form10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF HE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2010
OR
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period _____ to _____.
Commission file number: 000-50644
Cutera, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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77-0492262
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. employer identification no.)
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3240 Bayshore Blvd., Brisbane, California 94005
(Address of principal executive offices)
(415) 657-5500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x
The number of shares of Registrant’s common stock issued and outstanding as of July 26, 2010 was 13,557,421.
FORM 10-Q
TABLE OF CONTENTS
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Page
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PART I
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FINANCIAL INFORMATION
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Item 1.
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3
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3
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4
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5
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6
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Item 2.
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14
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Item 3.
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26
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Item 4.
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27
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PART II
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OTHER INFORMATION
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Item 1.
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27
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Item 1A
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28
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Item 2.
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38
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Item 3.
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38
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Item 4.
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38
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Item 5.
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38
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Item 6.
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39
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40
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PART I. FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL STATEMENTS
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CUTERA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
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June 30,
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December, 31,
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2010
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2009
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Cash and cash equivalents
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Other current assets and prepaid expenses
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Property and equipment, net
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Deferred tax asset, net of current portion
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Liabilities and Stockholders' Equity
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Total current liabilities
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Deferred revenue, net of current portion
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Commitments and Contingencies (Note 8)
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Additional paid-in capital
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Accumulated other comprehensive loss
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Total stockholders’ equity
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Total liabilities and stockholders’ equity
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2010
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2009
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2010
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2009
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General and administrative
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Interest and other income, net
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Provision (benefit) for income taxes
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Weighted-average number of shares used in per share calculations:
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Six Months Ended
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June 30,
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2010
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2009
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Cash flows from operating activities:
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Adjustments to reconcile net loss to net cash used in operating activities:
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Tax deficit from stock-based compensation
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Depreciation and amortization
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Provision for excess and obsolete inventories
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Provision for doubtful accounts receivable
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Gain on sale of marketable investments
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Change in deferred tax asset
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(10
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34
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Changes in assets and liabilities:
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Other current assets and prepaid expenses
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Net cash used in operating activities
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Cash flows from investing activities:
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Acquisition of property and equipment
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Proceeds from sales of marketable investments
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Proceeds from maturities of marketable investments
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Purchase of marketable investments
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Net cash provided by investing activities
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Cash flows from financing activities:
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Proceeds from exercise of stock options and employee stock purchase plan
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Net cash provided by financing activities
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Net increase (decrease) in cash and cash equivalents
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Cash and cash equivalents at beginning of period
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Cash and cash equivalents at end of period
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Description of Operations and Principles of Consolidation.
Cutera, Inc. (Cutera or the Company) is a global provider of laser and other light-based aesthetic systems for practitioners worldwide. The Company designs, develops, manufactures, and markets the CoolGlide, Xeo and Solera product platforms for use by physicians and other qualified practitioners to allow its customers to offer safe and effective aesthetic treatments to their customers. The Xeo and Solera platforms offer multiple hand pieces and applications, which allow customers to upgrade their systems (Upgrades revenue). In addition to systems and upgrades revenue, the Company generates revenue from the sale of extended warranty contracts, labor and materials for products that are out of warranty, Titan hand piece refills, and the distribution of third party dermal filler and cosmeceuticals in Japan.
Headquartered in Brisbane, California, the Company has wholly-owned subsidiaries in Australia, Canada, France, Japan, Spain, Switzerland and United Kingdom that market, sell and service its products outside of the United States. The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All inter-company transactions and balances have been eliminated.
Business Segment
In accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 280 guidance on disclosures about segments of an enterprise and related information, operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. Our chief decision maker, as defined under the FASB’s ASC 280 guidance, is a combination of the Chief Executive Officer; and the Executive Vice President and Chief Financial Officer. To date, the Company has viewed its operations, managed its business, and used one measurement of profitability for the one operating segment – the sale of aesthetic medical equipment and services, and distribution of cosmeceuticals and dermal filler products, to qualified medical practitioners. In addition, substantially all of the Company’s long-lived assets are located in one facility in the United States. As a result, the financial information disclosed herein represents all of the material financial information related to the Company’s operating segment.
Unaudited Interim Financial Information
The financial information filed is unaudited. The Condensed Consolidated Financial Statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for the fair statement of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The December 31, 2009 Condensed Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America (GAAP). The results for interim periods are not necessarily indicative of the results for the entire year or any other interim period. The Condensed Consolidated Financial Statements should be read in conjunction with the Company’s financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission, or SEC, on March 15, 2010.
Use of Estimates
The preparation of interim Condensed Consolidated Financial Statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported and disclosed in the Condensed Consolidated Financial Statements and the accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, the Company evaluates these estimates, including those related to warranty obligation, sales commission, accounts receivable and sales allowances, provision for excess and obsolete inventories, fair values of marketable and long-term investments, fair values of acquired intangible assets, useful lives of intangible assets and property and equipment, recoverability of deferred tax assets, and effective income tax rates, among others. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Significant Accounting Policies
The Company’s significant accounting policies are disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 15, 2010, and have not changed significantly as of June 30, 2010.
Recent Accounting Updates
In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13, “Multiple-Deliverable Revenue Arrangements a Consensus of the FASB Emerging Issues Task Force” an update to ASC Topic 605, “Revenue Recognition.” This update requires the allocation of consideration among separately identified deliverables contained within an arrangement, based on their related selling prices. This update will be effective for annual reporting periods beginning January 1, 2011. The Company is currently evaluating the impact of this update on its financial position, results of operations, cash flows, and disclosures.
In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” an update to ASC Topic 820, “Fair Value Measurements and Disclosures.” This update requires an entity to: (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and (ii) present separate information for Level 3 activity pertaining to gross purchases, sales, issuances, and settlements. This guidance became effective for us in the quarter ended March 31, 2010, except that the disclosure on the roll forward activities for Level 3 fair value measurements will become effective for us with the reporting period beginning January 1, 2011. Other than requiring additional disclosures, adoption of this new guidance did not have a material impact on our financial statements.
Note 2. Balance Sheet Details
Cash and Cash Equivalents, Marketable Investments and Long-Term Investments:
The Company considers all highly liquid investments, with an original maturity of three months or less at the time of purchase, to be cash equivalents. Investments in debt securities are accounted for as “available-for-sale” securities, carried at fair value with unrealized gains and losses reported in other comprehensive loss, held for use in current operations and classified in current assets as “Marketable investments” and in long term assets as “Long-term investments.”
The following is a summary of cash and cash equivalents, marketable investments and long-term investments (in thousands):
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June 30, 2010
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Amortized
Cost
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Gross
Unrealized
Gains
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Gross
Unrealized
Losses
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Fair
Market
Value
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Cash and cash equivalents
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Marketable investments- debt securities
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Long-term investments in auction rate securities
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Total cash and cash equivalents, marketable investments and long-term investments
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December 31, 2009
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Amortized
Cost
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Gross
Unrealized
Gains
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Gross
Unrealized
Losses
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Fair
Market
Value
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Cash and cash equivalents
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Total marketable investments
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Long-term investments in auction rate securities
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Total cash and cash equivalents, marketable investments and long-term investments
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Fair Value of Financial Instruments:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
• Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
• Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
• Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.
As of June 30, 2010, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above was as follows (in thousands):
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Level 1
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Level 2
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Level 3
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Total
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Securities available for sale:
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Marketable investments–debt securities
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Long-term investments–auction rate securities
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Total assets at fair value
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The Company’s Level 1 financial assets are money market funds and highly liquid debt instruments of U.S. federal and municipal governments and their agencies with stated maturities of three months or less from the date of purchase, whose fair values are based on quoted market prices. The Company’s Level 2 financial assets are highly liquid debt instruments of U.S. federal and municipal governments and their agencies as well as corporate bonds issued with a Federal Deposit Insurance Corporations (FDIC) guarantee under the U.S. Treasury Department’s Temporary Liquidity Guarantee Program (TLGP). These securities have stated maturities of greater than three months, whose fair values are obtained from readily-available pricing sources for the identical underlying security that may, or may not, be actively traded.
At June 30, 2010, observable market information was not available to determine the fair value of the Company’s ARS investments. Therefore, the fair value is based on valuation models that relied on Level 3 inputs including those that are based on expected cash flow streams and collateral values, assessments of counterparty credit quality, default risk underlying the security, market discount rates and overall capital market liquidity. The valuation of the Company’s ARS investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact the valuations in the future include changes to credit ratings of the securities, as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity. These financial instruments are classified within Level 3 of the fair value hierarchy.
The table presented below summarizes the change in carrying value of the Company’s financial assets (in thousands):
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Beginning balance, January 1, 2010
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuance, sales and settlements (net):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Current Assets and Prepaid Expenses:
Other current assets and prepaid expenses consist of the following (in thousands):
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories:
Inventories consist of the following (in thousands):
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets:
Intangible assets comprised of a patent sublicense acquired from Palomar in 2006, a technology sublicense acquired in 2002 and an other intangible asset acquired in 2007. The components of intangible assets were as follows (in thousands):
| |
|
June 30, 2010
|
|
| |
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
Amount
|
|
|
Net Carrying
Amount
|
|
|
Patent sublicense
|
|
$
|
1,218
|
|
|
$
|
586
|
|
|
$
|
632
|
|
|
Technology sublicense
|
|
|
538
|
|
|
|
437
|
|
|
|
101
|
|
|
Total
|
|
$
|
1,756
|
|
|
$
|
1,023
|
|
|
$
|
733
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Amortization
Amount
|
|
|
|
|
|
|
|
$ |
1,218 |
|
|
$ |
517 |
|
|
$ |
701 |
|
|
|
|
|
538 |
|
|
|
410 |
|
|
|
128 |
|
|
|
|
|
20 |
|
|
|
20 |
|
|
|
— |
|
|
|
|
$ |
1,776 |
|
|
$ |
947 |
|
|
$ |
829 |
|
Amortization expense for intangible assets was $96,000 for the six months ended June 30, 2010 and $99,000 for the six months ended June 30, 2009.
Based on intangible assets recorded at June 30, 2010, and assuming no subsequent additions to, or impairment of the underlying assets, the remaining estimated annual amortization expense is expected to be as follows (in thousands):
|
Fiscal Year Ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3. Stock-based Compensation Expense
Total pre-tax stock-based compensation expense by department recognized during the three and six months ended June 30, 2010 and 2009 was as follows (in thousands):
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4. Net Loss Per Share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the year. Diluted net loss per common share is the same as basic net loss per common share, as the effect of the potential common stock equivalents is anti-dilutive and as such is excluded from the calculations of the diluted net loss per share.
The following table sets forth the computation of basic and diluted net loss and the weighted average number of shares used in computing basic and diluted net loss per share (in thousands):
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss – Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding used in computing basic and diluted net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities
The following number of shares outstanding, prior to the application of the treasury stock method, were excluded from the computation of diluted net loss per common share for the periods presented because including them would have had an anti-dilutive effect (in thousands):
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Options to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5. Service Contract Revenue
Service contract revenue is recognized on a straight-line basis over the period of the applicable service contract. The following table provides changes in deferred service contract revenue for the six months ended June 30, 2010 and 2009 (in thousands):
Costs incurred under service contracts were $3.1 million for the six months ended June 30, 2010 and $2.4 million for the six months ended June 30, 2009 and are recognized as incurred.
Note 6. Comprehensive Loss
Comprehensive loss generally represents all changes in stockholders’ equity except those resulting from investments or contributions by stockholders. The Company’s unrealized gains and loss, net on marketable investments represents the only component of other comprehensive loss that is excluded from net loss. The changes in components of comprehensive loss for the periods presented were as follows (in thousands):
| |
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
| |
|
2010 |
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net loss
|
|
$ |
(3,761 |
) |
|
$ |
(2,364 |
) |
|
$ |
(5,779 |
) |
|
$ |
(4,192 |
) |
|
Net change in unrealized gain (loss) on available-for sale-securities
|
|
|
(22 |
) |
|
|
1,931 |
|
|
|
(88 |
) |
|
|
1,740 |
|
|
Change in income tax effect on unrealized gain (loss) on available-for sale-securities
|
|
|
— |
|
|
|
(8 |
) |
|
|
— |
|
|
|
67 |
|
|
Comprehensive loss
|
|
$ |
(3,783 |
) |
|
$ |
(441 |
) |
|
$ |
(5,867 |
) |
|
$ |
(2,385 |
) |
Note 7. Income Taxes
The Company’s income tax provision for the three and six months ended June 30, 2010 is primarily related to income taxes of the Company’s non U.S. operations. The Company’s income tax benefit for the three and six months ended June 30, 2009 reflects applicable United States federal and state income tax and the tax impact of non-U.S. operations, reduced primarily by tax exempt interest income and research and development (R&D) tax credit. The Company recorded an income tax provision of $82,000 during the three months ended June 30, 2010 and $129,000 during the six months ended June 30, 2010. The Company recorded an income tax benefit of $1.8 million during the three months ended June 30, 2009 and $3.0 million during the six months ended June 30, 2009.
The Company utilizes the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. In evaluating the ability to recover deferred tax assets, the Company considered available positive and negative evidence giving greater weight to its recent cumulative losses and its ability to carryback losses against prior taxable income and lesser weight to its projected financial results due to the challenges of forecasting future periods. The Company also considered, commensurate with its objective verifiability, the forecast of future taxable income including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. At the end of the third quarter of 2009, changes in previously anticipated expectations necessitated a valuation allowance against the U.S. operations historical excess tax benefits to be recognized in that quarter since they were no longer more likely than not realizable. Under current tax laws, this valuation allowance will not limit the Company’s ability to utilize federal and state deferred tax assets provided it can generate sufficient future taxable income.
As of the end of the second quarter of 2010, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined and disclosed pursuant to FASB ASC Topic 740, at the end of 2009.
Note 8. Commitments and Contingencies
Warranty Obligations
The Company historically provided a standard one-year or two-year warranty coverage on its systems. Beginning in September 2009, the Company changed its warranty policy to a one-year standard warranty on all systems. Warranty coverage provided is for labor and parts necessary to repair the systems during the warranty period. The Company accounts for the estimated warranty cost of the standard warranty coverage as a charge to costs of revenue when revenue is recognized. The estimated warranty cost is based on historical product performance. To determine the estimated warranty reserve, the Company utilizes actual service records to calculate the average service expense per system and applies this to the equivalent number of units exposed under warranty. The Company updates these estimated charges every quarter.
The following table provides the changes in the product warranty accrual for the six months ended June 30, 2010 and 2009 (in thousands):
|
|
|
June 30,
2010
|
|
|
June 30,
2009
|
|
|
|
|
$ |
1,049 |
|
|
$ |
1,916 |
|
Add: Accruals for warranties issued during the period
|
|
|
987 |
|
|
|
1,077 |
|
Less: Settlements made during the period
|
|
|
(1,308 |
) |
|
|
(1,655 |
) |
|
|
|
$ |
728 |
|
|
$ |
1,338 |
|
Facility Leases
The Company leases its Brisbane, California, office and manufacturing facility under a non-cancelable operating lease which expires in 2013. In addition, the Company has leased office facilities in certain international countries, including: Japan, Switzerland, France, and Spain. As of June 30, 2010, the Company was committed to minimum lease payments for facilities and other leased assets under long-term non-cancelable operating leases as follows (in thousands):
|
Fiscal Year Ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future minimum rental payments
|
|
|
|
|
Purchase Commitments
The Company maintains certain open inventory purchase commitments with its suppliers to ensure a smooth and continuous supply for key components. The Company’s liability in these purchase commitments is generally restricted to a forecasted time-horizon as agreed between the parties. These forecasted time-horizons can vary among different suppliers. The Company’s open inventory purchase commitments were not material at June 30, 2010.
2009 Restructuring Charges
In accordance with FASB ASC 420-10-50 and SAB Topic 5.P.4, the Company recognized a total of $976,000 in restructuring charges during the year ended December 31, 2009. These benefits were provided to then current employees that were involuntarily terminated under the terms of one-time benefit arrangements during the year. The Company implemented three reduction-in-force (RIF) programs in 2009: January 2009, May 2009 and August 2009. In general, the company-wide RIF programs specifically targeted positions that were directly impacted by the business slow down, such as sales, customer relations, manufacturing, and service. All employees terminated under these programs were notified within the quarter the severance and benefit expenses were recognized. The Company did not exit, dispose, terminate, or relocate any business activities and it did not materially change either the scope of, or the manner in which it conducted business following the headcount reductions. The Company incurred severance and benefits expenses accrued under one-time benefit arrangements of $646,000 for the three months and $880,000 for the six months ended June 30, 2009, and the severance liability was $218,000 at June 30, 2009. There were no remaining obligations associated with the 2009 RIF at December 31, 2009.
Litigation
Two securities class action lawsuits were filed against the Company and two of the Company’s executive officers in April 2007 and May 2007, respectively, in the U.S. District Court for the Northern District of California following declines in the Company’s stock price. The plaintiffs claimed to represent purchasers of the Company’s common stock from January 31, 2007 through May 7, 2007. The complaints generally alleged that materially false statements and omissions were made regarding the Company’s financial prospects, and sought unspecified monetary damages. On November 1, 2007, the Court ordered the two cases consolidated. On December 17, 2007, the plaintiffs filed a consolidated, amended complaint, and on January 31, 2008, the Company filed a motion to dismiss that complaint. On September 30, 2008, in response to the Company’s motion, the Court issued an order dismissing the plaintiffs’ amended complaint without prejudice. On October 28, 2008, the plaintiffs filed a Notice Of Intention Not to File A Second Amended Consolidated Complaint. On November 25, 2008, the Court closed the case on its own initiative. On November 26, 2008, the plaintiffs filed a Notice of Appeal to the U.S. Court of Appeals for the Ninth Circuit, on April 16, 2009 the plaintiffs filed their opening brief with that Court, on June 17, 2009 the Company filed its response to Plaintiff’s brief, on July 1, 2009 the plaintiffs filed their response to the Company’s brief, and on February 11, 2010 both parties presented oral argument to the Court of Appeals. On June 30, 2010, the U.S. Court of Appeals for the Ninth Circuit affirmed the District Court’s order dismissing the complaint.
A Telephone Consumer Protection Act, or TCPA, class action lawsuit was filed against the Company in January 2008 in the Illinois Circuit Court, Cook County, by Bridgeport Pain Control Center, Ltd., seeking monetary damages, injunctive relief, costs and other relief. The complaint alleged that the Company violated the TCPA by sending unsolicited advertisements by facsimile to the plaintiff and other recipients nationwide during the four-year period preceding the lawsuit without the prior express invitation or permission of the recipients. Two state law claims, limited to Illinois recipients, alleged a class period of three and five years, respectively. Under the TCPA, recipients of unsolicited facsimile advertisements may be entitled to damages of $500 per violation for inadvertent violations and $1,500 per violation for knowing or willful violations. On February 22, 2008, the Company removed the case to federal court in the Northern District of Illinois. On August 25, 2009, following negotiations between the parties, the parties entered into a settlement agreement that would resolve the case on a class-wide basis. On April 6, 2010, the Court gave its final approval for the settlement. Under the terms of the settlement, the Company paid a total of $950,000 in exchange for a full release of facsimile-related claims. The Company included $850,000 in its 2009 Condensed Consolidated Statements of Operations for the cost of the settlement, net of the estimated administrative expenses expected to be recoverable from its insurance carrier.
Other Legal Matters
In addition to the foregoing lawsuits, the Company is named from time to time as a party to product liability and contractual lawsuits in the normal course of its business. As of June 30, 2010, the Company was not a party to any material pending litigation other than those described above in the “Litigation” section.
Indemnifications
In the normal course of business, the Company enters into agreements that contain a variety of representations, warranties, and indemnification obligations. For example, the Company entered into indemnification agreements with each of its directors and executive officers. The Company’s exposure under its various indemnification obligations, including those under the indemnification agreements with its directors and executive officers, is unknown since indemnification obligations involve future claims that may be made against the Company. The Company has not accrued or paid any amounts for any such indemnification obligations to date.
Note 9. Subsequent Events
Management evaluated all activity of the Company and concluded that no subsequent events have occurred that would require recognition in the Condensed Consolidated Financial Statements or disclosure in Notes to Condensed Consolidated Financial Statements as of June 30, 2010.
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Caution Regarding Forward-Looking Statements
The following discussion should be read in conjunction with the attached condensed consolidated financial statements and notes thereto, and with our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2009 as contained in our annual report on Form 10-K filed with the SEC on March 15, 2010. This quarterly report, including the following sections, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout this report, and particularly in this Item 2, the forward-looking statements are based upon our current expectations, estimates and projections and reflect our beliefs and assumptions based upon information available to us at the date of this report. In some cases, you can identify these statements by words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” and other similar terms. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements. These forward-looking statements include, but are not limited to, statements relating to our future financial performance, the ability to grow our business, increase our revenue, manage expenses, generate additional cash, achieve and maintain profitability, develop and commercialize existing and new products and applications, and improve the performance of our worldwide sales and distribution network, and the outlook regarding long term prospects. These forward-looking statements involve risks and uncertainties. The cautionary statements set forth below and those contained in Part II, Item 1A – “Risk Factors” commencing on page 28, identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. We caution you to not place undue reliance on these forward-looking statements, which reflect management’s analysis and expectations only as of the date of this report. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-Q.
Introduction
The Management’s Discussion and Analysis, or MD&A, is organized as follows:
|
|
·
|
Executive Summary. This section provides a general description and history of our business, a brief discussion of our product lines and the opportunities, trends, challenges and risks we focus on in the operation of our business.
|
|
|
·
|
Critical Accounting Policies and Estimates. This section describes the key accounting policies that are affected by critical accounting estimates.
|
|
|
·
|
Recent Accounting Pronouncements. This section describes the issuance and effect of new accounting pronouncements that may be applicable to us.
|
|
|
·
|
Results of Operations. This section provides our analysis and outlook for the significant line items on our Consolidated Statements of Operations.
|
|
|
·
|
Liquidity and Capital Resources. This section provides an analysis of our liquidity and cash flows, as well as a discussion of our commitments that existed as of June 30, 2010.
|
Executive Summary
Company Description. We are a global medical device company engaged in the design, development, manufacture, marketing and servicing of laser and other light-based aesthetics systems for practitioners worldwide. We offer aesthetic systems on three platforms—Xeo, CoolGlide, and Solera— for use by physicians and other qualified practitioners to allow our customers to offer safe and effective aesthetic treatments to their customers. . The Xeo and Solera platforms offer multiple hand pieces and applications, which allow customers to upgrade their systems (Upgrades revenue). In addition to systems and upgrades revenue, we generate revenue from the sale of extended warranty contracts, labor and materials for products that are out of warranty, Titan hand piece refills, and the distribution of third party dermal filler and cosmeceuticals in Japan.
Our corporate headquarters and U.S. operations are located in Brisbane, California, from where we conduct our manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. In the United States, we market, sell and service our products primarily through direct sales and service employees and through a distribution relationship with PSS World Medical Shared Services, Inc., a wholly owned subsidiary of PSS World Medical, or PSS, which has over 700 sales representatives serving physician offices throughout the United States. In addition, we also sell certain items, like Titan hand piece refills and marketing brochures, through the internet.
International sales are generally made through direct sales employees and through a worldwide distributor network in over 30 countries. Outside the United States, we have a direct sales presence in Australia, Canada, France, Japan, Spain, Switzerland and the United Kingdom.
Products. Our revenue is derived from the sale of Products, Upgrades, Service, Titan hand piece refills, and dermal fillers and cosmeceuticals. Product revenue represents the sale of a system platform, which consists of a console that incorporates a universal graphic user interface, a laser and/or other light-based module, control system software and high voltage electronics, and one or more hand pieces. However, depending on the application, the laser or other light-based module is sometimes contained in the hand piece, such as with our Pearl and Pearl Fractional applications, instead of in the console. We offer our customers the ability to select the system that best fits their practice at the time of purchase and then to cost-effectively add applications to their system as their practice grows. This enables customers to upgrade their systems whenever they want and provides us with a source of recurring revenue, which we classify as Upgrades revenue. Service revenue includes extended warranty contracts and services on out-of-warranty products, which is comprised of labor and material. Revenues from extended warranty contracts are deferred and amortized over the lives of the associated contracts and services are recognized at the time the services are provided. Titan hand piece refill revenue is associated with our Titan hand piece which requires replacement of the optical source after a set number of pulses has been used.
In addition, we have distribution agreements with BioForm, Inc. (BioForm) to distribute its Radiesse® dermal filler product in Japan, and with Obagi Medical Products, Inc. (Obagi) to distribute its cosmeceuticals, or skin care products, in Japan. In addition, we offer Obagi products as part of an introductory promotion program pursued by us and Obagi in the U.S. and Canadian markets. Revenue from these arrangements is shown under the category of Dermal filler and cosmeceuticals. We also have a distribution agreement with Sound Surgical Technologies, LLC (SST) to distribute its VASER® Lipo System in certain European countries and Canada. Revenue from the sale of this product will be included in Product revenue.
Significant Business Trends. We believe that our ability to grow revenue will be primarily dependent on the following:
|
|
·
|
Continuing to expand our product offerings.
|
|
|
·
|
Investments made in our global sales and marketing infrastructure.
|
|
|
·
|
Use of clinical results to support new aesthetic products and applications.
|
|
|
·
|
Enhanced luminary development and reference selling efforts (to develop a location where our products can be displayed and used to assist in selling efforts).
|
|
|
·
|
Customer demand for our products and consumer demand for the applications they offer.
|
|
|
·
|
Marketing to physicians in the core dermatology and plastic surgeon specialties, as well as outside those specialties.
|
|
|
·
|
Generating Service, Upgrade, Titan hand piece refill, and Dermal filler and cosmeceuticals revenue from our growing installed base of customers.
|
U.S. Revenue
Our U.S. revenue increased by 5% in the three months ended June 30, 2010, compared to the same period in 2009. However, our U.S. revenue decreased 14% in the six months ended June 30, 2010, compared to the same period in 2009. We believe this decrease is, in part, due to:
|
|
·
|
Many of our current and prospective customers that do not have established medical offices continuing to be reluctant to purchase capital equipment. In times of general economic uncertainty and tight credit, individuals often reduce or delay their capital equipment purchase decisions.
|
|
|
·
|
There continues to be a lack of availability of consumer credit for some of our customers that do not have established medical offices, e.g. Med - Spas, which is contributing to reduced volume.
|
|
|
·
|
Lower average selling price (ASP), which is resulting from our customers purchasing fewer applications and lower pricing for certain of our premium applications to address competitive pressures.
|
Voluntary Titan XL Recall
In the first-half of 2010, we initiated a voluntary recall of our Titan XL hand piece. As a result of this voluntary recall, our Titan hand piece refill revenue decreased 32% in the three months, and 18% in the six months, ended June 30, 2010, compared to the same periods in 2009. As part of the voluntary recall program, we provided our customers with a fully “refilled” Titan XL hand piece and therefore our Titan refill sales were lower compared to the same periods in 2009. Further, in our results of operations, we recorded an expense of $62,000 for the three months and $487,000 for the six months ended June 30, 2010, for the estimated cost of this voluntary recall. These factors adversely affected our gross margin for the three and six months ended June 30, 2010, compared to the same periods in 2009.
2009 Reduction in Force
In 2009, in response to the economic environment and our reduced revenue in 2008 and 2009, we reduced our company-wide workforce by approximately 18% and implemented other cost-reduction measures in the first-half of 2009. The headcount reductions impacted all departments and functions and resulted in restructuring charges of approximately $880,000 in the first-half of 2009. As a result of these cost-reduction measures, our operating expenses declined in the six months ended June 30, 2010, compared to the same period in 2009.
Factors that May Impact Future Performance.
Our industry is impacted by numerous competitive, regulatory and other significant factors. Our industry is highly competitive and our future performance depends on our ability to compete successfully. Additionally, our future performance is dependent upon our ability to continue to expand our product offerings, develop innovative technologies, obtain regulatory clearances for our products, protect the proprietary technology of our products and our manufacturing processes, manufacture our products cost-effectively, and successfully market and distribute our products in a profitable manner. If we fail to execute on the aforementioned initiatives, our business would be adversely affected. A detailed discussion of these and other factors that could impact our future performance are provided in Part II, Item 1A “Risk Factors” section below.
Critical Accounting Policies and Estimates.
The preparation of our Condensed Consolidated Financial Statements and related disclosures in conformity with generally accepted accounting principles in the United States, or GAAP, requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates, judgments and assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances. We periodically review our estimates and make adjustments when facts and circumstances dictate. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected.
Critical accounting estimates, as defined by the Securities and Exchange Commission (SEC), are those that are most important to the portrayal of our financial condition and results of operations and require our management’s most difficult and subjective judgments and estimates of matters that are inherently uncertain. The accounting policies and estimates that we consider to be critical, subjective, and requiring judgment in their application are summarized in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with SEC on March 15, 2010. There have been no significant changes to the accounting policies and estimates disclosed in our Form 10-K, except for our Titan XL voluntary recall program.
Titan XL Voluntary Recall
In the first-half 2010, we initiated a voluntary recall of our global installed base of Titan XL hand pieces to replace certain components. We estimated the cost of the Titan XL voluntary recall to be $487,000 based on the direct costs of replacing certain components of the estimated number of hand pieces to be replaced. At June 30, 2010, our remaining accrual balance was $182,000.
Recent Accounting Pronouncements
For a full description of recent accounting updates, including the respective expected dates of adoption and effects on results of operations and financial condition see Note 1 “Summary of Significant Accounting Policies – Recent Accounting Updates” in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q”.
Results of Operations
The following table sets forth selected consolidated financial data for the periods indicated, expressed as a percentage of net total revenue.
| |
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
| |
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Operating Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
100%
|
|
|
|
100%
|
|
|
|
100%
|
|
|
|
100%
|
|
|
Cost of revenue
|
|
|
44%
|
|
|
|
44%
|
|
|
|
43%
|
|
|
|
42%
|
|
|
Gross profit
|
|
|
56%
|
|
|
|
56%
|
|
|
|
57%
|
|
|
|
58%
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
53%
|
|
|
|
52%
|
|
|
|
49%
|
|
|
|
50%
|
|
|
Research and development
|
|
|
12%
|
|
|
|
13%
|
|
|
|
11%
|
|
|
|
12%
|
|
|
General and administrative
|
|
|
22%
|
|
|
|
31%
|
|
|
|
19%
|
|
|
|
24%
|
|
|
Litigation settlement
|
|
|
—%
|
|
|
—%
|
|
|
|
—%
|
|
|
|
3%
|
|
|
Total operating expenses
|
|
|
87%
|
|
|
|
96%
|
|
|
|
79%
|
|
|
|
89%
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(31)%
|
|
|
|
(40)%
|
|
|
|
(22)%
|
|
|
|
(31)%
|
|
|
Interest and other income, net
|
|
|
1%
|
|
|
|
5%
|
|
|
|
1%
|
|
|
|
4%
|
|
|
Loss before income taxes
|
|
|
(30)%
|
|
|
|
(35)%
|
|
|
|
(21)%
|
|
|
|
(27)%
|
|
|
Provision (benefit) for income taxes
|
|
|
1%
|
|
|
|
(15)%
|
|
|
|
1%
|
|
|
|
(11)%
|
|
|
Net loss
|
|
|
(31)%
|
|
|
|
(20)%
|
|
|
|
(22)%
|
|
|
|
(16)%
|
|
Percentages in this table and throughout our discussion and analysis of financial condition and results of operations may reflect rounding adjustments.
Net Revenue
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
(Dollars in thousands)
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
Revenue mix by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,784 |
|
|
|
5 |
% |
|
$ |
4,551 |
|
|
$ |
9,331 |
|
|
|
(14 |
)% |
|
$ |
10,896 |
|
|
|
|
|
7,433 |
|
|
|
4 |
% |
|
|
7,114 |
|
|
|
16,635 |
|
|
|
9 |
% |
|
|
15,199 |
|
Consolidated total revenue
|
|
$ |
12,217 |
|
|
|
5 |
% |
|
$ |
11,665 |
|
|
$ |
25,966 |
|
|
|
— |
% |
|
$ |
26,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States as a percentage of total revenue
|
|
|
39 |
% |
|
|
|
|
|
|
39 |
% |
|
|
36 |
% |
|
|
|
|
|
|
42 |
% |
International as a percentage of total revenue
|
|
|
61 |
% |
|
|
|
|
|
|
61 |
% |
|
|
64 |
% |
|
|
|
|
|
|
58 |
% |
Revenue mix by product category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,676 |
|
|
|
10 |
% |
|
$ |
5,142 |
|
|
$ |
13,121 |
|
|
|
3 |
% |
|
$ |
12,794 |
|
|
|
|
|
1,338 |
|
|
|
11 |
% |
|
|
1,201 |
|
|
|
2,541 |
|
|
|
(14 |
)% |
|
|
2,955 |
|
|
|
|
|
3,437 |
|
|
|
1 |
% |
|
|
3,397 |
|
|
|
6,751 |
|
|
|
2 |
% |
|
|
6,650 |
|
|
|
|
|
960 |
|
|
|
(32 |
)% |
|
|
1,403 |
|
|
|
2,282 |
|
|
|
(18 |
)% |
|
|
2,788 |
|
Dermal fillers and cosmeceuticals (1)
|
|
|
806 |
|
|
|
54 |
% |
|
|
522 |
|
|
|
1,271 |
|
|
|
40 |
% |
|
|
908 |
|
Consolidated total revenue
|
|
$ |
12,217 |
|
|
|
5 |
% |
|
$ |
11,665 |
|
|
$ |
25,966 |
|
|
|
— |
% |
|
$ |
26,095 |
|
|
(1)
|
Beginning in 2010, we classified revenue from sales of BioForm’s Radiesse® dermal filler product in Japan and sales of Obagi’s cosmeceuticals product in the revenue category ‘Dermal filler and cosmeceuticals.’ Previously, we classified these sales in the revenue category ‘Products.’ As such, we reclassified the 2009 revenue from BioForm’s Radiesse® dermal filler product sales in Japan and Obagi cosmeceuticals product sales from ‘Products’ to ‘Dermal filler and cosmeceuticals.’
|
Products Revenue
As explained in more detail in the Products section of the Executive Summary above, our Products consist of configurable system platform that includes a console and one or more hand pieces. Each Product is configured to give our customers the ability to select the combination of platform and hand pieces that provides the applications that best fit their practice.
Products revenue increased 10% in the three months, and 3% for the six months, ended June 30, 2010, compared to the same periods in 2009. The increase in the three-month period was due primarily to a higher number of systems sold, albeit at a lower weighted average selling price (ASP). The increase in the six-month period was due primarily to a higher number of systems sold internationally; partially offset by a lower number of systems sold in the U.S., but in both geographies at lower weighted ASPs. The lower weighted ASPs resulted primarily from a combination of the following factors ─ that are not stated in order of magnitude as we are not able to separately quantify the impacts of each of these factors due to the custom system configuration of the units sold:
|
|
·
|
customers purchasing fewer applications;
|
|
|
·
|
our Products weighted ASPs were negatively affected by competitive pricing pressures in the marketplace; and
|
|
|
·
|
our international Products’ weighted ASPs were negatively affected by a higher percentage of revenue from distributors, which have a lower weighted ASP than our direct revenue.
|
Upgrades Revenue
As explained in more detail in the Products section of the Executive Summary above, our configurable system platforms allow customers to add applications to their existing systems to meet the changing needs of their practices. In some cases, when certain applications are desired that are only available on a platform other than the one owned by the customer, the upgrades revenue will include a platform exchange and additional hand pieces.
Upgrades revenue increased 11% in the three months ended June 30, 2010, compared to the same period in 2009. This increase was due primarily to an increase in platform upgrade revenue. Hand piece upgrade revenue remained relatively flat as an increase in hand piece upgrade unit sales were offset by a decrease in the hand pieces weighted ASPs. The decrease in hand piece weighted ASP resulted primarily from an unfavorable mix of applications due to fewer Pearl and Pearl fractional ─ our premium priced upgrade products ─ upgrades being sold during the three months ended June 30, 2010, compared to the same period in 2009.
Upgrades revenue decreased 14% in the six months ended June 30, 2010, compared to the same period in 2009. This decrease was due primarily to a decrease in hand piece weighted ASPs, resulting primarily from an unfavorable mix of applications due to fewer Pearl and Pearl fractional ─ our premium priced upgrade products ─ upgrades being sold during the three months ended June 30, 2010, compared to the same period in 2009. The lower ASPs were partially offset by an increase in hand piece upgrade unit sales.
Service Revenue
Our service revenue slightly increased by 1% in the three months and 2% in the six months ended June 30, 2010, compared to the same periods in 2009. This revenue has remained flat over the past several quarters due primarily to higher service contract revenue, offset by lower extended warranty contract amortization, as a result of lower ASP’s on our extended warranty contracts.
Titan Hand Piece Refill Revenue
Our Titan hand piece refill revenue decreased 32% in the three months and 18% in the six months ended June 2010, compared to the same periods in 2009. These decreases were due primarily to our voluntary recall of our Titan XL hand piece in the first-half of 2010, in which we provided our eligible customers with a fully “refilled” Titan XL hand piece.
Dermal Filler and Cosmeceuticals Revenue
Our dermal fillers and cosmeceuticals revenue increased 54% in three months, and 40% in the six months, ended June 30, 2010, compared to the same periods in 2009. These increases were due primarily to the commencement of the sale of Obagi products in Japan in February 2010.
Total U.S. Revenue
U.S revenue increased 5% in the three months ended June 30, 2010, compared to the same period in 2009. This increase was due primarily to an increase of in Products and Upgrades revenue of 28%, partially offset by lower Titan hand piece refill revenue of 37%, due primarily to the voluntary recall of our Titan XL hand piece in the first-half of 2010, in which we provided our customers with a fully “refilled” Titan XL hand piece.
U.S revenue decreased 14% in the six months ended June 30, 2010, compared to the same period in 2009. This decrease was due primarily to a decrease in Products and Upgrades revenue of 20% and, to a lesser extent, lower Titan hand piece refill revenue of 22%, due primarily to the voluntary recall of our Titan XL hand piece in the first-half of 2010, in which we provided our customers with a fully “refilled” Titan XL hand piece.
Total International Revenue
International revenue increased 4% in the three months ended June 30, 2010, compared to the same period in 2009. This increase was due primarily to:
|
|
·
|
an increase in Japan Products and cosmeceuticals revenue of 116%; partially offset by
|
|
|
·
|
a decrease in Australia Products revenue of 55%; and
|
|
|
·
|
a decrease in international Titan hand piece refill revenue of 29%, due primarily to the voluntary recall of our Titan XL hand piece in the first-half of 2010, in which we provided our customers with a fully “refilled” Titan XL hand piece.
|
International revenue increased 9% in the six months ended June 30, 2010, compared to the same period in 2009. This increase was due primarily to:
|
|
·
|
an increase in Japan Products and cosmeceuticals revenue of 56%; and
|
|
|
·
|
an increase in Canada Products revenue of 343%; partially offset by
|
|
|
·
|
a decrease in Europe Products revenue of 47%; and
|
|
|
·
|
a decrease in international Titan hand piece refill revenue of 16%, due primarily to the voluntary recall of our Titan XL hand piece in the first-half of 2010, in which we provided our customers with a fully “refilled” Titan XL hand piece.
|
For discussion of revenue by product category see discussion above.
Gross Profit
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
(Dollars in thousands)
|
2010
|
|
|
% Change
|
|
2009
|
|
2010
|
|
|
% Change
|
|
2009
|
|
|
|
|
$ |
6,882 |
|
|
|
5 |
% |
|
$ |
6,535 |
|
|
$ |
14,802 |
|
|
|
(2 |
)% |
|
$ |
15,029 |
|
As a percentage of net revenue
|
|
|
56 |
% |
|
|
|
|
|
|
56 |
% |
|
|
57 |
% |
|
|
|
|
|
|
58 |
% |
Our cost of revenue consists primarily of material, personnel expenses, royalty expense, warranty and manufacturing overhead expenses.
Gross profit as a percent of net revenue (gross margin) remained flat at 56% for both the three months ended June 30, 2010 and 2009, due primarily to a decrease in service related expenses resulting from reduced material costs, offset by an unfavorable product mix resulting from increased sales of our lower margin products, such as cosmeceuticals, and the $62,000 expense associated with our voluntary Titan XL recall program.
Gross margin was 57% for the six months ended June 30, 2010, compared to 58% for the same period in 2009. This decrease in gross margin was due primarily to an unfavorable product mix resulting from increased sales of our lower margin products, such as cosmeceuticals, and the $487,000 expense associated with our voluntary Titan XL recall program; partly offset by an increase in margins related to reduced service related expenses resulting from reduced material costs.
Sales and Marketing
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
(Dollars in thousands)
|
2010
|
|
|
% Change
|
|
2009
|
|
2010
|
|
|
% Change
|
|
2009
|
|
|
|
|
$ |
6,452 |
|
|
|
6 |
% |
|
$ |
6,071 |
|
|
$ |
12,813 |
|
|
|
(2 |
)% |
|
$ |
13,074 |
|
As a percentage of total revenue
|
|
|
53 |
% |
|
|
|
|
|
|
52 |
% |
|
|
49 |
% |
|
|
|
|
|
|
50 |
% |
Sales and marketing expenses consist primarily of personnel expenses, expenses associated with customer-attended workshops and trade shows, post-marketing studies, and advertising.
Sales and marketing expenses increased $381,000 in the three ended June 30, 2010, compared to the same period in 2009. This increase was due primarily to:
|
|
·
|
expenses of $281,000 related to the creation of three new departments in the first quarter of 2010: post marketing studies (clinical development), business development and telesales;
|
|
|
·
|
an increase in advertising and printing expenses of $125,000; and
|
|
|
·
|
an increase in travel and related expenses of $108,000, mainly from our international sales force; partially offset by
|
|
|
·
|
lower personnel expenses of $136,000 in the U.S. and internationally, with the exception of Japan, due primarily to lower sales commission expenses resulting from lower revenue, and to lower sales headcount, resulting from our 2009 restructuring efforts. Personnel expense in Japan increased as we hired additional sales representative and established an administrative infrastructure to sell Obagi cosmeceuticals.
|
Sales and marketing expenses decreased $261,000 in the six months ended June 30, 2010, compared to the same period in 2009. This decrease was mainly due to:
|
|
·
|
a decrease in personnel expenses of $532,000, due primarily to lower sales headcount, resulting from our 2009 restructuring efforts, and lower sales commission expenses resulting from lower revenue;
|
|
|
·
|
a decrease in sales of demonstration equipment expense of $212,000, due primarily to lower sales headcount, fewer workshops and fewer trade shows;
|
|
|
·
|
a decrease in customer-attended workshops and trade show expenses of $189,000, due primarily to fewer workshops as a result of lower sales headcount and due to cost cutting measures for trade shows;
|
|
|
·
|
a decrease in expenses related to our annual sales meeting of $186,000, which reflects fewer sales professionals attending the meeting (due to the reduction in headcount) and reduced third party expenses associated with the meeting; partially offset by
|
|
|
·
|
expenses of $541,000 related to the creation of three new departments in the first quarter of 2010: clinical development (post marketing studies), business development and telesales;
|
|
|
·
|
an increase in advertising and printing expenses of $209,000; and
|
|
|
·
|
an increase in travel and related expenses of $121,000, mainly from our international sales force.
|
Sales and marketing expenses, as a percentage of net revenue, increased to 53% for the three months ended June 30, 2010, compared to 52% for the same period in 2009. This increase in expenses as a percentage of net revenue was due primarily to higher expense partially offset by higher revenue in the three months ended June 30, 2010, compared to the same period in 2009. Sales and marketing expenses, as a percentage of net revenue, decreased to 49% for the six months ended June 30, 2010, compared to 50% for the same period in 2009. This decrease in expenses as a percentage of net revenue was due primarily to higher revenue coupled with lower expense in the six months ended June 30, 2010, compared to the same period in 2009.
Research and Development (R&D)
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
(Dollars in thousands)
|
2010
|
|
|
% Change
|
|
2009
|
|
2010
|
|
|
% Change
|
|
2009
|
|
|
|
|
$ |
1,506 |
|
|
|
1 |
% |
|
$ |
1,495 |
|
|
$ |
2,960 |
|
|
|
(9 |
) % |
|
$ |
3,238 |
|
As a percentage of total revenue
|
|
|
12 |
% |
|
|
|
|
|
|
13 |
% |
|
|
11 |
% |
|
|
|
|
|
|
12 |
% |
R&D expenses consist primarily of personnel expenses, clinical research, regulatory and material costs.
R&D expenses slightly increased by $11,000 in the three months ended June 30, 2010, compared to the same period in 2009. This decrease was due primarily to:
|
|
·
|
a net increase in personnel expenses and consulting services of $76,000, resulting mainly from an increase in headcount in the second quarter of 2010; partially offset by
|
|
|
·
|
a decrease in prototype equipment expenses in clinical research of $56,000 and lower material costs of $30,000 reflecting R&D efforts for our TruSculpt product during the first-half of 2009 that was not replicated in the first-half of 2010.
|
R&D expenses decreased by $278,000 for the six months ended June 30, 2010, compared to the same period in 2009. This decrease was due primarily to lower material spending of $125,000 and lower prototype equipment expense in clinical research of $67,000 reflecting R&D efforts for our TruSculpt product during the first-half of 2009, that was not replicated in the first-half of 2010.
R&D expenses, as a percentage of net revenue, decreased to 12% for the three months ended June 30, 2010, compared to 13% for the same period in 2009. This decrease in expenses as a percentage of net revenue was due primarily to higher revenue in the three months ended June 30, 2010, compared to the same period in 2009. R&D expenses, as a percentage of net revenue, decreased to 11% for the six months ended June 30, 2010, compared to 12% for the same period in 2009. This decrease in expenses as a percentage of net revenue was due primarily to higher revenue coupled with lower expense in the six months ended June 30, 2010, compared to the same period in 2009.
General and Administrative (G&A)
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
(Dollars in thousands)
|
|
2010
|
|
% Change
|
|
2009
|
|
|
2010
|
|
% Change
|
|