UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015
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 |
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(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 ☒ 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 ☒ |
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 ☒
The number of shares of Registrant’s common stock issued and outstanding as of October 31, 2015 was 12,928,577.
FORM 10-Q
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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ITEM 1. |
FINANCIAL STATEMENTS |
CUTERA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
|
September 30, 2015 |
December 31, 2014 |
|||||||
|
Assets |
||||||||
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Current assets: |
||||||||
|
Cash and cash equivalents |
$ | 10,055 | $ | 9,803 | ||||
|
Marketable investments |
37,689 | 71,343 | ||||||
|
Accounts receivable, net |
9,013 | 11,137 | ||||||
|
Inventories |
13,479 | 10,988 | ||||||
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Deferred tax asset |
69 | 26 | ||||||
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Other current assets and prepaid expenses |
1,977 | 1,591 | ||||||
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Total current assets |
72,282 | 104,888 | ||||||
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Property and equipment, net |
1,386 | 1,461 | ||||||
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Deferred tax asset, net of current portion |
291 | 269 | ||||||
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Intangibles, net |
227 | 595 | ||||||
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Goodwill |
1,339 | 1,339 | ||||||
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Other long-term assets |
392 | 361 | ||||||
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Total assets |
$ | 75,917 | $ | 108,913 | ||||
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Liabilities and Stockholders' Equity |
||||||||
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Current liabilities: |
||||||||
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Accounts payable |
$ | 2,659 | $ | 3,083 | ||||
|
Accrued liabilities |
12,234 | 11,007 | ||||||
|
Deferred revenue |
8,470 | 8,898 | ||||||
|
Total current liabilities |
23,363 | 22,988 | ||||||
|
Deferred revenue, net of current portion |
2,495 | 4,346 | ||||||
|
Income tax liability |
187 | 145 | ||||||
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Other long-term liabilities |
538 | 926 | ||||||
|
Total liabilities |
26,583 | 28,405 | ||||||
|
Commitments and Contingencies (Note 10) |
||||||||
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Stockholders’ equity: |
||||||||
|
Convertible preferred stock, $0.001 par value; authorized: 5,000,000 shares; none issued and outstanding |
— | — | ||||||
|
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 13,136,245 and 14,446,950 shares at September 30, 2015 and December 31, 2014, respectively |
13 | 14 | ||||||
|
Additional paid-in capital |
81,043 | 105,721 | ||||||
|
Accumulated deficit |
(31,722 |
) |
(25,232 |
) | ||||
|
Accumulated other comprehensive income |
— | 5 | ||||||
|
Total stockholders’ equity |
49,334 | 80,508 | ||||||
|
Total liabilities and stockholders’ equity |
$ | 75,917 | $ | 108,913 | ||||
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)
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2015 |
2014 |
2015 |
2014 |
|||||||||||||
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Net revenue: |
||||||||||||||||
|
Products |
$ | 18,797 | $ | 14,409 | $ | 51,542 | $ | 39,332 | ||||||||
|
Service |
4,288 | 4,317 | 13,177 | 13,307 | ||||||||||||
|
Total net revenue |
23,085 | 18,726 | 64,719 | 52,639 | ||||||||||||
|
Cost of revenue: |
||||||||||||||||
|
Products |
7,625 | 5,877 | 22,555 | 16,871 | ||||||||||||
|
Service |
1,969 | 2,058 | 5,778 | 6,215 | ||||||||||||
|
Total cost of revenue |
9,594 | 7,935 | 28,333 | 23,086 | ||||||||||||
|
Gross profit |
13,491 | 10,791 | 36,386 | 29,553 | ||||||||||||
|
Operating expenses: |
||||||||||||||||
|
Sales and marketing |
8,790 | 7,805 | 26,043 | 22,890 | ||||||||||||
|
Research and development |
2,748 | 2,628 | 7,921 | 7,894 | ||||||||||||
|
General and administrative |
2,937 | 2,897 | 8,940 | 7,796 | ||||||||||||
|
Total operating expenses |
14,475 | 13,330 | 42,904 | 38,580 | ||||||||||||
|
Loss from operations |
(984 |
) |
(2,539 |
) |
(6,518 |
) |
(9,027 |
) | ||||||||
|
Interest and other income, net |
84 | — | 188 | 218 | ||||||||||||
|
Loss before income taxes |
(900 |
) |
(2,539 |
) |
(6,330 |
) |
(8,809 |
) | ||||||||
|
Provision for income taxes |
57 | 97 | 160 | 178 | ||||||||||||
|
Net loss |
$ | (957 |
) |
$ | (2,636 |
) |
$ | (6,490 |
) |
$ | (8,987 |
) | ||||
|
Net loss per share: |
||||||||||||||||
|
Basic and Diluted |
$ | (0.07 |
) |
$ | (0.18 |
) |
$ | (0.45 |
) |
$ | (0.63 |
) | ||||
|
Weighted-average number of shares used in per share calculations: |
||||||||||||||||
|
Basic and Diluted |
13,827 | 14,334 | 14,290 | 14,197 | ||||||||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2015 |
2014 |
2015 |
2014 |
|||||||||||||
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Net loss |
$ | (957 |
) |
$ | (2,636 |
) |
$ | (6,490 |
) |
$ | (8,987 |
) | ||||
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Other comprehensive loss: |
||||||||||||||||
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Available-for-sale investments |
||||||||||||||||
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Net change in unrealized gain (loss) on available-for-sale investments |
(19 |
) |
(57 |
) |
1 | (29 |
) | |||||||||
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Less: Reclassification adjustment for gains on investments recognized during the year |
(4 |
) |
(3 |
) |
(6 |
) |
(4 |
) | ||||||||
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Net change in unrealized gain (loss) on available-for-sale investments |
(23 |
) |
(60 |
) |
(5 |
) |
(33 |
) | ||||||||
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Tax benefit |
(6 |
) |
(10 |
) |
— | — | ||||||||||
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Other comprehensive loss, net of tax |
(17 |
) |
(50 |
) |
(5 |
) |
(33 |
) | ||||||||
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Comprehensive loss |
$ | (974 |
) |
$ | (2,686 |
) |
$ | (6,495 |
) |
$ | (9,020 |
) | ||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
Nine Months Ended September 30, |
||||||||
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2015 |
2014 |
|||||||
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Cash flows from operating activities: |
||||||||
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Net loss |
$ | (6,490 |
) |
$ | (8,987 |
) | ||
|
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
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Stock-based compensation |
2,987 | 2,298 | ||||||
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Depreciation and amortization |
912 | 989 | ||||||
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Other |
213 | 222 | ||||||
|
Changes in assets and liabilities: |
||||||||
|
Accounts receivable |
2,124 | 845 | ||||||
|
Inventories |
(2,491 |
) |
(2,100 |
) | ||||
|
Other current assets and prepaid expenses |
(138 |
) |
(181 |
) | ||||
|
Other long-term assets |
(31 |
) |
311 | |||||
|
Accounts payable |
(424 |
) |
898 | |||||
|
Accrued liabilities |
544 | (385 |
) | |||||
|
Other long-term liabilities |
(217 |
) |
(214 |
) | ||||
|
Deferred revenue |
(2,279 |
) |
1,507 | |||||
|
Income tax liability |
42 | 43 | ||||||
|
Net cash used in operating activities |
(5,248 |
) |
(4,754 |
) | ||||
|
Cash flows from investing activities: |
||||||||
|
Acquisition of property, equipment and software |
(703 |
) |
(390 |
) | ||||
|
Proceeds from sales of marketable investments |
19,271 | 11,501 | ||||||
|
Proceeds from maturities of marketable investments |
29,024 | 22,260 | ||||||
|
Purchase of marketable investments |
(14,887 |
) |
(36,539 |
) | ||||
|
Net cash provided by (used in) investing activities |
32,705 | (3,168 |
) | |||||
|
Cash flows from financing activities: |
||||||||
|
Repurchase of common stock |
(36,616 |
) |
— | |||||
|
Proceeds from exercise of stock options and employee stock purchase plan |
9,554 | 3,166 | ||||||
|
Payments on capital lease obligations |
(143 |
) |
(109 |
) | ||||
|
Net cash provided by (used in) financing activities |
(27,205 |
) |
3,057 | |||||
|
Net increase (decrease) in cash and cash equivalents |
252 | (4,865 |
) | |||||
|
Cash and cash equivalents at beginning of period |
9,803 | 16,242 | ||||||
|
Cash and cash equivalents at end of period |
$ | 10,055 | $ | 11,377 | ||||
|
Supplemental disclosure of non-cash items: |
||||||||
|
Repurchase of common stock acquired but not settled |
$ | 604 | $ | — | ||||
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 energy-based aesthetic systems for practitioners worldwide. The Company designs, develops, manufactures, and markets laser and other energy-based product platforms for use by physicians and other qualified practitioners, which enable them to offer safe and effective aesthetic treatments to their customers. The Company currently markets the following key product platforms: CoolGlide®, xeo®, solera®, GenesisPlusTM, excel VTM, truSculptTM, excel HRTM, enlightenTM and myQTM. The Company’s products offer multiple hand pieces and applications, which allow customers to upgrade their systems. The sales of systems, upgrades, hand pieces, Titan refills and the distribution of third party manufactured cosmeceuticals (or “Skincare”) are classified as “Product” revenue. In the second quarter of 2014, the Company terminated its agreement with Merz Pharma GmbH (“Merz”) for the distribution of its Radiesse dermal filler product. In addition to Product revenue, the Company generates revenue from the sale of post-warranty service contracts, parts, detachable hand piece replacements (except for Titan) and service labor for the repair and maintenance of products that are out of warranty, all of which is classified as “Service” revenue.
Headquartered in Brisbane, California, the Company has wholly-owned subsidiaries in Australia, Belgium, Canada, France, Hong Kong, Japan, Spain, Switzerland and the United Kingdom. The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries and all inter-company transactions and balances have been eliminated. The Company markets, sells and services its products outside of the United States through its direct employees as well as a global distributor network.
Unaudited Interim Financial Information
The interim 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, 2014 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 previously filed audited financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2015.
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 revenue elements, warranty obligations, sales commissions, accounts receivable and sales allowances, provision for excess and obsolete inventories, fair values of marketable investments, fair values of acquired intangible assets, useful lives of intangible assets and property and equipment, fair values of performance stock units and options to purchase the Company’s stock, recoverability of deferred tax assets, legal matters and claims, 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.
Recent Accounting Pronouncements
In May 2014, the Financial Accountings Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, or ASU 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In August 2015, the FASB issued an update to defer the effective date of this update by one year. The updated standard becomes effective for the Company in the first quarter of fiscal year 2018, but allows the Company to adopt the standard one year earlier if it so chooses. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its Consolidated Financial Statements and related disclosures, and is therefore unable to determine the impact on the Company's financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern. This standard update provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new guidance is effective for all annual and interim periods ending after December 15, 2016. The new guidance will not have an impact on the Company's consolidated financial statements.
Note 2. Cash, Cash Equivalents and Marketable Investments
The Company invests its cash primarily in money market funds, commercial paper, corporate notes and bonds, municipal bonds, and debt securities issued by the U.S. government and its agencies. 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 with maturities of greater than three months at the time of purchase are accounted for as “available-for-sale,” are carried at fair value with unrealized gains and losses reported as a component of stockholders’ equity, are held for use in current operations and are classified in current assets as “marketable investments.”
The following tables summarize the components, and the unrealized gains and losses position, related to the Company’s cash, cash equivalents and marketable investments (in thousands):
|
September 30, 2015 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Market Value |
||||||||||||
|
Cash and cash equivalents: |
||||||||||||||||
|
Cash |
$ | 7,137 | $ | — | $ | — | $ | 7,137 | ||||||||
|
Money market funds |
719 | — | — | 719 | ||||||||||||
|
Commercial paper |
2,199 | — | — | 2,199 | ||||||||||||
|
Total cash and cash equivalents |
10,055 | — | — | 10,055 | ||||||||||||
|
Marketable investments: |
||||||||||||||||
|
U.S. government notes |
7,766 | 23 | — | 7,789 | ||||||||||||
|
U.S. government agencies |
9,676 | 18 | — | 9,694 | ||||||||||||
|
Municipal securities |
3,913 | 8 | — | 3,921 | ||||||||||||
|
Commercial paper |
4,996 | 2 | — | 4,998 | ||||||||||||
|
Corporate debt securities |
11,288 | 3 | (4 |
) |
11,287 | |||||||||||
|
Total marketable investments |
37,639 | 54 | (4 |
) |
37,689 | |||||||||||
|
Total cash, cash equivalents and marketable investments |
$ | 47,694 | $ | 54 | $ | (4 |
) |
$ | 47,744 | |||||||
|
December 31, 2014 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Market Value |
||||||||||||
|
Cash and cash equivalents: |
||||||||||||||||
|
Cash |
$ | 7,761 | $ | — | $ | — | $ | 7,761 | ||||||||
|
Money market funds |
242 | — | — | 242 | ||||||||||||
|
Commercial paper |
1,800 | — | — | 1,800 | ||||||||||||
|
Total cash and cash equivalents |
9,803 | — | — | 9,803 | ||||||||||||
|
Marketable investments: |
||||||||||||||||
|
U.S. government notes |
18,345 | 17 | (1 |
) |
18,361 | |||||||||||
|
U.S. government agencies |
19,768 | 33 | (1 |
) |
19,800 | |||||||||||
|
Municipal securities |
3,607 | 3 | (3 |
) |
3,607 | |||||||||||
|
Commercial paper |
10,693 | 2 | — | 10,695 | ||||||||||||
|
Corporate debt securities |
18,875 | 13 | (8 |
) |
18,880 | |||||||||||
|
Total marketable investments |
71,288 | 68 | (13 |
) |
71,343 | |||||||||||
|
Total cash, cash equivalents and marketable investments |
$ | 81,091 | $ | 68 | $ | (13 |
) |
$ | 81,146 | |||||||
As of September 30, 2015 and December 31, 2014, total gross unrealized losses were $4,000 and $13,000, respectively, and were related to interest rate changes on available-for-sale marketable investments. The Company has concluded that it is more-likely-than-not that the securities will be held until maturity or the recovery of their cost basis. No securities were in an unrealized loss position for more than 12 months.
The following table summarizes the contractual maturities of the Company’s available-for-sale securities, classified as marketable investments as of September 30, 2015 (in thousands):
|
Amount |
||||
|
Due in less than one year |
$ | 26,103 | ||
|
Due in 1 to 3 years |
11,586 | |||
| Total marketable investments | $ | 37,689 | ||
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, 2015, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows (in thousands):
|
September 30, 2015 |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
|
Cash equivalents: |
||||||||||||||||
|
Money market funds |
$ | 719 | $ | — | $ | — | $ | 719 | ||||||||
|
Commercial paper |
— | 2,199 | — | 2,199 | ||||||||||||
|
Marketable investments: |
||||||||||||||||
|
Available-for-sale securities |
— | 37,689 | — | 37,689 | ||||||||||||
|
Total assets at fair value |
$ | 719 | $ | 39,888 | $ | — | $ | 40,607 | ||||||||
As of December 31, 2014, 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, 2014 |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
|
Cash equivalents: |
||||||||||||||||
|
Money market funds |
$ | 242 | $ | — | $ | — | $ | 242 | ||||||||
|
Commercial paper |
— | 1,800 | — | 1,800 | ||||||||||||
|
Marketable investments: |
||||||||||||||||
|
Available-for-sale securities |
— | 71,343 | — | 71,343 | ||||||||||||
|
Total assets at fair value |
$ | 242 | $ | 73,143 | $ | — | $ | 73,385 | ||||||||
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, 2015 is less than 36 months and all of these investments are rated by S&P and Moody’s at A or better.
Note 4. Inventories
As of September 30, 2015 and December 31, 2014, inventories consist of the following (in thousands):
|
September 30, 2015 |
December 31, 2014 |
|||||||
|
Raw materials |
$ | 8,379 | $ | 7,185 | ||||
|
Finished goods |
5,100 | 3,803 | ||||||
|
Total |
$ | 13,479 | $ | 10,988 | ||||
Note 5. 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 historical service costs to calculate the expected 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 three and nine months ended September 30, 2015 and 2014 (in thousands):
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2015 |
2014 |
2015 |
2014 |
|||||||||||||
|
Beginning Balance |
$ | 1,254 | $ | 1,080 | $ | 1,167 | $ | 1,202 | ||||||||
|
Add: Accruals for warranties issued during the period |
1,122 | 568 | 2,674 | 1,615 | ||||||||||||
|
Less: Settlements made during the period |
(979 |
) |
(671 |
) |
(2,444 |
) |
(1,840 |
) | ||||||||
|
Ending Balance |
$ | 1,397 | $ | 977 | $ | 1,397 | $ | 977 | ||||||||
Note 6. Deferred Service Contract Revenue
The Company generates Service revenue from the sale of extended service contracts and from time and material services provided to customers who are not under a warranty or extended service contract. Service contract revenue is recognized on a straight-line basis over the period of the applicable contract. Service revenue, from customers whose systems are not under a service contract, is recognized as the services are provided.
The following table provides changes in the deferred service contract revenue balance for the three and nine months ended September 30, 2015 and 2014 (in thousands):
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2015 |
2014 |
2015 |
2014 |
|||||||||||||
|
Beginning Balance |
$ | 11,546 | $ | 13,001 | $ | 12,949 | $ | 11,637 | ||||||||
|
Add: Payments received |
2,331 | 3,418 | 7,383 | 10,985 | ||||||||||||
|
Less: Revenue recognized |
(3,199 |
) |
(3,233 |
) |
(9,654 |
) |
(9,436 |
) | ||||||||
|
Ending Balance |
$ | 10,678 | $ | 13,186 | $ | 10,678 | $ | 13,186 | ||||||||
Costs for extended service contracts were $1.5 million and $1.8 million for the three months ended September 30, 2015 and 2014, respectively, and $4.6 million and $5.3 million for the nine months ended September 30, 2015 and 2014, respectively.
Note 7. Stockholders’ Equity and Stock-based Compensation Expense
Share Repurchase Program
On February 18, 2015, the Company’s Board of Directors modified the Company’s stock buyback program (“Modified Stock Buyback Program”), from $10 million to $40 million, under which the Company’s issued and outstanding common shares can be repurchased through a 10b5-1 program based on predetermined pricing and volume parameters, as well as open-market purchases that are subject to management discretion and regulatory restrictions.
In the three months ended September 30, 2015, the Company repurchased 1,344,699 shares of its common stock for approximately $19.4 million. In the nine months ended September 30, 2015, the Company repurchased 2,609,308 shares of its common stock for approximately $37.1 million. In the month of October 2015, the Company completed the buyback of the remaining $2.9 million under the Modified Stock Buyback Program. All shares repurchased were retired and returned to authorized but unissued status.
Stock-based Compensation Expense
Stock-based compensation expense by department recognized during the three and nine months ended September 30, 2015 and 2014 were as follows (in thousands):
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2015 |
2014 |
2015 |
2014 |
|||||||||||||
|
Cost of revenue |
$ | 112 | $ | 145 | $ | 329 | $ | 416 | ||||||||
|
Sales and marketing |
311 | 195 | 727 | 414 | ||||||||||||
|
Research and development |
148 | 167 | 510 | 406 | ||||||||||||
|
General and administrative |
473 | 473 | 1,421 | 1,062 | ||||||||||||
|
Total stock-based compensation expense |
$ | 1,044 | $ | 980 | $ | 2,987 | $ | 2,298 | ||||||||
Under the 2004 Equity Incentive Plan, as amended, the Company issued 290,759 and 1,335,484 shares of common stock during the three and nine months ended September 30, 2015, in conjunction with stock options exercised and the vesting of RSUs and PSUs.
Activity under the Company’s 2004 Equity Incentive Plan, as amended, is summarized as follows:
|
Options Outstanding |
||||||||||||
|
Shares Available for Grant |
Number of Stock Options Outstanding |
Weighted- Average Exercise Price |
||||||||||
|
Balance, December 31, 2014 |
129,760 | 3,462,567 | $ | 9.39 | ||||||||
|
Additional shares reserved |
1,300,000 | — | — | |||||||||
|
Options granted |
(129,000 |
) |
129,000 | 13.26 | ||||||||
|
Stock awards granted 1 2 |
(394,010 |
) |
— | — | ||||||||
|
Options exercised |
— | (1,117,639 |
) |
9.20 | ||||||||
|
Options canceled |
278,554 | (278,554 |
) |
12.54 | ||||||||
|
Stock awards canceled 1 |
83,157 | — | — | |||||||||
|
Balance, September 30, 2015 |
1,268,461 | 2,195,374 | $ | 9.31 | ||||||||
|
1. |
The Company has a “fungible share” provision in its 2004 Equity Incentive Plan whereby for each full-value award (RSU/PSU) issued or canceled under the Plan, results in a requirement to subtract / add back 2.12 shares from / to the Shares Available for Grant. |
| 2. | Included in 'Stock awards granted' of 394,010, was 158,294 fungible shares relating to 74,667of PSUs granted. These PSUs will result in a higher or lower number of shares of common stock that may be paid out on March 15, 2016, based on the achievement of three performance goals at targets that were pre-determined by the Board and disclosed in a Form 8-K on August 7, 2015. |
As of September 30, 2015, there was approximately $4.9 million of unrecognized compensation expense, net of projected forfeitures, related to non-vested equity awards. The expense is expected to be recognized over the remaining weighted-average period of 2.1 years. The actual expense recorded may be higher or lower based on a number of factors, including actual forfeitures experienced and the degree of achievement of the performance goals related to the PSUs granted.
Note 8. 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 numbers 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, |
|||||||||||||||
|
2015 |
2014 |
2015 |
2014 |
|||||||||||||
|
Options to purchase common stock |
2,330 | 3,391 | 2,710 | 3,498 | ||||||||||||
|
Restricted stock units |
307 | 209 | 296 | 177 | ||||||||||||
|
Performance stock units |
— | — | 96 | 3 | ||||||||||||
|
Employee stock purchase plan shares |
27 | 31 | 59 | 54 | ||||||||||||
|
Total |
2,664 | 3,631 | 3,161 | 3,732 | ||||||||||||
Note 9. Income Taxes
The Company’s quarterly income taxes reflect an estimate of the corresponding year’s annual effective tax rate and include, when applicable, adjustments from discrete tax items. For the three and nine months ended September 30, 2015, the Company’s tax provision was $57,000 and $160,000, compared to $97,000 and $178,000 for the three and nine months ended September 30, 2014, respectively, and was primarily related to income taxes of the Company’s non-U.S. operations as the Company’s U.S. operations were in a loss position and the Company maintains a 100% valuation allowance against its U.S. deferred tax assets.
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 enacted 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, 2015 and December 31, 2014, 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 lesser weight to its projected financial results due to the subjectivity involved in 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.
Note 10. Commitments and Contingencies
Litigation and Litigation Settlements
The Company is named from time to time as a party to product liability, contractual lawsuits and other general corporate matters 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, 2015 and December 31, 2014, the Company had an immaterial accrual for legal matters and claims and did not expect to incur any material costs beyond the amounts accrued.
|
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, 2014 as contained in our annual report on Form 10-K filed with the SEC on March 16, 2015. 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 22 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 leading medical device company specializing in the research, development, manufacture, marketing and servicing of laser and other energy-based aesthetics systems for practitioners worldwide. We offer easy-to-use products which enable physicians and other qualified practitioners to perform safe and effective aesthetic procedures, including treatment of vascular conditions and removal of benign pigmented lesions, hair-removal, skin rejuvenation, body contouring, skin resurfacing, tattoo removal and toenail fungus. Our platforms are designed to be easily upgraded to add additional applications and hand pieces, which provide flexibility for our customers as they expand their practices. 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, hand piece refills, and third-party manufactured cosmeceuticals. In the second quarter of 2014, we terminated our agreement with Merz for the distribution of its Radiesse® dermal filler product.
Our corporate headquarters and U.S. operations are located in Brisbane, California, where we conduct our manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. We have wholly-owned subsidiaries in Australia, Belgium, Canada, France, Hong Kong, Japan, Spain, Switzerland and the United Kingdom. We market, sell and service our products outside of the United States through our direct employees as well as a global distributor network in over 40 countries.
Products
Our revenue is derived from the sale of Products and Services. Our Product revenue is derived from the sale of systems and upgrades, Titan refills, and Skincare products (or cosmeceuticals). Product and upgrade revenue includes the sales of new systems and additional applications that customers purchase as their practice grows. A system consists of a console that incorporates a universal graphic user interface, a laser and/or other energy-based module, control system software, high voltage electronics and one or more hand pieces. Our broad portfolio of system platforms include:
|
● |
enlighten | |
|
● |
excel V | |
|
● |
excel HR | |
|
● |
xeo | |
|
● |
truSculpt | |
|
● |
GenesisPlus | |
|
● |
CoolGlide | |
|
● |
solera | |
|
● |
myQ |
Service revenue relates to prepaid service contracts, direct billings for detachable hand piece replacements (except for Titan) and revenue for parts and labor on out-of-warranty products. For our Titan hand pieces, after a set number of treatments have been performed, the customer is required to send the hand piece back to the factory for refurbishment, which we refer to as “refilling” the hand piece. In Japan, we distribute ZO Medical Health Inc. (“ZO”) cosmeceutical products and through the second quarter of 2014, we also distributed Merz’s Radiesse® dermal filler product.
Significant Business Trends
We believe that our ability to grow revenue will be primarily dependent on the following:
|
● |
Consumer demand for the applications of our products. |
|
● |
Customer (physicians) demand for our products. |
|
● |
Continuing to expand our product offerings ─ both through internal development and sourcing from other vendors. |
|
● |
Ongoing investment in our global sales and marketing infrastructure. |
|
● |
Use of clinical results to support new aesthetic products and applications. |
|
● |
Enhanced luminary development and reference selling efforts (to develop a location where our products can be displayed and used to assist in selling efforts). |
|
● |
Marketing to physicians in the core dermatology and plastic surgery specialties, as well as outside those specialties. |
|
● |
Generating ongoing revenue from our growing installed base of customers through the sale of Service, Products and upgrades, Hand piece refills, and Skincare products. |
For a detailed discussion of the significant business trends impacting our business, please see the section titled “Results of Operations” below.
Factors that May Impact Future Performance.
Our industry is impacted by numerous competitive, regulatory, macroeconomic 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 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 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, 2014 filed with the SEC on March 16, 2015. There have been no significant changes to the accounting policies and estimates disclosed in our Form 10-K.
Results of Operations
The following table sets forth selected consolidated financial data for the periods indicated, expressed as a percentage of total revenue, net. Percentages in this table and throughout our discussion and analysis of financial condition and results of operations may reflect rounding adjustments.
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2015 |
2014 |
2015 |
2014 |
|||||||||||||
|
Net revenue |
100 |
% |
100 |
% |
100 |
% |
100 |
% | ||||||||
|
Cost of revenue |
42 |
% |
42 |
% |
44 |
% |
44 |
% | ||||||||
|
Gross margin |
58 |
% |
58 |
% |
56 |
% |
56 |
% | ||||||||
|
Operating expenses: |
||||||||||||||||
|
Sales and marketing |
38 |
% |
42 |
% |
40 |
% |
43 |
% | ||||||||
|
Research and development |
12 |
% |
14 |
% |
12 |
% |
15 |
% | ||||||||
|
General and administrative |
13 |
% |
15 |
% |
14 |
% |
15 |
% | ||||||||
|
Total operating expenses |
63 |
% |
71 |
% |
66 |
% |
73 |
% | ||||||||
|
Loss from operations |
(5 |
)% |
(13 |
)% |
(10 |
)% |
(17 |
)% | ||||||||
|
Interest and other income, net |
1 |
% |
— |
% |
— |
% |
— |
% | ||||||||
|
Loss before income taxes |
(4 |
)% |
(13 |
)% |
(10 |
)% |
(17 |
)% | ||||||||
|
Provision for income taxes |
— |
% |
1 |
% |
— |
% |
— |
% | ||||||||
|
Net loss |
(4 |
)% |
(14 |
)% |
(10 |
)% |
(17 |
)% | ||||||||
Total Net Revenue
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
|
(Dollars in thousands) |
2015 |
% Change |
2014 |
2015 |
% Change |
2014 |
||||||||||||||||||
|
Revenue mix by geography: |
||||||||||||||||||||||||
|
United States |
$ | 13,206 | 74 | % | $ | 7,607 | $ | 32,034 | 47 | % | $ | 21,733 | ||||||||||||
|
International |
9,879 | (11 |
)% |
11,119 | 32,685 | 6 | % | 30,906 | ||||||||||||||||
|
Consolidated total revenue |
$ | 23,085 | 23 | % | $ | 18,726 | $ | 64,719 | 23 | % | $ | 52,639 | ||||||||||||
|
United States as a percentage of total revenue |
57 | % | 41 | % | 49 | % | 41 | % | ||||||||||||||||
|
International as a percentage of total revenue |
43 | % | 59 | % | 51 | % | 59 | % | ||||||||||||||||
|
Revenue mix by product category: |
||||||||||||||||||||||||
|
Product – North America |
$ | 10,830 | 80 | % | $ | 6,018 | $ | 25,480 | 64 | % | $ | 15,584 | ||||||||||||
|
Product – Rest of World |
6,562 | (5 |
)% |
6,904 | 21,769 | 20 | % | 18,188 | ||||||||||||||||
| Total Product | 17,392 | 35 | % | 12,922 | 47,249 | 40 | % | 33,772 | ||||||||||||||||
|
Hand Piece Refills |
671 | (19 |
)% |
824 | 2,204 | (23 |
)% |
2,870 | ||||||||||||||||
|
Skincare |
734 | 11 | % | 663 | 2,089 | (22 |
)% |
2,690 | ||||||||||||||||
|
Service |
4,288 | (1 |
)% |
4,317 | 13,177 | (1 |
)% |
13,307 | ||||||||||||||||
|
Consolidated total revenue |
$ | 23,085 | 23 | % | $ | 18,726 | $ | 64,719 | 23 | % | $ | 52,639 | ||||||||||||
Discussion of Revenue by Geography:
Our U.S. revenue increased by $5.6 million, or 74%, and by $10.3 million, or 47% in the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. These increases were due primarily to the hiring of a new sales management experienced in the medical equipment industry, expansion of our direct sales force and the restructuring of their compensation arrangements. In addition, the increase in sales resulted from our recently launched enlighten and excel HR products as well as an increase in the sales of excel V and xeo, partially offset by declines in sales of some of our legacy products.
Our international revenue declined by $1.2 million, or 11%, in the three months ended September 30, 2015, compared to the same period in 2014. This decrease was due primarily to the appreciation of the U.S. Dollar against the Euro, Japanese Yen and the Australian Dollar, along with a reduction in revenue from our direct business in Japan, Canada and Europe, partially offset by increases in our distributor business in Asia Pacific and Latin American countries as well as our direct business in Australia. Our international revenue increased by $1.8 million, or 6% in the nine months ended September 30, 2015, compared to the same period in 2014. This increase was due primarily to increases in revenue from our distributor business in Europe as well as Asia Pacific countries, along with an increase in our direct business in Australia, partially offset by the negative impact associated with the appreciation of the U.S. Dollar against the Euro, Japanese Yen and the Australian Dollar as well as a decline in our direct business in Japan and Canada.
Discussion of Revenue by Product Type:
Product Revenue
Product revenue in North America increased by $4.8 million, or 80%, and by $9.9 million, or 64% in the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. These increases were attributable primarily to:
|
● |
Revenue from our newly introduced enlighten and excel HR product; |
|
● |
Increase in revenue from excel V and xeo; which was offset partly by |
|
● |
Reduction in revenue from our legacy products. |
Product revenue outside of North America (“Rest of the World”) decreased by $0.3 million, or 5%, in the three months ended September 30, 2015, compared to the same period in 2014. This decrease was attributable primarily to:
|
● |
The negative impact associated with the appreciation of the U.S. Dollar against the Euro, Japanese Yen and the Australian Dollar; |
|
● |
Reduction in revenue from some of our legacy products; which was offset partly by |
|
● |
Revenue from our newly introduced enlighten and excel HR product |
Product revenue outside of North America increased by $3.6 million, or 20%, in the nine months ended September 30, 2015, compared to the same period in 2014. This increase was attributable primarily to:
|
● |
Revenue from our newly introduced enlighten and excel HR product; which was offset partly by |
|
● |
The negative impact associated with the appreciation of the U.S. Dollar against the Euro, Japanese Yen and the Australian Dollar; and |
|
● |
Reduction in revenue from some of our legacy products. |
Hand Piece Refills Revenue
Our hand piece refills revenue decreased by $153,000, or 19%, and by $666,000, or 23% in the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014. These decreases were caused by reduced utilization and due to the decline in our Japan sourced revenue resulting, primarily from the devaluation of the Japanese Yen relative to the U.S. Dollar.
Skincare Revenue
Our skincare revenue increased by $71,000, or 11% in the three months ended September 30, 2015, compared to the same period in 2014. This increase was due primarily to expanded product offerings of this distributed product, partially offset by declines in the Japanese Yen relative to the U.S. Dollar. Our skincare revenue decreased by $601,000, or 22% in the nine months ended September 30, 2015, compared to the same periods in 2014. This decline was due primarily to the termination of our agreement with Merz for the distribution of their Radiesse® dermal filler product in the second quarter of 2014 as well as the decline in the Japanese Yen relative to the U.S. Dollar, partially offset by the expanded product offering of this distributed product.
Service Revenue
Our worldwide Service revenue decreased by $29,000, or 1%, and by $130,000, or 1% in the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014.
Gross Profit
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
|
(Dollars in thousands) |
2015 |
% Change |
2014 |
2015 |
% Change |
2014 |
||||||||||||||||||
|
Gross profit |
$ | 13,491 | 25 |
% |
$ | 10,791 | $ | 36,386 | 23 |
% |
$ | 29,553 | ||||||||||||
|
As a percentage of total net revenue |
58 |
% |
58 |
% |
56 |
% |
56 |
% | ||||||||||||||||
Our cost of revenue consists primarily of material, personnel expenses, royalty expense, product warranty costs, amortization of intangibles and manufacturing overhead expenses.
Gross margin was 58% in both of the three months ended September 30, 2015 and 2014. Gross margin was 56% in both of the nine months ended September 30, 2015 and 2014. Gross margin remained flat for both periods ended September 30, 2015 due primarily to:
|
● |
Increased leverage resulting from higher revenue; and |
|
● |
Higher volume of direct sales, which have a higher margin than our distributor sales; offset by |
|
● |
A shift in product mix towards lower margin products; and |
|
● |
Unfavorable impact on our international selling prices due to the strengthening of the U.S. Dollar against the Euro, Japanese Yen and the Australian Dollar. |
Sales and Marketing
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
|
(Dollars in thousands) |
2015 |
% Change |
2014 |
2015 |
% Change |
2014 |
||||||||||||||||||
|
Sales and marketing |
$ | 8,790 | 13 |
% |
$ | 7,805 | $ | 26,043 | 14 |
% |
$ | 22,890 | ||||||||||||
|
As a percentage of total net revenue |
38 |
% |
42 |
% |
40 |
% |
43 |
% | ||||||||||||||||
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 by $1.0 million, and represented 38% of total net revenue in the three months ended September 30, 2015, compared to 42% in the same period in 2014. The $1.0 million increase was due primarily to:
|
● |
$458,000 net increase in North American personnel related expenses, which were driven primarily by higher commissions due to higher sales; | |
|
● |
$406,000 of higher promotional expenses primarily in North America; and | |
|
● |
$145,000 of higher international personnel and travel related expenses due to increased headcount. |
Sales and marketing expenses increased by $3.2 million, and represented 40% of total net revenue in the nine months ended September 30, 2015, compared to 43% in the same period in 2014. The $3.2 million increase was due primarily to:
|
● |
$2.0 million net increase in North American personnel related expenses, which was due in part to increased headcount, higher commissions resulting from higher sales and higher severance expense; | |
|
● |
$743,000 of higher promotional expenses primarily in North America and Australia; and | |
|
● |
$707,000 of higher international personnel and travel related expenses due to increased headcount, partially offset by the decline in expenses resulting from the devaluation of the Euro, Japanese Yen and the Australian Dollar versus the U.S. Dollar. |
Research and Development (“R&D”)
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
|
(Dollars in thousands) |
2015 |
% Change |
2014 |
2015 |
% Change |
2014 |
||||||||||||||||||
|
Research and development |
$ | 2,748 | 5 |
% |
$ | 2,628 | $ | 7,921 | — |
% |
$ | 7,894 | ||||||||||||
|
As a percentage of total net revenue |
12 |
% |
14 |
% |
12 |
% |
15 |
% | ||||||||||||||||
R&D expenses consist primarily of personnel expenses, clinical research, regulatory and material costs. R&D expenses increased by $120,000, and represented 12% of total net revenue in the three months ended September 30, 2015, compared to 14% for the same period in 2014. This increase in expense was due primarily to:
|
● |
$95,000 of increased personnel and consulting related expenses; | |
|
● |
$72,000 of increased equipment related expense; partially offset by | |
|
● |
$50,000 of decreased material spending, related to project timing. |
R&D expenses increased by $27,000, and represented 12% of total net revenue in the nine months ended September 30, 2015, compared to 15% for the same period in 2014. This increase in expense was due primarily to:
|
● |
$718,000 of increased personnel and consulting related expenses; | |
|
● |
$201,000 of increased equipment related expense; | |
|
● |
$74,000 of increase travel related expenses; partially offset by | |
|
● |
$977,000 of decreased material spending related to project timing. |
General and Administrative (“G&A”)
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
|
(Dollars in thousands) |
2015 |
% Change |
2014 |
2015 |
% Change |
2014 |
||||||||||||||||||
|
General and administrative |
$ | 2,937 | 1 |
% |
$ | 2,897 | $ | 8,940 | 15 |
% |
$ | 7,796 | ||||||||||||
|
As a percentage of total net revenue |
13 |
% |
15 |
% |
14 |
% |
15 |
% | ||||||||||||||||
G&A expenses consist primarily of personnel expenses, legal fees, accounting, audit and tax consulting fees, U.S. medical device excise tax and other general and administrative expenses. G&A expenses increased by $40,000 and represented 13% of total net revenue in the three months ended September 30, 2015, compared to 15% in the same period in 2014.
G&A expenses increased by $1.1 million and represented 14% of total net revenue in the nine months ended September 30, 2015, compared to 15% in the same period in 2014. This increase was due primarily to $1.1 million of increased personnel related expenses.
Interest and Other Income, Net
Interest and other income, net, consists of the following:
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
|
(Dollars in thousands) |
2015 |
% Change |
2014 |
2015 |
% Change |
2014 |
||||||||||||||||||
|
Interest income |
$ | 74 | (30 |
)% |
$ | 106 | $ | 264 | (12 |
)% |
$ | 299 | ||||||||||||
|
Other income, net |
10 | (109 |
)% |
(106 |
) |
(76 |
) |
(6 |
)% |
(81 |
) | |||||||||||||
|
Total interest and other income, net |
$ | 84 | — |
% |
$ | — | $ | 188 | (14 |
)% |
$ | 218 | ||||||||||||
Interest and other income, net, increased $84,000 for the three months ended September 30, 2015, compared to the same period in 2014. This increase was due primarily to a reduction in net foreign exchange losses, partially offset by lower interest income as a result of a decrease in our marketable investments balance. Interest and other income, net, decreased by $30,000 for the nine months ended September 30, 2015, compared to the same period in 2014. This decrease was primarily attributable to lower interest income as a result of a decrease in our marketable investments balance.
Provision for Income Taxes
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
|
(Dollars in thousands) |
2015 |
% Change |
2014 |
2015 |
% Change |
2014 |
||||||||||||||||||
|
Loss before income taxes |
$ | (900 |
) |
(65 |
)% |
$ | (2,539 |
) |
$ | (6,330 |
) |
(28 |
)% |
$ | (8,809 |
) | ||||||||
|
Provision for income taxes |
57 | (41 |
)% |
97 | 160 | (10 |
)% |
178 | ||||||||||||||||
For the three and nine months ended September 30, 2015, we recorded an income tax provision of $57,000 and $160,000, compared to $97,000 and $178,000 for the three and nine months ended September 30, 2014, respectively, which was primarily related to income taxes of our non-U.S. operations as our U.S. operations were in a loss position and we maintain a 100% valuation allowance against our U.S. deferred tax assets.
Liquidity and Capital Resources
Liquidity is the measurement of our ability to meet potential cash requirements, fund the planned expansion of our operations and acquire businesses. Our sources of cash include operations, stock option exercises and the liquidation of marketable investments. We actively manage our cash usage and investment of liquid cash to ensure the maintenance of sufficient funds to meet our daily needs. The majority of our cash and investments are held in U.S. banks and our foreign subsidiaries maintain a limited amount of cash in their local banks to cover their short-term operating expenses.
Cash, Cash Equivalents and Marketable Investments
The following table summarizes our cash, cash equivalents and marketable investments:
|
(Dollars in thousands) |
September 30, 2015 |
December 31, 2014 |
Change |
|||||||||
|
Cash and cash equivalents |
$ | 10,055 | $ | 9,803 | $ | 252 | ||||||
|
Marketable investments |
37,689 | 71,343 | (33,654 |
) | ||||||||
|
Total |
$ | 47,744 | $ | 81,146 | ||||||||