Note 7. Revenue

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 14% of the Company’s total revenue for the three months ended March 31,2018.

The Company's system sale arrangements generally 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, which is if a product or service is separately identifiable from other items in the bundled package, and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The Company’s system sale arrangements include 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 and marketing 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 contract services and training, the Company satisfies all of the performance obligations at a point in time. System, system accessories (hand pieces), training, and services are also sold on a stand-alone basis, and related performance obligations are satisfied over time as the services are performed. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation, on a relative basis using its standalone selling price. The stated contract value is the transaction price to be allocated to the separate performance obligations.

Nature of Products and Services

Systems

System revenue represents the sale of a system or an upgrade of an existing system. A system consists of a console that incorporates a universal graphic user interface, a laser and or other energy based module, control system software and high voltage 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 the Company’s Pearl and Pearl Fractional applications instead of within the console.

The Company considers system and software license as one performance obligation. The system and the software are highly interrelated and interdependent. Both are necessary for the system to work as designed. The customer cannot benefit from the system without the license to the embedded software. 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 us with a source of additional Systems revenue.

The Company considers set-up or installation an immaterial promise as set-up or installation for systems other than enlighten system takes only a short time. The related costs to complete set-up or installation are immaterial to the Company. The enlighten system includes the related software license as one performance obligation and the calibration or installation service as a separate performance obligation since a third party could perform this service.

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. The Company recognizes revenue on cash basis for system sales to other international direct end-customer sales that have not been credit approved, and after satisfying all remaining obligations on the agreement. For systems sold through credit approved distributors, revenue is recognized at the time of shipment. The Company’s system arrangements generally do not provide a right of return. The Company provides a standard one-year warranty coverage for all systems sold to end-customers, to cover parts and service, and offer extended service plans that vary by the type of product and the level of service desired.

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 because of the volume of purchases by these distributors.

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Skincare products

The Company sells third-party manufactured skincare products in Japan. The Company purchases and inventories these third-party skincare products from the manufacturers and sells them 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. The Company warrants that the cosmeceuticals will be free of significant defects in workmanship and materials for 90 days from shipment. Skincare products are typically sold in a separate contract as the only performance obligations. The Company recognizes revenue for skincare products at a point in time, generally upon shipment or delivery.

Consumables (Other accessories)

The Company treats its customer’s purchase of replacement Titan and truSculpt 3D hand pieces as “consumable” revenue, which provides the Company with a source of recurring revenue from existing customers. The Company’s recently launched Juliet and Secret RF products have single use disposable tips which need to be replaced after every treatment. Sale of these consumable tips further enhance the Company’s recurring revenue stream. Hand piece refills of the Company’s legacy truSculpt product are includedin the standard warranty and service contract offerings for this product.

Extended contract services

The Company offers post-warranty services to its customers through extended service contracts that cover preventive maintenance and or replacement parts and labor, or by direct billing for detachable hand piece replacements, parts and labor. These post-warranty services serve as additional sources of recurring revenue from the Company’s installed product base. Service revenue is recognized over time as the customers benefit from the service throughout the service period. Revenue related to services performed on a time-and-materials basis is recognized when performed. For the Company's performance obligations recognized over time, revenue is generally recognized using a time-based measure of progress reflecting generally consistent efforts to satisfy those performance obligations throughout the arrangement term.

Training

Sales of system to customers include training on the system to be provided within 90 days of purchase. The Company considers training as a separate performance obligation as customers can benefit from readily available resources due to the fact that the customer already has the system. If training occurred before the system was delivered, the customer would not have readily available resources and could not benefit from the training. Training is also sold separately from the system. This occurs when customers hire new employees and want the Company to train them on a system the customer already owns. The training is useful in providing an enhanced approach to using the System, so the training also has benefit. The Company recognizes revenue for training over time as the training is provided. As training is not required for customers to use the systems, the Company concludes that it has no effect on the Company’s evaluation of when the risks and rewards of ownership transfer to customers.

Customer Marketing Support

In North America, the Company offers marketing and consulting phone support to its customers who purchase its truSculpt 3D system. This includes a unique marketing program and a customizable practice support kit to help customers inform, inspire and engage their current and prospective patients. This is a personalized program designed to help customers jump-start their practice with truSculpt 3D. It includes a business model and marketing training performed remotely with ongoing phone consultations for six months from date of purchase.

The Company considers this a separate performance obligation, and allocates and recognizes revenue over the six-month term of support. The Company determines the standalone selling price based on cost plus a margin.

Significant Judgments

More judgments and estimates are required under Topic 606 than were required under the previous revenue recognition guidance, Topic 605. Due to the nature of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.

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The Company’s contract agreement with customers for system purchases includes the delivery of the system and a nonexclusive, nontransferable license to use such software and/or firmware in connection with customer’s use of the product. The tangible product, including the embedded software, are delivered to the customer at the time of sale. In some circumstances, 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, the following multiple-element arrangement exists: a tangible product delivered to the customer at the inception of the revenue arrangement; and a service contract for delivery of services to the customer over a contractually stated period of time defined in the service contract.

Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. The system and the software are highly interrelated and interdependent. Both are necessary for the system to work as designed. The customer cannot benefit from one without the other. The Company has concluded that systems and the related software license are one performance obligation. The enlighten system includes the related software license as one performance obligation and the calibration/installation service as a separate performance obligation. The calibration/installation is a separate performance obligation for the enlighten system because a knowledgeable third-party could perform this service.

The Company has however concluded that set-up or installation for all other systems (excluding the enlighten system) is perfunctory as the set-up or installation for systems other than enlighten take only a short time, the related costs to complete set-up or installation are immaterial.

Sales of Products to customers include training on the products to be provided within 90 days of purchase. Training is considered a separate performance obligation.

Extended warranty, if included in the agreement, requires the Company to provide extended warranty services for one, two or three years. The Company considers extended warranty as a separate performance obligation.

Skincare products are typically sold in a separate contract as the only performance obligations.

Judgment is required to determine the standalone selling price ("SSP") for each distinct performance obligation. The Company rarely licenses or sells products on a standalone basis, so the Company estimates SSPs for each performance obligation as follows:

enlighten system: SSP is estimated from observable inputs, if available, and if not available, the Company estimates the SSP using cost plus margin.

All other systems: For systems other than truSculpt 3D with marketing program, and other marketing support, SSP is estimated from observable inputs, if available, and if not available, the Company estimates the SSP using cost plus margin. The Company estimates SSP for truSculpt 3D with marketing support using cost plus margin approach; for truSculpt 3D without marketing support, the Company estimates SSP from observable inputs, if available, and if not available, SSP is estimated using cost plus margin.

Training: SSP is estimated from observable inputs when sold on a standalone basis.

Extended warranty: SSP is estimated from observable inputs when sold on a standalone basis (by customer type).

Marketing program (excluding third-party marketing support, which is not considered a performance obligation.): SSP is estimated based on cost plus a margin.

Skincare products: Skincare products are the only performance obligation in the contracts. All product is delivered at the same time, therefore the Company does not have to allocate the transaction price for skincare products.

The Company allocates transaction price and discount to each performance obligation (i.e., system, extended warranty, training) based on the relative SSP of the performance obligation in the contract.

The Company recognizes revenue for all products (systems, accessories, etc.) at a point in time. The software license embedded in the system is a functional license giving the customer the right to use the software as it exists at the time of shipment. Therefore, revenue related to the software license is recognized at a point in time – upon shipment, and the software license does not change the timing of revenue recognition for the system. The Company concluded that it should recognize revenue for extended warranty over the service period on a straight-line basis. The Company also concluded that it should recognize the revenue for the marketing support (excluding third-party marketing) over the committed period for the service. The Company plans to use the invoice practical expedient for services provided on a time and materials basis (i.e., recognize the revenue for services as the time and materials are incurred and invoiced to the customer).

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The Company will combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for the contracts as a single contract. If a group of agreements are so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether the separate agreements should be accounted for separately or as, in substance, a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.

The Company is required to estimate the total consideration expected to be received from contracts with customers. In limited circumstances, the consideration expected to be received is variable based on the specific terms of the contract or based on the Company’s expectations of the term of the contract. Generally, the Company has not experienced significant returns or refunds to customers. These estimates require significant judgment and the change in these estimates could have an effect on its results of operations during the periods involved.

Contract balance

The Company’s service contracts include an upfront payment for the one, two or three-year contract terms. The timing of receipt of payment and timing of performance of the services create timing differences that result in contract liabilities (deferred revenue) on the Company’s condensed consolidated balance sheet. The advance payments under these contracts are recorded in deferred revenue (contract liability), and the Company recognizes the revenue on a straight-line basis over the period of the applicable contract. Contracted but unsatisfied performance obligations were approximately $11.0 million as of March 31, 2018, of which the Company expects to recognize approximately 80% of the revenue over the next 12 months and the remainder thereafter.

Deferred Sales Commissions

The Company records a contract asset for the incremental costs of obtaining a contract with a customer, including direct sales commissions that are earned upon execution of the contract for its post-warranty service contracts that are capitalized and amortized over the estimated customer relationship period.

The Company uses the portfolio method to capitalize and recognize the amortization expense related to these capitalized costs related to initial contracts and renewals and such expense is recognized over a period associated with the revenue of the related portfolio, which is generally two to three years for the Company’s product and service arrangements. The Company determined that it would apply the one-year practical expedient to sales commissions on systems sales and training because the revenue for these items would be recognized at a point in time (systems) or shortly after the sale is completed (training).

Incremental costs related to initial contracts and renewals are amortized over the same period because the commissions paid on both the initial contract and renewals are commensurate with one another. Total capitalized costs as of March 31,2018 were $4.9 million and are included in other assets in the Company’s condensed consolidated balance sheet. Amortization of these assets was $0.4 million during the three months ended March 31, 2018 and is included in sales and marketing expense in the Company’s condensed consolidated income statement.

For the three months ended March 31, ~~2017,~~2018, our income tax benefit was ~~$118,000,~~$2,619,000, compared to a tax ~~expense~~benefit of ~~$24,000~~$118,000 in the same period in ~~2016.~~2017. In the three months ended March 31, ~~2017,~~2018, we calculated the provision for income taxes for interim reporting periods by applying an estimate of the "annual effective tax rate" for the full ~~fiscal~~ year to ordinary income or ~~loss.~~loss for the reporting period. Our income tax benefit for the three months ended March 31, 2017 relates primarily to U.S. alternative minimum taxes as we are able to utilize our net operating losses brought forward against our projected income for fiscal 2017. In addition, our income tax benefit for the three months ended March 31, 20172018 reflects a projected income tax expense for ~~our~~U.S. and non-U.S. ~~operations.~~operations resulting in an annual effective tax rate applied to the year-to-date ordinary loss. The income tax benefit includes excess tax benefits generated by stock deductions exercised or vested in the three months ended March 31, 2018.

For our income tax provision in the three months ended March 31, ~~2016,~~2017, the tax ~~expense~~benefit was primarily related to projected U.S. alternative minimum taxes and income taxes from non-U.S. operations. The income tax benefit resulted from applying the annual effective tax rate by the year-to-date ordinary loss. The projected income tax reflected utilization of ~~our non-U.S. operations as our U.S. operations were~~net operating loss carryforwards. However, the tax effect of such utilization was offset by a change in ~~a loss position and we had a 100%~~ valuation allowance ~~against them. We did not record a year-to-date tax benefit associated with~~for the ~~projected 2016 U.S. tax expense as of~~three months ended March 31, ~~2016 due to historical losses and uncertainties related to the projected income. We continue to maintain a 100% valuation allowance against our U.S. deferred tax assets in fiscal 2016 and~~ 2017.

Liquidity is the measurement of our ability to meet potential cash requirements, fund the planned expansion of our operations and acquire businesses. Our sources of cash include operations, stock option exercises, ~~Employee Stock Purchase Plan contributions,~~ and ~~the liquidation of marketable investments.~~employee stock purchases. We actively manage our cash usage and investment of liquid cash to ensure the maintenance of sufficient funds to meet our daily needs. The majority of our cash and investments are held in U.S. banks and our foreign subsidiaries maintain a limited amount of cash in their local banks to cover their short-term operating expenses.

~~Cash~~, ~~Cash Equivalents~~At March 31, 2018 and ~~Marketable Investments~~December 31, 2017, we had 40.3 million and $45.1 million of working capital, and our cash and cash equivalents and marketable investments totaled $23.9 and $35.9 million as of March 31, 2018 and December 31, 2017 respectively. Our combined cash and cash equivalents and marketable investments balance decreased by $11.9 million in the quarter end March 31, 2018 principally due to the settlement of Accrued liabilities, increased inventory purchases related to the increasing demand of our products, and an increase in investments in sales, service and other management headcount to facilitate continued revenue expansion. The following table summarizes our cash and cash equivalents and marketable investments:

The following table summarizes our cash, cash equivalents and marketable investments:

Net cash used in operating activities in the three months ended March 31, ~~2017~~2018 was ~~$3.8~~$10.0 million, which was due primarily to:

~~Net cash used in operating activities in the~~ ~~three months ended March 31, 2016 was $4.0 million, which was due primarily to:~~

We The Company generated net cash of ~~$3.3~~$8.6 million in our investing activities in the three months ended March 31, ~~2017,~~2018, which was attributable primarily to:

We ~~used net cash of $721,000 in our investing activities in the three months ended March 31, 2016, which was attributable primarily to:~~

Net cash used in financing activities was $1.8 million in the three months ended March 31, ~~2017,~~2018, which was primarily due to:

~~Net cash~~ ~~provided by financing activities was $162,000 in the three months ended March 31, 2016, which was primarily due to:~~

We had cash, cash equivalents, and marketable investments of ~~$48.4~~$24.0 million as of March 31, ~~2017.~~2018. For the first three months of ~~2017,~~2018, we financed our operations through the sales ~~and maturities~~ of marketable investments and cash from the sale of stock due to employees exercising their stock options. We believe ~~the~~that our existing ~~capital~~cash resources ~~including cash, cash equivalents and marketable investments of $48.4 million,~~ are sufficient to meet our ~~operating~~anticipated cash needs for working capital and capital ~~requirements~~expenditures for at least the next several ~~years, and enable us to repurchase the remaining $7.2 million of stock pursuant to our Share Repurchase Program.~~years.

~~Except for the recent trend of cash used to fund our operating activities,~~ purchase fixed assets and repurchase our common stock, we are unaware of any other known trends or any known demands, commitments, events or uncertainties, including collectability of our accounts receivable, that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way.

~~There have been~~During the three months ended March 31, 2018, there were no material ~~changes~~changes to our commitments and contingencies ~~from those disclosed~~described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in ~~our~~the Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, filed with the SEC on March ~~15, 2017.~~26, 2018.

A summary of the key market risks facing the Company is disclosed below. For a detailed discussion, please see our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, filed with the SEC on March ~~15, 2017.~~26, 2018.

~~Our exposure to interest rate risk relates primarily to our~~The Company holds cash equivalents as well as short-term and long-term fixed income securities. The Company’s investment portfolio ~~which~~ includes ~~primarily debt instruments of the U.S. Government~~fixed and ~~its agencies, municipal bonds, corporate debt securities~~ ~~and commercial paper.~~floating rate securities. Changes in interest rates could impact our anticipated interest income. Fixed rate securities may have their fair market value adversely impacted ~~if there is an increase~~due to fluctuations in interest ~~rates. While it is~~rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our ~~intent~~future investment income may fall short of expectation due to ~~hold these securities to maturity,~~changes in interest rates or we may suffer losses in principal if ~~for some reason we need~~forced to sell ~~a security that has~~securities which have declined in market value due to changes in interest ~~rates, then~~rates. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we ~~may suffer losses~~invest in ~~principal.~~debt instruments of the U.S. Government and its agencies and municipal bonds, high grade corporate bonds, commercial paper, CDs and money markets, and, by policy, restrict our exposure to any single type of investment or issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at a weighted average maturity of generally less than eighteen months. Based on discounted cash flow modeling with respect to our total investment portfolio as of March 31, ~~2017,~~2018, assuming a hypothetical increase in interest rates of one percentage point, ~~(or 100 basis points),~~ the fair value of our total investment portfolio would ~~have~~ potentially ~~declined~~decline by approximately ~~$163,000.~~$66,000.

The Company does not believe that inflation has had a material effect on our business, financial condition, or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations.

The Company generates revenue in Japanese Yen, Euros, Australian Dollars, Canadian Dollars, British Pounds and Swiss Francs. Additionally, a portion of our operating expenses and assets and liabilities are denominated in each of these currencies. Therefore, fluctuations in these currencies against the U.S. dollar could materially and adversely affect our results of operations upon translation of The Company’s revenue denominated in these currencies, as well as the remeasurement of our international subsidiaries’ financial statements into U.S. dollars

~~We do~~The Company has historically not ~~actively hedge~~engaged in hedging activities relating to our ~~exposure to currency rate fluctuations.~~ ~~Although a significant proportion of our revenue and costs are denominated in U.S. Dollars, we are exposed to~~ foreign currency ~~fluctuations in countries where~~denominated transactions, given we have a ~~direct operation. The three major currencies that we have exposure~~natural hedge resulting from our foreign cash receipts being utilized to ~~and have assets and liabilities denominated in~~fund our respective local ~~currencies in, are Japanese Yen, Euro and Australian Dollar.~~currency expenses

An evaluation as of March 31, 2018 was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our “disclosure controls and procedures.” Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the “Exchange Act,” defines “disclosure controls and procedures” as controls and other procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act 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 its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at March 31, 2018.

Attached as exhibits to this Quarterly Report are certifications of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“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.

~~We conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined~~Changes 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 our management, including the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that as of the end of the period covered by this report the disclosure controls and procedures were effective at a reasonable assurance level.Internal Control over Financial Reporting

~~Disclosure Controls are controls and procedures designed to reasonably assure~~ ~~that information required to be disclosed~~There were no changes in our 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 our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our Disclosure Controls include components of internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the U.S. To the extent that components of our internal control over financial reporting during the three-month period ended March 31, 2018 that have materially affected, or are ~~included within Disclosure Controls, they are included in the scope of~~reasonably likely to materially affect, our ~~annual controls evaluation.~~internal control over financial reporting.

~~Our~~ ~~management, including the CEO and CFO, does not expect that our disclosure controls or internal control over financial reporting will prevent all error and all fraud.~~ A control system, no matter how well ~~designed~~conceived and operated, can provide only reasonable, not absolute, assurance that the ~~control system’s~~ objectives ~~will be met. Further,~~of 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.~~met. Because of ~~the~~ inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, ~~and instances of fraud,~~ if any, within a company have been detected. ~~These inherent limitations include~~Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the ~~realities that judgments in decision making can be faulty~~objectives of our disclosure control system are met. As set forth above, our Chief Executive Officer 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 override~~Chief Financial Officer have concluded, based on their evaluation as of the ~~controls. The design~~end of ~~any system of~~the period covered by this report, that our disclosure controls ~~is based in part on certain assumptions about the likelihood of future events,~~ and ~~there can be no~~procedures were effective to provide reasonable assurance that ~~any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because~~the objectives of ~~changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective~~our disclosure control system ~~misstatements due to error or fraud may occur and not be detected.~~were met.

~~There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.~~

~~We are~~ ~~named from~~From time to time, asThe Company may be involved in legal and administrative proceedings and claims of various types. For a ~~party~~description of The Company’s material pending legal and regulatory proceedings and settlements refer to ~~product liability~~Note 12 to the Company’s consolidated financial statements entitled “Litigation and ~~contractual lawsuits~~Related Matters,” in the ~~normal course of business. We routinely assess~~Annual Report on Form 10-K for the ~~likelihood of any adverse judgments or outcomes related to legal matters and claims, as well as ranges of probable losses. A determination of~~year ended December 31, 2017, filed with 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 we shall incur a loss, and whether the loss is estimable. We are not currently a party to any material legal proceedings.SEC on March 26, 2018.

~~We operate in a rapidly changing economic and~~ ~~technological environment that presents numerous~~The Company’s business faces many risks. Any of the risks many of which are driven by factors that we cannot control or predict. Our business, financial condition and results of operations may be impacted by a number of factors. In addition to the factors discussed elsewherereferenced in this ~~report,~~Form 10-Q or the ~~following risks and uncertainties~~Company’s other SEC filings could ~~materially harm~~have a material impact on our business and consolidated financial ~~condition~~position or results of operations, including causing our 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.operations. Additional risks and uncertainties not presently known to us or that we currently ~~deem~~believe to be immaterial may also ~~may materially adversely affect us~~impair our business operations.

There have been no material changes in ~~future periods. You~~the risk factors set forth in Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. For detailed discussion of risk factors that should ~~carefully consider these risks and uncertainties before investing~~be understood by any investor contemplating investment in our ~~securities.~~

If our product mix does not improve towards more favorable higher margin products, or if our cost of revenue does not decrease as a percentage of our revenue, our gross margins and operating margins may be adversely ~~impacted, it could have a material adverse effect on our profitability, cash flow from operations, assets and on our~~ stock, ~~price.~~

~~Our gross margin (revenue less cost of revenue) declined~~please refer to ~~53% in the three months ended March 31, 2017, compared to 56% in~~ the same period in 2016. Our gross margin is impacted by the revenue that we generate and the costs incurred to generate the revenue. Our first quarter 2017 revenue was negatively impacted by our product mix towards a higher percentage of revenue being sourced from our ~~enlighten~~ ~~and~~ ~~excel HR~~ ~~products, that have lower gross margins than our legacy products. Our gross margin from the~~ ~~enlighten~~ ~~product was adversely impacted by the sale of discounted~~ ~~enlighten III~~ ~~products and upgrades due in part to market seeding during the early launch phase of this new product. In addition, our initial cost of production and warranty of the~~ ~~enlighten III~~ ~~product were higher than expected.~~

~~In order to improve our gross margins for our~~ ~~enlighten~~ products, we need to be able to increase the average selling prices ("ASPs"), as well as reduce its cost of production and servicing. While we are in the process of implementing initiatives to improve our ~~enlighten III~~ ~~product margin, there can be no assurance given that we will be successful in doing so.~~

~~Our future gross margin may also be affected by a number of other factors including, the competitive market environment in which we operate, a decrease in ASPs achieved for our product sales, a shift~~“Part I. Item 1A. Risk Factors” in our ~~product mix towards~~ ~~products with lower ASPs or lower margins, or a decrease~~2017 Form 10-K and elsewhere in our ASPs as a result of bundling products to achieve higher revenue, or a decrease in the number of applications per system purchased by customers. In addition, our cost of revenue may also be adversely impacted by various factors such as increased expenses associated with the repair of defective products covered by our warranty program, utilization of our relatively fixed manufacturing costs, a shift in our product mix towards products that have a higher cost of manufacturing, and obsolescence of our inventory.

~~If our product mix towards higher margin products does not improve, or if our ASPs do not improve, or if our cost of revenue increases by a greater percentage than our revenue, or if we~~ are not able to reduce expenses in the event of a decline in revenue, we may continue to experience a decline in our gross margins, compared to the same period in the prior year, which could have a material adverse effect on our profitability, cash flow from operations, assets and on our stock price.

~~Although we had profitable third and fourth quarters in 2016, we gave financial guidance that we expect to be in a loss position in the first quarter of 2017 but profitable for the full year of 2017~~, there can be no assurance that we will be able to achieve or maintain profitability for the remainder of fiscal 2017. Given our recent operating history of 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 rely heavily on our sales professionals to market and sell our products worldwide. If we are unable to hire, effectively train, manage, improve the productivity of, and retain our sales professionals, our business will be harmed, which would impair our future revenue and profitability.~~

~~Our success largely depends on our ability to hire, train, manage and improve the productivity levels of our sales professionals worldwide. Because of~~ our focus on non-core practitioners in the past, several of our 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 very strong.

We have experienced direct sales employee and sales management turnover in North America, Japan, and Europe. Competition for sales professionals who are familiar and trained to sell in the aesthetic equipment market continues to be strong. As a result, we have lost some of our sales people to our competitors. Our 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, some of those sales professionals have left our company for jobs that they perceive to be better opportunities, both within and outside of the aesthetic industry. However, we have also hired a record number of new sales people, including several from our competitors. Several of our sales employees and sales management have been 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 our industry, we have recruited sales professionals from outside the industry. Sales professionals from outside the industry take longer to train and to become familiar with our 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 our sales force.

~~We train our existing and recently recruited sales professionals to better understand our existing and new product te~~chnologies and how they can be positioned against our competitors’ products. These initiatives are intended to improve the productivity of our sales professionals and our revenue and profitability. It takes time for the sales professionals to become productive following their training and there can be no assurance that the recently recruited sales professionals will be adequately trained in a timely manner, or that our direct sales productivity will improve, or that we will not experience significant levels of attrition in the future.

Measures we implement in an effort to recruit, retain, train and manage our sales professionals, strengthen their relationships with core market physicians, and improve their productivity may not be successful and may instead contribute to instability in our operations, additional departures from our sales organization, or further reduce our revenue and harm our business. If we are not able to improve the productivity and retention of our North American and international sales professionals, then our total revenue, profitability and stock price may be adversely impacted.this Form 10-Q.

~~The aesthetic equipment market is characterized by rapid innovation. To compete effectively, we must develop and/or acquire new products, market them successfully, and identify new markets for our technology.~~

~~We have created products to apply our technology to body contouring, hair removal, treatment~~

Table of ~~veins, tattoo removal, and skin rejuvenation, including~~ ~~the 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 launched~~ ~~enlighten~~~~, a dual wavelength, dual pulse duration tattoo removal and benign pigmented lesions treatment system featuring picosecond technology~~. To grow in the future, we 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 our product offerings, we must, among other things:~~
● ~~Develop and acquire new products that either add to or significantly improve our current product offerings;~~
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~~Convince our existing and prospective customers that our product offerings are an attractive revenue-generating addition to their practice;~~
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~~Sell our product offerings to a broad customer base;~~
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~~Identify new markets and alternative applications for our technology;~~
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~~Protect our existing and future products with defensible intellectual~~ ~~property; and~~
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~~Satisfy and maintain all regulatory requirements for commercialization.~~
~~Historically, product introductions have been a significant component of our financial performance. To be successful in the aesthetics industry, we need to continue to i~~nnovate. Our business strategy has therefore been based, in part, on our expectation that we will continue to increase our product offerings. We need to continue to devote substantial research and development resources to make new product introductions, which can be costly and time consuming to our organization.
~~We also believe that, to increase revenue from sales of new products, we need to continue to develop our clinical support, further expand and nurture relationships with industry thought leaders and~~ increase market awareness of the benefits of our new products. However, even with a significant investment in research and development, we may be unable to continue to develop, acquire or effectively launch and market new products and technologies regularly, or at all. If we fail to successfully commercialize new products, our business may be harmed.
~~While we attempt to protect our 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 expect that any competitive advantage we may enjoy from current and future innovations may diminish over time as companies successfully respond to our, or create their own, innovations. Consequently, we believe that we will have to continuously innovate and improve our products and technology to compete successfully. If we are unable to innovate successfully, our products could become obsolete and our revenue could decline as our customers and prospects purchase our competitors’ products.
~~Demand for our products in any of our markets could be weakened by several factors, including:~~
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~~Inability to develop and market our products to the core market specialties of dermatologists~~ ~~and plastic surgeons;~~
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~~Poor financial performance of market segments that attempt to introduce aesthetic procedures to their businesses;~~
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~~The inability to differentiate our products from those of our competitors;~~
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~~Reduced patient demand for elective aesthetic~~ ~~procedures;~~
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~~Failure to build and maintain relationships with opinion leaders within the various market segments;~~
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~~An increase in malpractice lawsuits that result in higher insurance costs; and~~
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~~The lack of credit financing, or an increase in the cost of borrowing, for some of our potential customers.~~
~~If we do not achieve anticipated demand for our products, there could be a material adverse effect on our total revenue, profitability, employee retention and stock price.~~

We depend on skilled and experienced personnel to operate our global business effectively. Changes to management or the inability to recruit, hire, train and retain qualified 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 any 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 any of our officers or other key employees. Any of our officers and other key employees may terminate their employment at any time and their knowledge of our business and industry would be difficult to replace. We do not have a succession plan in place for each of our officers and key employees. In addition, we do not maintain “key person” life insurance policies covering any of our employees.
We recently hired a new Chief Executive Officer and President (“CEO”), who also is on our Board of Directors. His prior experience is primarily with medical device companies, but not within the aesthetics industry specifically. In addition, he has never been a public company CEO. Recently 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, our strategic focus, operations or business plans. We can give no assurances that we will be able to properly manage any such shift in focus, or that any changes to our 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 our business or may increase the likelihood of turnover in key officers and employees. Our success depends in part on having a successful leadership team. If we cannot effectively manage the leadership transitions and management changes, it could make it more difficult to successfully operate our business and pursue our business goals. We cannot ensure that we will be able to retain the services of any members of our executive officers or other key employees. If we do not succeed in attracting well-qualified employees, retaining and motivating existing employees or integrating new executives and employees, our business could be materially and adversely affected.
Our ability to retain our skilled labor force and our success in attracting and hiring new skilled employees are critical factors in determining whether we will be successful in the future. We may not be able to meet our future hiring needs 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. Failure to attract, train and retain personnel, particularly technical and sales and marketing personnel, would materially harm our ability to compete effectively and grow our business.
~~Our search for a replacement Executive Vice President and Chief Financial Officer (“~~CFO”), may cause uncertainty regarding the future of our operations, impact employee hiring and retention, increase the volatility in our stock price, and adversely impact our revenue, operating results, and financial condition.
On April 17, 2017, Our Executive Vice President and Chief Financial Officer notified the Company that he plans to leave the Company. However, he plans to remain in his current role and assist with an orderly transition for up to three months following the appointment of his successor. While the Company has initiated a search to identify a replacement for him, any related speculation and uncertainty in connection with the search and the appointment of a replacement CFO may cause or result in:
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~~Disruption of our business or distraction of certain employees and management;~~
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~~Difficulty recruiting, hiring, motivating and retaining other talented and skilled personnel, including a replacement CFO; and~~
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~~Increased concern amongst our investors, which may increase our stock price volatility.~~
If we are unable to mitigate these or other potential risks related to the uncertainty caused by the planned departure and replacement of our CFO, it may disrupt our business or adversely impact our revenue, operating results, and financial condition. Further, there can be no assurance that we will be able to attract a qualified new CFO who has the desired qualifications to lead our Company or that we can hire a replacement CFO on acceptable terms.
The lease for our corporate headquarters and manufacturing facility in Brisbane, California, U.S.A., expires on December 31, 2017. We have identified a new facility in the same general vicinity of our current facility and our Board of Directors has approved the lease for this new facility. Even though the new facility is within 40 miles of our current facility, we may experience loss of key employees, incur relocation costs and capital expenditures for furniture, fixtures and equipmen
We occupy office space in Brisbane, California, in a facility leased from a commercial landlord, with a lease that expires on December 31, 2017. There is significant demand for leased facilities in the San Francisco Bay area and leasing costs have increased significantly over the last few years. We have identified a new facility in the same general vicinity of current facility and our Board of Directors has approved the lease for the new facility.
Even though the new facility is within 40 miles of our current facility, we may experience loss of key employees, incur relocation costs and capital expenditures relating to leasehold improvements, furniture, fixtures and equipment. Further, we may incur related expenses, such as those associated with regulatory approvals or clearances to manufacture our products. While we plan to arrange for an orderly move and relocation to the new facility, we may encounter disruptions of our manufacturing and operations, may not be able to hire replacement employees on a timely basis, and incur significant costs related to the move, all of which could have an adverse effect on our financial condition, results of operations and cash flow.
~~Macroeconomic political and market conditions, and catastrophic events may adversely affect our business, results of operations, financial condition and stock price.~~
~~Our business is influenced by a range of factors that are beyond~~ ~~our control, including:~~
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~~General macro-economic and business conditions in our key markets of North America, Japan, Asia (excluding Japan), the Middle East, Europe and Australia;~~
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~~The lack of credit financing, or an increase in the cost of borrowing, for some of our potential customers due to increasing interest rates.~~
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~~The overall demand for our products by the core market specialties of dermatologists and plastic surgeons;~~

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~~The timing and success of new product introductions by us or our competitors or any~~ ~~other change in the competitive landscape for non-surgical aesthetic procedures, including consolidation among our competitors;~~
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~~The level of awareness of aesthetic procedures and the market adoption of our products;~~
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~~Changes in our pricing policies or those of our competitors;~~
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~~Governmental budgetary constraints or shifts in government spending priorities;~~
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~~General political developments, both domestic and in our foreign markets, including economic and political uncertainty caused by the recent election of a new U.S. president;~~
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~~Natural disasters;~~
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~~Currency exchange rate fluctuations; and~~
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~~Any trade restrictions or higher import taxes that may be imposed by foreign countries against products sold internationally by U.S. companies.~~
~~Macroeconomic~~ developments, like global recessions and financial crises could negatively affect our business, operating results or financial condition which, in turn, could adversely affect our 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 our 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 an~~d 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 our results of operations and financial condition, including our revenue growth and profitability.
~~Macroeconomic declines, negative political developments, adverse market conditions and catastrophic events may cause a decline in our revenue, negatively affect our operating results, adversely affect our cash flow and could result in a decline in our stock price.~~
~~The price of our common stock has increased by over~~ 73~~% in the six months ended~~ ~~March~~31, 2017 and may fluctuate substantially due to several factors, some of which are discussed below. Further, we have a 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 our stock price.
~~The price of our common stock h~~as increased by over 73% in the six months ended March 31, 2017 due in part to our recent improved revenue and profitability performance, the acquisition 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 conclusion of the U.S. presidential election in November 2016 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 our relatively small public float, our 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 our common stock may have a greater impact on the trading price for our shares than would be the case if our public float were larger. The public market price of our 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 our common stock could also be affected by a number of other factors, including:~~
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~~Litigation surrounding executive compensation has increased.~~ If we are involved in a lawsuit related to compensation matters or any other matters not covered by our D&O insurance, there could be material expenses involved, fines, or remedial actions which could negatively affect our stock price;
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~~The general market conditions~~ ~~unrelated to our operating performance;~~
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~~Sales of large blocks of our common stock, including sales by our executive officers, directors and our large institutional investors;~~
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~~Quarterly variations in our, or our competitors’, results of operations;~~
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~~Actual or anticipated changes or fluctuations in our results of operations;~~
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~~Actual or anticipated changes in analysts’ estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ estimates;~~
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~~The announcement of new~~ ~~products, service enhancements, distributor relationships or acquisitions by us or our competitors;~~
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~~The announcement of the departure of a key employee or executive officer by us or our competitors;~~
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~~Regulatory developments or delays concerning our, or our~~ ~~competitors’ products; and~~
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~~The initiation of any other litigation by us or against us.~~

~~Actual or perceived instability and / or volatility in our stock price could reduce demand from potential buyers of our stock, thereby causing our 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 our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our 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 our management’s attention and resources from our business. This could have a material adverse effect on our business, results of operations and financial condition.
~~We may fail to meet our publicly announced guidance or other expectations about our business and future operating results,~~ ~~which would cause our stock price to decline.~~
~~We may continue to provide financial guidance about our business and future operating results. In developing this guidance, our management must make certain assumption~~s and judgments about our future operating performance, including projected hiring of sales professionals, continued growth of revenue in the aesthetic device market, continue to increase our market share, reduce costs of production of our recently introduced products, and continued stability of the macro-economic environment in our key markets. Furthermore, analysts and investors may develop and publish their own projections of our business, which may form a consensus about our future performance. Our business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of our control, and which could adversely affect our operations and operating results. Furthermore, if we make downward revisions of our previously announced guidance, or if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our common stock would decline.
~~To successfully~~ ~~market and sell our products internationally, we must address many issues that are unique to our international business.~~
~~International revenue is a material component of our business strategy, and represented 45% of our total revenue in 2016 compared to~~ 48% of our 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 depend on third-party distributors and a direct sales force to sell our products internationally, and if they underperform, we may be unable to increase or maintain our 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 have experienced significant turnover of our European sales team in the past. While we continue to have a direct sa~~les and service organization in France, Belgium, Spain, Switzerland and the United Kingdom, a significant portion of our European revenue is generated through our network of distributors. Though we continue to evaluate and replace non-performing distributors, and have recently brought greater focus on collaborating with our distributor partners, there can be no assurance given that these initiatives will result in improved European-sourced revenue or profitability in the future.
~~To grow our business, we~~ will need to improve productivity in current sales territories and expand into new territories. However, direct sales productivity may not improve and distributors may not accept our business or commit the necessary resources to market and sell our products to the level of our expectations. If we are not able to increase or maintain international revenue growth, our total revenue, profitability and stock price may be adversely impacted.
~~We believe, as we continue to manage our international operations and~~ ~~develop opportunities in additional international territories, our international revenue will be subject to a number of risks, including:~~
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~~Fluctuating foreign currency exchange rates;~~
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~~Difficulties in staffing and managing our foreign operations;~~
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~~Increased~~ ~~management, travel, infrastructure and legal compliance costs associated with having international operations in various countries;~~
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~~Political and economic uncertainty~~ around the world, such as the recent U.S. presidential election and the United Kingdom’s referendum in June 2016 in which voters approved an exit from the European Union, commonly referred to as “Brexit”;
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~~Compliance with multiple and changing foreign laws and regulations, including foreign certification and regulatory requirements and the risks and costs of non-compliance with such laws and regulations;~~
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~~Lengthy payment cycles and difficulty in collecting accounts receivable;~~

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~~Compliance with laws an~~d regulations for foreign operations, including the United States Foreign Corrupt Practices Act, the United Kingdom Bribery Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our offerings in certain foreign markets, and the risks and costs of non-compliance;
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~~Customs clearance and shipping delays;~~
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~~Lack of awareness of our brand in international markets;~~
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~~Preference for locally-produced products; and~~
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~~Reduced~~ ~~protection for intellectual property rights in some countries and practical difficulties of enforcing intellectual property and contract rights abroad.~~
~~If one or more of these risks were realized, it could require us to dedicate significant resources to remedy the situation; and if we were unsuccessful at finding a solution, we may not be able to sell our products in a particular market and, as a result, our revenue may decline.~~
~~In addition, compliance with laws and regulations applicable to our internati~~onal operations increases our cost of doing business in foreign jurisdictions. We 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 our business. In many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or United States regulations applicable to us. In addition, although we have implemented policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of our employees, contractors, distributors and agents will comply with these laws and policies. Violations of laws or key control policies by our 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 our offerings and could have a material adverse effect on our business operations and financial results.
~~To successfully market and sell third party products internationally, we must address many issues that are unique to the related distribution arrangements which could reduce our available cash reserves and negatively impact our profitability.~~
~~We have entered into distribution arrangements pursuant to which we utilize our sales force and distributors to sell products manufactured by other companies.~~ In Japan, we have a non-exclusive right to distribute a Q-switched laser product manufactured by a third party OEM. We also have 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.
Each of these distribution agreements presents its own unique risks and challenges. For example, to sell skincare products we need to invest in creating a sales structure that is experienced in the sale of such products and not in capital equipment. We need to commit resources to train our sales force, obtain regulatory licenses in Japan and develop new marketing materials to promote the sale of skincare products. In addition, the minimum commitments and other costs of distributing products manufactured by these companies may exceed the incremental revenue that we derive from the sale of their products, thereby negatively impacting our profitability and reducing our available cash reserves.
~~If we do not make the minimum~~ purchases required in the distribution contracts, or if the third party manufacturer revokes our distribution rights, we could lose the distribution rights of the products to physicians in Japan, which would adversely affect our future revenue, results of operations, cash flows and our stock price.
We offer credit terms to some qualified customers and also to leasing companies to finance the purchase of our products. In the event that any of these customers default on the amounts payable to us, our earning~~s may be adversely affected.~~
We generally offer credit terms of 30 to 90 days to qualified customers. In addition, from time to time, we offer certain key international distributors, with whom we have 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 distributor partners to have our products in stock and provide our products to customers on a timely basis. As of March 31, 2017, one international distributor partner accounted for 13% of our outstanding accounts receivable balance.
~~While we believe we have an adequate basis to ensure that we collect our accounts receivable, we cannot provide any assurance that the financial position of c~~ustomers to whom we have provided payment terms will not change adversely before we receive payment. In the event that there is a default by any of the customers to whom we have provided credit terms, we may recognize a bad debt charge in our general and administrative expenses. If this bad debt charge is material, it could negatively affect our future results of operations, cash flows and our stock price.

~~Any acquisitions that we make could result in operating difficulties, dilution, and other consequences that may adversely impact our business and results of operations.~~
~~While we from time to time evalu~~ate potential acquisitions of businesses, products and technologies, and anticipate continuing to make these evaluations, we have no present understandings, commitments or agreements with respect to any material acquisitions or collaborative projects We may not be able to identify appropriate acquisition candidates or strategic partners, or successfully negotiate, finance or integrate any businesses, products or technologies that we acquire.
~~We have limited experience as a team with acquiring companies a~~nd products. Furthermore, the integration of any acquisition and management of any collaborative project may divert management®€™s time and resources from our core business and disrupt our operations and we may incur significant legal, accounting and banking fees in connection with such a transaction. Acquisitions could diminish our 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 our 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.
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unantic~~ipated liabilities, and harm our business and our financial condition or results.~~
~~We are subject to fluctuations in the exchange rate of the U.S. Dollar and foreign currencies.~~
~~Fore~~ign 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 and stock price.
Our ability to effectively compete and generate additional revenue from new and existing products depends upon our ability to distinguish our company and our products from our competitors and their products, and to dev~~elop and effectively market new and existing products. Our success is dependent on many factors, including the following:~~
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~~Speed of new and innovative product development;~~
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~~Effective strategy and execution of new product launches;~~
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~~Identification and development of clinical support for new indications of our existing products;~~
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~~Product performance;~~
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~~Product pricing;~~
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~~Quality of customer support;~~
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~~Development of successful distribution channels, both domestically and internationally; and~~
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~~Intellectual property protection.~~
To compete effectively, we have to demonstrate that our new and existing products are attractive alternatives to other devices and treatments, by differentiating our 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 our competitors have newer or different products and more established customer relationships than we do, which could inhibit our market penetration efforts. For example, we have encountered, and expect to continue to encounter, situations where, due to pre-existing relationships, potential customers decided to purchase additional products from our competitors. Potential customers also may need to recoup the cost of products that they have already purchased from our competitors and may decide not to purchase our products, or to delay such purchases. If we are unable to increase our market penetration or compete effectively, our revenue and profitability will be adversely impacted.
~~We compete against companies that offer alternative solutions to our products, or have greater resources, a larger installed base of~~customers and broader product offerings than ours. In addition, increased consolidation in our industry may lead to increased competition. If we are not able to effectively compete with these companies, it may harm our business.
~~Our industry is subject to intense competition. Our products compete against conventional non-energy-based treatments, such as electro~~lysis, Botox and collagen injections, chemical peels, microdermabrasion and sclerotherapy. Our products also compete against laser and other energy-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. Further, other companies could introduce new products that are in direct competition with our products. Competition with these companies could result in reduced selling prices, reduced profit margins and loss of market share, any of which would harm our 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 increase~~d downward pressure on our product prices. For example, in February 2017, Allergan announced its intent to acquire of Zeltiq and Hologic announced its intent to acquire Cynosure, 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 the newly-combined entities have greater financial resources, deeper sales channels and greater pricing flexibility than we do. Rumored or actual consolidation of our partners and competitors will likely cause uncertainty and disruption to our business and can cause our stock price to fluctuate.
~~The energy-based aesthetic market faces competition from non-energy-based medical products, such as Botox and colla~~gen injections. Other alternatives to the use of our products include electrolysis, a procedure involving the application of electric current to eliminate hair follicles, and chemical peels. We 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 our products, practitioner demand for our products could be inhibited, resulting in unfavorable operating results and reduce~~d growth potential.~~
Continued expansion of the global market for laser and other-energy-based aesthetic procedures is a material assumption of our business strategy. Most procedures performed using our products are elective procedures not reimbursable thr~~ough government or private health insurance, with the costs borne by the patient. The decision to utilize our products may therefore be influenced by a number of factors, including:~~
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~~Consumer disposable income and access to consumer credit, which as a result of the unstable economy, may have been significantly impacted;~~
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~~The cost of procedures performed using our products;~~
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~~The cost, safety and effectiveness of alternative treatments, including treatments which are not based upon laser or other energy-based technologies and treatments which use pharmaceutical products;~~
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~~The success of our sales and marketing efforts; and~~
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~~The education of our customers and patients on the benefits and uses of our products, compared to competitors’ products and technologies.~~
~~If,~~ as a result of these factors, there is not sufficient demand for the procedures performed with our products, practitioner demand for our products could be reduced, which could have a material adverse effect on our business, financial condition, revenue and result of operations.
~~If we fail 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.~~
~~The FDA,~~ state authorities and international regulatory bodies have broad enforcement powers. If we fail 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:
●
~~Warning letters, fines, injunctions, consent decrees and civil penalties;~~
●
~~Repair, replacement, refund, recall or seizure of our products;~~
●
~~Operating restrictions or partial suspension or total shutdown of production;~~
●
~~Refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses, or modifications to existing products;~~
●
~~Withdrawing 510(k) clearance or pre-market approvals that have already been granted; and~~
●
~~Criminal prosecution.~~
~~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 produc~~ts. 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 our ability to sell our 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 an~~d 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 of~~ten revised or reinterpreted by the agency in ways that may significantly affect our business and our 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 our 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 our products to market. Either of these changes lengthen the duration to market, increase our costs of doing business, adversely affect the future permitted uses of approved products, or otherwise adversely affect the market for our products.
~~If we fail to comply with the FDA’s Quality System Regulation and laser performance standards, our manufacturing operations could be halted, and our business would suffer.~~
~~We are 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 our products. Because our products involve the use of lasers, our 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 have had multiple quality syst~~em audits by the FDA, our Notified Body, and other foreign regulatory agencies, with the most recent inspection by the FDA occurring over three weeks in March 2014. There were no significant findings and only one observation 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 our failure to comply with applicable laser performance standards could result in enforcement actions, including a public warning letter, a shutdown of our manufacturing operations, a recall of our products, civil or criminal penalties, or other sanctions, such as those described in the preceding paragraph, which would cause our sales and business to suffer.
~~We ar~~e a sponsor of Biomedical Research. As such, we are also subject to FDA regulations relating to the design and conduct of clinical trials. We are subject to unannounced Bioresearch Monitoring Program ("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. Our responses to these observations were accepted by the FDA. Failure to take satisfactory corrective action in response to an adverse BIMO inspection or our 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 our sales and business to suffer.
~~If we modify one of our FDA-approved devices, we may need to seek re-approval, which, if not granted, would prevent us from selling our modified products or cause us to redesign our 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. We may not be able to obtain additional 510(k) clearance or pre-market approvals for new products or for modifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining future clearance would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenue and future profitability.
We have made modifications to our devices in the past and may make additional modifications in the future that we believe do not or will not require additional clearance or approvals. If the FDA disagrees, and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing the modified devices, which could harm our operating results and require us to redesign our products.

~~We may be unable to obtain or maintain international regulatory qualifications or approvals for our current or future products and indications, which could harm our business.~~
~~Sales of our 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-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. We may be unable to obtain or maintain regulatory qualifications, clearances or approvals in other countries. We may also incur significant costs in attempting to obtain and in maintaining foreign regulatory approvals or qualifications. If we experience delays in receiving necessary qualifications, clearances or approvals to market our products outside the U.S., or if we fail to receive those qualifications, clearances or approvals, we may be unable to market our products or enhancements in international markets effectively, or at all, which could have a material adverse effect on our business and growth strategy.
~~Any defects in the design, material or workmanship of our products may not be discovered prior to shipment to customers, which could materially increase our expenses, adversely impact profitability and harm our business.~~
The design of our products is complex. To manufacture them successfully, we must procure quality components and employ individuals with a significant degree of technical expertise. If our designs are defective, or the material components used in our products are subject to wearing out, or if suppliers fail to deliver components to specification, or if our employees fail to properly assemble, test and package our products, the reliability and performance of our products will be adversely impacted.
~~If our products contain defects that cannot be repaired easily, inexpensively, or on a timely basis, we may experience:~~
●
~~Damage to our brand reputation;~~
●
~~Loss of customer orders and delay in order fulfillment;~~
●
~~Increased costs due to product repair or replacement;~~
●
~~Inability to attract new customers;~~
●
~~Diversion of resources from our manufacturing and research and development departments into our service department; and~~
●
~~Legal action.~~
~~The occurrence of any one or more of the foregoing could~~ ~~materially increase expenses, adversely impact profitability and harm our business.~~
~~Product liability suits could be brought against us due to a defective design, material or workmanship or misuse of our products and could result in expensive and time-consuming litigation, payment of substantial damages and an increase in our insurance rates.~~
~~If our products are defectively designed, manufactured or labeled, contain defective components or are misused, we may become subject to substantial and costly litig~~ation by our customers or their patients. Misusing our products or failing to adhere to operating guidelines could cause significant eye and skin damage, and underlying tissue damage. In addition, if our operating guidelines are found to be inadequate, we may be subject to liability. We have been involved, and may in the future be involved, in litigation related to the use of our products. Product liability claims could divert management’s attention from our core business, be expensive to defend and result in sizable damage awards against us. We may not have sufficient insurance coverage for all future claims. We may not be able to obtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry and could reduce product sales. In addition, we historically experienced steep increases in our product liability insurance premiums as a percentage of revenue. If our premiums continue to rise, we may no longer be able to afford adequate insurance coverage.
~~If customers are not trained and/or our prod~~ucts are used by non-physicians, it could result in product misuse and adverse treatment outcomes, which could harm our reputation, result in product liability litigation, distract management and result in additional costs, all of which could harm our business.
Because we do not require training for users of our products, and sell our products at times to non-physicians, there exists an increased potential for misuse of our products, which could harm our reputation and our business. U.S. federal regulations allow us to sell our products to or on the order of “licensed practitioners.” The definition of “licensed practitioners” varies from state to state. As a result, our 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 our products. We do not supervise the procedures performed with our products, nor do we require that direct medical supervision occur. We and our distributors generally offer but do not require product training to the purchasers or operators of our products. In addition, we sometimes sell our systems to companies that rent our systems to third parties and that provide a technician to perform the procedures. The lack of training and the purchase and use of our products by non-physicians may result in product misuse and adverse treatment outcomes, which could harm our reputation and our 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 our marketable investments or impair our liquidity.~~
~~We invest our 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 c~~ommercial paper and high grade corporate debt. As of March 31, 2017, our balance in marketable investments was $37 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, the fair value of our total investment portfolio as of March 31, 2017 would have potentially decreased by approximately $163,000, resulting in an unrealized loss that would subsequently adversely impact our earnings. As a result, changes in the market interest rates will affect our future net income (loss).
~~Our manufacturing~~ ~~operations are dependent upon third-party suppliers, making us vulnerable to supply shortages and price fluctuations, which could harm our business.~~
~~Many of the components and materials that comprise our products are currently manufactured by a limited nu~~mber of suppliers. A supply interruption or an increase in demand beyond our current suppliers’ capabilities could harm our ability to manufacture our products until a new source of supply is identified and qualified. Our reliance on these suppliers subjects us to a number of risks that could harm our business, including:
●
~~Interruption of supply resulting from modifications to or discontinuation of a supplier’s operations;~~
●
~~Delays in product shipments resulting from uncorrected defects, reliability issues or~~ ~~a supplier’s variation in a component;~~
●
~~A lack of long-term supply arrangements for key components with our suppliers;~~
●
~~Inability to obtain adequate supply in a timely manner, or on reasonable terms;~~
●
~~Inability to redesign one or more components in our~~ ~~systems in the event that a supplier discontinues manufacturing such components and we are unable to source it from other suppliers on reasonable terms;~~
●
~~Difficulty locating and qualifying alternative suppliers for our components in a timely manner;~~
●
~~Production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications; and~~
●
~~Delay in supplier deliveries.~~
~~Any interruption in the supply of components or materials, or our inability to obtain su~~bstitute components or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers, which would have an adverse effect on our business.
~~Intellectual property rights may not provide~~ ~~adequate protection for some or all of our products, which may permit third parties to~~~~compete against us more effectively.~~
~~We rely on patent, copyright, trade secret and trademark laws and confidentiality agreements to protect our technology and product~~s. As of March 31, 2017, we had 34 issued U.S. patents. Some of our components, such as our laser module, electronic control system and high-voltage electronics, are not, and in the future may not be, protected by patents. Additionally, our 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 obtain 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. We may not be able to prevent the unauthorized disclosure or use of our 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 our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be effective. Moreover, the laws of many foreign countries will not protect our 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 r~~isk of direct competition. Competitors could purchase one of our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, design around our protected technology, or develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property is not adequately protected against competitors’ products and methods, our competitive position and our business could be adversely affected.
~~We may be involved~~ ~~in future costly intellectual property litigation, which could impact our future business and financial performance.~~
~~Our competitors or other patent holders may assert that our present or future products and the methods we employ are covered by their pat~~ents. In addition, we do not know whether our competitors own or will obtain patents that they may claim prevent, limit or interfere with our ability to make, use, sell or import our products. Although we may seek to resolve any potential future claims or actions, we may not be able to do so on reasonable terms, or at all. If, following a successful third-party action for infringement, we cannot obtain a license or redesign our products, we may have to stop manufacturing and selling the applicable products and our 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 our products, any of which would have a material adverse effect on our business, results of operations and financial condition.

~~We 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 our own intellectual property. For example, we have been, and may hereafter become, involved in litigation to protect the trademark rights associated with our company name or the names of our products. Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate, and could divert management’s attention from our core business.
~~The expense and potential unavailability of insurance coverage for our customers could adversely affect our ability to sell our products, and therefore adversely affect our financial conditio~~n.
Some of our customers and prospective customers have had difficulty procuring or maintaining liability insurance to cover their operation and use of our products. Medical malpractice carriers are withdrawing coverage in certain states or substantially increasing premiums. If this trend continues or worsens, our customers may discontinue using our 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 our customers and prospects could adversely affect our ability to sell our products, and that could harm our financial condition.
~~From time to time we may become subject to income tax audits or similar proceedings, and as a~~ ~~result we may incur additional costs and expenses or owe additional taxes, interest and penalties that may negatively impact our operating results.~~
~~We are subject to income taxes in the United States and certain foreign jurisdictions where we operate thro~~ugh a subsidiary, including Australia, Belgium, Canada, France, Hong Kong, Japan, Spain, Switzerland and the United Kingdom. Our determination of our tax liability is subject to review by applicable domestic and foreign tax authorities.
~~We are currently~~ under audit for our California sales and use tax returns for the period July 2013 through June 2016, and are uncertain of the potential outcome of this audit. Also, 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 immaterial adjustments, the final timing and resolution of any future tax examinations are subject to significant uncertainty and could result in our having to pay amounts to the applicable tax authority in order to resolve examination of our tax positions, which could result in an increase or decrease of our current estimate of unrecognized tax benefits and may negatively impact our financial position, results of operations or cash flows.
~~We may be adversely affected by changes in U.S. tax laws, importation taxes and other changes that may be imposed by the current administration.~~
Congress and the current administration have indicated a desire to reform the U.S. corporate income tax. As part of any tax reform, it is possible that the current corporate income tax rate may be reduced, and there may be other potential changes including limiting or eliminating various other deductions, credits or tax preferences. In addition, if the current administration starts levying import taxes on products being sourced from Mexico 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. mark~~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.~~

~~Anti-takeover provisions in our Amended 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:
●
~~A classified board of directors;~~
●
~~Advance notice requirements to stockholders for matters to be brought at stockholder meetings;~~
●
~~Limitations on stockholder actions by written consent; and~~
●
~~The right to issue preferred stock without~~ ~~stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.~~
~~These provisions, as well as Change of Control and Severance Agreements entered into with each of our executive officers and certain key employees, mi~~ght discourage, delay or prevent a change in control of our company or a change in our management. The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time. Any of these provisions could, under certain circumstances, depress the market price of our common stock.

Contents

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
~~The following table summarizes the activity related to stock repurchases for the~~ ~~three months ended March 31, 2017~~ ~~(in thousands except per share data)~~:
Period

Total Number
of Shares
Purchased

Average Price
Paid
per Share

Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs

Approximate
Dollar Value
of Shares
That May Yet
Be Purchased
Under the
Plans
or Program

February 21-28, 2017

30

21.06

30

9,509

March 1-31, 2017

110

20.57

110

7,238

February 21-March 31, 2017

140

20.68

140

7,238

~~On February 8, 2016,~~ our Board of Directors approved the expansion of the Stock Repurchase Program by $10 million, under which the Company is authorized to repurchase shares of its common stock. 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 the Stock Repurchase Program by an additional $5 million. In the three months ended March 31, 2017, we repurchased 140,400 shares of our common stock for approximately $2.9 million. As of March 31, 2017, there remained an additional $7.2 million available in the Stock Repurchase Program to repurchase shares of common stock. All shares repurchased were retired and returned to authorized but unissued status.
~~ITEM 3.~~
~~DEFAULTS UPON SENIOR SECURITIES~~

None.

ITEM 4.3.
~~MINE SAFETY DISCLOSURES~~DEFAULTS UPON SENIOR SECURITIES

N~~one.~~None.

ITEM 5.4.
~~OTHER INFORMATION~~MINE SAFETY DISCLOSURES

The Company's Board of Directors has approved a facility lease for a new corporate headquarter building in Fremont, California. The Company plans to contract with the landlord and move into the new facility at the end of 2017.None.

ITEM 5.
OTHER INFORMATION
None.

ITEM 6.EXHIBITS

Exhibit
No.

Description
3.2
⁽¹⁾
Amended and Restated Certificate of Incorporation of the Registrant (Delaware).

3.4
⁽¹⁾
Bylaws of the Registrant.

4.1
⁽²⁾
Specimen Common Stock certificate of the Registrant.

10.14
⁽³⁾
Cutera, Inc. 2004 Amended and Restated Equity Incentive Plan.

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.ins

Instance Document

101.sch

XBRL Taxonomy Extension Schema Document

101.cal

XBRL Taxonomy Extension Calculation Linkbase Document

101.def

XBRL Taxonomy Extension Definition Linkbase Document

101.lab

XBRL Taxonomy Extension Label Linkbase Document

101.pre

XBRL Taxonomy Extension Presentation Linkbase Document

(1)
Incorporated by reference from our Registration Statement on Form S-1 (Registration No. 333-111928) which was declared effective on March 30, 2004.
(2)
Incorporated by reference from our Annual Report on Form 10-K filed with the SEC on March 25, 2005.
(3)
Incorporated by reference from our Definitive Proxy Statement on Form 14A filed with the SEC on April 27, 2015.

31
Table of Contents
SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of The 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 ~~1st~~9th day of May, ~~2017.~~2018.

CUTERA, INC.

/S/ ~~RONALD J. SANTILLI~~SANDRA A. GARDINER

~~Ronald J. Santilli~~Sandra A. Gardiner

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

32
35

		Page
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2	~~Management~~’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations	13 22
Item 3	Quantitative and Qualitative Disclosures About Market Risk	1929
Item 4	Controls and Procedures	2030

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	2130
Item 1A	Risk Factors	2130
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	3431
Item 3	Defaults Upon Senior Securities	3431
Item 4	Mine Safety Disclosures	3431
Item 5	Other Information	3431
Item 6	Exhibits	3531
	Signature	3532

	March 31, 2017			December 31, 2016			March 31, 2018			December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	11,443		$	13,775		$	10,910		$	14,184
Marketable investments		36,990			40,299			13,062			21,728
Accounts receivable, net		17,859			16,547			19,862			20,777
Inventories		15,672			14,977			30,979			28,782
Other current assets and prepaid expenses		2,403			2,251			2,601			2,903
Total current assets		84,367			87,849			77,414			88,374

Property and equipment, net		1,802			1,907			2,214			2,096
Deferred tax asset		394			377			21,792			19,055
Intangibles, net		—			2
Goodwill		1,339			1,339			1,339			1,339
Other long-term assets		389			380			5,367			374
Total assets	$	88,291		$	91,854		$	108,126		$	111,238

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	3,089		$	2,598		$	8,206		$	7,002
Accrued liabilities		14,950			17,397			20,083			26,848
Deferred revenue		8,275			8,394			8,847			9,461
Total current liabilities		26,314			28,389			37,136			43,311

Deferred revenue, net of current portion		1,801			1,705			2,168			2,195
Income tax liability		169			168			384			379
Other long-term liabilities		565			582			583			460
Total liabilities		28,849			30,844			40,271			46,345

Commitments and Contingencies (Note 10)
Commitments and Contingencies (Note 12)

Stockholders’ equity:
Stockholders’ equity:
Convertible preferred stock, $0.001 par value; authorized: 5,000,000 shares; none issued and outstanding		—			—			—			—
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 13,909,182 and 13,773,389 shares at March 31, 2017 and December 31, 2016, respectively		14			14
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 13,634,154 and 13,477,973 shares at March 31, 2018 and December 31, 2017, respectively								14			13
Additional paid-in capital		87,569			88,114			62,057			62,025
Accumulated deficit		(28,068	)		(27,046	)
Retained earnings								5,888			2,947
Accumulated other comprehensive loss		(73	)		(72	)		(104	)		(92	)
Total stockholders’ equity		59,442			61,010
Total stockholders’ equity								67,855			64,893

Total liabilities and stockholders’ equity	$	88,291		$	91,854
Total liabilities and stockholders’ equity							$	108,126		$	111,238

	Three Months Ended						Three Months Ended
	March 31,						March 31,
	2017			2016			2018			2017
Net revenue:
Products	$	24,475		$	17,956		$	29,264		$	24,475
Service		4,824			4,467			4,861			4,824
Total net revenue		29,299			22,423			34,125			29,299
Cost of revenue:
Products		11,144			7,648			13,922			11,144
Service		2,634			2,301			2,869			2,634
Total cost of revenue		13,778			9,949			16,791			13,778
Gross profit		15,521			12,474			17,334			15,521

Operating expenses:
Sales and marketing		10,773			8,716			13,088			10,773
Research and development		2,945			2,709			3,556			2,945
General and administrative		3,216			3,220			5,439			3,216
Total operating expenses		16,934			14,645			22,083			16,934
Loss from operations		(1,413	)		(2,171	)		(4,749	)		(1,413	)
Interest and other income, net		273			144			98			273
Loss before income taxes		(1,140	)		(2,027	)		(4,651	)		(1,140	)
Provision (benefit) for income taxes		(118	)		24
Benefit for income taxes								(2,619	)		(118	)
Net loss	$	(1,022	)	$	(2,051	)	$	(2,032	)	$	(1,022	)

Net loss per share:
Basic and Diluted	$	(0.07	)	$	(0.16	)	$	(0.15	)	$	(0.07	)

Weighted-average number of shares used in per share calculations:
Basic and Diluted		13,840			13,010			13,587			13,840

	Three Months Ended						Three Months Ended
	March 31,						March 31,
	2017			2016			2018			2017
Net loss	$	(1,022	)	$	(2,051	)	$	(2,032	)	$	(1,022	)
Other comprehensive income (loss):
Other comprehensive loss:
Available-for-sale investments
Net change in unrealized gain (loss) on available-for-sale investments		3			69			(21	)		3
Less: Reclassification adjustment for gains on investments recognized during the year		(4	)		—
Net change in unrealized gain (loss) on available-for-sale investments		(1	)		69
Tax provision (benefit)		—			—
Other comprehensive income (loss), net of tax		(1	)		69
Less: Reclassification adjustment for (gains) losses on investments recognized during the period								9			(4	)
Net change in unrealized loss on available-for-sale investments								(12	)		(1	)
Tax loss (benefit)								—			—
Other comprehensive loss, net of tax								(12	)		(1	)
Comprehensive loss	$	(1,023	)	$	(1,982	)	$	(2,044	)	$	(1,023	)

	Three Months Ended March 31,						Three Months Ended March 31,
	2017			2016			2018			2017
Cash flows from operating activities:
Net loss	$	(1,022	)	$	(2,051	)	$	(2,032	)	$	(1,022	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		1,395			1,332			1,688			1,395
Depreciation and amortization		248			240
Depreciation of tangible assets								254			248
Amortization of contract acquisition costs								373			—
Change in deferred tax asset								(2,737)			(17	)
Other		(51	)		12			25			(34)
Changes in assets and liabilities:
Accounts receivable		(1,305	)		472			915			(1,305	)
Inventories		(695	)		(1,397	)		(2,197	)		(695	)
Other current assets and prepaid expenses		(158	)		(230	)		1,753			(158	)
Other long-term assets		(9	)		(35	)		(2,150	)		(9	)
Accounts payable		491			611			1,204			491
Accrued liabilities		(2,657	)		(2,758	)		(6,727	)		(2,657	)
Deferred revenue								(456	)		(23	)
Other long-term liabilities		—			(82	)		40			1
Deferred revenue		(23	)		(103	)
Income tax liability		1			(55	)
Net cash used in operating activities		(3,785	)		(4,044	)		(10,047	)		(3,785	)

Cash flows from investing activities:
Acquisition of property, equipment and software		(69	)		(97	)		(104	)		(69	)
Disposal of property and equipment		25			—			—			25
Proceeds from sales of marketable investments		5,255			1,800			13,044			5,255
Proceeds from maturities of marketable investments		14,035			3,975			—			14,035
Purchase of marketable investments		(15,972	)		(6,399	)		(4,390	)		(15,972	)
Net cash provided by (used in) investing activities		3,274			(721	)
Net cash provided by investing activities								8,550			3,274

Cash flows from financing activities:
Repurchase of common stock		(2,700	)		(279	)		—			(2,700	)
Proceeds from exercise of stock options and employee stock purchase plan		1,751			744			633			1,751
Taxes paid related to net share settlement of equity awards		(784	)		(233	)		(2,288	)		(784	)
Payments on capital lease obligations		(88	)		(70	)		(122	)		(88	)
Net cash (used in) provided by financing activities		(1,821	)		162
Net cash used in financing activities								(1,777	)		(1,821	)

Net decrease in cash and cash equivalents		(2,332	)		(4,603	)		(3,274	)		(2,332	)
Cash and cash equivalents at beginning of period		13,775			10,868			14,184			13,775
Cash and cash equivalents at end of period	$	11,443		$	6,265		$	10,910		$	11,443

Supplemental disclosure of non-cash items:
Repurchase of common stock acquired but not settled	$	207		$	27			—		$	207
Assets acquired under capital lease	$	80		$	51		$	284		$	80

	●	$210,000 for variable consideration on sale transactions.
	●	$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 amortized over the period of anticipated support renewals. Under the prior guidance, the Company expensed such costs when incurred.

	As reported under Topic 606		Adjustments			Balances under Prior GAAP
	(In thousands)
Other long-term assets		5,367		4,862			505
Accrued Liabilities		20,083		(111	)		20,194
Deferred revenue		11,015		(194	)		10,821
Retained earnings		5,888		5,167			721

March 31, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
March 31, 2018										Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Cash and cash equivalents:
Cash	$	6,918	$	—	$	—		$	6,918	$	10,579	$	—	$	—		$	10,579
Money market funds		1,026		—		—			1,026		331		—		—			331
Commercial paper		3,499		—		—			3,499
Total cash and cash equivalents		11,443		—		—			11,443		10,910		—		—			10,910

Marketable investments:
U.S. government notes		4,453		—		(11	)		4,442		7,110		—		(14	)		7,096
U.S. government agencies		2,002		—		(2	)		2,000
Municipal securities		—		—		—			—		201		—		(1	)		200
Commercial paper		17,243		3		(1	)		17,245
Corporate debt securities		13,305		7		(9	)		13,303		5,795		1		(30	)		5,766
Total marketable investments		37,003		10		(23	)		36,990		13,106		1		(45	)		13,062

Total cash, cash equivalents and marketable investments	$	48,446	$	10	$	(23	)	$	48,433	$	24,016	$	1	$	(45	)	$	23,972

December 31, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
December 31, 2017										Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Cash and cash equivalents:
Cash	$	6,672	$	—	$	—		$	6,672	$	14,058	$	—	$	—		$	14,058
Money market funds		6,053		—		—			6,053		126		—		—			126
Commercial paper		1,050		—		—			1,050
Total cash and cash equivalents		13,775		—		—			13,775		14,184		—		—			14,184

Marketable investments:
U.S. government notes		8,403		4		(9	)		8,398		11,885		—		(15	)		11,870
U.S. government agencies		3,918		—		(2	)		3,916
Municipal securities		1,325		—		—			1,325		201		—		(1	)		200
Commercial paper		12,299		2		(2	)		12,299		1,836		—		(3	)		1,833
Corporate debt securities		14,366		3		(8	)		14,361		7,838		2		(15	)		7,825
Total marketable investments		40,311		9		(21	)		40,299		21,760		2		(34	)		21,728

Total cash, cash equivalents and marketable investments	$	54,086	$	9	$	(21	)	$	54,074	$	35,944	$	2	$	(34	)	$	35,912

	Amount		Amount
Due in less than one year	$	33,230	$	11,867
Due in 1 to 3 years		3,760		1,195
Total marketable investments	$	36,990	$	13,062

March 31, 2017	Level 1		Level 2		Level 3		Total
March 31, 2018									Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	1,026	$	—	$	—	$	1,026	$	331	$	—	$	—	$	331
Commercial paper		—		3,499		—		3,499
Marketable investments:
Available-for-sale securities		—		36,990		—		36,990
Marketable investments:
Available-for-sale securities										—		13,062		—		13,062
Total assets at fair value	$	1,026	$	40,489	$	—	$	41,515	$	331	$	13,062	$	—	$	13,393

December 31, 2016	Level 1		Level 2		Level 3		Total
December 31, 2017									Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	6,053	$	—	$	—	$	6,053	$	126	$	—	$	—	$	126
Commercial paper		—		1,050		—		1,050		—		—		—		—
Marketable investments:
Available-for-sale securities		—		40,299		—		40,299
Marketable investments:
Available-for-sale securities										—		21,728		—		21,728
Total assets at fair value	$	6,053	$	41,349	$	—	$	47,402	$	126	$	21,728	$	—	$	21,854

	March 31, 2017		December 31, 2016		March 31, 2018		December 31, 2017
Raw materials	$	11,543	$	10,966	$	18,735	$	19,160
Work in process						2,813		2,744
Finished goods		4,129		4,011		9,431		6,878
Total	$	15,672	$	14,977	$	30,979	$	28,782

	March 31, 2017		December 31, 2016		March 31, 2018		December 31, 2017
Accrued payroll and related expenses	$	7,113	$	9,036	$	9,003	$	12,567
Sales and marketing accruals						2,136		3,710
Warranty liability		2,735		2,461		3,373		3,508
Sales tax		1,644		2,373		1,718		2,920
Other		3,458		3,527		3,853		4,143
Total	$	14,950	$	17,397	$	20,083	$	26,848

	Three Months Ended						Three Months Ended
	March 31,						March 31,
	2017			2016			2018			2017
Beginning Balance	$	2,461		$	1,819		$	3,508		$	2,461
Add: Accruals for warranties issued during the period		2,135			1,254			2,264			2,135
Less: Settlements made during the period		(1,861	)		(1,254	)		(2,399	)		(1,861	)
Ending Balance	$	2,735		$	1,819		$	3,373		$	2,735

				Options Outstanding								Options Outstanding
	Shares Available for Grant			Number of Stock Options Outstanding			Weighted- Average Exercise Price		Shares Available for Grant			Number of Stock Options Outstanding			Weighted- Average Exercise Price
Balance, December 31, 2016		721,657			1,116,472		$	9.56
Balance, December 31, 2017										1,494,866			839,919		$	16.46
Options granted		(52,000	)		52,000			18.18		(14,500	)		14,500			53.90
Stock awards granted⁽^{1) (2)}		(449,440	)		—			—
Stock awards granted⁽¹⁾										(310,275	)		—			—
Options exercised		—			(201,686	)		8.68		—			(66,167	)		9.57
Options canceled		11,352			(11,352	)		17.39		32,438			(32,438	)		15.87
Stock awards canceled⁽¹⁾		94,113			—			—
Balance, March 31, 2017		325,682			955,434		$	10.12
Stock awards canceled⁽¹⁾										43,990			—			—
Balance, March 31, 2018										1,246,519			755,814		$	17.81

Year Ending March 31,	Amount
2018	$	2,266
2019		3,002
2020		2,937
2021		2,529
2022		2,495
2023 and beyond		213
Total future minimum lease payments	$	13,442

	Three months ended March 31, 2018			Three months ended March 31, 2017
Numerator:
Net loss	$	(2,032	)	$	(1,022	)
Denominator:
Weighted-average shares outstanding in basic calculation		13,587			13,840
Add: dilutive effect of potential common shares		—			—
Weighted-average shares used in computing diluted net income per share		13,587			13,840
Net loss per share:
Net loss per share, basic and diluted	$	(0.15	)	$	(0.07	)

	Three Months Ended March 31,
Revenue mix by geography:	2018		2017
United States	$	21,136	$	16,544
Japan		3,555		3,880
Asia, excluding Japan		2,843		3,184
Europe		2,570		2,225
Rest of the world		4,021		3,466
Total consolidaed revenue	$	34,125	$	29,299

Revenue mix by product category:
Products	$	27,239	$	22,992
Consumables (Hand Piece Refills)		769		499
Skincare		1,256		984
Total product revenue	$	29,264	$	24,475
Service		4,861		4,824
Total consolidated revenue	$	34,125	$	29,299

	●	changes in our common stock price;
	●	the ability of our sales force to effectively market and promote our products, and the extent to which those products gain market acceptance;
	●	the existence and timing of any product approvals or changes;
	●	the rate and size of expenditures incurred on our clinical, manufacturing, sales, marketing and product development efforts;
	●	our ability to obtain and retain personnel;
	●	the availability of key components, materials and contract services, which depends on our ability to forecast sales, among other things;
	●	investigations of our 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;
	●	product recalls or safety alerts;
	●	litigation, including product liability, patent, employment, securities class action, stockholder derivative, general commercial and other lawsuits;
	●	continued volatility in the global market and worldwide economic conditions, including, but not limited to, the impact of events such as Brexit;
	●	changes in tax laws, including changes due to Brexit, or exposure to additional income tax liabilities;
	●	the financial health of our customers and their ability to purchase our products in the current economic environment; and
	●	other unusual or non-operating expenses, such as expenses related to mergers or acquisitions, may cause operating result variations.

	Three Months Ended March 31,
(Dollars in thousands)	2017			% Change			2016
Revenue mix by geography:
United States	$	16,544			50	%	$	11,054
International		12,755			12	%		11,369
Consolidated total revenue	$	29,299			31	%	$	22,423

United States as a percentage of total revenue		56	%					49	%
International as a percentage of total revenue		44	%					51	%

Revenue mix by product category:
Systems – North America	$	14,460			60	%	$	9,024
Systems – International		8,532			14	%		7,489
Total Systems		22,992			39	%		16,513
Hand Piece Refills		499			(12	)%		564
Skincare		984			12	%		879
Service		4,824			8	%		4,467
Consolidated total revenue	$	29,299			31	%	$	22,423

	Three Months Ended March 31,
(Dollars in thousands)	2018			% Change			2017
Revenue mix by geography:
United States	$	21,136			28	%	$	16,544
International		12,989			2	%		12,755
Consolidated total revenue	$	34,125			16	%	$	29,299

United States as a percentage of total revenue		62	%					56	%
International as a percentage of total revenue		38	%					44	%

Revenue mix by product category:
Systems – North America	$	18,944			31	%	$	14,460
Systems – Rest of World		8,295			(3	)%		8,532
Total Systems		27,239			18	%		22,992
Consumables		769			54	%		499
Skincare		1,256			28	%		984
Total Products		29,264			20	%		24,475
Service		4,861			1	%		4,824
Total Net Revenue	$	34,125			16	%	$	29,299

	Three Months Ended March 31,									Three Months Ended March 31,
(Dollars in thousands)	2017			% Change			2016			2018			% Change			2017
Sales and marketing	$	10,773			24	%	$	8,716		$	13,088			21	%	$	10,773
As a percentage of total net revenue		37	%					39	%		38	%					37	%

	Three Months Ended March 31,
(Dollars in thousands)	2017		% Change			2016
Interest income	$	119		55	%	$	77
Other income (expense), net		154		130	%		67
Total interest and other income, net	$	273		90	%	$	144

(Dollars in thousands)	March 31, 2017		December 31, 2016		Change			March 31, 2018		December 31, 2017		Change
Cash and cash equivalents	$	11,443	$	13,775	$	(2,332	)	$	10,910	$	14,184	$	(3,274	)
Marketable investments		36,990		40,299		(3,309	)		13,062		21,728		(8,666	)
Total	$	48,433	$	54,074	$	(5,641	)	$	23,972	$	35,912	$	(11,940	)

	Three Months Ended March 31,						Three Months Ended March 31,
(Dollars in thousands)	2017			2016			2018			2017
Net cash flow provided by (used in):
Operating activities	$	(3,785	)	$	(4,044	)	$	(10,047	)	$	(3,785	)
Investing activities		3,274			(721	)		8,550			3,274
Financing activities		(1,821	)		162			(1,777	)		(1,821	)
Net decrease in cash and cash equivalents	$	(2,332	)	$	(4,603	)	$	(3,274	)	$	(2,332	)

	●	~~the repurchase of common stock for $279,000; and~~
	●	~~$233,000 of cash used for taxes paid related to net share settlement of equity awards~~

	●	~~Develop and acquire new products that either add to or significantly improve our current product offerings;~~
	●	~~Convince our existing and prospective customers that our product offerings are an attractive revenue-generating addition to their practice;~~

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Program
February 21-28, 2017		30		21.06		30		9,509
March 1-31, 2017		110		20.57		110		7,238
February 21-March 31, 2017		140		20.68		140		7,238

Exhibit No.		Description
3.2	⁽¹⁾	Amended and Restated Certificate of Incorporation of the Registrant (Delaware).

3.4	⁽¹⁾	Bylaws of the Registrant.

4.1	⁽²⁾	Specimen Common Stock certificate of the Registrant.

10.14	⁽³⁾	Cutera, Inc. 2004 Amended and Restated Equity Incentive Plan.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.ins		Instance Document

101.sch		XBRL Taxonomy Extension Schema Document

101.cal		XBRL Taxonomy Extension Calculation Linkbase Document

101.def		XBRL Taxonomy Extension Definition Linkbase Document

101.lab		XBRL Taxonomy Extension Label Linkbase Document

101.pre		XBRL Taxonomy Extension Presentation Linkbase Document

	CUTERA, INC.

	/S/ ~~RONALD J. SANTILLI~~SANDRA A. GARDINER
	~~Ronald J. Santilli~~Sandra A. Gardiner
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)