activity under the 1998 Plan and 2004 Equity Incentive Plan is summarized as follows:
Options Outstanding | Options Outstanding | |||||||||||||||||||||||||||||||||||||||
Shares Available For Grant | Number of Shares | Weighted- Average Exercise Price | Weighted-Average Remaining ContractualLife (in years) | Aggregate Intrinsic Value (in $ millions)(1) | Shares Available For Grant | Number of Shares | Weighted- Average Exercise Price | Weighted-Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value (in millions ) (1) | |||||||||||||||||||||||||||||||
Balances as of December 31, 2013 | 709,483 | 3,792,162 | $ | 9.42 | 4.2 | $ | 5.1 | |||||||||||||||||||||||||||||||||
Additional shares reserved(2) | 200,000 | — | — | |||||||||||||||||||||||||||||||||||||
Balances as of December 31, 2016 | 721,657 | 1,116,472 | $ | 9.56 | 3.70 | $ | 8.70 | |||||||||||||||||||||||||||||||||
Options granted | (486,300 | ) | 486,300 | $ | 9.78 | (278,250) | 278,250 | 31.00 | - | - | ||||||||||||||||||||||||||||||
Options exercised | — | (396,970 | ) | $ | 8.33 | - | (488,398) | 8.96 | - | - | ||||||||||||||||||||||||||||||
Options cancelled (expired or forfeited) | 418,925 | (418,925 | ) | $ | 11.15 | 66,405 | (66,405) | 16.54 | - | - | ||||||||||||||||||||||||||||||
Stock awards granted | (764,394 | ) | — | — | (873,881) | - | - | - | - | |||||||||||||||||||||||||||||||
Stock awards cancelled (expired or forfeited) | 52,046 | — | — | 258,935 | - | - | - | - | ||||||||||||||||||||||||||||||||
Balances as of December 31, 2014 | 129,760 | 3,462,567 | $ | 9.39 | 3.4 | $ | 5.7 | |||||||||||||||||||||||||||||||||
Additional shares reserved(3) | 1,300,000 | — | ||||||||||||||||||||||||||||||||||||||
Additional shares reserved | 1,600,000 | - | - | - | - | |||||||||||||||||||||||||||||||||||
Balances as of December 31, 2017 | 1,494,866 | 839,919 | $ | 16.46 | 3.99 | $ | 24.4 | |||||||||||||||||||||||||||||||||
Options granted | (129,000 | ) | 129,000 | $ | 13,.26 | (21,010) | 21,010 | $ | 50.65 | - | - | |||||||||||||||||||||||||||||
Options exercised | — | (1,141,904 | ) | $ | 9.20 | - | (271,902) | 9.99 | - | - | ||||||||||||||||||||||||||||||
Options cancelled (expired or forfeited) | 300,866 | (300,866 | ) | $ | 12.37 | 81,322 | (81,322) | 21,55 | - | - | ||||||||||||||||||||||||||||||
Stock awards granted | (430,580 | ) | — | — | (562,070) | - | - | - | - | |||||||||||||||||||||||||||||||
Stock awards cancelled (expired or forfeited) | 92,379 | — | — | 148,197 | - | - | - | - | ||||||||||||||||||||||||||||||||
Balances as of December 31, 2015 | 1,263,425 | 2,148,797 | $ | 9.31 | 3.4 | $ | 7.9 | |||||||||||||||||||||||||||||||||
Options granted | (162,000 | ) | 162,000 | $ | 11.55 | |||||||||||||||||||||||||||||||||||
Balances as of December 31, 2018 | 1,141,305 | 507,705 | $ | 20.52 | 3.52 | $ | 2.00 | |||||||||||||||||||||||||||||||||
Additional shares reserved(2) | 700,000 | |||||||||||||||||||||||||||||||||||||||
Options exercised | — | (1,051,138 | ) | $ | 8.89 | - | (160,798) | $ | 10.03 | - | - | |||||||||||||||||||||||||||||
Options cancelled (expired or forfeited) | 143,187 | (143,187 | ) | $ | 12.93 | 51,208 | (51,208) | 24.61 | - | - | ||||||||||||||||||||||||||||||
Stock awards granted | (1,018,005 | ) | — | — | (1,538,128) | - | - | - | - | |||||||||||||||||||||||||||||||
Stock awards cancelled (expired or forfeited) | 495,050 | — | — | 407,320 | - | - | - | - | ||||||||||||||||||||||||||||||||
Balances as of December 31, 2016 | 721,657 | 1,116,472 | $ | 9.56 | 3.7 | $ | 8.7 | |||||||||||||||||||||||||||||||||
Exercisable as of December 31, 2016 | 767,277 | $ | 8.92 | 3.0 | $ | 6.5 | ||||||||||||||||||||||||||||||||||
Vested and expected to vest, net of estimated forfeitures, as of December 31, 2016 | 1,069,923 | $ | 9.47 | 3.6 | $ | 8.4 | ||||||||||||||||||||||||||||||||||
Balances as of December 31, 2019 | 761,705 | 295,699 | $ | 25.52 | 3.19 | $ | 3.04 | |||||||||||||||||||||||||||||||||
Exercisable as of December 31, 2019 | 222,400 | $ | 22.16 | 2.83 | $ | 3.04 | ||||||||||||||||||||||||||||||||||
Vested and expected to vest, net of estimated forfeitures, as of December 31, 2019 | 285,462 | $ | 25.08 | 3.00 | $ | 3.06 | ||||||||||||||||||||||||||||||||||
(1) | Basedontheclosingstockpriceof$35.81ofthe |
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The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the Company’s closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2016.2019. The aggregate intrinsic amount changes based on the fair market value of the Company’s common stock. Total intrinsic value of options exercised in 2016, 20152019, 2018 and 20142017 was $3.6$1.0 million, $5.1$8.3 million, and $824,000,$8.0 million, respectively. The options outstanding and exercisable at December 31, 20162019 were in the following exercise price ranges:
Options Outstanding | Options Exercisable | ||||||||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted-Average Remaining Contractual Life (in years) | Number Outstanding | Weighted-Average Exercise Price | |||||||||||||||
| $6.88 | 158,643 | 2.57 | 158,643 | $ | 6.88 | ||||||||||||||
| $7.15 | – | $8.52 | 32,750 | 1.85 | 32,750 | 7.71 | |||||||||||||
| $8.72 | 127,995 | 1.40 | 127,995 | 8.72 | |||||||||||||||
| $8.80 | 213,741 | 3.46 | 166,370 | 8.80 | |||||||||||||||
| $8.91 | – | $9.65 | 144,460 | 4.19 | 100,019 | 9.31 | |||||||||||||
| $9.97 | – | $10.03 | 115,000 | 4.66 | 67,605 | 9.99 | |||||||||||||
| $10.24 | - | $10.86 | 114,133 | 3.87 | 55,394 | 10.30 | |||||||||||||
| $10.90 | – | $11.98 | 116,250 | 5.66 | 24,792 | 11.18 | |||||||||||||
| $13.40 | - | $14.04 | 88,500 | 5.87 | 31,938 | 13.67 | |||||||||||||
| $15.32 | 5,000 | 5.56 | 1,771 | 15.32 | |||||||||||||||
| $6.88 | – | $15.32 | 1,116,472 | 3.74 | 767,277 | $ | 8.92 | ||||||||||||
Exercise Prices | Number Outstanding | Contractual Life (in years) | Number Exercisable | ||||||||||||||
| $8.80 | 48,864 | 0.48 | 48,864 | ||||||||||||||
| $9.65 | – | $10.79 | 33,743 | 1.98 | 32,806 | ||||||||||||
| $10.80 | – | $14.04 | 36,146 | 3.24 | 33,752 | ||||||||||||
| $15.32 | – | $18.55 | 10,896 | 3.74 | 8,584 | ||||||||||||
| $19.55 | 12,000 | 4.32 | 8,292 | ||||||||||||||
| $25.70 | 38,625 | 4.59 | 23,594 | ||||||||||||||
| $39.30 | 72,000 | 4.42 | 41,230 | ||||||||||||||
| $43.40 | 6,510 | 0.25 | 2,849 | ||||||||||||||
| $47.40 | 29,915 | 3.72 | 19,116 | ||||||||||||||
| $53.90 | 7,000 | 5.20 | 3,313 | ||||||||||||||
| $8.80 | – | $53.90 | 295,669 | 2.83 | 222,400 | ||||||||||||
As of December 31, 2015 there were 1,561,916 options that were exercisable at a weighted average exercise price of $9.05.
Stock Awards (RSU and PSU) Activity Table
Information with respect to restricted stock units’RSUs and performance stock units’PSUs activity is as follows (in thousands):
Number of Shares | Weighted-Average Grant- Date Fair Value | Aggregate Fair Value(1) (in thousands) | Aggregate Intrinsic Value(2) (in thousands) | Number of | Weighted-Average Grant- Date Fair | Aggregate Fair Value(1) | Aggregate Intrinsic Value (2) | |||||||||||||||||||||||||
Outstanding at December 31, 2013 | 179,465 | $ | 8.34 | $ | 1,827 | |||||||||||||||||||||||||||
Shares | Value | (in thousands) | (in thousands) | |||||||||||||||||||||||||||||
Outstanding at December 31, 2016 | 445,317 | $ | 11.15 | $ | 7,726 | |||||||||||||||||||||||||||
Granted | 360,563 | $ | 9.72 | 412,208 | $ | 28.74 | ||||||||||||||||||||||||||
Vested(3) | (81,157 | ) | $ | 8.62 | $ | 777(4) | (224,799 | ) | $ | 10.91 | $ | 5,168 | (4) | |||||||||||||||||||
Forfeited | (24,550 | ) | $ | 8.14 | (122,139 | ) | $ | 13.56 | ||||||||||||||||||||||||
Outstanding at December 31, 2014 | 434,321 | $ | 9.31 | $ | 4,639 | |||||||||||||||||||||||||||
Outstanding at December 31, 2017 | 510,587 | $ | 24.88 | $ | 23,155 | |||||||||||||||||||||||||||
Granted | 203,104 | $ | 14.81 | 265,124 | $ | 44.57 | ||||||||||||||||||||||||||
Vested(3) | (222,220 | ) | $ | 11.79 | $ | 3,285(5) | (231,515 | ) | $ | 21.10 | $ | 9,483 | (5) | |||||||||||||||||||
Forfeited | (43,575 | ) | $ | 9.09 | (69,905 | ) | $ | 20.01 | ||||||||||||||||||||||||
Outstanding at December 31, 2015 | 371,630 | $ | 12.39 | $ | 4,753 | |||||||||||||||||||||||||||
Outstanding at December 31, 2018 | 474,291 | $ | 38.44 | $ | 8,072 | |||||||||||||||||||||||||||
Granted | 480,191 | $ | 10.80 | 963,814 | $ | 18.68 | ||||||||||||||||||||||||||
Vested(3) | (172,990 | ) | $ | 12.56 | $ | 1,906(6) | (172,281 | ) | $ | 33.66 | $ | 6,169 | (6) | |||||||||||||||||||
Forfeited | (233,514 | ) | $ | 11.36 | (161,022 | ) | $ | 37.91 | ||||||||||||||||||||||||
Outstanding at December 31, 2016 | 445,317 | $ | 11.15 | $ | 7,726 | |||||||||||||||||||||||||||
Outstanding at December 31, 2019 | 1,104,802 | $ | 22.10 | $ | 37,442 | |||||||||||||||||||||||||||
(1) | RepresentsthevalueoftheCompany’sstockonthedatethattherestrictedstockunits andperformancestockunits vest. |
(2) | BasedontheclosingstockpriceoftheCompany’sstockof$ |
(3) | ThenumberofrestrictedstockunitsvestedincludessharesthattheCompanywithheldonbehalfoftheemployeestosatisfythestatutorytaxwithholdingrequirements. |
(4) | Onthegrantdate,thefairvalueforthesevestedawardswas$2.5 |
(5) | On |
(6) | On |
Stock-Based Compensation
Stock-based compensation expense for stock options, restricted stock units, performance stock units and ESPP shares for the yearyears ended December 31, 2016, 20152019, 2018 and 20142017 was as follows (in thousands):
Year EndedDecember 31, | Year Ended December 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2019 | 2018 | 2017 | |||||||||||||||||||
Stock options | $ | 989 | $ | 1,438 | $ | 1,811 | $ | 622 | $ | 838 | $ | 815 | ||||||||||||
RSUs | 1,508 | 1,297 | 875 | 4,786 | 4,648 | 1,813 | ||||||||||||||||||
PSUs | 967 | 1,167 | 455 | 3,948 | 1,105 | 2,093 | ||||||||||||||||||
ESPP | 249 | 182 | 158 | 476 | 566 | 389 | ||||||||||||||||||
Total stock-based compensation expense | $ | 3,713 | $ | 4,084 | $ | 3,299 | $ | 9,832 | $ | 7,157 | $ | 5,110 | ||||||||||||
As of December 31, 2016,2019, the unrecognized compensation cost, net of expected forfeitures, was $3.3$12.2 million for stock options and stock awards, which will be recognized over an estimated weighted-average remaining amortization period of 1.662.64 years. For the ESPP, the unrecognized compensation cost, net of expected forfeitures, was $110,000,$0.2 million, which will be recognized over an estimated weighted-average amortization period 0.33 years.
The Company issues new shares of common stock upon the exercise of stock options, vesting of RSUs and PSUs, and the issuance of ESPP shares. The amount of cash received from these issuances (excluding PSUs), net of taxes withheld and paid, in 2016, 2015 and 20142019, 2018and 2017 was $9.5$3.9 million, $10.1$1.3 million, and $3.6$4.0 million. There was no direct tax benefit (deficit) in 2016, 2015 or 2014. The Company elected to account for the indirect effects of stock-based awards, primarily the research and development tax credit, through the Statement of Operations.
Total stock-based compensation expense recognized during the year ended December 31, 2016, 20152019, 2018 and 20142017 was recorded in the Consolidated Statement of Operations as follows (in thousands):
Year EndedDecember 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Cost of revenue | $ | 341 | $ | 447 | $ | 560 | ||||||
Sales and marketing | 1,179 | 1,054 | 641 | |||||||||
Research and development | 596 | 662 | 581 | |||||||||
General and administrative | 1,597 | 1,921 | 1,517 | |||||||||
Total stock-based compensation expense | $ | 3,713 | $ | 4,084 | $ | 3,299 | ||||||
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Cost of revenue | $ | 1,572 | $ | 743 | $ | 660 | ||||||
Sales and marketing | 4,510 | 2,105 | 1,642 | |||||||||
Research and development | 1,536 | 824 | 936 | |||||||||
General and administrative | 2,214 | 3,485 | 1,872 | |||||||||
Total stock-based compensation expense | $ | 9,832 | $ | 7,157 | $ | 5,110 | ||||||
Valuation Assumptions and Fair Value of Stock Options and ESPP Grants
The Company uses the Black-Scholes option pricing model to estimate the fair value of options granted under its equity incentive plans and rights to acquire stock granted under its employee stock purchase plan. The Company based the weighted average estimated fair values of the employee stock option grantsoptions and rights granted under the employee stock purchase plan, as well asand the weighted average assumptions used in calculating theseto calculate the grant date fair values, on estimates at the date of grant,are as follows:
Stock Options | Stock Purchase Plan | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||||
Expected term (in years)(1) | 3.83 | 3.24 | 4.18 | 0.50 | 0.50 | 0.50 | ||||||||||||||||||
Risk-free interest rate(2) | 1.09 | % | 0.90 | % | 1.31 | % | 0.46 | % | 0.17 | % | 0.06 | % | ||||||||||||
Volatility(3) | 40 | % | 30 | % | 41 | % | 39 | % | 36 | % | 37 | % | ||||||||||||
Dividend yield(4) | — | % | — | % | — | % | — | % | — | % | — | % | ||||||||||||
Weighted average estimated fair value at grant date | $ | 3.72 | $ | 4.78 | $ | 3.36 | $ | 3.22 | $ | 3.51 | $ | 2.65 | ||||||||||||
Stock Options And ESPP | Stock Purchase Plan | |||||||||||||||||||||||
2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||||||||
Expected term (in years) (1) | 3.65 | 3.70 | 3.70 | 0.50 | 0.50 | 0.50 | ||||||||||||||||||
Risk-free interest rate (2) | 1.64 | % | 2.60 | % | 1.73 | % | 2.49 | % | 2.34 | % | 1.14 | % | ||||||||||||
Volatility(3) | 54 | % | 44 | % | 40 | % | 70 | % | 61 | % | 42 | % | ||||||||||||
Dividend yield(4) | - | % | - | % | - | % | - | % | - | % | - | % | ||||||||||||
Weighted average estimated fair value at grant date | $ | 14.83 | $ | 18.00 | $ | 9.98 | $ | 9.60 | $ | 9.60 | $ | 8.21 | ||||||||||||
(1) | The expected term represents the period during which the Company’s stock-based awards are expected to be outstanding. The estimated term is based on historical experience of similar awards, giving consideration to the contractual terms of the awards, vesting requirements, and expectation of future employee behavior, including post-vesting terminations. The expected term of groups of employees that have similar historical exercise patterns has been considered separately for valuation purposes. |
(2) | The risk-free interest rate is based on U.S. Treasury debt securities with maturities close to the expected term of the option or ESSP participation right as of the date of grant. |
(3) | Estimated volatility is based on historical volatility. The Company |
(4) | The Company has not |
The Company periodically estimates forfeiture rates based on its historical experience withinfor separate groups of employees and adjusts the stock-based paymentcompensation expense accordingly. The forfeiture rates used in 20162019 ranged from 0% to 17%17.7%.
the stock options, determined using the fair value of the award issued on the day of the grant.
The Company granted 9,303 RSU’s to non-employees, during the year ended December 31, 2019, 3,384 RSUs during the year ended December 31, 2018, and 7,745 stock options and 2,478 RSUs during the year ended 2017. The 7,745 stock options granted in 2017 vests over 4 years at 25% on the first anniversary of the grant date and 1/48th each month thereafter.
The 9,303 RSUs granted in 2019 vests over 4 years at 25% each anniversary of the grant date. These RSUs and stock options were granted in exchange for consulting services to be rendered and are measured and recognized as they are earned.
Stock AwardsWithholdings
For Stock Awards granted to employees, the number of shares issued on the date the Stock Awards vest is net of the tax withholding requirements paid on behalf of the employees. In 2016, 20152019, 2018, and 2014,2017, the Company withheld 56,157, 68,101,42,695, 77,049, and 15,76964,490 shares of common stock, respectively, to satisfy its employees’ tax obligations of $619,000, $1.0$0.8 million, $3.1 million, and $156,000,$1.5 million, respectively. The Company paid this amount in cash to the appropriate taxing authorities. Although shares withheld are not issued, they are treated as common stock repurchases for accounting and disclosure purposes, as they reduce the number of shares that would have been issued upon vesting.
Stock Repurchase Program
As of December 31, 2014, there was $10.0 million authorized for the repurchase of the Company’s common stock under the Company’s Stock Repurchase Program, originally adopted in November 2012 and modified on August 5, 2013. The Stock Repurchase Program permits the Company to purchase its common stock through a 10b5-1 program based on predetermined pricing and volume as well as open-market purchases that are subject to management discretion and regulatory restrictions. On February 18, 2015, the Company’s Board of Directors approved the expansion of its Stock Repurchase Program from $10 million to $40 million. In the year ended December 31, 2015, the Company repurchased 2,818,038 shares of its common stock for approximately $40.0 million.
On February 8, 2016, the Company’s Board of Directors approved the expansion of its Stock Repurchase Program by an additional $10 million. In the year ended December 31, 2016, the Company repurchased 455,311 shares of its common stock for approximately $4.9 million. As of December 31, 2016, there remained an additional $5.1 million to be purchased. On February 13, 2017 the Company’s Board of Directors approved the expansion of its Stock Repurchase Program by an additional $5 million. The Company plans to make the repurchases from time to time through open market transactions at prevailing prices and/or through privately-negotiated transactions, and/or through a pre-arranged Rule 10b5-1 trading plan.
Adjustment to Retained Earnings
The Company early adopted ASU 2016-09 in the fourth quarter of 2016 with effect from the beginning of 2016 and recorded a net increase to prior-period retained earnings of $49,000 relating to the cumulative effect adjustment upon adoption. For a detailed discussion of the impact of the adoption, refer to “Note 6—Income Taxes.”
NOTE6— 7—INCOME TAXES
The Company files income tax returns in the U.S. federal and various state and local jurisdictions and foreign jurisdictions.Thejurisdictions. The Company’s income (loss) before provision for income taxes consisted of the following (in thousands):
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2019 | 2018 | 2017 | |||||||||||||||||||
U.S. | $ | 2,207 | $ | (4,588 | ) | $ | (10,592 | ) | $ | (13,037) | $ | (14,177) |
| $ | 11,203 | |||||||||
Foreign | 513 | 360 | 199 | 774 | 662 | 757 | ||||||||||||||||||
Income (loss) before income taxes | $ | 2,720 | $ | (4,228 | ) | $ | (10,393 | ) | $ | (12,263 | ) | $ | (13,515 | ) | $ | 11,960 | ||||||||
The components of the provision (benefit) for income taxes are as follows (in thousands):
Year Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Current: | ||||||||||||
Federal | $ | — | $ | (7 | ) | $ | (7 | ) | ||||
State | 16 | 23 | 19 | |||||||||
Foreign | 131 | 218 | 110 | |||||||||
Total Current | 147 | 234 | 122 | |||||||||
Deferred: | ||||||||||||
Federal | (24 | ) | 33 | 32 | ||||||||
State | (2 | ) | — | — | ||||||||
Foreign | 22 | (55 | ) | 65 | ||||||||
Total Deferred | (4 | ) | (22 | ) | 97 | |||||||
Tax provision | $ | 143 | $ | 212 | $ | 219 | ||||||
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Current: | ||||||||||||
Federal | $ | - | $ | (15) |
| $ | 148 | |||||
State | 101 | 123 | 71 | |||||||||
Foreign | (76) | 303 | 511 | |||||||||
Total Current | 25 | 411 | 730 | |||||||||
Deferred: | ||||||||||||
Federal | 2 | 15,674 | (17,393) |
| ||||||||
State | 1 | 1,230 | (1,348) |
| ||||||||
Foreign | 57 | (60) |
| (22) |
| |||||||
Total Deferred | 60 | 16,844 | (18,763) |
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Tax provision | $ | 85 | $ | 17,255 | $ | (18,033) |
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The Company’s net deferred tax assetassets consists of the following (in thousands):
December 31, | December 31, | |||||||||||||||
2016 | 2015 | 2019 | 2018 | |||||||||||||
Net operating loss carryforwards | $ | 15,487 | * | $ | 14,231 | $ | 14,507 | $ | 11,227 | |||||||
Stock-based compensation | 1,486 | 2,462 | 1,111 | 1,040 | ||||||||||||
Other accruals and reserves | 2,160 | 4,679 | 2,202 | 1,924 | ||||||||||||
Credits | 9,006 | * | 4,477 | 11,887 | 10,857 | |||||||||||
Foreign | 377 | 350 | - | 457 | ||||||||||||
Accrued warranty | 890 | 657 | 924 | 1,863 | ||||||||||||
Depreciation and amortization | 2,627 | 1,105 | 2,354 | 2,024 | ||||||||||||
Other | 95 | 5 | 897 | 282 | ||||||||||||
Operating Lease Asset | 3,949 | - | ||||||||||||||
Deferred tax asset before valuation allowance | 32,128 | 27,966 | 37,831 | 29,674 | ||||||||||||
Valuation allowance | (31,751 | )* | (27,616 | ) | (32,350) | (27,865) |
| |||||||||
Deferred tax asset after valuation allowance | 377 | 350 | 5,481 | 1,809 | ||||||||||||
Deferred tax liability on accrued commissions 606 cost | (1,076) | (1,269) |
| |||||||||||||
Deferred tax liability on goodwill | (85 | ) | (103 | ) | (97) | (83) |
| |||||||||
Operating Lease Liability | (3,885) | - | ||||||||||||||
Net deferred tax asset | $ | 292 | $ | 247 | $ | 423 | $ | 457 | ||||||||
* Includes impact
The differences between the U.S. federal statutory income tax rates to the Company’s effective tax rate are as follows:
Year Ended December 31, | ||||||||||||
2016 | 2015* | 2014* | ||||||||||
U.S. federal statutory income tax rate | 34.00 | % | 34.00 | % | 34.00 | % | ||||||
State tax rate, net of federal benefit | (14.56 | ) | 1.94 | 1.62 | ||||||||
Benefit for research and development credit | (9.25 | ) | 15.92 | 7.24 | ||||||||
Stock-based compensation | 14.36 | (19.19 | ) | (5.56 | ) | |||||||
Foreign rate differential | (0.16 | ) | (1.47 | ) | (1.04 | ) | ||||||
True ups | (0.67 | ) | — | — | ||||||||
Other | 6.08 | (4.58 | ) | (1.78 | ) | |||||||
Valuation allowance | (24.57 | ) | (31.63 | ) | (36.58 | ) | ||||||
Effective tax rate | 5.23 | % | (5.01 | )% | (2.10 | )% | ||||||
*Certain items have changed for classification purposes.
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017* | ||||||||||
U.S. federal statutory income tax rate | 21.00% | 21.00% |
| 34.00% |
| |||||||
State tax rate | 2.82 | (4.95) | (5.59) | |||||||||
Meals and entertainment | (2.83) | (2.66) | 2.15 | |||||||||
Permanent differences | (2.58) | - | - | |||||||||
Stock-based compensation | 3.78 | 13.66 | (21.55) | |||||||||
SAB 118 Change in Estimate | - | (2.43) | - | |||||||||
Foreign rate differential | (0.34) | 0.11 | (0.50) | |||||||||
Other | (0.33) | (1.21) | 0.65 | |||||||||
General business credit | 8.14 | 4.31 | (2.72) | |||||||||
Change in Federal Tax Rate | - | - | 60.98 | |||||||||
Valuation allowance | (38.60) | (155.49) | (218.17) | |||||||||
Change in prior year reserves | 2.53 | - | - | |||||||||
Deferred true-up | 5.71 | - | - | |||||||||
Effective tax rate | (0.70)% |
| (127.66)% |
| (150.75)% |
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* | Otherbalancein2017 wasreclassifiedforconsistencywith2018 and 2019. |
The Company recognizes deferred tax assets for the expected future tax consequences
As of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. The Company recordsDecember 31, 2019, we recorded a valuation allowance to reduceof $32.4 million for the portion of the deferred tax assetsasset that we do not expect to their estimated realizable value, when it is more likely than not that it will not be able to generate sufficient future taxable income to realize the net carrying value.realized. The Company has recorded a full valuation allowance against its U.S. federalon the Company’s net deferred taxes increased by $4.5 million and state deferred tax assets due to its history of operating losses. In$20.6 million during the years ended December 31, 2016, 20152019, and 2014,2018, respectively. The changes in valuation allowance are primarily due to additional U.S. deferred tax assets and liabilities incurred in the respective year. The Company has $0.4 million of net deferred tax assets in foreign jurisdictions, which management believes are more-likely-than-not to be fully realized given the expectation of future earnings in these jurisdictions. We continue to monitor the realizability of the U.S. deferred tax assets taking into account multiple factors, including the results of operations and magnitude of excess tax deductions for stock-based compensation. We intend to continue maintaining a full valuation allowance on our U.S. deferred tax assets until there wasis sufficient evidence to support the reversal of all or some portion of these allowances. Release of all, or a net increase inportion, of the valuation allowance would result in the recognition of $4.1 million, $1.6 million,certain deferred tax assets and $3.3 million, respectively.a decrease to income tax expense for the period the release is recorded.
As ofAt December 31, 2016,2019, the Company had cumulativeapproximately $60.1 million and $31.3 million of federal and state net operating loss carry-forwards forcarryforwards, respectively, available to offset future taxable income. The federal and state income tax reporting purposesnet operating loss carryforwards, if not utilized will generally begin to expire in 2029 through 2038. $18.4 million of approximately $42.0 million and $21.8 million, respectively. Thetotal federal net operating loss carry-forwards if not utilized will begin to expire beginning in 2029 through the year 2035 and the state net operating loss carry-forwards if not utilized will expire beginning in 2029 through the year 2035. The Company maintained a valuation allowance against these net operating loss carry-forwards as ofcarryforwards were generated post December 31, 2016.
As of2017 and have no expiration. At December 31, 2016,2019, the Company had research and development tax credits foravailable to offset federal, California and Massachusetts tax liabilities in the amount of $6.6 million, $8.1 million and $0.3 million, respectively. Federal credits will begin to expire in 2024, California state tax credits have no expiration, and Massachusetts tax credits begin to expire in 2021.
Federal and state income tax purposes of approximately $5.0 million and $6.2 million, respectively. The federal research and development tax credits if not utilized will expire beginning in 2024 through the year 2035. The state research and development creditslaws can be carried forward indefinitely, except for $268,000, which will expire beginning in 2020 through 2021. The Company maintained a valuation allowance against these tax credits as of December 31, 2016.
In March 2016, the FASB issued ASU No. 2016-09,Improvements to Employee Share-Based Payment Accountingas part of its simplification initiative, which involves several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classificationimpose substantial restrictions on the statementutilization of cash flows. The changes required by this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Prior to ASU 2016-09, tax benefits in excess of compensation cost (“windfalls”) were recorded in equity,net operating loss and tax deficiencies (“shortfalls”) were recordedcredit carry-forwards in equity to the extent of previous windfalls, and then to the income statement. While the simplification reduces some of the administrative complexities by eliminating the need to track a “windfall pool,” it increases the volatility of income tax expense. The ASU also removes the requirement to delay recognition of a windfall tax benefit until it reduces current taxes payable. Under the new guidance, the benefit is recorded when it arises, subject to normal valuation allowance considerations. Under the new guidance, entities are permitted to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated or recognized when they occur. Estimates of forfeitures are still required in certain circumstances, such as at the time of modificationevent of an award or issuance of a replacement award“ownership change,” as defined in a business combination.
In accordance with ASU 2016-09, the Company decided to early adopt ASU 2016-09 in the fourth quarter of 2016 with effect from the beginning of 2016, and:
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The utilization of NOL carryforwards and tax credits may be subject to a substantial annual limitation due to the ownership change limitations provided by Section 382 of the U.S. Internal Revenue Code (“IRC”), and similar state provisions. The annual limitation may result in the expiration of NOL carryforwards and tax credits before utilization. The Company completed an IRC Section 382 analysis through December 31, 2016 andCode. We have determined that there were no significant limitations tolimitation would be placed on the utilization of NOL or tax credit carryforwards. As such, the NOLour net operating loss and tax credit carryforwards presented are not expectedcarry-forwards due to expire unutilized, unless there is a futureprior ownership change as determined by Section 382 of the IRC.changes.
UndistributedNo deferred tax liabilities for foreign withholding taxes have been recorded relating to the earnings of the Company’sour foreign subsidiaries at December 31, 2016 and 2015 were approximately $3.1 million and $2.8 million, respectively, andsince all such earnings are consideredintended to be indefinitely reinvested and, accordingly, no provision for federal and state income taxes has been provided thereon. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability would be reduced by any foreign income taxes previously paid on these earnings. Because of the availability of U.S. foreign tax credits, the determinationreinvested. The amount of the unrecognized deferred tax liability onassociated with these earnings is not practicable.immaterial.
Uncertain Tax Positions
The Company establishes reserves for uncertain tax positions based on 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 taxesperforms a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related interest and penalties due for potential adjustmentsappeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that may result from examinationsis more than 50% likely of open U.S. federal, state and foreign tax years. Ifbeing realized upon settlement.
Although the Company ultimately determinesbelieves it has adequately reserved for its uncertain tax positions, no assurance can be given that paymentthe final tax outcome of these amounts arematters will not more-likely-than-not,be different. The Company adjusts these reserves in light of changing facts and circumstances, such as the Company will reverse the liability and recognizeclosing of a tax benefit duringaudit or the period in whichrefinement of an estimate. To the Company makesextent that the determination. The Companyfinal tax outcome of these matters is different than the amounts recorded, such differences will record an additional charge inimpact the Company’s provision for income taxes in the period in which the Company determines that the recorded tax liabilitysuch determination is less than the Company expects the ultimate assessment to be.made. The Company’s policy is to include interest and penalties related to gross unrecognized tax benefits within the provision for income taxes.taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest and penalties.
The Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2005 through 20162019 tax years generally remain subject to examination by U.S., federal and California state tax authorities due to the Company’s net operating loss and credit carryforwards. For significant foreign jurisdictions, the 2011 through 20162018 tax years generally remain subject to examination by their respective tax authorities.
The following table summarizes the activity related to the Company’s gross unrecognized tax benefits in December 31, 20142017 to December 31, 20162019 (in thousands):
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2019 | 2018 | 2017 | |||||||||||||||||||
Balance at beginning of year | $ | 651 | $ | 597 | $ | 535 | $ | 1,563 | $ | 1,519 | $ | 707 | ||||||||||||
Decreases related to prior year tax positions | (291) | (70 | ) | 643 | ||||||||||||||||||||
Increases related to prior year tax positions | — | — | — | 25 | - | - | ||||||||||||||||||
Increases related to current year tax positions | 56 | 54 | 62 | 129 | 114 | 169 | ||||||||||||||||||
Decreases related to lapsing of statute of limitations | — | — | — | |||||||||||||||||||||
Balance at end of year | $ | 707 | $ | 651 | $ | 597 | $ | 1,426 | $ | 1,563 | $ | 1,519 | ||||||||||||
TheIt is the Company’s total unrecognizedpolicy to recognize interest and penalties related to income tax benefits and accrued interest that, if recognized, would affect its effectivematters in income tax rate at December 31, 2016 and 2015, were approximately $82,000 and $78,000, respectively.expense. As of December 31, 2016 and 2015,2019, the Company had accrued approximately $49,000interest and $45,000 for paymentpenalties of interest, respectively. Interest included in the provision for income taxes was not significant in all the periods presented. The Company has not accrued any penalties$58,000 related to its uncertain tax positions as it believes that it is more likely than not that there will not be any assessment of penalties. The Company expects that the amount of unrecognized tax benefits will not materially change within the next 12 months.positions.
NOTE7— 8—NETINCOME (LOSS) PER SHARE
Basic net income (loss)loss per share is computed using the weighted-average number of shares outstanding during the period. In periods of net income, diluted shares outstanding include the dilutive effect of in-the-money equity awards (stock options, restrictedRSUs, PSUs and employee stock units and performance stock units)purchase plan contributions), which is calculated based on the average share price for each fiscal period using the treasury stock method. Under
In accordance with ASC 260 (Earnings per Share), the assumed proceeds under the treasury stock method include the amountaverage unrecognized compensation expense of in-the money stock options and restricted stock units. This results in the employee must pay forassumed buyback of additional shares, thereby reducing the dilutive impact of equity award, and the amount of compensation cost for future service that the Company has not yet recognized, are all assumed to be used to repurchase shares. awards.
Diluted earnings per share is the same as basic earnings per share for the periods in which the Company had a net loss because the inclusion of outstanding common stock equivalents would be anti-dilutive.
The following table sets forth the computation of basic and diluted net income (loss) and the weighted average number of weightedshares used in computing basic and diluted net income (loss) per share (in thousands, except per share data):
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Numerator: | ||||||||||||
Net income (loss) (in thousands) | $ | (12,348) | $ | (30,770) | $ | 29,993 | ||||||
Denominator: | ||||||||||||
Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic | 14,096 | 13,771 | 13,873 | |||||||||
Dilutive effect of incremental shares and share equivalents | - | - | 855 | |||||||||
Weighted average shares of common stock outstanding used in computing net income (loss) per share, diluted | 14,096 | 13,771 | 14,728 | |||||||||
Net loss per share: | ||||||||||||
Net income (loss) per share, basic | $ | (0.88) | $ | (2.23) | $ | 2.16 | ||||||
Net income (loss) per share, diluted | $ | (0.88) | $ | (2.23) | $ | 2.04 | ||||||
The following numbers of shares outstanding, prior to the application of the treasury stock method, were excluded from the computation of diluted net income (loss)loss per common share for the yearsperiod presented because including them would have had an anti-dilutive effect (in thousands):
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2019 | 2018 | 2017 | |||||||||||||||||||
Options to purchase common stock | 220 | 2,575 | 3,489 | 417 | 664 | 42 | ||||||||||||||||||
Restricted stock units | 24 | 296 | 213 | 559 | 432 | 9 | ||||||||||||||||||
Employee stock purchase plan shares | — | 93 | 86 | 111 | 133 | - | ||||||||||||||||||
Performance stock units | — | 24 | 37 | 178 | 43 | - | ||||||||||||||||||
Total | 244 | 2,988 | 3,825 | 1,265 | 1,272 | 51 | ||||||||||||||||||
NOTE8—9—DEFINEDCONTRIBUTIONPLAN
In the U.S., the Company has an employee savings plan (“401(k) Plan”) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Eligible employees may make voluntary contributions to the 401(k) Plan up to 100% of their annual compensation, subject to statutory annual limitations. In 2016, 20152019, 2018 and 2014,2017, the Company made discretionary contributions under the 401(k) Plan of $262,000, $244,000$0.4 million, $0.4 million and $211,000,$0.3 million, respectively.
For the Company’s Japanese subsidiary, a discretionary employee retirement plan has been established. In addition, for some of the Company’s other foreign subsidiaries, the Company deposits funds with insurance companies, third-party trustees, or into government-managed accounts consistent with the requirements of local laws. The Company has fully funded or accrued for its obligations as of December 31, 2016,2019, and the related expense for each of the three years then ended was not significant.
NOTE9— 10—SEGMENT INFORMATION AND REVENUE BYGEOGRAPY GEOGRAPHY AND PRODUCTS
OperatingSegment reporting is based on the “management approach,” following the method that management organizes the company’s reportable segments are identified as components of an enterprise aboutfor which separate discrete financial information is made available for evaluationto, and evaluated regularly by, the chief operating decision maker or decision-making group, in making decisions how to allocateallocating resources and assessin assessing performance. The Company’s chief operating decision maker as defined under the FASB’s ASC 280 guidance,("CODM") is a combination of theits Chief Executive Officer ("CEO"), who makes decisions on allocating resources and in assessing performance. The CEO reviews the Executive Vice PresidentCompany's consolidated results as one operating segment. In making operating decisions, the CEO primarily considers consolidated financial information, accompanied by disaggregated information about revenues by geography and Chief Financial Officer. To date,product. All of the Company’s chief decision maker has viewedprincipal operations and decision-making functions are located in the U.S. The Company’s CEO views its operations, managedmanages its business, and useduses one measurement of profitability for the one operating segment –- which sells aesthetic medical equipment and services, and distributes skincare products, to qualified medical practitioners. Substantially all of the Company’s long-lived assets are located in the U.S.
The following table summarizespresents a summary of revenue by geographic region, based ongeography for the location of the customer,year ended December 31, 2019, 2018 and by product category2017 (in thousands):
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2019 | 2018 | 2017 | |||||||||||||||||||
Revenue mix by geography: | ||||||||||||||||||||||||
United States | $ | 65,513 | $ | 48,916 | $ | 35,494 | $ | 106,243 | $ | 101,862 | $ | 94,581 | ||||||||||||
Japan | 14,727 | 11,504 | 13,328 | 24,142 | 17,819 | 17,264 | ||||||||||||||||||
Asia, excluding Japan | 13,445 | 15,596 | 11,023 | 16,110 | 15,467 | 13,719 | ||||||||||||||||||
Europe | 7,539 | 7,728 | 7,792 | 10,596 | 8,875 | 8,317 | ||||||||||||||||||
Rest of the world | 16,832 | 11,017 | 10,501 | 24,621 | 18,697 | 17,612 | ||||||||||||||||||
Consolidated total | $ | 118,056 | $ | 94,761 | $ | 78,138 | ||||||||||||||||||
Total Consolidated revenue | $ | 181,712 | $ | 162,720 | $ | 151,493 | ||||||||||||||||||
Revenue mix by product category: | ||||||||||||||||||||||||
Products | $ | 92,721 | $ | 71,223 | $ | 53,106 | ||||||||||||||||||
Hand Piece Refills | 2,498 | 2,910 | 3,714 | |||||||||||||||||||||
Systems | $ | 140,478 | $ | 132,595 | $ | 125,883 | ||||||||||||||||||
Consumables | 9,648 | 4,162 | 2,435 | |||||||||||||||||||||
Skincare | 3,809 | 2,889 | 3,479 | 8,512 | 5,778 | 4,342 | ||||||||||||||||||
Total product revenue | 99,028 | 77,022 | 60,299 | 158,638 | 142,535 | 132,660 | ||||||||||||||||||
Service | 19,028 | 17,739 | 17,839 | 23,074 | 20,185 | 18,833 | ||||||||||||||||||
Consolidated total | $ | 118,056 | $ | 94,761 | $ | 78,138 | ||||||||||||||||||
Total Consolidated revenue | $ | 181,712 | $ | 162,720 | $ | 151,493 | ||||||||||||||||||
NOTE10— 11– COMMITMENTS AND CONTINGENCIES
LEASES
The Company is a party to certain operating and finance leases for vehicles, office space and storages facilities. The Company’s material operating leases consist of office space, as well as storage facilities and finance leases are made up automobiles. The Company’s leases generally have remaining terms of 1 to 10 years, some of which include options to renew the leases for up to 5 years. The Company leases space for operations in the United States, Japan, Belgium, France and Spain. In addition to the above facility leases, the Company also routinely leases automobiles for certain sales and field service employees under finance leases.
The Company determines if a contract contains a lease at inception. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, the Company estimates the incremental secured borrowing rates corresponding to the maturities of the leases. The Company based the rate estimates on prevailing financial market conditions, credit analysis, and management judgment.
The Company recognizes expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce the Company’s right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.
Below is supplemental balance sheet information related to leases (in thousands):
Assets | Classification | December 31, 2019 | |||
Right-of-use assets | Operating lease right-of-use assets | $ | 7,702 | ||
Finance lease | Property and equipment, net* | 1,008 | |||
Total leased assets | $ | 8,710 | |||
*Finance lease assets included in Property and equipment, net.
Liabilities | Classification | December 31, 2019 | |||
Operating lease liabilities | |||||
Operating lease liabilities, current | Operating lease liabilities | $ | 2,800 | ||
Operating lease liabilities , non-current | Operating lease liabilities, net of current portion | 5,112 | |||
Total operating lease liabilities | $ | 7,912 | |||
Finance lease liabilities | |||||
Finance lease liabilities, current | Accrued liabilities | $ | 541 | ||
Finance lease liabilities, non-current | Other long-term liabilities | 578 | |||
Total finance lease liabilities | $ | 1,119 | |||
Lease costs during the twelve months ended December 31, 2019:
Finance lease cost | Amortization expense | $ | 704 | ||
Finance lease cost | Interest for finance lease | 88 | |||
Operating lease cost | Operating lease expense | 2,892 |
Cash paid for amounts included in the measurement of lease liabilities during the twelve months ended December 31, 2019 were as follows:
Operating cash flow | Finance lease | $ | 88 | ||
Financing cash flow | Finance lease | 649 | |||
Operating cash flow | Operating lease | 2,820 |
Maturities of lease liabilities
Maturities of lease liabilities were as follows as of December 31, 2019 (in thousands):
Operating leases | ||||
2020 | $ | 2,868 | ||
2021 | 2,613 | |||
2022 | 2,821 | |||
2023 | 326 | |||
2024 | 26 | |||
Total lease payments | 8,654 | |||
Less: imputed interest | 742 | |||
Present value of lease liabilities | $ | 7,912 | ||
Facility
Vehicle Leases
As of December 31, 2016,2019, the Company was committed to minimum lease payments for vehicles leased under long-term non-cancelable finance leases as follows (in thousands):
Operating leases | ||||
2020 | $ | 543 | ||
2021 | 412 | |||
2022 | 253 | |||
2023 | 4 | |||
Total lease payments | 1,212 | |||
Less: imputed interest | 93 | |||
Present value of lease liabilities | $ | 1,119 | ||
As previously disclosed in the Company’s 2018 Annual Report on Form 10-K and under the previous lease accounting, maturities of lease liabilities were as follows as of December 31, 2018:
Facility Leases
As of December 31, 2018, 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):
Year Ending December 31, | Amount | |||||||
2017 | $ | 1,912 | ||||||
2018 | 189 | |||||||
Operating leases | ||||||||
2019 | 35 | $ | 3,011 | |||||
2020 | 5 | 2,939 | ||||||
2021 | 2,564 | |||||||
2022 | 2,495 | |||||||
2023 and thereafter | 214 | |||||||
Future minimum rental payments | $ | 2,141 | $ | 11,223 | ||||
Gross rent expense recognized in the years ended December 31, 2016, 2015 and 2014 was $1.6 million, $1.5 million and $1.5 million, respectively.Vehicle Leases – U.S.
Vehicle Leases
As of December 31, 2016,2018, the Company was committed to minimum lease payments for vehicles leased under long-term non-cancelable capital leases as follows (in thousands):
Year Ending December 31, | Amount | |||||||
2017 | $ | 367 | ||||||
2018 | 354 | |||||||
Operating leases | ||||||||
2019 | 266 | $ | 576 | |||||
2020 | 6 | 287 | ||||||
2021 | 152 | |||||||
Future minimum lease payments | $ | 993 | $ | 1,015 | ||||
Weighted-average remaining lease term and discount rate, as of December 31, 2019, were as follows:
Lease Term and Discount Rate | ||||
Weighted-average remaining lease term (years) | ||||
Operating leases | 3.0 | |||
Finance leases | 2.5 | |||
Weighted-average discount rate | ||||
Operating leases | 4.4 | % | ||
Finance leases | 5.6 | % |
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.an agreed-upon period. These forecasted time-horizonsperiods can vary among different suppliers. The Company’sAlthough open inventory purchase commitments with its suppliers were not significant at December 31, 2016.orders are considered enforceable and legally binding, the terms generally allow the Company the option to cancel, reschedule, and adjust their requirements based on the Company's business needs prior to the delivery of goods or performance of services.
Indemnifications
In the normal course of the Company’s 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 and certain key employees. 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.
Contingencies
Litigation and Litigation Settlements
The Company is named from time to time as a party to other legal proceedings, product liability, commercial disputes, employee disputes, and contractual lawsuits in the normalordinary course of business.The Company routinely assesses the likelihoodCompany’s business. These matters are subject to many uncertainties and outcomes that are not predictable and that may not be known for extended periods of any adverse judgments or outcomestime. A liability and related charge are recorded to earnings in the Company’s consolidated financial statements for legal matters and claims, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after analysis of each known issue, historical experience, whether it is more likely than not that the Company shall incur a loss, and whetherwhen the loss is estimable. considered probable and the amount can be reasonably estimated. The assessment is re-evaluated each accounting period and is based on all available information, including discussion with outside legal counsel. If a reasonable estimate of a known or probable loss cannot be made, but a range of probable losses can be estimated, the low-end of the range of losses is recognized if no amount within the range is a better estimate than any other. If a material loss is reasonably possible, but not probable and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. The Company expenses legal fees as incurred.
In November 2019, the Company’s former Executive Vice President and CFO Sandra A. Gardiner announced her resignation from the Company. On November 7, 2019, Ms. Gardiner filed an arbitration demand against the Company in connection with the terms of her employment and resignation. The Company intends to defend the matter vigorously. At this time, the Company has not determined that an award to Ms. Gardiner is probable and does not expect any settlement to be material.
As of December 31, 20162019 and 2015,December 31, 2018, the Company had accrued $138,000Nil and $110,000,$171,000, respectively related to various pending commercial and product liability and contractual lawsuits. The Company does not believe that a material loss in excess of accrued amounts is reasonably possible.
NOTE 12—DEBT
Loan and Security Agreement
On May 30, 2018, the Company and Wells Fargo Bank, N.A. (“Wells Fargo”) entered into a Loan and Security Agreement (the “Original Revolving Line of Credit”) in the original principal amount of $25 million. The Original Revolving Line of Credit terminates on May 30, 2021.
Covenants
The Original Revolving Line of Credit contained financial and other covenants as well as the maintenance of a leverage ratio not to exceed 2.5 to 1.0 and a Trailing Twelve Month ("TTM") adjusted EBITDA of not less than $10 million. A violation of any of the covenants could result in a default under the Original Revolving Line of Credit that would permit the lenders to restrict the Company’s ability to further access the revolving line of credit for loans and letters of credit and require the immediate repayment of any outstanding loans under the Loan and Security Agreement.
During the third quarter of 2018, the Company received notice that it was in violation of certain financial covenants in the Original Revolving Line of Credit and entered into discussions with Wells Fargo to amend and revise certain terms of the Original Revolving Line of Credit.
On or about November 2, 2018, the Company entered into a First Amendment and Waiver to the Loan and Security Agreement with Wells Fargo (the “First Amended Revolving Line of Credit”). The First Amended Revolving Line of Credit provided for a principal amount of $15 million, with the ability to request an additional $10 million, and a waiver of any existing defaults under the Original Revolving Line of Credit as long as the Company is in compliance with the terms of the First Amended Revolving Line of Credit.
On or about March 11, 2019, the Company entered into a Second Amendment and Waiver to the Loan and Security Agreement with Wells Fargo (the “Second Amended Revolving Line of Credit”). The Second Amended Revolving Line of Credit requires the Company to maintain a minimum cash balance of $15 million at Wells Fargo, but removes all other covenants so long as no money is drawn on the line of credit. The Company may draw down on the line of credit at the time it reaches and maintains TTM adjusted EBITDA of not less than $10 million, and a leverage ratio not to exceed 2.5 to 1.0.
A violation of any of the covenants could result in a default under the Second Amended Revolving Line of Credit that would permit the lenders to restrict the Company’s ability to further access the revolving line of credit for loans and letters of credit and require the immediate repayment of any outstanding loans under the Second Amended Revolving Line of Credit.
As of December 31, 2019, the Company had not drawn on the Original Revolving Line of Credit and the Company is in compliance with all financial covenants of the Original Revolving Line of Credit, as amended by the First Amended Revolving Line of Credit and the Second Amended Revolving Line of Credit.
NOTE 11—13—RELATED PARTIES
In 2016,2018 and 2017, the Company paid $182,100$63,000 and $196,000, respectively, to a former board member Mr. Dave Gollnick a founder and director of the Company, for product development, clinical sales and marketing support services. In addition, as of December 31, 2016, the Company granted himMr. Gollnick 6,500 RSUs with a grant-date fair value of $87,100, that vest over three (3) years at the rate of 33.33% per year on each of the three anniversaries from the vesting commencement date of October 28, 2016, subject to him continuing to provide consulting and/ or board services to the Company. The Company’s Audit Committee approved the extension of Mr. Gollnick’s consulting agreement through December 31, 2018 at the rate of $200 per hour for a maximum of 40 hours per week.
The Company signed an agreement with a real estate firm, T3 Advisors, effective September 2017, to assist the Company in real estate related issues (including strategic planning and search for new facilities). One of T3 Advisors’ Senior Vice President "Mr. Austin Barrett" is related to Greg Barrett – a member of the Company’s board of directors. In 2018 and 2017, the Company incurred $192,000 and $38,000 respectively, related to T3 Advisors Real estate brokerage services
NOTE 12—14—SUBSEQUENT EVENTSEVENTS
The Company evaluates events or transactions that occur after the balance sheet date through to the date which the financial statements are issued, for potential recognition or disclosure in its consolidated financial statements in accordance with Subsequent Events.
On February 8, 2016, the Company’s Board of Directors approved the expansion of its Stock Repurchase Program by an additional $10 million. In the year ended DecemberJanuary 31, 2016,2020, the Company repurchased 455,311 sharesfiled a lawsuit in Federal District Court in California against Lutronic Aesthetics, Inc. and any involved corporate affiliates (“Lutronic”). The lawsuit claims include misappropriation of its common stocktrade secrets in violation of the Uniform Trade Secrets Act and the Defend Trade Secrets Act; Racketeer Influenced and Corrupt Organizations Act ("RICO") violations; tortious interference with contractual relations and with prospective economic advantage; unfair competition as defined by the California Business and Professions Code; and aiding and abetting the breach of fiduciary duties and/or duty of loyalty owed by certain former Company employees. On January 28, 2020, the Company initiated legal action against certain former employees for approximately $4.9 million. Asmultiple claims involving violations of December 31, 2016, there remained an additional $5.1 millionthese former employees’ explicit agreements with the Company, as well as violations of duties owed to be purchased. On February 13, 2017 the Company’s BoardCompany under California law.
In both of Directors approvedthese actions, the expansionCompany seeks compensatory damages, equitable relief and punitive damages, as well as fees and costs related to the legal action. At this time, the Company is unable to predict the associated costs, expenses and timeline associated therewith due to the early state of its Stock Repurchase Program by an additional $5 million. The Company plans to make the repurchases from time to time through open market transactions at prevailing prices and/or through privately-negotiated transactions, and/or through a pre-arranged Rule 10b5-1 trading plan.this matter.
SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)
(Inthousands,exceptpershareamounts)
Quarter ended: | Dec. 31, 2016 | Sept. 30, 2016 | June 30, 2016 | March 31, 2016 | Dec. 31, 2015 | Sept. 30, 2015 | June 30, 2015 | March 31, 2015 | Dec. 31, 2019 | Sept. 30, 2019 | June 30, 2019 | March 31, 2019 | Dec. 31, 2018 | Sept. 30, 2018 | June 30, 2018 | March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
Net revenue | $ | 37,875 | $ | 30,281 | $ | 27,477 | $ | 22,423 | $ | 30,042 | $ | 23,085 | $ | 22,563 | $ | 19,071 | $ | 51,795 | $ | 46,117 | $ | 47,774 | $ | 36,026 | $ | 45,469 | $ | 40,573 | $ | 42,553 | $ | 34,125 | ||||||||||||||||||||||||||||||||
Cost of revenue | 15,962 | 12,538 | 11,472 | 9,949 | 12,145 | 9,594 | 9,687 | 9,052 | 23,005 | 19,884 | 21,943 | 18,717 | 26,683 | 18,688 | 20,176 | 16,791 | ||||||||||||||||||||||||||||||||||||||||||||||||
Gross profit | 21,913 | 17,743 | 16,005 | 12,474 | 17,897 | 13,491 | 12,876 | 10,019 | 28,790 | 26,233 | 25,831 | 17,309 | 18,786 | 21,885 | 22,377 | 17,334 | ||||||||||||||||||||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales and marketing | 11,561 | 10,574 | 10,712 | 8,716 | 9,899 | 8,790 | 9,066 | 8,187 | 20,323 | 17,691 | 16,992 | 16,104 | 15,318 | 14,479 | 15,535 | 13,088 | ||||||||||||||||||||||||||||||||||||||||||||||||
Research and development | 2,897 | 2,914 | 2,712 | 2,709 | 2,812 | 2,748 | 2,728 | 2,445 | 4,463 | 3,643 | 3,273 | 3,706 | 3,464 | 3,244 | 4,095 | 3,556 | ||||||||||||||||||||||||||||||||||||||||||||||||
General and administrative | 3,010 | 2,716 | 3,997 | 3,220 | 3,189 | 2,937 | 3,014 | 2,989 | 5,933 | 7,308 | 5,267 | 5,525 | 5,494 | 5,160 | 4,902 | 5,439 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total operating expenses | 17,468 | 16,204 | 17,421 | 14,645 | 15,900 | 14,475 | 14,808 | 13,621 | 30,719 | 28,642 | 25,532 | 25,335 | 24,276 | 22,883 | 24,532 | 22,083 | ||||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) from operations | 4,445 | 1,539 | (1,416 | ) | (2,171 | ) | 1,997 | (984 | ) | (1,932 | ) | (3,602 | ) | (1,929 | ) | (2,409 | ) | 299 | (8,026 | ) | (5,490 | ) | (998 | ) | (2,155 | ) | (4,749 | ) | ||||||||||||||||||||||||||||||||||||
Interest and other income, net | (204 | ) | 166 | 217 | 144 | 105 | 84 | 96 | 8 | (20 | ) | (146 | ) | 46 | (79 | ) | (44 | ) | (49 | ) | (129 | ) | 98 | |||||||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | 4,241 | 1,705 | (1,199 | ) | (2,027 | ) | 2,102 | (900 | ) | (1,836 | ) | (3,594 | ) | (1,949 | ) | (2,555 | ) | 345 | (8,105 | ) | (5,534 | ) | (1,047 | ) | (2,284 | ) | (4,651 | ) | ||||||||||||||||||||||||||||||||||||
Income tax provision | 28 | 61 | 30 | 24 | 52 | 57 | 53 | 50 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax provision (benefit) | 139 | 73 | (243 | ) | 115 | 20,760 | (174 | ) | (712 | ) | (2,619 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 4,213 | $ | 1,644 | $ | (1,229 | ) | $ | (2,051 | ) | $ | 2,050 | $ | (957 | ) | $ | (1,889 | ) | $ | (3,644 | ) | $ | (2,088 | ) | $ | (2,628 | ) | $ | 588 | $ | (8,220 | ) | $ | (26,293 | ) | $ | (873 | ) | $ | (1,572 | ) | $ | (2,032 | ) | ||||||||||||||||||||
Net income (loss) per share—basic | $ | 0.31 | $ | 0.12 | $ | (0.09 | ) | $ | (0.16 | ) | $ | 0.16 | $ | (0.07 | ) | $ | (0.13 | ) | $ | (0.25 | ) | |||||||||||||||||||||||||||||||||||||||||||
Net income (loss) per share—diluted | $ | 0.30 | $ | 0.12 | $ | (0.09 | ) | $ | (0.16 | ) | $ | 0.15 | $ | (0.07 | ) | $ | (0.13 | ) | $ | (0.25 | ) | |||||||||||||||||||||||||||||||||||||||||||
Net income (loss) per share-basic | $ | (0.15 | ) | $ | (0.19 | ) | $ | 0.04 | $ | (0.59 | ) | $ | (1.89 | ) | $ | (0.06 | ) | $ | (0.11 | ) | $ | (0.15 | ) | |||||||||||||||||||||||||||||||||||||||||
Net income (loss) per share-diluted | $ | (0.15 | ) | $ | (0.19 | ) | $ | 0.04 | $ | (0.59 | ) | $ | (1.89 | ) | $ | (0.06 | ) | $ | (0.11 | ) | $ | (0.15 | ) | |||||||||||||||||||||||||||||||||||||||||
Weighted average number of shares used in per share calculations: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basic | 13,591 | 13,163 | 13,131 | 13,010 | 12,978 | 13,827 | 14,441 | 14,611 | 14,261 | 14,182 | 14,086 | 14,017 | 13,932 | 13,851 | 13,709 | 13,587 | ||||||||||||||||||||||||||||||||||||||||||||||||
Diluted | 14,201 | 13,544 | 13,131 | 13,010 | 13,591 | 13,827 | 14,441 | 14,611 | 14,261 | 14,182 | 14,356 | 14,017 | 13,932 | 13,851 | 13,709 | 13,587 | ||||||||||||||||||||||||||||||||||||||||||||||||
SCHEDULE II
CUTERA, INC.
VALUATIONAND QUALIFYING ACCOUNTS
(in thousands)
For the Years ANDQUALIFYINGACCOUNTS
(inthousands)
FortheYearsEndedDecember31,20169, 2015 and 20142018and2017
Balance at Beginning of Year | Additions | Deductions | Balance at End of Year | |||||||||||||
Deferred tax assets valuation allowance | ||||||||||||||||
Year ended December 31, 2019 | $ | 27,865 | $ | 7,396 | $ | 2,911 | $ | 32,350 | ||||||||
Year ended December 31, 2018 | $ | 7,242 | $ | 22,770 | $ | 2,147 | $ | 27,865 | ||||||||
Year ended December 31, 2017 | $ | 31,751 | $ | 617 | $ | 25,126 | $ | 7,242 | ||||||||
Balance at Beginning of Year | Additions | Deductions | Balance at End of Year | |||||||||||||
Deferred tax assets valuation allowance | ||||||||||||||||
Year ended December 31, 2016 | $ | 27,616 | $ | 6,755 | $ | 2,620 | $ | 31,751 | ||||||||
Year ended December 31, 2015 | $ | 26,046 | $ | 3,327 | $ | 1,757 | $ | 27,616 | ||||||||
Year ended December 31, 2014 | $ | 22,762 | $ | 3,780 | $ | 496 | $ | 26,046 | ||||||||
Balance at Beginning of Year | Additions | Deductions | Balance at End of Year | |||||||||||||
Allowance for doubtful accounts receivable | ||||||||||||||||
Year ended December 31, 2016 | $ | 4 | $ | 21 | $ | 4 | $ | 21 | ||||||||
Year ended December 31, 2015 | $ | — | $ | 4 | $ | — | $ | 4 | ||||||||
Year ended December 31, 2014 | $ | 19 | $ | 4 | $ | 23 | $ | — | ||||||||
Balance at Beginning of Year | Additions | Deductions | Balance at End of Year | |||||||||||||
Allowance for doubtful accounts receivable | ||||||||||||||||
Year ended December 31, 2019 | $ | 1,257 | 1,361 | 1,264 | 1,354 | |||||||||||
Year ended December 31, 2018 | $ | 9 | $ | 1,880 | $ | 632 | $ | 1,257 | ||||||||
Year ended December 31, 2017 | $ | 21 | $ | 14 | $ | 26 | $ | 9 | ||||||||
ITEM9. | CHANGESINANDDISAGREEMENTSWITHACCOUNTANTSONACCOUNTINGANDFINANCIALDISCLOSURE |
None.
ITEM 9A. | CONTROLSAND PROCEDURES |
EvaluationConclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on the foregoing, the Company’s Chief Executive Officer (“CEO”) and Interim Chief Financial Officer (“CFO”), concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
Attached as exhibits to this Annual Report are certifications of the Company’s Chief Executive Officer (“CEO”)CEO and Chief Financial Officer (“CFO”),CFO, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (Exchange Act). This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
The Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Exchange Act) (Disclosure Controls) as of the end of the period covered by this Report required by Exchange Act Rules 13a-15(b) or 15d-15(b). The controls evaluation was conducted under the supervision and with the participation of the Company’s management, including the CEO and CFO. Based on this evaluation, the CEO and our CFO have concluded that as of the end of the period covered by this report the Company’s disclosure controls and procedures were effective at a reasonable assurance level.
Definition of DisclosureInherent Limitations Over Internal Controls
Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in the Company’s reports filed under the Exchange Act, such as this Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. The Company’s Disclosure Controls include components of its internal control over financial reporting which consists of control processesis designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the U.S. To the extent that components of theGAAP. The Company’s internal control over financial reporting are included within its Disclosure Controls, they are included in the scope of the Company’s annual controls evaluation.includes those policies and procedures that:
Management’s Report on Internal Control over Financial Reporting
● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; |
● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and |
● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. |
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation ofManagement, including the Company’s management, including the CEO and CFO, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on criteria established in the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2016. The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by BDO USA LLP, an Independent Registered Public Accounting Firm, as stated in their report, which is included herein.
Limitations on the Effectiveness of Controls
The Company’s management, including the CEO and CFO, does not expect that the Company’s disclosureinternal controls or internal control over financial reporting will prevent or detect all errorerrors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system’s objectives will besystem are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management overrideAlso, any evaluation of the controls. The design of any systemeffectiveness of controls is based in part on certain assumptions aboutfuture periods are subject to the likelihood of future events, and there can be no assurancerisk that any design will succeed in achieving its stated goals under all potential future conditions. Over time,those internal controls may become inadequate because of changes in business conditions, or deterioration inthat the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraudprocedures may occur and not be detected.deteriorate.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of the Company’s management, including Company’s CEO and CFO, the Company conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of the Company’s assessment under the framework in the Internal Control-Integrated Framework (2013), the Company’s management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2019.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, has been audited by an independent registered public accounting firm, as stated in their attestation report, which is included in their annual report under “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of Cutera, Inc.
We have audited Cutera, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established inInternal Control – Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Cutera, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Cutera, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Cutera, Inc.' as of December 31, 2016 and 2015 and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the years ended December 31, 2016, 2015 and 2014 and our report dated March 15, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
San Jose, California
March 15, 2017
ITEM 9B. | OTHERINFORMATION |
The Company has established that the 2017 Annual Meeting of Stockholders will be held at its principal executive offices located at 3240 Bayshore Blvd., Brisbane, CA 94005-1021 on June 14, 2017 at 10:00 a.m. and the record date for the purposes of voting in that meeting shall be April 17, 2017.None
PARTIII
Certain information required by Part III is omitted from this Annual Reportreport on Form 10-K because we will file a Definitiveand is incorporated herein by reference to the Company’s definitive Proxy Statement (the “Proxy Statement”) for our 2017the Company’s next Annual Meeting of Stockholders with(the “Proxy Statement”), which we intend to file pursuant to Regulation 14A of the Securities and Exchange CommissionAct of 1934, as amended, within 120 days after the end of our fiscal year ended December 31, 2016.2019.
ITEM 10. | DIRECTORS, |
The information required by this Itemitem concerning the Company’s directors and corporate governance is incorporated herein by reference to the information set forth in the section titled “Directors and Corporate Governance” in the Company’s Proxy Statement. Information required by this item concerning the Company’s executive officers is incorporated by reference to the information set forth in the section entitled “Information about our Executive Officers” in the Company’s Proxy Statement. Information regarding the Company’s Section 16 reporting compliance and code of business conduct and ethics is incorporated by reference to the information set forth in the section entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in the Company’s Proxy Statement.
ITEM 11. | EXECUTIVECOMPENSATION |
The information required by this Itemitem regarding executive compensation is incorporated herein by reference to the information set forth in the sections titled “Executive Compensation” and “Compensation for Directors” in the Company’s Proxy Statement.
ITEM 12. | SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Itemitem regarding security ownership of certain beneficial owners and management is incorporated herein by reference to the information set forth in the section titled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in the Company’s Proxy Statement.
ITEM 13. | CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
In 2016, we paid $182,100 to Mr. Dave, a founder and director of the Company, for product development, clinical sales and marketing support services. In addition, we granted him 6,500 restricted stock units with a grant-date fair value of $87,100, that vest over three (3) years at the rate of 33.33% per year on each of the three anniversaries from the vesting commencement date of October 28, 2016, subject to him continuing to provide consulting and/ or board services to us. The Audit Committee approved the extension of Mr. Gollnick’s consulting agreement through December 31, 2018 at the rate of $200 per hour for a maximum of 40 hours per week.
Further information required by this item regarding certain relationships and related transactions and director independence is discussed in detail and incorporated herein by reference to the information set forth in the sections titled “Certain Relationships and Related Transactions” and “Corporate Governance“Directors and Board Matters”Corporate Governance” in our 2017the Company’s Proxy Statement.
ITEM 14. | PRINCIPALACCOUNTING FEES AND SERVICES |
The information required by this Itemitem regarding principal accountant fees and services is incorporated herein by reference to the information set forth in the section titled “Principal Accountant Fees and Services” in the Company’s Proxy Statement.
PARTIV
ITEM15. | EXHIBITS, |
The following documents are filed as part of this Annual Report on Form 10-K
(1) |
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(2) | The following financial statement schedule |
Schedule II: Valuation and Qualifying Accounts.
(3) | Exhibits. |
Exhibit No. | Description | |
3.1 |
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4.1 |
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10.1 |
10.2 |
10.3 |
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10.7 |
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| 10.13 |
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| 10.15 |
10.16 |
10.17 |
10.18 |
10.19 |
10.20 |
10.21 |
10.22 |
10.23 |
10.24 |
23.1 | Consent of Independent Registered Public Accounting |
24.1 |
| 31.1 |
31.2 |
| 32.1 | ||
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| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
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ITEM 16. FORM 10-K SUMMARY
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of Thethe Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the city of Brisbane, State of California, on the 15ththe16th day of March, 2017.2020.
CUTERA, INC. | ||||
By: | /s/ DAVID H. MOWRY | |||
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PowerofAttorney
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James A. Reinstein,David H. Mowry, and Fuad Ahmad, and each of them, as his attorney-in-fact,or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him or her and in his or her name, place, and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorney-in-fact,attorneys-in-fact and agents, and any of them or histheir substitute or substitutes, may lawfully do or cause to be done by virtue thereof.hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date |
/s/ |
| March |
/s/ |
| March |
/s/ J. DANIEL PLANTS J. Daniel Plants | Chairman of the Board of Directors | March |
| 16, 2020 | ||
/s/ DAVID B. APFELBERG David B. Apfelberg |
Director | March |
/s/ GREGORY A. BARRETT Gregory A. Barrett |
Director | March |
/s/ |
Director | March |
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/s/ TIM O’SHEA Tim O’Shea |
Director | March |
/s/ |
Director | March |
| 102 |