form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q
 

 (Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the quarterly period ended September 30, 2012

OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period _____ to_____.

Commission file number: 000-50644


Cutera, Inc.
(Exact name of registrant as specified in its charter)


 
Delaware
 
77-0492262
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification no.)

3240 Bayshore Blvd., Brisbane, California 94005
(Address of principal executive offices)

(415) 657-5500
(Registrant’s telephone number, including area code)
 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    x    No    ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x     No    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

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 October 26, 2012 was 14,127,344.
 


 
 

 
 
CUTERA, INC.

FORM 10-Q

TABLE OF CONTENTS

 
 
Page
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1
3
 
3
 
4
 
5
 
6
 
7
Item 2
15
Item 3
24
Item 4
24
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1
25
Item 1A
25
Item 2
36
Item 3
36
Item 4
36
Item 5
36
Item 6
37
 
38

 
2

 
PART I. FINANCIAL INFORMATION

ITEM 1.

CUTERA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)
 
 
 
September 30, 2012
(unaudited)
 
 
December 31, 2011
(audited)
 
Assets
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
24,334
 
 
$
14,020
 
Marketable investments
 
 
55,795
 
 
 
74,666
 
Accounts receivable, net
 
 
7,845
 
 
 
5,193
 
Inventories
 
 
12,477
 
 
 
10,729
 
Deferred tax asset
 
 
49
 
 
 
55
 
Other current assets and prepaid expenses
 
 
1,443
 
 
 
1,432
 
Total current assets
 
 
101,943
 
 
 
106,095
 
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
 
885
 
 
 
853
 
Long-term investments
 
 
1,050
 
 
 
3,027
 
Deferred tax asset, net of current portion
 
 
470
 
 
 
446
 
Intangibles, net
 
 
2,876
 
 
 
446
 
Goodwill
   
1,339
     
 
Other long-term assets
 
 
517
 
 
 
486
 
Total assets
 
$
109,080
 
 
$
111,353
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
Accounts payable
 
$
2,297
 
 
$
2,573
 
Accrued liabilities
 
 
9,486
 
 
 
9,262
 
Deferred revenue
 
 
6,299
 
 
 
5,185
 
Total current liabilities
 
 
18,082
 
 
 
17,020
 
 
 
 
 
 
 
 
 
 
Deferred rent
 
 
1,347
 
 
 
1,448
 
Deferred revenue, net of current portion
 
 
1,411
 
 
 
840
 
Income tax liability
 
 
471
 
 
 
478
 
Total liabilities
 
 
21,311
 
 
 
19,786
 
 
 
 
 
 
 
 
 
 
Commitments and Contingencies (Note 12)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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: 14,127,344 and 13,948,395 shares at September 30, 2012 and December 31, 2011, respectively
 
 
14
 
 
 
14
 
Additional paid-in capital
 
 
98,865
 
 
 
95,719
 
Accumulated deficit
 
 
(10,950
)
 
 
(3,325
 )
Accumulated other comprehensive loss
 
 
(160
)
 
 
(841
)
Total stockholders’ equity
 
 
87,769
 
 
 
91,567
 
Total liabilities and stockholders’ equity
 
$
109,080
 
 
$
111,353
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
3

 
CUTERA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
September 30,
 
 
September 30,
 
 
 
2012
 
 
2011
 
 
2012
 
 
2011
 
Net revenue:
 
   
 
 
   
 
 
   
 
 
   
 
Products
 
$
15,128
 
 
$
12,005
 
 
$
42,138
 
 
$
31,599
 
Service
 
 
4,298
 
 
 
3,227
 
 
 
12,606
 
 
 
10,149
 
Total net revenue
 
 
19,426
 
 
 
15,232
 
 
 
54,744
 
 
 
41,748
 
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Products
 
 
6,618
 
 
 
4,580
 
 
 
19,237
 
 
 
12,078
 
Service
 
 
2,210
 
 
 
2,192
 
 
 
6,710
 
 
 
6,394
 
Total cost of revenue
 
 
8,828
 
 
 
6,772
 
 
 
25,947
 
 
 
18,472
 
Gross profit
 
 
10,598
 
 
 
8,460
 
 
 
28,797
 
 
 
23,276
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
 
 
7,014
 
 
 
6,426
 
 
 
21,563
 
 
 
18,720
 
Research and development
 
 
2,217
 
 
 
2,352
 
 
 
6,305
 
 
 
6,828
 
General and administrative
 
 
2,475
 
 
 
2,310
 
 
 
8,824
 
 
 
7,226
 
Total operating expenses
 
 
11,706
 
 
 
11,088
 
 
 
36,692
 
 
 
32,774
 
Loss from operations
 
 
(1,108
)
 
 
(2,628
)
 
 
(7,895
)
 
 
(9,498
)
Interest and other income, net
 
 
152
 
 
 
91
 
 
 
392
 
 
 
474
 
Loss before income taxes
 
 
(956
)
 
 
(2,537
)
 
 
(7,503
)
 
 
(9,024
)
Provision (benefit) for income taxes
 
 
(64
)
 
 
326
 
 
 
122
 
 
 
150
 
Net loss
 
$
(892
)
 
$
(2,863
)
 
$
(7,625
)
 
$
(9,174
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and Diluted
 
$
(0.06
)
 
$
(0.21
)
 
$
(0.54
)
 
$
(0.67
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average number of shares used in per share calculations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and Diluted
 
 
14,127
 
 
 
13,862
 
 
 
14,061
 
 
 
13,765
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
4


CUTERA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
September 30,
 
 
September 30,
 
 
 
2012
 
 
2011
 
 
2012
 
 
2011
 
Net loss
 
$
(892
)
 
$
(2,863
)
 
$
(7,625
)
 
$
(9,174
)
Other comprehensive income:
 
   
 
 
   
 
 
   
 
 
   
 
Net change in unrealized gain on available-for-sale securities
 
 
267
 
 
 
35
 
 
 
804
 
 
 
725
 
Provision (benefit) for income taxes related to items of other comprehensive income
 
 
102
 
 
 
(262
)
 
 
123
 
 
 
(194
)
Other comprehensive income, net of tax
 
 
165
 
 
 
297
 
 
 
681
 
 
 
919
 
Comprehensive loss
 
$
(727
)
 
$
(2,566
)
 
$
(6,944
)
 
$
(8,255
)
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
5

 
CUTERA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
 
(unaudited)
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
2012
 
 
2011
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 
$
(7,625
)
 
$
(9,174
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
 
 
 
Stock-based compensation
 
 
2,334
 
 
 
3,105
 
Tax benefit from stock-based compensation
 
 
 
 
 
21
 
Excess tax benefit related to stock-based compensation
 
 
 
 
 
(21
)
Depreciation and amortization
 
 
1,186
 
 
 
483
 
Other
 
 
(113
)
 
 
235
 
Changes in assets and liabilities:
 
 
 
 
 
 
 
 
Accounts receivable
 
 
(2,698
)
 
 
106
 
Inventories
 
 
(196
)
 
 
(3,211
)
Other current assets and prepaid expenses
 
 
717
 
 
 
1,951
 
Other long-term assets
   
(31
)
   
(493
)
Accounts payable
 
 
(276
)
 
 
855
 
Accrued liabilities
 
 
(163
)
 
 
1,086
 
Deferred rent
 
 
(24
)
 
 
(10
)
Deferred revenue
 
 
905
 
 
 
(698
)
Income tax liability
 
 
(7
)
 
 
12
 
Net cash used in operating activities
 
 
(5,991
)
 
 
(5,753
)
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
Acquisition of property and equipment
 
 
(358
)
 
 
(421
)
Disposal of property and equipment
   
     
36
 
Business acquisition
 
 
(5,091
)
 
 
 
Proceeds from sales of marketable and long-term investments
 
 
26,361
 
 
 
17,597
 
Proceeds from maturities of marketable investments
 
 
34,445
 
 
 
35,085
 
Purchase of marketable investments
 
 
(39,864
)
 
 
(46,255
)
Net cash provided by investing activities
 
 
15,493
 
 
 
6,042
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
Proceeds from exercise of stock options and employee stock purchase plan
 
 
812
 
 
 
1,045
 
Excess tax benefit related to stock-based compensation
 
 
 
 
 
21
 
Net cash provided by financing activities
 
 
812
 
 
 
1,066
 
 
 
 
 
 
 
 
 
 
Net increase in cash and cash equivalents
 
 
10,314
 
 
 
1,355
 
Cash and cash equivalents at beginning of period
 
 
14,020
 
 
 
12,519
 
Cash and cash equivalents at end of period
 
$
24,334
 
 
$
13,874
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
6

 
CUTERA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Description of Operations and Principles of Consolidation.
Cutera, Inc. (Cutera or the Company) is a global provider of laser and light-based aesthetic systems for practitioners worldwide. The Company designs, develops, manufactures, and markets the CoolGlide, Xeo, Solera, GenesisPlus, Excel V and truSculpt product platforms for use by physicians and other qualified practitioners to allow its customers to offer safe and effective aesthetic treatments to their customers. The Xeo and Solera platforms offer multiple hand pieces and applications, which allow customers to upgrade their systems (Upgrade revenue). In addition to systems and Upgrade revenue, the Company generates revenue from the sale of post warranty service contracts, providing services for products that are out of warranty, and Titan hand piece refills. In Japan the Company also distributes third party manufactured dermal fillers, cosmeceuticals and a Q-switched laser system called myQ.

In February 2012, the Company acquired the global aesthetic business unit of IRIDEX Corporation (or Iridex), which included various laser systems (such as the VariLite and Gemini) and an installed base of customers, whose products are being serviced by the Company.

Headquartered in Brisbane, California, the Company has wholly-owned subsidiaries in Australia, Canada, and France and Japan that market, sell and service its products outside of the United States. Effective March 31, 2012, the Company decided to discontinue its direct operations in Spain and the United Kingdom and instead plans on seeking a distributor to market its products in these countries. The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries and all inter-company transactions and balances have been eliminated.

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, 2011 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, 2011 filed with the Securities and Exchange Commission, or SEC, on March 15, 2012.

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.

Note 2. Cash and Cash Equivalents, Marketable Securities 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.”
 
 
7

 
The following tables summarize unrealized gains and losses related to our marketable investments and long-term investments, both designated as available-for-sale (in thousands):
 
September 30, 2012
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Fair Market Value
 
Cash and cash equivalents:
 
   
 
 
   
 
 
   
 
 
   
 
Cash
 
$
1,853
 
 
$
 
 
$
 
 
$
1,853
 
Money market funds
 
 
14,577
 
 
 
 
 
 
 
 
 
14,577
 
Commercial paper
 
 
7,904
 
 
 
 
 
 
 
 
 
7,904
 
Total cash and cash equivalents
 
 
24,334
 
 
 
 
 
 
 
 
 
24,334
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
 
 
23,884
 
 
 
51
 
 
 
(1
)
 
 
23,934
 
Municipal securities
 
 
6,046
 
 
 
32
 
 
 
(1
)
 
 
6,077
 
Commercial paper
 
 
7,507
 
 
 
2
 
 
 
 
 
 
7,509
 
Corporate debt securities
 
 
18,215
 
 
 
61
 
 
 
(1
)
 
 
18,275
 
Total marketable investments
 
 
55,652
 
 
 
146
 
 
 
(3
)
 
 
55,795
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term investment in auction rate securities
 
 
1,200
 
 
 
 
 
 
(150
)
 
 
1,050
 
Total cash, cash equivalents, marketable investments and long-term investments
 
$
81,186
 
 
$
146
 
 
$
(153
)
 
$
81,179
 
 
 
December 31, 2011
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Fair Market Value
 
Cash and cash equivalents:
 
   
 
 
   
 
 
   
 
 
   
 
Cash
 
$
2,153
 
 
$
 
 
$
 
 
$
2,153
 
Money market funds
 
 
7,318
 
 
 
 
 
 
 
 
 
7,318
 
Commercial paper
 
 
4,549
 
 
 
 
 
 
 
 
 
4,549
 
Total cash and cash equivalents
 
 
14,020
 
 
 
 
 
 
 
 
 
14,020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government notes
 
 
3,655
 
 
 
10
 
 
 
 
 
 
3,665
 
U.S. government agencies
 
 
41,535
 
 
 
44
 
 
 
(14
)
 
 
41,565
 
Municipal securities
 
 
6,091
 
 
 
44
 
 
 
(1
)
 
 
6,134
 
Commercial paper
 
 
4,747
 
 
 
1
 
 
 
(1
)
 
 
4,747
 
Corporate debt securities
 
 
18,574
 
 
 
15
 
 
 
(34
)
 
 
18,555
 
Total marketable investments
 
 
74,602
 
 
 
114
 
 
 
(50
)
 
 
74,666
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term investment in auction rate securities
 
 
3,900
 
 
 
 
 
 
(873
)
 
 
3,027
 
Total cash, cash equivalents, marketable investments and long-term investments
 
$
92,522
 
 
$
114
 
 
$
(923
)
 
$
91,713
 

As of September 30, 2012 and December 31, 2011, the total gross unrealized losses were $153,000 and $923,000 respectively and were primarily related to long-term investments in auction rate securities (ARS), which were in an unrealized loss position for 12 months or greater. No other securities were in unrealized loss positions for more than 12 months.  The unrealized losses in the ARS securities are not attributed to changes in credit risk and the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.

Since February 2008, uncertainties in the credit markets affected the majority of ARS investments and auctions for the Company’s investments in these securities have failed to settle on their respective settlement dates. However, since 2009 $12.2 million of ARS were redeemed at full par value. The maturity date for the one remaining ARS investment in the Company’s portfolio is 2041.
 
 
8

 
The following table summarizes the estimated fair value of our securities available-for-sale and classified as cash and cash equivalents, marketable investments and long-term investments classified by the contractual maturity date of the security as of September 30, 2012 (in thousands):
 
 
 
Amount
 
Due in less than one year
 
$
35,073
 
Due in 1 to 5 years
 
 
28,626
 
Due in 5 to 10 years
 
 
 
Due in greater than 10 years
 
 
1,050
 
 
 
$
64,749
 

Note 3. 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 September 30, 2012, 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):

September 30, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Cash equivalents:
 
   
 
 
   
 
 
   
 
 
   
 
Money market funds
 
$
14,577
 
 
 
 
 
 
 
 
$
14,577
 
Commercial paper
 
 
 
 
 
7,904
 
 
 
 
 
 
7,904
 
Short-term marketable investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
 
 
 
 
 
23,934
 
 
 
 
 
 
23,934
 
Municipal securities
 
 
 
 
 
6,077
 
 
 
 
 
 
6,077
 
Commercial paper
 
 
 
 
 
7,509
 
 
 
 
 
 
7,509
 
Corporate debt securities
 
 
 
 
 
18,275
 
 
 
 
 
 
18,275
 
Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale auction rate securities
 
 
 
 
 
 
 
 
1,050
 
 
 
1,050
 
Total assets at fair value
 
$
14,577
 
 
$
63,699
 
 
$
1,050
 
 
$
79,326
 
 
 
9

 
As of December 31, 2011, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above was as follows (in thousands):

December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Cash equivalents:
 
   
 
 
   
 
 
   
 
 
   
 
Money market funds
 
$
7,318
 
 
 
 
 
 
 
 
$
7,318
 
Commercial paper
 
 
 
 
 
4,549
 
 
 
 
 
 
4,549
 
Short-term marketable investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government notes
 
 
 
 
 
3,665
 
 
 
 
 
 
3,665
 
U.S. government agencies
 
 
 
 
 
41,565
 
 
 
 
 
 
41,565
 
Municipal securities
 
 
 
 
 
6,134
 
 
 
 
 
 
6,134
 
Commercial paper
 
 
 
 
 
4,747
 
 
 
 
 
 
4,747
 
Corporate debt securities
 
 
 
 
 
18,555
 
 
 
 
 
 
18,555
 
Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale auction rate securities
 
 
 
 
 
 
 
 
3,027
 
 
 
3,027
 
Total assets at fair value
 
$
7,318
 
 
$
79,215
 
 
$
3,027
 
 
$
89,560
 

The Company’s Level 2 investments include U.S. government-backed securities and corporate securities that are valued based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The average remaining maturity of the Company’s Level 2 investments as of September 30, 2012 is less than 36 months and all of these investments are rated by S&P and Moody’s at A or better.

At September 30, 2012, observable market information was not available to determine the fair value of the Company’s ARS investments. Therefore, the fair value was based on broker-provided 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 expected future cash flows of the ARS were discounted using a risk adjusted discount rate that compensated for the illiquidity. Projected future cash flows over the economic life of the ARS (of approximately 12.5 years) were modeled based on the contractual penalty rates for the security added to a tax adjusted LIBOR interest rate curve. The discount rates that were applied to the cash flows were based on a premium over the projected yield curve and included an adjustment for credit, illiquidity, and other risk factors. The valuation of the Company’s ARS investment is subject to uncertainties that are difficult to predict. Factors that may impact the valuation in the future include changes to credit ratings of the security, as well as to the underlying assets supporting that security, rates of default of the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity. This financial instrument is classified within Level 3 of the fair value hierarchy.
 
The table presented below summarizes the change in carrying value associated with Level 3 financial assets, which represents the Company’s investment in long term ARS, for the nine months ended September 30, 2012 (in thousands):

   
Amount
 
Balance at December 31, 2011
  $ 3,027  
Total gains and losses included in other comprehensive loss
    723  
Settlements
    (2,700 )
Balance at September 30, 2012
  $ 1,050  
 
Note 4. Inventories
Inventories consist of the following (in thousands):

 
 
September 30, 2012
 
 
December 31, 2011
 
Raw materials
 
$
8,077
 
 
$
6,587
 
Finished goods
 
 
4,400
 
 
 
4,142
 
Total
 
$
12,477
 
 
$
10,729
 
 
 
10

 
Note 5. Acquisition
 
On February 2, 2012, Cutera acquired certain assets and liabilities of Iridex’s global aesthetics business unit for $5.1 million in cash. This business is engaged in developing, manufacturing, marketing and servicing laser-based medical systems and delivery devices. The business purpose of this transaction was to acquire access to an expanded installed base of customers, add to Cutera’s product offerings and acquire a recurring stream of service revenue. This acquisition was considered a business combination for accounting purposes, and as such, in addition to valuing all the assets, the Company recorded goodwill associated with the expected synergies from leveraging the customer relationships and integrating new product offerings into the Company’s business.
 
The fair values of the assets acquired were determined to be $4.8 million of net tangible and intangible assets and $1.3 million of goodwill. The customer relationship intangible assets are being amortized over 5 years on a straight-line basis. Other intangible assets are being amortized over 11 months to 5 years from the date of acquisition on a straight-line basis.
 
The recorded purchase price amounts are preliminary and subject to change as the Company is awaiting additional information related to inventory.
 
The following table summarizes the fair value as of February 2, 2012 of the net assets acquired (in thousands):

Purchase price paid
 
$
5,091
 
         
Assets (liabilities acquired)
 
 
 
 
Inventory
 
 
1,552
 
Customer relationship intangible assets
 
 
2,510
 
Other identified intangible assets
   
780
 
Goodwill
 
 
1,339
 
Deferred service revenue
 
 
(780
)
Accrued warranty liability
 
 
(310
)
Total
 
$
5,091
 

Disclosure of the amounts of revenue and earnings of the asset and liabilities of the acquired Iridex aesthetics business is not practicable because the acquired business was immediately integrated into Cutera's operations.

Note 6. Goodwill and Other Intangible Assets

Goodwill and other intangible assets comprise a patent sublicense acquired from Palomar in 2006; a technology sublicense acquired in 2002; and, intangible assets and goodwill related to the acquisition of Iridex’s aesthetic business unit. The components of intangible assets were as follows (in thousands):

 
 
September 30, 2012
 
 
 
Gross Carrying
Amount
 
 
Accumulated
Amortization
Amount
 
 
Net
Carrying
Amount
 
Patent sublicense
 
$
1,218
   
$
896
   
$
322
 
Technology sublicense
 
 
538
 
 
 
538
 
 
 
 
Customer relationship intangible related to acquisition
   
2,510
     
335
     
2,175
 
Other identified intangible assets related to acquisition
   
780
     
401
     
379
 
Goodwill
 
 
1,339
 
 
 
 
 
 
1,339
 
Total
 
$
6,385
 
 
$
2,170
 
 
$
4,215
 

 
11

 
 
 
December 31, 2011
 
 
 
Gross Carrying
Amount
 
 
Accumulated
Amortization
Amount
 
 
Net
Carrying
Amount
 
Patent sublicense
 
$
1,218
 
 
$
793
 
 
$
425
 
Technology sublicense
 
 
538
 
 
 
517
 
 
 
21
 
Total
 
$
1,756
 
 
$
1,310
 
 
$
446
 

Amortization expense for intangible assets was $860,000 and $144,000 for the nine-month periods ended September 30, 2012 and 2011 respectively.

Based on intangible assets recorded at September 30, 2012, and assuming no subsequent additions to, or impairment of the underlying assets, the remaining estimated annual amortization expense is expected to be as follows (in thousands):
 
Fiscal Year Ending December 31,
 
Amount
 
2012 (remainder)
 
$
310
 
2013
 
 
696
 
2014
 
 
696
 
2015
 
 
569
 
2016
 
 
558
 
Thereafter
 
 
47
 
Total
 
$
2,876
 

Note 7. Warranty

The Company provides a standard one-year warranty on all systems. Warranty coverage provided is for labor and parts necessary to repair the systems during the warranty period. The Company accounts for the estimated warranty cost of the standard warranty coverage as a charge to costs of revenue when revenue is recognized. The estimated warranty cost is based on historical product performance. To determine the estimated warranty reserve, the Company utilizes actual service records to calculate the average service expense per system and applies this to the equivalent number of units exposed under warranty. The Company updates these estimated charges every quarter.

The following table provides the changes in the product warranty accrual for the nine-month period ended September 30, 2012 (in thousands):

   
Amount
 
Beginning Balance – December 31, 2011
  $ 1,121  
Add: Accruals for warranties issued during the period
    2,414  
Add: Warranties assumed with business acquisition
    310  
Less: Settlements made during the period
    (2,599 )
Ending Balance –September 30, 2012
  $ 1,246  

Note 8. Deferred Service Contract Revenue

Service contract revenue is recognized on a straight-line basis over the period of the applicable extended warranty contract.
 
 
12

 
The following table provides changes in deferred service contract revenue for the nine-month period ended September 30, 2012 and 2011 (in thousands):
 
 
 
September 30
 
 
 
2012
 
2011
 
Beginning Balance
 
$
5,838
 
 
$
6,765
 
Add:         Payments received
 
 
9,335
 
 
 
6,332
 
Add:         Contract revenue assumed with business acquisition
 
 
780
 
 
 
 
Less:         Revenue recognized
 
 
(8,359
)
 
 
(7,024
)
Ending Balance
 
$
7,594
 
 
$
6,073
 

Costs incurred under service contracts were $5.4 million for the nine-month period ended September 30, 2012 and $3.1 million for the nine-month period ended September 30, 2011 which are recognized as incurred.

Note 9. Stock-based Compensation Expense

Stock-based compensation expense by department recognized during the three and nine-month periods ended September 30, 2012 and 2011 was as follows (in thousands):
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
September 30,
 
 
September 30,
 
 
 
2012
 
 
2011
 
 
2012
 
 
2011
 
Cost of revenue
 
$
169
 
 
$
179
 
 
$
480
 
 
$
505
 
Sales and marketing
 
 
177
 
 
 
210
 
 
 
476
 
 
 
625
 
Research and development
 
 
126
 
 
 
184
 
 
 
419
 
 
 
524
 
General and administrative
 
 
337
 
 
 
321
 
 
 
959
 
 
 
1,451
 
Total stock-based compensation expense
 
$
809
 
 
$
894
 
 
$
2,334
 
 
$
3,105
 

Under the 2004 Equity Incentive Plan, the Company issued 178,949 shares of common stock during the nine-month period ended September 30, 2012, in conjunction with stock options exercised, restricted stock units released and purchases associated with the Employee Stock Purchase Plan.

During the nine-month period ended September 30, 2012, the following number of equity awards of the Company’s common stock was granted (in thousands):
   
Shares
 
Stock options
    898  
Restricted stock Units
    148  
Performance stock units
    42 *
Total
    1,088  

* In the third quarter of 2012, the Company granted its executive officers 42,250 Performance Stock Units, or PSUs that shall vest on June 1, 2013, subject to the recipient’s continued service through that date. At the vest date, the Company shall issue fully-paid up common stock based on the actual revenue achievement as a percentage of three revenue based performance goals. If the revenue achievement is below 50% for a performance goal, then zero (0) common stock shall be issued for that goal; and for achievement of greater than 50% the number of common stock to be issued shall be prorated but capped at 200% of the target.

As of September 30, 2012, there was $4.2 million of unrecognized compensation expense, net of projected forfeitures related to non-vested stock awards. The expense is expected to be recognized over the remaining weighted-average period of 2.7 years.

Note 10. 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.
 
 
13

 
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
 
 
Nine Months Ended
 
 
 
September 30,
 
 
September 30,
 
 
 
2012
 
 
2011
 
 
2012
 
 
2011
 
Options to purchase common stock
 
 
3,910
 
 
 
3,990
 
 
 
3,680
 
 
 
3,619
 
Restricted stock units
 
 
132
 
 
 
56
 
 
 
79
 
 
 
62
 
Performance stock units
   
16
     
 
   
14
     
 
Employee stock purchase plan shares
 
 
30
 
 
 
30
 
 
 
52
 
 
 
51
 
Total
 
 
4,088
 
 
 
4,076
 
 
 
3,825
 
 
 
3,732
 

Note 11. Income Taxes

For the three months ended September 30, 2012 and 2011, the Company’s tax benefit was $64,000 and tax expense was $326,000, respectively. For the nine months ended September 30, 2012 and 2011, the Company’s income tax expense was $122,000 and $150,000, respectively. The Company’s income tax expense (benefit) was primarily attributable to income taxes of the Company’s international operations, offset by benefits for income taxes related to gains and losses on marketable and long term investments recorded in other comprehensive loss.

Included in the $326,000 expense for the three months ended September 30, 2011, was a discrete charge of $262,000 for the clearing of disproportionate tax effects in accumulated other comprehensive loss related to unrealized gains and losses on marketable and long term investments. Included in the $150,000 expense for the nine months ended September 30, 2011 was a discrete net charge of $194,000 for the clearing of disproportionate tax effects in other comprehensive income related to unrealized gains and losses on marketable investments, offset by a discrete tax benefit of $246,000 resulting from the carry-back of fiscal year 2010 federal losses to obtain a refund of alternative minimum taxes paid for fiscal year 2008.

The Company utilizes the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. As of September 30, 2012 and December 31, 2011, the Company had a 100% valuation allowance against its U.S. deferred tax assets. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. In evaluating the ability to recover deferred tax assets, the Company considered available positive and negative evidence giving greater weight to its recent cumulative losses and its ability to carry-back losses against prior taxable income and lesser weight to its projected financial results due to the challenges of forecasting future periods. The Company also considered, commensurate with its objective verifiability, the forecast of future taxable income including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.

As of September 30, 2012, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined and disclosed pursuant to FASB ASC Topic 740 as of December 31, 2011.

Note 12. Commitments and Contingencies

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 with its suppliers were not significant at September 30, 2012.

Litigation and Litigation Settlements
The Company is named from time to time as a party to product liability and contractual lawsuits in the normal course of business. The Company routinely assesses the likelihood of any adverse judgments or outcomes related to legal matters and claims, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after analysis of each known issue, historical experience, whether it is more likely than not that the Company shall incur a loss, and whether the loss is estimable. As of September 30, 2012, the Company had accrued $296,000 related to pending product liability and contractual lawsuits.

 
14


ITEM 2.

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, 2011 as contained in our annual report on Form 10-K filed with the SEC on March 15, 2012. 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 25, 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.
 
Results of Operations. This section provides our analysis and outlook for the significant line items on our Consolidated Statements of Operations.
 
Liquidity and Capital Resources. This section provides an analysis of our liquidity and cash flows, as well as a discussion of our commitments.

Executive Summary

Company Description.

We are a global medical device company specializing in the design, development, manufacture, marketing and servicing of laser and light-based aesthetics systems for practitioners worldwide. We offer easy-to-use products based on seven platforms — CoolGlide®, Xeo®, Solera®, GenesisPlusTM, Excel VTM, myQTM, and truSculptTM, each of which enables physicians and other qualified practitioners to perform safe and effective aesthetic procedures for their customers. The Xeo and Solera platforms offer multiple hand pieces and applications, which allow customers to upgrade their systems, which we treat as Upgrade revenue. In addition to systems and Upgrade revenue, we generate revenue from the sale of post warranty service contracts, providing services for products that are out of warranty; Titan hand piece refills; and third party manufactured dermal fillers and cosmeceutical products.

In February 2012, we acquired the global aesthetic business unit of Iridex Inc., which included various laser systems (such as the VariLite and Gemini) and an installed base of customers, whose products are serviced by us.
 
Our corporate headquarters and U.S. operations are located in Brisbane, California, from where we conduct our manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. In the United States, we market, sell and service our products through direct sales and service employees, and a distribution relationship with PSS World Medical Shared Services, Inc. (“PSS”), a wholly owned subsidiary of PSS World Medical which has over 700 sales representatives serving physician offices throughout the United States. We also sell certain items such as our Titan hand piece refills and marketing brochures online.
 
 
15

 
International sales are generally made through direct sales employees and a worldwide distributor network in over 40 countries. Outside of the United States, we have a direct sales presence in Australia, Canada, France and Japan. Effective March 31, 2012, we decided to discontinue our direct operations in Spain and the United Kingdom and instead plan on seeking a distributor to market our products in these countries.

Products

Our revenue is derived from the sale of Products, Upgrades, Service, Titan hand piece refills, and Dermal fillers and cosmeceutical products. Product revenue represents the sale of a system. A system consists of a console that incorporates a universal graphic user interface, a laser and/or light-based module, control system software and high voltage electronics; as well as one or more hand pieces. However, depending on the application, the laser or light-based module is sometimes contained in the hand piece, such as with our Pearl and Pearl Fractional applications, instead of within the console.

We offer our customers the ability to select the system that best fits their practice at the time of purchase and then to cost-effectively add applications to their system as their practice grows. This provides customers the flexibility to upgrade their systems whenever they want and provides us with a source of recurring revenue which we classify as Upgrade revenue. Service revenue relates to amortization of prepaid service contracts, direct billings for detachable hand piece replacements and revenue for parts and labor on out-of-warranty products. Titan hand piece refill revenue is associated with our Titan hand piece which requires replacement of the optical source after a set number of pulses have been used. In Japan, we distribute Merz Pharma GmbH’s (Merz) Radiesse® dermal filler product; and Obagi Medical Products, Inc.’s (Obagi) cosmeceutical products.

Significant Business Trends

We believe that our ability to grow revenue will be primarily dependent on the following:

 
Continuing to expand our product offerings ─ both through internal development and sourcing from other vendors.