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CUTR > SEC Filings for CUTR > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for CUTERA INC

Form 10-Q for CUTERA INC


8-May-2014

Quarterly Report


ITEM 2. 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, 2013 as contained in our annual report on Form 10-K filed with the SEC on March 18, 2014. 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 19 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:

ˇ 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.

ˇ Critical Accounting Policies and Estimates. This section describes the key accounting policies that are affected by critical accounting estimates.

ˇ Results of Operations. This section provides our analysis and outlook for the significant line items on our Consolidated Statements of Operations.

ˇ 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 vascular and benign pigmented lesions, hair-removal, skin rejuvenation, body contouring, skin resurfacing, tattoo removal and toenail fungus. Our platforms are designed to be easily upgradeable 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 dermal fillers and cosmeceuticals. In April 2014, we terminated our agreement with Merz for the distribution of its RadiesseŽ dermal filler product.

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. We market, sell and service our products through direct sales and service employees in the U.S., Australia, Belgium, Canada, France, Japan and Switzerland. Sales and Service outside of these direct markets are made through a worldwide distributor network in over 60 countries.


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Products

Our Product revenue is derived from the sale of Products and upgrades, Service, Titan hand piece refills, and Dermal fillers and cosmeceuticals. Product revenue includes the sales of systems. 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 Product brands include:

ˇ Excel VTM

ˇ XeoŽ

ˇ GenesisPlusTM

ˇ truSculptTM

ˇ CoolGlideŽ

ˇ SoleraŽ

ˇ myQTM

ˇ VariLiteTM

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, resulting in Upgrade revenue. Service revenue relates to amortization of prepaid service contracts, direct billings for detachable hand piece replacements (except for Titan and truSculpt) and revenue for parts and labor on out-of-warranty products. For our Titan and truSculpt 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 April 2014, we also distributed Merz's RadiesseŽ dermal filler product.

Significant Business Trends

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

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

ˇ Ongoing investment in our global sales and marketing infrastructure.

ˇ Use of clinical results to support new aesthetic products and applications.

ˇ Enhanced luminary development and reference selling efforts (to develop a location where our products can be displayed and used to assist in selling efforts).

ˇ Customer demand for our products.

ˇ Consumer demand for the application of our products.

ˇ Marketing to physicians in the core dermatology and plastic surgeon specialties, as well as outside those specialties.

ˇ Generating ongoing revenue from our growing installed base of customers through the sale of Service, Upgrade, Titan hand piece refills, and cosmeceutical products.

In April 2014, we terminated our agreement with Merz for the distribution of its RadiesseŽ dermal filler product. The dermal filler business has not historically been a significant component of our revenue and we do not anticipate that his termination will have an adverse effect on our revenue.

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.


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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, 2013 filed with the SEC on March 18, 2014. 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 March 31,
                                           2014                    2013

Net revenue                                     100 %                   100 %
Cost of revenue                                  45 %                    46 %
Gross margin                                     55 %                    54 %

Operating expenses:
Sales and marketing                              45 %                    41 %
Research and development                         16 %                    13 %
General and administrative                       16 %                    14 %
Total operating expenses                         77 %                    68 %

Loss from operations                            (22 )%                  (14 )%
Interest and other income, net                    - %                     1 %
Loss before income taxes                        (22 )%                  (13 )%
Provision (benefit) for income taxes              - %                     - %
Net loss                                        (22 )%                  (13 )%



Total Net Revenue
                                                            Three Months Ended March 31,
(Dollars in thousands)                                  2014            % Change         2013
Revenue mix by geography:
United States                                        $     6,017               (7 )%   $   6,488
International                                             10,172                7 %        9,479
Consolidated total revenue                           $    16,189                1 %    $  15,967

United States as a percentage of total revenue                37 %                            41 %
International as a percentage of total revenue                63 %                            59 %
Revenue mix by product category:
Products and upgrades                                $     9,484                3 %    $   9,197
Titan and truSculpt hand piece refills                     1,041              (13 )%       1,190
Dermal fillers and cosmeceuticals                          1,227                8 %        1,136
Total Product Revenue                                     11,752                2 %       11,523
Service                                                    4,437                - %        4,444
Consolidated total revenue                           $    16,189                1 %    $  15,967


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Discussion of Revenue by Geography:

Our U.S. revenue decreased by $471,000, or 7%, in the three months ended March 31, 2014, compared to the same period in 2013. This decrease was due primarily to reduced productivity of our U.S. sales force, caused in part by the restructuring of our North American sales force, direct sales employee and sales management turnover, and the hiring of a record number of new field sales professionals in the first quarter of 2014. We believe that, as is normal with any sales reorganization and expansion, the productivity improvements of new hires take time to have their full effect, which contributed to the decline in
u.s. revenue in the first quarter of 2014, compared to the same period in 2013.

Our international revenue increased by $693,000, or 7%, in the three-month period ended March 31, 2014, compared to the same period in 2013. This increase was due primarily to increases in revenue from Japan and our global distribution network, offset by a decline in revenue from France.

Discussion of Revenue by Product Type:

Product and Upgrade Revenue

As explained in more detail in the Products section of the Executive Summary above, some of our products consist of a configurable system platform that includes a console and one or more hand pieces. Each product is configured to give our customers the ability to select the combination of platform and hand pieces that provides the applications that best fit their practice.

Product and upgrade revenue increased by $287,000, or 3%, in the three months ended March 31, 2014, compared to the same period in 2013. This increase was attributable primarily to:

ˇ The continued improvement in revenue from our Excel V product; which was offset partly by;

ˇ Reduction in revenue from some of our legacy products caused in part by competitive pricing.

Titan and truSculpt Hand Piece Refill Revenue

Our Titan and truSculpt hand piece refill revenue decreased by $149,000, or 13%, in the three months ended March 31, 2014, compared to the same period in 2013. This decrease was due primarily to declines in Titan hand piece refill revenue, caused partially by reduced utilization and partly due to the decline in the Japanese Yen versus the U.S. Dollar. In addition, there was a decrease in revenue from truSculpt refills due to a repositioning of the product to include hand piece refills to be covered as part of our system warranty and service contracts, enabling our customers unlimited hand piece refills commencing with the third quarter of 2013.

Dermal Filler and Cosmeceuticals Revenue

Our dermal filler and cosmeceuticals revenue increased by $91,000, or 8%, in the three months ended March 31, 2014, compared to the same period in 2013. This increase was due primarily to a temporary increase in consumer demand due to changes in the Japanese consumption tax rate effective April 1, 2014, partially offset by the continued weakening of the Japanese yen versus the U.S. Dollar.

In April 2014, we terminated our agreement with Merz for the distribution of its RadiesseŽ dermal filler product. As a consequence, we expect future revenue from this product category to decline.

Service Revenue

Our worldwide Service revenue was flat in the three months ended March 31, 2014,
compared to the same period in 2013.

Gross Profit
                                                              Three Months Ended March 31,
(Dollars in thousands)                                  2014             % Change            2013
Gross profit                                         $     8,886                  4 %     $   8,550
Gross margin (Gross profit as a percentage of
total net revenue)                                            55 %                               54 %

Our cost of revenue consists primarily of material, personnel expenses, royalty expense, warranty expense, amortization of intangibles and manufacturing overhead expenses.


Table of Contents
Gross margin was 55% in the three months ended March 31, 2014, compared to 54% for the same period in 2013. This improvement was due primarily to:

ˇ the implementation of product cost reduction initiatives;

ˇ improved gross margin from our Service business, due primarily to reduced material expenses resulting from improved reliability of our products; and

ˇ reduced amortization of intangibles related to the acquisition of Iridex's aesthetic business.

Sales and Marketing
                                             Three Months Ended March 31,
(Dollars in thousands)                    2014            % Change        2013
Sales and marketing                    $     7,331               14 %    $ 6,456
As a percentage of total net revenue            45 %                          41 %

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 $875,000, and represented 45% of total net revenue, in the three months ended March 31, 2014, compared to 41% in the same period in 2013. The $875,000 increase was due primarily to:

ˇ $678,000 of increased personnel related expense, resulting from the realignment of our sales organization and increased hiring activity in the first three months of 2014; and

ˇ $150,000 of increased consulting expenses related primarily to new product introductions.

Research and Development (R&D)
                                             Three Months Ended March 31,
(Dollars in thousands)                    2014            % Change        2013
Research and development               $     2,644               25 %    $ 2,121
As a percentage of total net revenue            16 %                          13 %

R&D expenses consist primarily of personnel expenses, clinical research, regulatory and material costs. R&D expenses increased by $523,000, and represented 16% of total net revenue, in the three months ended March 31, 2013, compared to 13% for the same period in 2013. The increase was due primarily to:

ˇ $442,000 of increased material spending, which is project timing dependent, related to new product development;

ˇ $163,000 of increased personnel related expenses due to increased headcount; partially offset by

ˇ $62,000 of decreased tools and equipment expenses.

General and Administrative (G&A)
                                             Three Months Ended March 31,
(Dollars in thousands)                    2014            % Change        2013
General and administrative             $     2,564               12 %    $ 2,289
As a percentage of total net revenue            16 %                          14 %

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 $275,000, and represented 16% of total net revenue, in the three months ended March 31, 2014, compared to 14% for the same period in 2013. This increase was due primarily to:

ˇ $200,000 of non-recurring outside consulting expense;

ˇ $145,000 of increased accounting fees; partially offset by

ˇ $38,000 of decreased variable personnel related expenses.

Interest and Other Income, Net

Interest and other income, net consist of the following:
                                            Three Months Ended March 31,
(Dollars in thousands)                   2014          % Change         2013
Interest income                        $     94              (14 %)     $ 109
Other income (expense), net                 (14 )           (154 %)        26
Total interest and other income, net   $     80              (41 %)     $ 135


Table of Contents
Interest and other income, net, decreased $55,000 for the three months ended March 31, 2014, compared to the same period in 2013. This decrease in interest income was primarily attributable to a reduction in the invested cash balance.

Provision (Benefit) for Income Taxes
                                             Three Months Ended March 31,
(Dollars in thousands)                    2014            % Change        2013
Loss before income taxes               $    (3,573 )             64 %   $ (2,181 )
Provision (benefit) for income taxes            37               NA          (18 )

For the three months ended March 31, 2014 and 2013, we recorded an income tax expense of $37,000 and tax benefit of $18,000 respectively, which was primarily related to income taxes of our non-U.S. operations. In addition, included in the tax provision for the three months ended March 31, 2013, was a benefit resulting from the release of uncertain tax position liabilities due to statutes lapsing.

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 and stock option exercises. 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:

                                                 December 31,
(Dollars in thousands)      March 31, 2014           2013           Change
Cash and cash equivalents   $        10,743     $       16,242     $ (5,499 )
Marketable investments               73,079             66,831        6,248
Total                       $        83,822     $       83,073     $    749



Cash Flows

                                               Three Months Ended March 31,
(Dollars in thousands)                           2014                 2013
Net cash flow provided by (used in):
Operating activities                        $         (972 )     $         (858 )
Investing activities                                (6,590 )             (9,097 )
Financing activities                                 2,063                3,681
Net decrease in cash and cash equivalents   $       (5,499 )     $       (6,274 )

Cash Flows from Operating Activities

Net cash used in operating activities in the three months ended March 31, 2014 was $1.0 million, which was due primarily to:

ˇ $2.6 million used due to the net loss of $3.6 million, after adjusting for non-cash related items of $1.1 million consisting primarily of stock-based compensation expense of $0.6 million and depreciation and amortization expenses of $0.3 million;

ˇ $1.5 million used to pay down the high year-end accrued liabilities balance; offset by

ˇ $3.1 million generated from the collection of cash from the high accounts receivable balance as of December 31, 2013.


Table of Contents
Net cash used in operating activities in the three months ended March 31, 2013 was $0.9 million, which was due primarily to:

ˇ $1.0 million used due to the net loss of $2.2 million, after adjusting for non-cash related items of $1.2 million consisting primarily of stock-based compensation expense of $0.8 million and depreciation and amortization expenses of $0.3 million;

ˇ $2.5 million used to pay down the high year-end accrued liabilities balance; partially offset by

ˇ $2.0 million generated from the collection of cash from the high accounts receivable balance as of December 31, 2012;

ˇ $0.6 million generated by an increase in deferred service revenue primarily from the sale of service contracts to an increasing installed base of customers.

Cash Flows from Investing Activities

We used net cash of $6.6 million in our investing activities in the three months ended March 31, 2014, which was attributable primarily to:

ˇ $16.8 million of cash used to purchase marketable investments; partially offset by

ˇ $10.4 million in net proceeds from the sales and maturities of marketable investments.

We used net cash of $9.1 million from investing activities in the three months ended March 31, 2013, which was attributable primarily to:

ˇ $20.5 million of cash used to purchase marketable investments; partially offset by

ˇ $11.6 million in net proceeds from the sales and maturities of marketable investments.

Cash Flows from Financing Activities

Net cash provided by financing activities was $2.1 million and $3.7 million in the three months ended March 31, 2014 and 2013, respectively-which was primarily due to proceeds from the issuance of common stock due to employees exercising their stock options.

Adequacy of cash resources to meet future needs

We had cash, cash equivalents, and marketable investments of $83.8 million as of March 31, 2014. For the first three months of 2014, we financed our operations through the sales and maturities of marketable investments and cash from the sale of stock due to employees exercising their stock options and shares issued pursuant to our employee stock purchase plan. We believe the existing capital resources, including cash and cash equivalents and marketable investments of $83.8 million, are sufficient to meet our operating and capital requirements for the next several years, as well as repurchase up to the remaining $10.0 million of our stock pursuant to the $20.0 million share buy-back program approved by our Board.

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

Commitments and Contingencies

There have been no material changes to our commitments and contingencies from . . .

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