CUTERA, INC.
2016 PROXY STATEMENT AND 2015 ANNUAL REPORT
Dear Stockholders:
You are cordially invited to attend the 2016 Annual Meeting of Stockholders of Cutera, Inc. (the “Company”). The
meeting will be held at our principal executive offices located at 3240 Bayshore Blvd., Brisbane, California 94005-
1021 on June 15, 2016 at 10:00 a.m. Pacific Time.
The attached Notice of 2016 Annual Meeting of Stockholders and Proxy Statement contain details of the business
to be conducted at the Annual Meeting. We have also made available a copy of our 2015 Annual Report to
Stockholders with this proxy statement. We encourage you to read our Annual Report. It includes our audited
financial statements and provides information about our business.
We have elected to provide access to our proxy materials over the internet under the Securities and Exchange
Commission’s “notice and access” rules. We are constantly focused on improving the ways people connect with
information, and believe that providing our proxy materials over the internet increases the ability of our
stockholders to connect with the information they need, while reducing the environmental impact of our Annual
Meeting. If you need additional information about Cutera, please visit the Investor Relations section of the
Company’s website at www.cutera.com.
Whether or not you attend the Annual Meeting, it is important that your shares be represented and voted at the
meeting. Therefore, I urge you to promptly vote and submit your proxy via the internet, by phone, or by signing,
dating, and returning the proxy card provided to you. If you decide to attend the Annual Meeting, you will be able
to vote in person, even if you have previously submitted your proxy.
On behalf of Cutera’s Board of Directors and executive team, I would like to express our appreciation for your
continued interest and confidence in our business.
Sincerely,
Kevin Connors,
President and Chief Executive Officer
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant ☒
Filed by a Party other than the Registrant ☐
Check the appropriate box:
☐
☐
☒
☐
☐
Preliminary Proxy Statement
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
Definitive Proxy Statement
Definitive Additional Materials
Soliciting Material Pursuant to §240.14a-11(c) or §240.14a-2
CUTERA, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
☒
☐
☐
☐
No fee required.
Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1)
(2)
(3)
(4)
(5)
Title of each class of securities to which transaction applies:
Aggregate number of securities to which transaction applies:
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it was determined):
Proposed maximum aggregate value of transaction:
Total fee paid:
Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the
date of its filing.
(1)
(2)
(3)
(4)
Amount Previously Paid:
Form, Schedule or Registration Statement No.:
Filing Party:
Date Filed:
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NOTICE OF 2016 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 15, 2016
10:00 A.M. Pacific Time
To our Stockholders:
You are cordially invited to attend the 2016 Annual Meeting of Stockholders of Cutera, Inc. (the “Company”). The meeting
will be held at our principal executive offices located at 3240 Bayshore Blvd., Brisbane, California 94005-1021. The meeting
will be held on June 15, 2016 at 10:00 a.m. Pacific Time, for the following purposes:
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To elect three Class III directors to each serve for a three-year term that expires at the 2019 Annual Meeting of
Stockholders and until their successors have been duly elected and qualified;
To ratify the selection of BDO USA, LLP as the independent registered public accounting firm of the Company (the
“Independent Registered Public Accounting Firm”) for the fiscal year ending December 31, 2016;
To hold a non-binding vote on the compensation of our Named Executive Officers; and
To transact such other business as may properly come before the Annual Meeting, including any motion to adjourn
to a later date to permit further solicitation of proxies, if necessary, or before any adjournment thereof.
The foregoing items of business are more fully described in the proxy statement accompanying this Notice of Annual
Meeting.
To help conserve resources and reduce printing and distribution costs, we will be mailing a notice to our stockholders, instead
of a paper copy of this proxy statement and our 2015 Annual Report, with instructions on how to access our proxy materials
over the Internet, including this proxy statement, our 2015 Annual Report and a form of proxy card or voting instruction card.
The notice will also contain instructions on how each of those stockholders can receive a paper copy of our proxy materials.
The meeting will begin promptly at 10:00 a.m., local time, and check-in will begin at 9:50 a.m. local time. Only holders of
record of shares of our common stock (NASDAQ: CUTR) at the close of business on April 25, 2016 will be entitled to notice
of, and to vote at, the meeting and any postponements or adjournments of the meeting.
For a period of at least 10 days prior to the meeting, a complete list of stockholders entitled to vote at the meeting will be
available and open to the examination of any stockholder for any purpose relating to the Annual Meeting during normal
business hours at our principal executive offices located at 3240 Bayshore Blvd., Brisbane, California 94005-1021.
By order of the Board of Directors,
Kevin P. Connors
President and Chief Executive Officer
Brisbane, California
April 29, 2016
Proxy Statement
YOUR VOTE IS IMPORTANT!
REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY VOTE BY
TELEPHONE, OR IF AVAILABLE, ELECTRONICALLY, OR, IF YOU RECEIVED PER YOUR REQUEST A
PAPER COPY OF OUR PROXY MATERIALS, COMPLETE, SIGN, DATE, AND RETURN THE ENCLOSED
PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID ENVELOPE. NO ADDITIONAL POSTAGE IS
NECESSARY IF THE PROXY CARD IS MAILED IN THE UNITED STATES OR CANADA. YOU MAY REVOKE
YOUR PROXY AT ANY TIME BEFORE IT IS VOTED AT THE MEETING.
Proxy Statement
TABLE OF CONTENTS
Page
QUESTIONS AND ANSWERS REGARDING THIS SOLICITATION AND VOTING AT THE ANNUAL
MEETING ......................................................................................................................................................................
Why am I receiving these proxy materials?............................................................................................................
Why did I receive a notice in the mail regarding the Internet availability of the proxy materials instead of a
paper copy of the proxy materials? ......................................................................................................................
What is the purpose of the Annual Meeting? .........................................................................................................
Who is entitled to attend the meeting? ...................................................................................................................
Who is entitled to vote at the meeting? ..................................................................................................................
How many shares must be present or represented to conduct business at the meeting (that is, what constitutes a
quorum)? ..............................................................................................................................................................
What items of business will be voted on at the meeting? .......................................................................................
How does the Board recommend that I vote? .........................................................................................................
What shares can I vote at the meeting? ..................................................................................................................
What is the difference between holding shares as a stockholder of record and as a beneficial owner? .................
How can I vote my shares without attending the meeting? ....................................................................................
How can I vote my shares in person at the meeting? ..............................................................................................
Can I change my vote? ...........................................................................................................................................
Is my vote confidential? .........................................................................................................................................
What vote is required to approve each item and how are votes counted? ..............................................................
What is a “broker non-vote”? .................................................................................................................................
How are “broker non-votes” counted? ...................................................................................................................
How are abstentions counted? ................................................................................................................................
What happens if additional matters are presented at the meeting? .........................................................................
Who will serve as inspector of election? ................................................................................................................
What should I do in the event that I receive more than one set of proxy/voting materials? ...................................
Who is soliciting my vote and who will bear the costs of this solicitation? ...........................................................
Where can I find the voting results of the meeting? ...............................................................................................
What is the deadline to propose actions for consideration at next year’s Annual Meeting of stockholders or to
nominate individuals to serve as directors? ..........................................................................................................
STOCK OWNERSHIP .....................................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management ....................................................................
Section 16(a) Beneficial Ownership Reporting Compliance ..................................................................................
CORPORATE GOVERNANCE AND BOARD MATTERS ...........................................................................................
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Director Independence ............................................................................................................................................
Board Leadership Structure ....................................................................................................................................
Risk Oversight and Analysis ..................................................................................................................................
Committees of the Board ........................................................................................................................................
Meetings Attended by Directors .............................................................................................................................
Director Nomination Process ..................................................................................................................................
Director Compensation ...........................................................................................................................................
Code of Ethics ........................................................................................................................................................
Compensation Committee Interlocks and Insider Participation .............................................................................
Family Relationships ..............................................................................................................................................
Communications with the Board by Stockholders .................................................................................................
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Proxy Statement
TABLE OF CONTENTS
Page
Stock Ownership Guidelines ..................................................................................................................................
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REPORT OF THE AUDIT COMMITTEE .......................................................................................................................
PROPOSAL ONE—ELECTION OF DIRECTORS .........................................................................................................
Classes of the Board of Directors ...........................................................................................................................
Director Nominees..................................................................................................................................................
Board of Directors’ Recommendation ....................................................................................................................
Directors Whose Terms Extend Beyond the 2016 Annual Meeting .......................................................................
PROPOSAL TWO—RATIFICATION OF BDO USA, LLP AS OUR INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ...................................................................................................................................................
Board of Directors’ Recommendation ....................................................................................................................
Audit and Non-Audit Services ...............................................................................................................................
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PROPOSAL THREE— NON-BINDING ADVISORY VOTE ON THE COMPENSATION OF OUR NAMED
EXECUTIVE OFFICERS ..............................................................................................................................................
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General ...................................................................................................................................................................
Summary of Our Executive Compensation Program .............................................................................................
Board of Directors’ Recommendation ....................................................................................................................
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NAMED EXECUTIVE OFFICERS AND EXECUTIVE COMPENSATION ................................................................
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Compensation Discussion and Analysis .................................................................................................................
Internal Revenue Code Section 162(m) and Limitations on Executive Compensation ..........................................
Securities Authorized for Issuance Under Equity Compensation Plans .................................................................
Summary Compensation Table ..............................................................................................................................
Grants of Plan-Based Awards .................................................................................................................................
Equity Incentive Awards Outstanding ....................................................................................................................
Options Exercised and Stock Vested ......................................................................................................................
Potential Payments Upon Termination or Change in Control ................................................................................
COMPENSATION COMMITTEE REPORT ...................................................................................................................
RELATED PERSON TRANSACTIONS .........................................................................................................................
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Policies and Procedures for Related Party Transactions .........................................................................................
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OTHER MATTERS ..........................................................................................................................................................
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Proxy Statement
TABLE OF CONTENTS
Page
Stock Ownership Guidelines ..................................................................................................................................
13
REPORT OF THE AUDIT COMMITTEE .......................................................................................................................
PROPOSAL ONE—ELECTION OF DIRECTORS .........................................................................................................
Classes of the Board of Directors ...........................................................................................................................
Director Nominees..................................................................................................................................................
Board of Directors’ Recommendation ....................................................................................................................
Directors Whose Terms Extend Beyond the 2016 Annual Meeting .......................................................................
PROPOSAL TWO—RATIFICATION OF BDO USA, LLP AS OUR INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ...................................................................................................................................................
Board of Directors’ Recommendation ....................................................................................................................
Audit and Non-Audit Services ...............................................................................................................................
PROPOSAL THREE— NON-BINDING ADVISORY VOTE ON THE COMPENSATION OF OUR NAMED
EXECUTIVE OFFICERS ..............................................................................................................................................
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General ...................................................................................................................................................................
Summary of Our Executive Compensation Program .............................................................................................
Board of Directors’ Recommendation ....................................................................................................................
NAMED EXECUTIVE OFFICERS AND EXECUTIVE COMPENSATION ................................................................
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Compensation Discussion and Analysis .................................................................................................................
Internal Revenue Code Section 162(m) and Limitations on Executive Compensation ..........................................
Securities Authorized for Issuance Under Equity Compensation Plans .................................................................
Summary Compensation Table ..............................................................................................................................
Grants of Plan-Based Awards .................................................................................................................................
Equity Incentive Awards Outstanding ....................................................................................................................
Options Exercised and Stock Vested ......................................................................................................................
Potential Payments Upon Termination or Change in Control ................................................................................
COMPENSATION COMMITTEE REPORT ...................................................................................................................
RELATED PERSON TRANSACTIONS .........................................................................................................................
Policies and Procedures for Related Party Transactions .........................................................................................
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OTHER MATTERS ..........................................................................................................................................................
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PROXY STATEMENT
FOR
2016 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 15, 2016
The Board of Directors (“Board”) of Cutera, Inc., a Delaware corporation, is soliciting the enclosed proxy from you. The
proxy will be used at our 2016 Annual Meeting of Stockholders to be held on Wednesday, June 15, 2016, beginning at 10:00
a.m., Pacific Time, which is the local time, at our principal executive offices located at 3240 Bayshore Blvd., Brisbane,
California 94005-1021, and at any postponements or adjournments thereof. This proxy statement contains important
information regarding the meeting. Specifically, it identifies the matters upon which you are being asked to vote, provides
information that you may find useful in determining how to vote and describes the voting procedures.
In this proxy statement the terms “we”, “our”, “Cutera” and the “Company” each refer to Cutera, Inc.; the term “Board”
means our Board of Directors; the term “proxy materials” means this proxy statement, the enclosed proxy card, and our
Annual Report on Form 10-K for the year ended December 31, 2015, filed with the U.S. Securities and Exchange Commission
(the “SEC”) on March 15, 2016, and the term “Annual Meeting” means our 2016 Annual Meeting of Stockholders.
We are sending the Notice of Internet Availability of Proxy Materials on or about May 6, 2016, to all stockholders of record
at the close of business on April 25, 2016 (the “Record Date”).
QUESTIONS AND ANSWERS REGARDING THIS SOLICITATION AND VOTING
AT THE ANNUAL MEETING
Why am I receiving these proxy
materials?
You are receiving these proxy materials from us because you were a stockholder of record
at the close of business on the Record Date (which was April 25, 2016). As a stockholder
of record, you are invited to attend the meeting and are entitled to and requested to vote
on the items of business described in this proxy statement.
Why did I receive a notice in the
mail regarding the Internet
availability of the proxy
materials instead of a paper
copy of the proxy materials?
Pursuant to SEC rules, we have elected to provide access to our proxy materials over the
Internet. Accordingly, we are sending a Notice of Internet Availability of Proxy Materials
(the “Notice”) to our stockholders.
All stockholders will have the ability to access the proxy materials on a website referred
to in the Notice or request to receive a printed set of the proxy materials.
Instructions on how to access the proxy materials over the Internet or to request a printed
copy may be found on the Notice.
In addition, stockholders may request to receive proxy materials in printed form by mail
or electronically by email on an ongoing basis. Choosing to receive your future proxy
materials by email will save us the cost of printing and mailing documents to you and will
reduce the impact of our annual stockholders’ meetings on the environment. If you chose
prior to the Record Date to receive future proxy materials by email, you should receive an
email this year with instructions containing a link to those materials and a link to the proxy
voting site. In connection with our upcoming Annual Meeting, if you choose to receive
future proxy materials by email, you will receive an email next year with instructions
containing a link to those materials and a link to the proxy voting site. Your election to
receive proxy materials by email will remain in effect until you terminate it.
Proxy Statement
What is the purpose of the
Annual Meeting?
At our meeting, stockholders of record will vote upon the items of business outlined in the
notice of meeting (on the cover page of this proxy statement), each of which is described
more fully in this proxy statement. In addition, management will report on the performance
of the Company and respond to questions from stockholders.
Who is entitled to attend the
meeting?
Who is entitled to vote at the
meeting?
You are entitled to attend the meeting only if you owned our common stock (or were a
joint holder) as of the Record Date or if you hold a valid proxy for the meeting. You should
be prepared to present photo identification for admittance.
Please also note that if you are not a stockholder of record but hold shares in street name
(that is, through a broker or nominee), you will need to provide proof of beneficial
ownership as of the Record Date, such as your most recent brokerage account statement,
a copy of the voting instruction card provided by your broker, trustee or nominee, or other
similar evidence of ownership.
The meeting will begin promptly at 10:00 a.m., local time. Check-in will begin at 9:50
a.m., local time.
Only stockholders who owned our common stock at the close of business on the Record
Date are entitled to notice of and to vote at the meeting, and at any postponements or
adjournments thereof.
As of the Record Date, 13,080,920 shares of our common stock were outstanding. Each
outstanding share of our common stock entitles the holder to one vote on each matter
considered at the meeting. Accordingly, there are a maximum of 13,080,920 votes that
may be cast at the meeting.
How many shares must be
present or represented to
conduct business at the meeting
(that is, what constitutes a
quorum)?
The presence at the meeting, in person or by proxy, of the holders of a majority of the
shares of our common stock entitled to vote at the meeting will constitute a quorum. A
quorum is required to conduct business at the meeting. The presence of the holders of our
common stock representing at least 6,540,461 votes will be required to establish a quorum
at the meeting. Both abstentions and broker non-votes are counted for the purpose of
determining the presence of a quorum.
What items of business will be
voted on at the meeting?
The items of business scheduled to be voted on at the meeting are as follows:
1. The election of three nominees to serve as Class III directors on our Board;
2. The ratification of BDO USA, LLP (“BDO”) as the Independent Registered
Public Accounting Firm for the 2016 fiscal year;
3. To hold a non-binding advisory vote on the compensation of our Named
Executive Officers; and
4. To transact such other business as may properly come before the Annual
Meeting, including any motion to adjourn to a later date to permit further
solicitation of proxies, if necessary, or before any adjournment thereof. These
proposals are described more fully below in this proxy statement. As of the date
of this proxy statement, the only business that our Board intends to present or
knows of that others will present at the meeting is as set forth in this proxy
statement. If any other matter or matters are properly brought before the
meeting, it is the intention of the persons who hold proxies to vote the shares
they represent in accordance with their best judgment.
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Proxy Statement
How does the Board
recommend that I vote?
Our Board recommends that you vote your shares “FOR” each of the director nominees,
“FOR” the ratification of BDO as the Independent Registered Public Accounting Firm for
the 2016 fiscal year, and “FOR” the approval of the non-binding advisory vote on the
compensation of our Named Executive Officers.
What shares can I vote at the
meeting?
You may vote all shares owned by you as of the Record Date, including (1) shares held
directly in your name as the stockholder of record, and (2) shares held for you as the
beneficial owner through a broker, trustee or other nominee such as a bank.
What is the difference between
holding shares as a stockholder
of record and as a beneficial
owner?
Most of our stockholders hold their shares through a broker or other nominee rather than
directly in their own name. As summarized below, there are some distinctions between
shares held of record and those owned beneficially.
Stockholders of Record. If your shares are registered directly in your name with our
transfer agent, Computershare Trust Company, Inc., you are considered, with respect to
those shares, the stockholder of record, and these proxy materials are being sent directly
to you by us. As the stockholder of record, you have the right to grant your voting proxy
directly to Cutera or to vote in person at the meeting. We have enclosed a proxy card for
your use.
Beneficial Owner. If your shares are held in a brokerage account or by another nominee,
you are considered the beneficial owner of shares held in street name, and these proxy
materials are being forwarded to you together with a voting instruction card. As the
beneficial owner, you have the right to direct your broker, trustee or nominee how to vote
and are also invited to attend the meeting. Please note that since a beneficial owner is not
the stockholder of record, you may not vote these shares in person at the meeting unless
you obtain a “legal proxy” from the broker, trustee or nominee that holds your shares,
giving you the right to vote the shares at the meeting. Your broker, trustee or nominee has
enclosed or provided voting instructions for you to use in directing the broker, trustee or
nominee how to vote your shares.
Whether you hold shares directly as the stockholder of record or beneficially in street
name, you may direct how your shares are voted without attending the meeting.
Stockholders of record of our common stock may submit proxies by completing, signing
and dating their proxy cards and mailing them in the accompanying pre-addressed
envelope. Our stockholders who hold shares beneficially in street name may vote by mail
by completing, signing and dating the voting instruction cards provided by the broker,
trustee or nominee and mailing them in the accompanying pre-addressed envelope.
Shares held in your name as the stockholder of record may be voted in person at the
meeting. Shares held beneficially in street name may be voted in person only if you obtain
a legal proxy from the broker, trustee or nominee that holds your shares giving you the
right to vote the shares. Even if you plan to attend the meeting, we recommend that you
also submit your proxy card or voting instructions as described above so that your vote
will be counted if you later decide not to, or are unable to, attend the meeting.
You may change your vote at any time prior to the vote at the meeting. If you are the
stockholder of record, you may change your vote by granting a new proxy bearing a later
date (which automatically revokes the earlier proxy), by providing a written notice of
revocation to our Secretary prior to your shares being voted, or by attending the meeting
and voting in person. Attendance at the meeting will not cause your previously granted
proxy to be revoked unless you specifically so request.
For shares you hold beneficially in street name, you may change your vote by submitting
new voting instructions to your broker, trustee or nominee, or, if you have obtained a legal
proxy from your broker, trustee or nominee giving you the right to vote your shares, by
attending the meeting and voting in person.
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How can I vote my shares
without attending the meeting?
How can I vote my shares in
person at the meeting?
Can I change my vote?
Proxy Statement
Is my vote confidential?
Proxy instructions, ballots and voting tabulations that identify individual stockholders are
handled in a manner that protects your voting privacy. Your vote will not be disclosed
either within Cutera or to third parties, except: (1) as necessary to meet applicable legal
requirements, (2) to allow for the tabulation of votes and certification of the vote, and (3)
to facilitate a successful proxy solicitation. Occasionally, stockholders provide written
comments on their proxy card, which are then forwarded to our management.
What vote is required to approve
each item and how are votes
counted?
The vote required to approve each item of business and the method for counting votes is
set forth below:
Election of Directors. The three director nominees receiving the highest number of
affirmative “FOR” votes at the meeting (a plurality of votes cast) will be elected to serve
as Class III directors. You may vote either “FOR” or “WITHHOLD” your vote for the
director nominees. A properly executed proxy marked “WITHHOLD” with respect to the
election of one or more directors will not be voted with respect to the director or directors
indicated, although it will be counted for purposes of determining whether there is a
quorum.
Ratification of BDO as our Independent Registered Public Accounting Firm. For the
ratification of BDO as our Independent Registered Public Accounting Firm, the
affirmative “FOR” vote of a majority of the shares represented in person or by proxy and
entitled to vote on the item will be required for approval. You may vote “FOR,”
“AGAINST” or “ABSTAIN” for this item of business. If you “ABSTAIN,” your
abstention has the same effect as a vote “AGAINST.”
Non-binding Advisory Vote on the Compensation of our Named Executive Officers.
For the non-binding vote on executive compensation, the affirmative “FOR” vote of a
majority of the shares represented in person or by proxy and entitled to vote on the item
will be required for approval. You may vote “FOR,” “AGAINST” or “ABSTAIN” for this
item of business. If you “ABSTAIN,” your abstention has the same effect as a vote
“AGAINST.”
If you provide specific instructions with regard to certain items, your shares will be voted
as you instruct on such items. If you sign your proxy card or voting instruction card without
giving specific instructions, your shares will be voted in accordance with the
recommendations of the Board (“FOR” all of the Company’s nominees to the Board,
“FOR” ratification of BDO as our Independent Registered Public Accounting Firm,
“FOR” the approval, by non-binding vote, of executive compensation, and in the discretion
of the proxy holders on any other matters that may properly come before the meeting).
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Proxy Statement
What is a “broker non-vote”? A “broker non-vote” occurs when a broker expressly instructs on a proxy card that it is not
voting on a matter, whether routine or non-routine. Under the rules that govern brokers
who have record ownership of shares that are held in street name for their clients who are
the beneficial owners of the shares, brokers have the discretion to vote such shares on
routine matters, which includes ratifying the appointment of an independent registered
public accounting firm but does not include the election of directors, and the non-binding
vote on executive compensation. Therefore, if you do not otherwise instruct your broker,
the broker may turn in a proxy card voting your shares “FOR” ratification of BDO as the
Independent Registered Public Accounting Firm.
However, if you do not instruct your broker how to vote with respect to the election of
directors and the non-binding vote on executive compensation, your broker may not vote
with respect to such proposal and your shares will not be counted as voting in favor of
these matters.
How are “broker non-votes”
counted?
Broker non-votes will be counted for the purpose of determining the presence or absence
of a quorum for the transaction of business, but they will not be counted in tabulating the
voting result for any particular proposal.
How are abstentions counted?
What happens if additional
matters are presented at the
meeting?
If you return a proxy card that indicates an abstention from voting on all matters, the shares
represented will be counted for the purpose of determining both the presence of a quorum
and the total number of votes cast with respect to a proposal (other than the election of
directors), but they will not be voted on any matter at the meeting. In the absence of
controlling precedent to the contrary, we intend to treat abstentions in this manner.
Accordingly, abstentions will have the same effect as a vote “AGAINST” a proposal.
Other than the four proposals described in this proxy statement, we are not aware of any
other business to be acted upon at the meeting. If you grant a proxy, the persons named as
proxy holders, Kevin P. Connors (President and Chief Executive Officer) and Ronald J.
Santilli (our Executive Vice President and Chief Financial Officer), will have the discretion
to vote your shares on any additional matters that may be properly presented for a vote at
the meeting. If, for any unforeseen reason, any of our nominees is not available as a
candidate for director, the persons named as proxy holders will vote your proxy for such
other candidate or candidates as may be nominated by our Board.
Who will serve as inspector of
election?
We expect a representative of Computershare Trust Company, Inc., our transfer agent, to
tabulate the votes, and expect Rajesh Madan, our Vice President of Finance and Legal to
act as inspector of election at the meeting.
What should I do in the event
that I receive more than one set
of proxy/voting materials?
Who is soliciting my vote and
who will bear the costs of this
solicitation?
You may receive more than one set of these proxy solicitation materials, including multiple
copies of this proxy statement and multiple proxy cards or voting instruction cards. For
example, if you hold your shares in more than one brokerage account, you may receive a
separate voting instruction card for each brokerage account in which you hold shares. In
addition, if you are a stockholder of record and your shares are registered in more than one
name, you may receive more than one proxy card. Please complete, sign, date and return
each Cutera proxy card and voting instruction card that you receive to ensure that all your
shares are voted.
Your vote is being solicited on behalf of the Board, and the Company will bear the entire
cost of solicitation of proxies, including preparation, assembly, printing and mailing of this
proxy statement. In addition to these mailed proxy materials, our directors and employees
may also solicit proxies in person, by telephone, by electronic mail or by other means of
communication. Directors and employees will not be paid any additional compensation for
soliciting proxies. We may reimburse brokerage firms, banks and other agents for the cost
of forwarding proxy materials to beneficial owners. We may also engage the services of a
professional proxy solicitation firm to aid in the solicitation of proxies from certain
brokers, bank nominees and other institutional owners. Our costs for such services, if
retained, will not be material.
-5-
Proxy Statement
Where can I find the voting
results of the meeting?
We intend to announce preliminary voting results at the Annual Meeting and file a Form
8-K with the SEC within four business days after the end of our Annual Meeting to report
the voting results.
What is the deadline to propose
actions for consideration at next
year’s Annual Meeting of
stockholders or to nominate
individuals to serve as directors?
As a stockholder, you may be entitled to present proposals for action at a future meeting
of stockholders, including director nominations.
Stockholder Proposals: For a stockholder proposal to be considered for inclusion in our
proxy statement for the Annual Meeting to be held in 2017, the written proposal must be
received by our corporate Secretary at our principal executive offices no later than January
5, 2017, which is the date 120 calendar days before the anniversary of the mailing date of
the Notice of Internet Availability of Proxy Materials. If the date of next year’s Annual
Meeting is moved more than 30 days before or after the anniversary date of this year’s
Annual Meeting, the deadline for inclusion of proposals in our proxy statement is instead
a reasonable time before we begin to print and mail its proxy materials. Such proposals
also must comply with the requirements of Rule 14a-8 of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), and any other applicable rules established by the
SEC. Stockholders interested in submitting such a proposal are advised to contact
knowledgeable legal counsel with regard to the detailed requirements of applicable
securities laws. Proposals should be addressed to:
Secretary
Cutera, Inc.
3240 Bayshore Blvd.
Brisbane, California 94005-1021
Nomination of Director Candidates: You may propose director candidates for
consideration by our Board. Any such recommendations should include the nominee’s
name and qualifications for Board membership and should be directed to the “Secretary”
at the address of our principal executive offices set forth above. In addition, our bylaws
permit stockholders to nominate directors for election at an Annual Meeting of
stockholders. To nominate a director, the stockholder must provide the information
required by our bylaws, as well as a statement by the nominee consenting to being named
as a nominee and to serve as a director if elected. In addition, the stockholder must give
timely notice to our corporate Secretary in accordance with the provisions of our bylaws,
which require that the notice be received by our corporate Secretary no later than January
5, 2017.
Copy of Bylaw Provisions: Our bylaws are available on the Investor page of our website
at www.cutera.com.You may also contact our corporate Secretary at our principal
executive offices for a copy of the relevant bylaw provisions regarding the requirements
for making stockholder proposals and nominating director candidates.
-6-
Proxy Statement
Security Ownership of Certain Beneficial Owners and Management
STOCK OWNERSHIP
The following table provides information relating to the beneficial ownership of our common stock as of the Record Date,
by:
● each stockholder known by us to own beneficially more than 5% of our common stock;
● each of our executive officers named in the Summary Compensation Table on page 35 (including our Chief
Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”);
● each of our directors; and
● all of our directors and Named Executive Officers (“NEOs”) as a group.
The number of shares beneficially owned by each entity, person, director or executive officer is determined in accordance
with the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose.
Under such rules, beneficial ownership includes any shares over which the individual has the sole or shared voting power or
investment power and any shares that the individual has the right to acquire within 60 days of April 25, 2016 (the Record
Date) through the exercise of any stock option or other right. The number and percentage of shares beneficially owned is
computed on the basis of 13,080,920 shares of our common stock outstanding as of the Record Date. The information in the
following table regarding the beneficial owners of more than 5% of our common stock is based upon information supplied
by principal stockholders or Schedules 13D and 13G filed with the SEC.
Shares of our common stock that a person has the right to acquire within 60 days of the Record Date are deemed outstanding
for purposes of computing the percentage ownership of the person holding such rights, but are not deemed outstanding for
purposes of computing the percentage ownership of any other person, except with respect to the percentage ownership of all
directors and executive officers as a group. To our knowledge, except as set forth in the footnotes to this table and subject to
applicable community property laws, each person or entity named in the table has sole voting and disposition power with
respect to the shares set forth opposite such person’s or entity’s name. The address for those persons for which an address is
not otherwise provided is c/o Cutera, Inc., 3240 Bayshore Blvd., Brisbane, California 94005-1021.
Name and Address of Beneficial Owner
Dimensional Fund Advisors LP .........................................................
Renaissance Technologies, LLC ........................................................
BlackRock, Inc. ..................................................................................
Voce Capital Management, LLC ........................................................
David B. Apfelberg ............................................................................
Gregory Barrett ..................................................................................
Kevin P. Connors ...............................................................................
David A. Gollnick ..............................................................................
Timothy J. O’Shea .............................................................................
J. Daniel Plants ...................................................................................
Clint H. Severson ...............................................................................
Ronald J. Santilli ................................................................................
Jerry P. Widman .................................................................................
All directors and Named Executive Officers as a group (9 persons) ..
Number of
Shares
Outstanding
1,052,533
993,831
923,456
675,986
12,327
22,050
549,595
112,892
31,954
—(1)
4,000
47,493
31,154
811,465
Warrants and
Options
Exercisable
Within 60
Days
Approximate
Percent
Owned
—
—
—
—
14,204
18,204
553,889
4,204
14,204
4,667
4,667
168,350
14,204
796,593
8.0%
7.6%
7.1%
5.2%
*
*
8.1%
*
*
*(1)
*
1.6%
*
11.6%
*Less than 1%.
(1) Mr. Plants is the Managing Partner of Voce Capital Management LLC, the holder of 675,986 shares (approximately
5.2%) of our outstanding common stock as of the Record Date. While Mr. Plants has disclaimed beneficial ownership
of the shares owned by Voce Capital Management LLC, except to the extent of his pecuniary interest therein, he has the
sole or shared voting power of these shares.
-7-
Proxy Statement Section 16(a) Beneficial Ownership Reporting Compliance
Committees of the Board
Section 16(a) of the Exchange Act requires our directors, officers and beneficial owners of more than 10% of our common
stock to file reports of ownership and reports of changes in the ownership with the SEC. Such persons are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file.
Our Board has four standing committees: the Audit Committee, the Compensation Committee, the Nominating and Corporate
Governance Committee and the Strategic Transactions Committee. From time to time, our Board may also create various ad
hoc committees for special purposes. The membership during the last fiscal year, and the function of each of the committees,
are described below.
Based solely on our review of the copies of such forms received by us, or written representations from reporting persons that
no Forms 3, 4 or 5 were required of such persons, we believe that during our fiscal year ended December 31, 2015 all reports
were timely filed.
CORPORATE GOVERNANCE AND BOARD MATTERS
Director Independence
Our Board currently consists of eight authorized directors. The Company’s directors are David B. Apfelberg, Gregory Barrett,
Kevin P. Connors, David A. Gollnick, Timothy J. O’Shea, J. Daniel Plants, Clint H. Severson, and Jerry P. Widman. Our
Board has determined that each of the directors other than Kevin P. Connors, the Company’s President and CEO, and David
A. Gollnick, the Company’s former Vice President of North American Sales and former Executive Vice President of Research
and Development, satisfy the current “independent director” standards established by rules of The NASDAQ Stock Market
LLC (“NASDAQ”).
Board Leadership Structure
Our Board does not have a chairman but David B. Apfelberg is the Board-designated lead independent director. We believe
Dr. Apfelberg’s technical qualifications as a physician and Adjunct Clinical Professor of Plastic Surgery at the Stanford
University Medical Center, understanding of our products, tenure with the Company and his knowledge of the aesthetics
market make him suitable for this lead independent director position. Our CEO, Mr. Connors, performs many of the functions
that a chairman would typically perform and works together with Dr. Apfelberg in setting the agenda for each board meeting
and presiding over such meetings. At the end of each board meeting, the independent directors meet without Mr. Connors
and Mr. Gollnick present. Following each meeting, Dr. Apfelberg provides feedback to Mr. Connors on his performance and
the performance of other Cutera employees during the meeting and frequently recommends new agenda items for the next
meeting.
As described in more detail below, the Board has four standing committees, an Audit Committee, a Compensation
Committee, a Nominating and Corporate Governance Committee and a Strategic Transactions Committee. The chairman and
each member of these committees is an independent director. The Board delegates substantial duties and responsibilities to
each committee. The committees make recommendations to the Board and report regularly to the Board on their activities
and any actions they have taken. We believe that our independent board committees and their chairman are an important
aspect of our board leadership structure.
Risk Oversight and Analysis
Our management is responsible for managing the risks we face in the ordinary course of operating our business. The Board
oversees potential risks and our risk management activities by receiving operational and strategic presentations from
management which include discussions of key risks to our business. While our Board has the ultimate responsibility for risk
management and oversight, various committees of the Board also support the Board in its fulfillment of this responsibility.
For example, our Audit Committee assists the Board in its risk oversight function by reviewing and discussing with
management our system of disclosure controls and our internal controls over financial reporting risks associated with our
cash investment policies, risks related to regulatory matters, and evaluating and advising on other matters. Our business is
run conservatively and excessive risk taking has been discouraged. As a result, risk analysis has not been a significant factor
for our Compensation Committee in establishing compensation. The Nominating and Corporate Governance Committee
assists the Board in fulfilling its oversight responsibilities with respect to the management of risks associated with Board
organization, membership and structure. The Strategic Transactions Committee evaluates from time-to-time, business
development opportunities, as well as any risks and benefits associated with acquiring potential targets, and reports back to
the full Board with their recommendations.
Non-Employee Directors:
Name of Director
David B. Apfelberg .....................................................................
Gregory Barrett ...........................................................................
David A. Gollnick .......................................................................
Timothy J. O’Shea ......................................................................
X
J. Daniel Plants ............................................................................
Clint H. Severson ........................................................................
Jerry P. Widman ..........................................................................
X
X*
Employee Director:
Kevin P. Connors ........................................................................
Nominating
and
Corporate
Strategic
Audit
Compensation
Governance
Transactions
Committee
Committee
Committee
Committee
X
X*
X
X
X
X*
X
X
X(1)
X
X*
Number of Meetings Held During the Last Fiscal Year ..............
6
6
—
—(2)
X = Committee member
* = Chairman of Committee
2016.
(1) = Clint H. Severson became a member of the Nominating and Corporate Governance Committee effective April 22,
(2) = While there were no formal meetings of the Strategic Transactions Committee in 2015, there were various discussions
at the full Board level relating to the evaluation of strategic transactions.
Audit Committee. The Audit Committee oversees the Company’s accounting and financial reporting processes and the audits
of its financial statements. The committee operates under a written charter adopted by the Board and a copy of the charter
can be found on the Investor page, under the Corporate Governance section of our website at www.cutera.com. In this role,
the Audit Committee monitors and oversees the integrity of the Company’s financial statements and related disclosures, the
qualifications, independence, and performance of the Company’s Independent Registered Public Accounting Firm, and the
Company’s compliance with applicable legal requirements and its business conduct policies. Our Board has determined that
each member of the Audit Committee meets the independence and financial literacy requirements of the NASDAQ rules and
the independence requirements of the SEC. Our Board has determined that Jerry P. Widman continues to qualify as an “audit
committee financial expert,” as defined in SEC rules. The report of the Audit Committee appears on page 15 of this proxy
statement.
-8-
-9-
Proxy Statement
Section 16(a) Beneficial Ownership Reporting Compliance
Committees of the Board
CORPORATE GOVERNANCE AND BOARD MATTERS
Name of Director
Audit
Committee
Compensation
Committee
Nominating
and
Corporate
Governance
Committee
Strategic
Transactions
Committee
Our Board has four standing committees: the Audit Committee, the Compensation Committee, the Nominating and Corporate
Governance Committee and the Strategic Transactions Committee. From time to time, our Board may also create various ad
hoc committees for special purposes. The membership during the last fiscal year, and the function of each of the committees,
are described below.
Non-Employee Directors:
David B. Apfelberg .....................................................................
Gregory Barrett ...........................................................................
David A. Gollnick .......................................................................
Timothy J. O’Shea ......................................................................
J. Daniel Plants ............................................................................
Clint H. Severson ........................................................................
Jerry P. Widman ..........................................................................
Employee Director:
Kevin P. Connors ........................................................................
X
X
X*
X
X*
X
X
X
X*
X
X
X(1)
X
X*
Number of Meetings Held During the Last Fiscal Year ..............
6
6
—
—(2)
X = Committee member
* = Chairman of Committee
(1) = Clint H. Severson became a member of the Nominating and Corporate Governance Committee effective April 22,
2016.
(2) = While there were no formal meetings of the Strategic Transactions Committee in 2015, there were various discussions
at the full Board level relating to the evaluation of strategic transactions.
Audit Committee. The Audit Committee oversees the Company’s accounting and financial reporting processes and the audits
of its financial statements. The committee operates under a written charter adopted by the Board and a copy of the charter
can be found on the Investor page, under the Corporate Governance section of our website at www.cutera.com. In this role,
the Audit Committee monitors and oversees the integrity of the Company’s financial statements and related disclosures, the
qualifications, independence, and performance of the Company’s Independent Registered Public Accounting Firm, and the
Company’s compliance with applicable legal requirements and its business conduct policies. Our Board has determined that
each member of the Audit Committee meets the independence and financial literacy requirements of the NASDAQ rules and
the independence requirements of the SEC. Our Board has determined that Jerry P. Widman continues to qualify as an “audit
committee financial expert,” as defined in SEC rules. The report of the Audit Committee appears on page 15 of this proxy
statement.
Section 16(a) of the Exchange Act requires our directors, officers and beneficial owners of more than 10% of our common
stock to file reports of ownership and reports of changes in the ownership with the SEC. Such persons are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file.
Based solely on our review of the copies of such forms received by us, or written representations from reporting persons that
no Forms 3, 4 or 5 were required of such persons, we believe that during our fiscal year ended December 31, 2015 all reports
were timely filed.
Director Independence
LLC (“NASDAQ”).
Board Leadership Structure
Our Board currently consists of eight authorized directors. The Company’s directors are David B. Apfelberg, Gregory Barrett,
Kevin P. Connors, David A. Gollnick, Timothy J. O’Shea, J. Daniel Plants, Clint H. Severson, and Jerry P. Widman. Our
Board has determined that each of the directors other than Kevin P. Connors, the Company’s President and CEO, and David
A. Gollnick, the Company’s former Vice President of North American Sales and former Executive Vice President of Research
and Development, satisfy the current “independent director” standards established by rules of The NASDAQ Stock Market
Our Board does not have a chairman but David B. Apfelberg is the Board-designated lead independent director. We believe
Dr. Apfelberg’s technical qualifications as a physician and Adjunct Clinical Professor of Plastic Surgery at the Stanford
University Medical Center, understanding of our products, tenure with the Company and his knowledge of the aesthetics
market make him suitable for this lead independent director position. Our CEO, Mr. Connors, performs many of the functions
that a chairman would typically perform and works together with Dr. Apfelberg in setting the agenda for each board meeting
and presiding over such meetings. At the end of each board meeting, the independent directors meet without Mr. Connors
and Mr. Gollnick present. Following each meeting, Dr. Apfelberg provides feedback to Mr. Connors on his performance and
the performance of other Cutera employees during the meeting and frequently recommends new agenda items for the next
meeting.
As described in more detail below, the Board has four standing committees, an Audit Committee, a Compensation
Committee, a Nominating and Corporate Governance Committee and a Strategic Transactions Committee. The chairman and
each member of these committees is an independent director. The Board delegates substantial duties and responsibilities to
each committee. The committees make recommendations to the Board and report regularly to the Board on their activities
and any actions they have taken. We believe that our independent board committees and their chairman are an important
aspect of our board leadership structure.
Risk Oversight and Analysis
Our management is responsible for managing the risks we face in the ordinary course of operating our business. The Board
oversees potential risks and our risk management activities by receiving operational and strategic presentations from
management which include discussions of key risks to our business. While our Board has the ultimate responsibility for risk
management and oversight, various committees of the Board also support the Board in its fulfillment of this responsibility.
For example, our Audit Committee assists the Board in its risk oversight function by reviewing and discussing with
management our system of disclosure controls and our internal controls over financial reporting risks associated with our
cash investment policies, risks related to regulatory matters, and evaluating and advising on other matters. Our business is
run conservatively and excessive risk taking has been discouraged. As a result, risk analysis has not been a significant factor
for our Compensation Committee in establishing compensation. The Nominating and Corporate Governance Committee
assists the Board in fulfilling its oversight responsibilities with respect to the management of risks associated with Board
organization, membership and structure. The Strategic Transactions Committee evaluates from time-to-time, business
development opportunities, as well as any risks and benefits associated with acquiring potential targets, and reports back to
the full Board with their recommendations.
-8-
-9-
Proxy Statement
Compensation Committee. The Compensation Committee, together with our Board, establishes compensation for our CEO
and the other executive officers and administers the Company’s 2004 Equity Incentive Plan (as amended) and 2004 Employee
Stock Purchase Plan. The Compensation Committee has a written charter, which was adopted by our Board, and can be found
on the Investor page, under the Corporate Governance section of our website at www.cutera.com.
Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee reviews and
makes recommendations to the Board on matters concerning corporate governance, Board composition, identification,
evaluation and nomination of director candidates, Board committees, Board compensation, and conflicts of interest. The
Nominating and Corporate Governance Committee has a written charter, which was adopted by our Board and can be found
on the Investor page, under the Corporate Governance section of our website at www.cutera.com.
Strategic Transactions Committee. The Strategic Transactions Committee reviews and evaluates any potential strategic
business combination transactions as the possibilities arise and other related or pertinent strategic alternatives for the
Company (which may include, but are not limited to, a merger, other business combination, recapitalization, acquisition,
spin-off, split-off, acquisition of a subsidiary, division or unit, or other similar transaction).
Meetings Attended by Directors
During 2015, the Board held five meetings, the Audit Committee held six meetings, the Compensation Committee held six
meetings, the Strategic Transactions Committee held no meetings, and the Nominating and Corporate Governance Committee
held no meetings. Each of the directors attended at least 80% of the meetings of the Board or committee(s) on which he
served during 2015.
The directors of the Company are encouraged to attend the Company’s Annual Meeting of Stockholders. In 2015, directors
Mr. Connors and Mr. Plants attended the meeting in person; and the remaining six directors attended the meeting
telephonically.
Director Nomination Process
Director Qualifications. While the Nominating and Corporate Governance Committee has not established specific minimum
qualifications for director candidates and does not maintain a specific policy with respect to Board diversity, the candidates
for Board membership should have the highest professional and personal ethics and values, and conduct themselves consistent
with our Code of Ethics. While the Nominating and Corporate Governance Committee has not formalized specific minimum
qualifications they believe must be met by a candidate to be recommended by the independent members, the Nominating and
Corporate Governance Committee believes that candidates and nominees must reflect a Board that is comprised of directors
who (i) have broad and relevant experience, (ii) are predominantly independent, (iii) are of high integrity, (iv) have
qualifications that will increase overall Board effectiveness and enhance long-term stockholder value, and (v) meet other
requirements as may be required by applicable rules, such as financial literacy or financial expertise with respect to Audit
Committee members.
-10-
Proxy Statement
Stockholder Nominations and Recommendations. As described above in the Question and Answer section of this proxy
statement under “What is the deadline to propose actions for consideration at next year’s Annual Meeting of Stockholders or
to nominate individuals to serve as directors?,” our bylaws set forth the procedure for the proper submission of stockholder
nominations for membership on our Board. In addition, the Nominating and Corporate Governance Committee may consider
properly submitted stockholder recommendations (as opposed to formal nominations) for candidates for membership on the
Board. A stockholder may make such a recommendation by submitting the following information to our Secretary at 3240
Bayshore Blvd., Brisbane, California 94005-1021 no later than January 5, 2017:
the candidate’s name;
●
● home and business contact information;
● detailed biographical data, relevant qualifications, professional and personal references;
●
●
information regarding any relationships between the candidate and Cutera within the last three years; and
evidence of ownership of Cutera stock by the recommending stockholder.
Identifying and Evaluating Director Nominees. Typically new candidates for nomination to the Board are suggested by
existing directors or by our executive officers, although candidates may initially come to our attention through professional
search firms, stockholders or other persons. The Nominating and Corporate Governance Committee carefully reviews the
qualifications of any candidates who have been properly brought to its attention. Such a review may, in the Nominating and
Corporate Governance Committee’s discretion, include a review solely of information provided to the Nominating and
Corporate Governance Committee or may also include discussion with persons familiar with the candidate, an interview with
the candidate or other actions that the Nominating and Corporate Governance Committee deems proper. The Nominating and
Corporate Governance Committee shall consider the suitability of each candidate, including the current members of the
Board, in light of the current size and composition of the Board. In evaluating the qualifications of the candidates, Nominating
and Corporate Governance Committee considers many factors, including, issues of character, judgment, independence,
expertise, length of service, and other commitments. In addition, the Nominating and Corporate Governance Committee takes
into account diversity in professional experience, skills and background in considering and evaluating candidates. However,
while diversity relating to background, skill, experience and perspective is one factor considered in the nomination process,
the Company does not have a formal policy relating to diversity. The Nominating and Corporate Governance Committee
evaluates such factors, among others, and does not assign any particular weighting or priority to any of these factors.
Candidates properly recommended by stockholders are evaluated by the Nominating and Corporate Governance Committee
using the same criteria as other candidates. Candidates are not discriminated against on the basis of race, religion, national
origin, sexual orientation, disability or any other basis proscribed by law.
Director Nominees at our 2016 Annual Meeting. Our Nominating and Corporate Governance Committee recommended the
director nominees for nomination to our Board.
-11-
Proxy Statement
Director Compensation
The following table sets forth a summary of the cash compensation paid and the grant date fair value of stock options and
stock awards of Cutera common stock, awarded to our non-employee directors in the fiscal year ended December 31, 2015.
2015 Director Compensation Table
Fees
Earned or
Name
Paid in Stock
Cash(1)
Awards(2)
Option
Awards(3) Compensation(4)
All Other
Total
David B. Apfelberg ............................................. $
Gregory Barrett ...................................................
David A. Gollnick ...............................................
Timothy J. O’Shea ..............................................
J. Daniel Plants ....................................................
Clint H. Severson ................................................
Jerry P. Widman ..................................................
51,000 $
65,000
45,000
62,500
50,000
52,500
71,000
60,000(5) $
60,000(6)
60,000(7)
60,000(8)
—
—
60,000(9)
— $
—
—
—
85,680
92,260
—
—
—
$ 111,000
125,000
45,240(7) 150,240
122,500
135,680
144,760
131,000
—
—
—
—
(1) The amounts reported in this column were earned in connection with serving on our Board and its committees, or as
committee Chairman retainers, each as described below.
(2) The amounts reported in this column represent the aggregate grant date fair value of shares of Cutera common stock
which vest over a one-year period, awarded during the fiscal year ended December 31, 2015 calculated in accordance
with Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 718.
(3) The amounts reported in this column represent the aggregate grant date fair value of equity awards which vest over a
three-year period, awarded during the fiscal year ended December 31, 2015 calculated in accordance with Financial
Accounting Standards Board Accounting Standards Codification (ASC) Topic 718.
(4) The amounts reported in this column were earned for services provided for other than serving on our Board or its
committees, each as described below.
(5) At December 31, 2015, Dr. Apfelberg held options to purchase 10,000 shares of Cutera common stock. .
(6) At December 31, 2015, Mr. Barrett held options to purchase 14,000 shares of Cutera common stock.
(7) Mr. Gollnick was paid $45,240 for consulting services provided to the Company in 2015.
(8) At December 31, 2015, Mr. O’Shea held options to purchase 10,000 shares of Cutera common stock.
(9) At December 31, 2015, Mr. Widman held options to purchase 10,000 shares of Cutera common stock.
For 2015, our non-employee directors earned an annual retainer of $45,000 for regular Board meetings; $6,000 for
Compensation Committee meetings (for members other than the Chairman); $7,500 for Audit Committee meetings (for
members other than the Chairman); and $5,000 for Strategic Transactions Committee meetings. Our non-employee directors
did not earn an annual retainer for Nominating and Corporate Governance Committee meetings (for members other than the
Chairman). The Chairman of the Audit Committee and the Compensation Committee each earned an annual retainer of
$20,000 for their services on the respective committees. The Chairman of the Nominating and Corporate Governance
Committee earned an annual retainer of $5,000 for his services. Our non-employee directors no longer receive meeting fees
for Board and committee meetings regardless of the number of meetings held throughout the year.
Our 2004 Equity Incentive Plan (as amended) provides for the automatic grant of options to purchase shares of Cutera
common stock to our non-employee directors. Each non-employee director who is appointed to the Board will receive an
initial option to purchase 14,000 shares of Cutera common stock upon such appointment. Each of these stock options will
have an exercise price equal to fair market value of Cutera common stock on the date of grant and a term of seven years and
will become exercisable as to one-third of the shares subject to the option on each anniversary of its date of grant, provided
the non-employee director remains a director on such dates. In addition, each non-employee director, who is a director on the
date of each Annual Meeting of Stockholders and has been a director for at least the preceding six months, will receive an
award of shares represented by the quotient of $60,000 divided by the closing market price of Cutera common stock on the
date of such Annual Meeting. These shares vest on the one-year anniversary of the grant date.
-12-
Proxy Statement
Code of Ethics
We are committed to maintaining the highest standards of business conduct and ethics. Our Code of Ethics, as amended, (the
“Code”) reflects our values and the business practices and principles of behavior that support this commitment. The Code is
intended to satisfy SEC rules for a “code of ethics” required by Section 406 of the Sarbanes-Oxley Act of 2002, as well as
the NASDAQ listing standards requirement for a “code of conduct.” The Code is available on the Company’s website at
www.cutera.com. We will post any amendment to the Code, as well as any waivers that are required to be disclosed by the
rules of the SEC or NASDAQ, on our website.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of the following members: David Apfelberg, Gregory Barrett and Jerry Widman.
Neither any member of the Compensation Committee, nor any of our NEOs, has a relationship that would constitute an
interlocking relationship with executive officers or directors of another entity. No Compensation Committee member is an
officer or employee of Cutera.
Family Relationships
There are no family relationships among any of our directors or executive officers.
Communications with the Board by Stockholders
Stockholders wishing to communicate with the Board or with an individual Board member concerning the Company may do
so by writing to the Board or to the particular Board member, and mailing the correspondence to: Attention: Board, c/o
Secretary, Cutera, Inc., 3240 Bayshore Blvd., Brisbane, California 94005-1021. The envelope should indicate that it contains
a stockholder communication. All such stockholder communications will be forwarded to the director or directors to whom
the communications are addressed.
Stock Ownership Guidelines
To enhance our overall corporate governance practices and director compensation program, our Board adopted stock
ownership guidelines for our non-employee directors, which the Compensation Committee intends to review annually. These
guidelines are designed to align our non-employee directors’ interests with our stockholders’ long-term interests by
promoting long-term ownership of Cutera common stock. These guidelines provide that, within five years of the later of the
adoption of the guidelines or his or her first date of election to our Board, our non-employee directors must hold shares of
Cutera common stock having a value not less than three times the value of their annual retainer for general Board service.
-13-
Proxy Statement
As of April 25, 2016, the non-employee directors’ holdings and target guidelines were as follows:
Non-Employee Directors
David B. Apfelberg. .........................................................................................
Gregory Barrett ................................................................................................
David A. Gollnick ...........................................................................................
Timothy J. O’Shea ..........................................................................................
J. Daniel Plants .................................................................................................
Clint H. Severson ............................................................................................
Jerry P. Widman ..............................................................................................
Stock
Ownership as of
April 25, 2016
Minimum Stock
Ownership
Required
12,327
22,050
112,892
31,954
—
4,000
31,154
11,519(1)
11,519(1)
11,519(1)
11,519(1)
11,519(2)
11,519(3)
11,519(1)
(1) Based on the closing stock price of $11.72 on April 25, 2016, each of these non-employee directors already held
shares that exceed the minimum stock ownership required.
(2) By January 6, 2020, based on the closing stock price of $11.72 on April 25, 2016.
(3) By January 3, 2020, based on the closing stock price of $11.72 on April 25, 2016.
On January 6, 2015, we entered into an agreement with Voce Capital Management LLC and Mr. Plants (the “Voce
Agreement”), which was filed with the SEC on January 8, 2015. The Voce Agreement states the terms and understandings
concerning the nomination and election of Mr. Plants to our Board of Directors and other matters. Further, it was agreed that
if, at any time Voce’s ownership in our common stock (subject to adjustment for stock splits, reclassifications, combinations
and similar adjustments) falls below 140,000 shares, then Mr. Plants will immediately resign from our Board.
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Proxy Statement
REPORT OF THE AUDIT COMMITTEE
In accordance with its written charter, the Audit Committee of the Board is responsible for assisting the Board to fulfill its
oversight of the integrity of the Company’s financial statements and internal controls, the Company’s compliance with legal
and regulatory requirements, the independent auditors’ qualifications and independence, and the performance of the
Company’s internal audit function and independent auditors. It is the responsibility of the Company’s management to prepare
the Company’s financial statements, develop and maintain adequate systems of internal accounting and financial controls,
facilitating the internal audit intended to evaluate the adequacy and effectiveness of the Company’s financial and operating
internal control systems.
BDO USA, LLP (“BDO ”), the Company’s independent registered public accounting firm for 2015 (the independent
auditors), was responsible for performing independent audits of the Company’s consolidated financial statements and internal
control over financial reporting and issuing an opinion on the conformity of those audited financial statements with generally
accepted accounting principles in the United States of America (“GAAP”) and on the effectiveness of the Company’s internal
control over financial reporting. The independent auditors also review the Company’s interim financial statements in
accordance with applicable auditing standards.
In evaluating the independence of BDO, the Audit Committee has (i) received the written disclosures and the letter from
BDO required by applicable requirements of the Public Company Accounting Oversight Board (“PCAOB”) regarding the
audit firm’s communications with the committee concerning independence, and (ii) discussed with BDO the firm’s
independence from the Company and management. The committee has concluded that BDO was independent from the
Company and its management. The committee has reviewed with the independent auditors and the Company’s internal
auditors the overall scope and specific plans for their respective audits, and the committee regularly monitored the progress
of both in assessing the Company’s compliance with Section 404 of the Sarbanes-Oxley Act, including their findings,
required resources and progress.
In 2015, the Audit Committee held six meetings. At every regular meeting, the Committee reviews the results of the
independent auditor’s examinations, their evaluations of the Company’s internal controls, and the overall quality of the
Company’s accounting and financial reporting. Following the regular meeting, the committee meets separately with the
independent auditors, without management present, and also meets separately with the Company’s management. In addition,
from time-to-time the Audit Committee met with the independent internal audit firm.
The committee has met and discussed with management and the independent auditors the fair and complete presentation of
the Company’s financial statements. The committee has also discussed and reviewed with the independent auditors all
communications required, including those described in Auditing Standards No. 16, “Communications with Audit
Committees,” as adopted by the PCAOB. The committee has discussed significant accounting policies applied in the financial
statements as well as alternative treatments. Management has represented that the consolidated financial statements have
been prepared in accordance with GAAP and the committee has reviewed and discussed the audited consolidated financial
statements with both management and the independent auditors.
Relying on the foregoing reviews and discussions, the committee recommended to the Board, and the Board approved,
inclusion of the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015, for filing with the Securities and Exchange Commission.
The foregoing report is provided by the undersigned members of the Audit Committee.
Timothy J. O’Shea
Clint H. Severson
Jerry P. Widman
(1) The material in this report is not deemed soliciting material or filed with the SEC and is not to be incorporated by
reference in any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended, whether made before or after the date of this Proxy Statement and irrespective of any general
incorporation language in those filings.
-15-
Proxy Statement
Classes of the Board of Directors
PROPOSAL ONE—ELECTION OF DIRECTORS
Our Amended and Restated Certificate of Incorporation provides that our Board shall be divided into three classes designated
as Class I, Class II and Class III, respectively, with the classes of directors serving for staggered three-year terms. Our Board
currently consists of eight directors, divided among the three classes as follows:
●
●
●
three Class I directors, Kevin P. Connors, David A. Gollnick and Clint H. Severson, whose terms expire at our
Annual Meeting of Stockholders to be held in 2017;
two Class II directors, David B. Apfelberg and Timothy J. O’Shea, whose terms expire at our Annual Meeting of
Stockholders to be held in 2018; and
three Class III directors Gregory Barrett, J. Daniel Plants and Jerry P. Widman, whose terms expire at the Annual
Meeting of Stockholders to be held in 2016.
The name of each member of the Board, the class in which he serves, and his age as of the Record Date, principal occupation
and length of service on the Board are as follows:
Name
Term
Expires Age
Class I Directors
Kevin P. Connors ............................ 2017
David A. Gollnick ........................... 2017
54
52
Clint H. Severson(2)(3) ...................... 2017
Class II Directors
David B. Apfelberg(1)(3) ................... 2018
68
74
Timothy J. O’Shea(2)(3)(4) ................. 2018
63
Principal Occupation
President and CEO
Former Vice President (“VP”) of North American
Sales and Former Executive Vice President (“EVP”)
of Research and Development
President and CEO, Abaxis, Inc.
Clinical Professor of Plastic Surgery, Stanford
University Medical Center
Former Managing Director, Oxo Capital
Director
Since
1998
1998
2015
1998
2004
Class III Directors
Gregory Barrett(1)(3) ......................... 2016
J. Daniel Plants(3)(4) .......................... 2016
Jerry P. Widman(1)(2)(3) ..................... 2016
62
48
73
President and CEO, DFINE, Inc.
Managing Partner, Voce Capital Management LLC
Former CFO, Ascension Health
2011
2015
2004
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of Nominating and Corporate Governance Committee.
(4) Member of the Strategic Transactions Committee.
Director Nominees
The Board has nominated Gregory Barrett, J. Daniel Plants and Jerry P. Widman for re-election as Class III directors.
-16-
Proxy Statement
Gregory Barrett has served as a member of our Board since October 2011. Mr. Barrett has been the President and CEO of
DFINE, Inc., a private medical device equipment company since September 2013. Mr. Barrett was the Chairman, President
and CEO of BÂRRX Medical, Inc., a private medical device company that was acquired by Covidien, a manufacturer and
distributer of products to treat gastrointestinal diseases. Prior to joining BÂRRX Medical in February 2004, from January
2001 through August 2003, Mr. Barrett served as President and CEO of ACMI Corporation, a developer of medical
visualization and energy systems; Group Vice President at Boston Scientific Corporation; Vice President, Global Sales and
Marketing at both Orthofix Corporation (formerly American Medical Electronics) and Baxter Healthcare. Mr. Barrett holds
a B.A. in Marketing from the University of Texas, Austin. We believe Mr. Barrett’s qualifications to serve on our Board
include his more than 37 years of diverse experiences in the medical device industry, including time spent serving as president
and CEO of several medical device companies. Mr. Barrett has held various Board positions with Softscope Medical,
BaroSense, Monteris Medical (Currently Chairman of the Board and member of the Compensation Committee), as well as
held Board positions for the companies in which he was employed.
J. Daniel Plants has served as a member of our Board since January 2015. Mr. Plants has been Managing Partner of Voce
Capital Management LLC since 2009. Prior to founding Voce Capital Management, Mr. Plants held a number of positions
at leading Wall Street firms, including executive roles in investment banking at Goldman Sachs and JPMorgan Chase and as
a corporate attorney with Sullivan & Cromwell. Mr. Plants is also the co-founder of the Bay Area Urban Debate League, a
San Francisco based charitable organization dedicated to expanding opportunities for area youth to become articulate,
informed leaders. Mr. Plants served as the organization’s Vice Chair from 2008 to 2012. Mr. Plants holds a Juris Doctorate
degree from University of Michigan Law School and an undergraduate degree from Baylor University. We believe
Mr. Plants’ qualifications to serve on our Board include his substantial experience as a strategic advisor and corporate
attorney, as well as his role as the founder of a successful investment management firm and status as a significant Company
stockholder, which bring valuable skills and perspective to the Board in the areas of finance, capital markets, strategy and
corporate governance.
Jerry P. Widman has served as a member of our Board since March 2004. From 1982 to 2001, Mr. Widman served as the
Chief Financial Officer of Ascension Health, a not-for-profit multi-hospital system. Mr. Widman has served as a member of
the Board of several other privately-held and publicly-held companies in the healthcare industry. Mr. Widman has
accumulated over 50 years of Board experience with 14 companies. Mr. Widman holds a B.B.A. from Case Western Reserve
University, an M.B.A. from the University of Denver, a J.D. from Cleveland State University, and is a Certified Public
Accountant. We believe Mr. Widman’s qualifications to serve on our Board include his financial expertise and prior
experience as a CFO, as well as his experience serving on the boards of various public and private companies.
If elected to our Board, directors Mr. Barrett, Mr. Plants and Mr. Widman would each hold office as a Class III director until
our Annual Meeting of Stockholders to be held in 2019, or until the earlier of their resignation, removal, or death.
Board of Directors’ Recommendation
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” EACH OF THE THREE NOMINEES
FOR CLASS III DIRECTOR LISTED ABOVE.
Directors Whose Terms Extend Beyond the 2016 Annual Meeting
Kevin P. Connors has served as our President and CEO, and as a member of our Board, since our inception in August 1998.
Prior to founding Cutera, from May 1996 to June 1998 Mr. Connors served as President and General Manager of Coherent
Medical Group, a unit of Coherent Inc., which manufactures lasers, optics and related accessories. We believe Mr. Connors’
qualifications to serve on our Board include, his knowledge of and leadership experience, in the aesthetic medical equipment
industry prior to joining Cutera and the substantial understanding of the Company and its operations that he has gained while
serving as President, CEO and director of the Company since its inception.
David B. Apfelberg, MD has served as a member of our Board since November 1998. Since 1980, Dr. Apfelberg has held
various roles at the Stanford University Medical Center, and currently serves as an Adjunct Clinical Professor of Plastic
Surgery. Since 1987, Dr. Apfelberg has also been a consultant for entrepreneurs and venture capital companies in the areas
of medical devices and medicine. From June 1991 to May 2001, Dr. Apfelberg was Director of the Plastic Surgery Center in
Atherton, California. Dr. Apfelberg is the author of five books on lasers in medicine and is a founding member and past
president of the American Society for Lasers in Medicine and Surgery. Dr. Apfelberg holds a B.M.S., Bachelor of Medical
Science, and an M.D. from Northwestern University Medical School. We believe Dr. Apfelberg’s qualifications to serve on
our Board include his medical expertise, understanding of our products, and his knowledge of the aesthetics market generally.
-17-
Proxy Statement
David A. Gollnick has served as a member of our Board since our inception in August 1998. From February 2014 to June
2014, he held the position of Vice President of North American Sales for the Company. From March 2009 to December 2014,
Mr. Gollnick has consulted with the Company for product development, clinical, sales and marketing support as needed. Mr.
Gollnick served as our EVP of Research and Development from April 2007 to March 2009 and as Vice President of Research
and Development from August 1998 until April 2007. From June 1996 to July 1998, Mr. Gollnick held the position of Vice
President of Research and Development at Coherent Medical Group, a unit of Coherent Inc. Mr. Gollnick holds a B.S. in
Mechanical Engineering from Fresno State University. We believe Mr. Gollnick’s qualifications to serve on our Board
include his technical experience in researching and developing products for the aesthetic medical equipment industry and his
understanding of our employees, products and operations.
Timothy J O'Shea has served as a member of our Board since April 2004. Mr. O'Shea was with OXO Capital from 2008 to
2014 serving as managing director. From 1995 to 2008, he served in a variety of management positions at Boston Scientific,
including Corporate Vice President of Business Development from 2000 to 2008. Mr. O'Shea currently acts as an advisor to
several medical device companies. Mr. O'Shea holds a B.A. in history from the University of Detroit. We believe Mr. O'Shea's
qualifications to serve on our Board include his corporate marketing knowledge as well as his diverse experience in the
medical device industry working for a large medical device company.
Clint Severson has served as a member of our Board since January 2015. He is presently the Chairman, Chief Executive
Officer and President of Abaxis, Inc., a manufacturer of portable blood analysis systems. Mr. Severson also serves on the
Boards of Directors of Response Biomedical Corporation and Trinity Biotech. From February 1989 to May 1996, Mr.
Severson served as President and Chief Executive Officer of MAST Immunosystems, Inc., a privately-held medical
diagnostics company. We believe Mr. Severson’s qualifications to serve on our Board include his more than 40 years of
experience as an executive in the medical and biotechnology industries.
-18-
Proxy Statement
PROPOSAL TWO—RATIFICATION OF BDO USA, LLP AS OUR INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Audit Committee of the Board has selected BDO USA, LLP as the Independent Registered Public Accounting Firm to
perform the audit of the Company’s consolidated financial statements for the fiscal year ending December 31, 2016. BDO
audited the Company’s consolidated financial statements for the fiscal years 2015 and 2014.
The Board is asking the stockholders to ratify the selection of BDO as the Company’s Independent Registered Public
Accounting Firm for 2016. Although not required by law, by rules of NASDAQ, or by the Company’s bylaws, the Board is
submitting the selection of BDO to the stockholders for ratification as a matter of good corporate practice. Even if the
selection is ratified, the Audit Committee in its discretion may select a different Independent Registered Public Accounting
Firm at any time during the year if it determines that such a change would be in the best interests of the Company and its
stockholders.
We have requested that representatives of BDO be present at the Annual Meeting. They will have an opportunity to make a
statement if they desire to do so and will be available to respond to appropriate questions from the Company’s stockholders.
Board of Directors’ Recommendation
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE RATIFICATION OF THE
SELECTION OF BDO AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FOR 2016.
Audit and Non-Audit Services
To help ensure the independence of the Independent Registered Public Accounting Firm, the Audit Committee has adopted
a policy for the pre-approval of all audit and non-audit services to be performed for the Company by its Independent
Registered Public Accounting Firm. Pursuant to this policy, all audit and non-audit services to be performed by the
Independent Registered Public Accounting Firm must be approved in advance by the Audit Committee. The Audit Committee
may delegate to one or more of its members the authority to grant the required approvals, provided that any exercise of such
authority is presented to the full Audit Committee at its next regularly scheduled meeting.
All of the services provided by BDO described in the table below were approved by the Audit Committee.
The aggregate fees incurred by the Company for audit and non-audit services in 2015 and 2014 were as follows:
Service Category
2015
2014
BDO USA LLP:
Audit Fees(1) .................................................................................................................. $
Audit-Related Fees ....................................................................................................... $
Tax Fees ........................................................................................................................ $
All Other Fees ............................................................................................................... $
Total BDO USA LLP ............................................................................................ $
457,120 $
— $
— $
— $
457,120 $
445,228
—
—
—
445,228
(1) In accordance with the SEC’s definitions and rules, audit fees are comprised of billed and unbilled fees for
professional services related to the audit of financial statements and internal control over financial reporting for the
Company’s 2015 and 2014 fiscal years as included in the annual report on Form 10-K; and the review of financial
statements for interim periods included in the quarterly reports on Form 10-Q within those years.
-19-
Proxy Statement
PROPOSAL THREE—NON-BINDING ADVISORY VOTE ON THE COMPENSATION
OF NAMED EXECUTIVE OFFICERS
Key Features of Our Executive Compensation Program
General
As required pursuant to Section 14A of the Securities Exchange Act of 1934, the Board is asking you to approve, on an
advisory and non-binding basis, the executive compensation programs and policies and the resulting 2015 compensation of
our Named Executive Officers listed in the 2015 Summary Compensation Table on page 35 (our “NEOs”) as described in
this proxy statement.
This proposal, commonly known as a “say-on-pay” proposal, gives our stockholders the opportunity to express their views
on our NEOs’ compensation as a whole. This vote is not intended to address any specific item of compensation or any specific
NEO, but rather the overall compensation of all of our NEOs and the philosophy, policies and practices described in this
proxy statement. Because the vote is advisory, the result will not be binding on our Compensation Committee and it will not
affect, limit or augment any existing compensation or awards. The say-on-pay vote will, however, provide information to the
Compensation Committee and our Board regarding investor sentiment about our executive compensation philosophy, policies
and practices, which they will take into account when considering future compensation arrangements. Our Board and the
Compensation Committee value the opinions of our stockholders and to the extent there is any significant vote against the
compensation of the NEOs as disclosed in this proxy statement, they will consider our stockholders’ concerns and the
Compensation Committee will evaluate whether any actions are necessary to address those concerns.
We recommend you should read the Compensation Discussion and Analysis and compensation tables and also consider the
factors below in determining whether to approve this proposal.
Summary of Our Executive Compensation Program
Pay-for-Performance and Stockholder Alignment
Our Compensation Committee reviews the compensation of our NEO and strikes a balance between fixed base pay and Pay-
for-Performance ("PFP") systems that tie compensation directly to specific business goals and management objectives. The
NEOs’ compensations are set-up such that it delivers competitive pay for competitive levels of performance. In order to align
the NEOs’ compensation drivers to the overall Company’s goals, the Compensation Committee designed the 2015
compensation such that the majority of the compensation was that of a PFP type. For example, in 2015, 68% of the CEO’s
compensation was performance-based and 31% of total pay was in the form of equity-based awards. Further, the equity-
based awards were split into 50% Performance Stock Units (“PSUs”), vesting of which was contingent upon the achievement
of certain pre-established Company revenue, operating loss reduction and stock price appreciation performance goals, and
50% was in Restricted Stock Units (“RSUs”). As a result, the impact of our growth in revenue, improvement of our operating
results and the improvement of our stock price, all significantly impacted the compensation of our NEOs. This ensured that
their interests were aligned to those of the Company’s and its stockholders.
WHAT WE DO
WHAT WE DON’T DO
We pay reasonable salaries and appropriate benefits
We do not enter into multi-year employment contracts.
We incent and pay for performance to align
We do not allow repricing of underwater stock options
compensation with shareholder goals.
for our executive officers.
We retain an independent compensation consultant to
We do not have single-trigger equity vesting in the event of
benchmark compensation at reasonable intervals.
a change-in-control
We consider market conditions and peer groups in
establishing compensation
We have stock ownership guidelines
We do not provide excessive perquisites
We do not provide any tax reimbursements or gross-ups
on any severance or change-in-control payments or benefits.
Following is a summary of some of the key features of our 2015 executive compensation program. For a detailed discussion
about our compensation philosophy, policies and practices, and other changes that we have made to our corporate governance
policies, see the section titled “Executive Compensation” below beginning on page 23.
• The primary objectives of our executive compensation programs are that they be fair, objective and consistent.
Further that compensation be directly and substantially linked to measurable corporate and individual performance
and that compensation remains competitive so that we can attract, motivate, retain and reward the key executives
whose knowledge, skills and performance are necessary for our success.
• We seek to foster a culture where individual performance is aligned with organizational objectives.
• Our NEOs are compensated with cash, equity and non-equity incentives, and other customary employee benefits.
• We evaluate and reward our NEOs based on the comparable industry specific and general market compensation for
their respective positions in the Company and an evaluation of their contributions to the achievement of short-and
long-term organizational goals.
• Executive compensation is reviewed annually by the Compensation Committee, and adjustments are made to reflect
performance-based factors and competitive conditions.
• Our Compensation Committee engages outside compensation consultant to review our executive compensation
programs, in comparison to a peer group of companies (the “Peer Group”), and recommend modifications to it.
• Our NEOs have Change of Control and Severance Agreements (“COC Agreements”) and, except for these
arrangements, we do not have employment agreements with any of our NEOs.
• We have stock ownership guideline for our NEOs.
We believe that the information provided above and within the Executive Compensation section of this proxy statement
demonstrates that our executive compensation program has been designed appropriately and is working to ensure our NEOs’
interests are aligned with our stockholders’ interests to support long-term value creation.
Accordingly, we ask our stockholders to vote “FOR” the following resolution at the Annual Meeting:
“RESOLVED, that the Company’s stockholders approve, on an advisory and non-binding basis, the compensation
of the NEOs, as disclosed in the Company’s Proxy Statement for the Annual Meeting of Stockholders pursuant to
the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation
Discussion and Analysis, the compensation tables and the other related disclosure.”
-20-
-21-
Proxy Statement
Key Features of Our Executive Compensation Program
WHAT WE DO
We pay reasonable salaries and appropriate benefits
WHAT WE DON’T DO
We do not enter into multi-year employment contracts.
We incent and pay for performance to align
compensation with shareholder goals.
We retain an independent compensation consultant to
benchmark compensation at reasonable intervals.
We do not allow repricing of underwater stock options
for our executive officers.
We do not have single-trigger equity vesting in the event of
a change-in-control
We consider market conditions and peer groups in
establishing compensation
We have stock ownership guidelines
We do not provide excessive perquisites
We do not provide any tax reimbursements or gross-ups
on any severance or change-in-control payments or benefits.
Following is a summary of some of the key features of our 2015 executive compensation program. For a detailed discussion
about our compensation philosophy, policies and practices, and other changes that we have made to our corporate governance
policies, see the section titled “Executive Compensation” below beginning on page 23.
• The primary objectives of our executive compensation programs are that they be fair, objective and consistent.
Further that compensation be directly and substantially linked to measurable corporate and individual performance
and that compensation remains competitive so that we can attract, motivate, retain and reward the key executives
whose knowledge, skills and performance are necessary for our success.
• We seek to foster a culture where individual performance is aligned with organizational objectives.
• Our NEOs are compensated with cash, equity and non-equity incentives, and other customary employee benefits.
• We evaluate and reward our NEOs based on the comparable industry specific and general market compensation for
their respective positions in the Company and an evaluation of their contributions to the achievement of short-and
long-term organizational goals.
• Executive compensation is reviewed annually by the Compensation Committee, and adjustments are made to reflect
performance-based factors and competitive conditions.
• Our Compensation Committee engages outside compensation consultant to review our executive compensation
programs, in comparison to a peer group of companies (the “Peer Group”), and recommend modifications to it.
• Our NEOs have Change of Control and Severance Agreements (“COC Agreements”) and, except for these
arrangements, we do not have employment agreements with any of our NEOs.
• We have stock ownership guideline for our NEOs.
We believe that the information provided above and within the Executive Compensation section of this proxy statement
demonstrates that our executive compensation program has been designed appropriately and is working to ensure our NEOs’
interests are aligned with our stockholders’ interests to support long-term value creation.
Accordingly, we ask our stockholders to vote “FOR” the following resolution at the Annual Meeting:
“RESOLVED, that the Company’s stockholders approve, on an advisory and non-binding basis, the compensation
of the NEOs, as disclosed in the Company’s Proxy Statement for the Annual Meeting of Stockholders pursuant to
the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation
Discussion and Analysis, the compensation tables and the other related disclosure.”
-21-
Proxy Statement
Consistent with the preference of our stockholders, as reflected in the advisory vote on the frequency of future say-on-pay
votes conducted at our 2011 Annual Meeting of Stockholders, the Board has adopted a policy providing for annual advisory
votes on the compensation of the NEOs.
Board of Directors’ Recommendation
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE ADVISORY (NON-BINDING)
VOTE APPROVING THE COMPENSATION OF THE NAMED EXECUTIVE OFFICERS.
-22-
Proxy Statement
NAMED EXECUTIVE OFFICERS AND EXECUTIVE COMPENSATION
Set forth below is certain information as of the Record Date, which is April 25, 2016, concerning our NEOs.
Name
Kevin P. Connors .....................................................
Ronald J. Santilli ......................................................
Age
54
56
Position(s)
President, CEO and Director
EVP and CFO
Further information regarding Kevin P. Connors is provided above under “Director Whose Terms Extend Beyond the 2016
Annual Meeting.”
Ronald J. Santilli has served as our CFO since September 2001. In addition, Mr. Santilli has performed the role of EVP since
April 2007 to present and prior to that he held the position of Vice President of Finance and Administration. Prior to joining
Cutera, from April 2001 to August 2001, Mr. Santilli served as Senior Director of Financial Planning and Accounting at
Lumenis, a manufacturer of medical lasers. From May 1982 to March 2001, Mr. Santilli held several positions at Coherent
Inc., including Sales Operations Manager, Controller of the Medical Group and, most recently, Director of Finance and
Administration. Mr. Santilli holds a B.S. in Business Administration from San Jose State University and an M.B.A. in Finance
from Golden Gate University.
-23-
Proxy Statement
COMPENSATION DISCUSSION AND ANALYSIS
Overview
The primary objectives of our compensation programs are that:
● They be fair, objective and consistent across the employee population;
● Compensation be directly and substantially linked to measurable corporate and individual performance; and
● Compensation remains competitive, so that we can attract, motivate, retain and reward the key employees whose
knowledge, skills and performance are necessary for our success.
We seek to foster a culture where individual performance is aligned with organizational objectives. We evaluate and reward
our NEOs based on the comparable industry specific and general market compensation for their respective positions in our
company and an evaluation of their contributions to the achievement of short-term and long-term organizational goals.
Executive compensation is reviewed and evaluated annually by the Compensation Committee and once every few years by
an independent compensation consultant hired by the Compensation Committee. Based on input received from the
compensation consultant, and the results of the stockholder vote on our say-on-pay, the Compensation Committee makes
adjustments to the components of, as well as, the total compensation of the NEOs.
Financial Highlights
Fiscal 2015 was a year of continued improvement and one dedicated to building the foundation for achieving stronger
financial performance in the future. Our research and development team delivered two new product platforms in 2014, which
provided us with a strong and well diversified portfolio of products. In addition, our sales and marketing leadership teams,
which we enhanced with proven and industry experienced leaders in 2014, continued their focus on revenue growth.
In 2015, the financial performance of our business improved, compared to 2014, as follows:
●
●
●
Improved revenue: Our global revenue improved by $16.6 million, or 21%, which was the result of an increase in
our U.S. revenue by 38% and our international revenue by 8%, despite the negative impact associated with the
appreciation of the U.S. Dollar against the Euro, Japanese Yen and the Australian Dollar. These revenue
improvements were primarily attributable to the introduction of enlighten and excel HR products in the market, the
continued growth in excel V sales and an increases in sales of our truSculpt product.
Increased gross margins: Our gross margins increased from 56% in 2014 to 57% in 2015 primarily due to the
improved leverage of our operations as a result of the increased revenue, as well as the implementation of several
management initiatives to improve the reliability of our products and product cost reductions.
Improved EBITDA: Our Earnings Before Interest Tax Depreciation and Amortization (“EBITDA”) increased by
$5.3 million.
● Cash from operations: Our cash generated by operations improved by $2.9 million through the continued
conservative management of our working capital and overall business.
● Stock Repurchase: Repurchased $40 million of our common stock through our stock repurchase plan in 2015.
Cash and investments at the end of 2015 were $48.4 million – with no debt. We believe our cash resources are sufficient to
meet our anticipated cash needs for the next several years.
-24-
Proxy Statement
Corporate Governance Highlights
We endeavor to maintain good corporate governance standards consistent with our executive compensation policies and
practices. The following policies and practices were in effect during 2015:
● The Compensation Committee is comprised solely of independent directors who have established effective means
for communicating with stockholders regarding executive compensation issues and concerns.
● We have a Nominating and Corporate Governance Committee that is comprised of independent directors who review
and make recommendations to the Board on matters concerning corporate governance, director composition,
identification, evaluation and nomination of director candidates, Board committees, director compensation and
conflicts of interest.
● The Compensation Committee conducts an annual review and approval of our compensation strategy. We ensure
that our compensation practices remain current with market conditions by having them reviewed by compensation
consultants from time to time. Our compensation philosophy and related corporate governance features are
complemented by several elements that are designed to align our executive compensation with long-term stockholder
interests, including the following:
- We do not currently offer, nor do we have plans to provide, pension arrangements, retirement plans or
nonqualified deferred compensation plans or arrangements to our executive officers, including our NEOs;
- We provide limited perquisites to our executive officers, including our NEOs. Our executive officers
participate in broad-based company-sponsored health and welfare benefits programs on the same basis as
our other full-time, salaried employees;
- Executive officers are not entitled to any tax reimbursement payments (including “gross-ups”) on any
severance or change-in-control payments or benefits;
- All change-in-control payments and benefits are based on a “double-trigger” arrangement (i.e., requiring
both a change-in-control of our company plus a qualifying termination of employment before payments and
benefits are paid);
- We use performance-based short-term and long-term incentives; and
- We adopted stock ownership guidelines for our executive officers and non-employee directors.
Role of Our Compensation Committee
Compensation Committee Charter
The Compensation Committee establishes the compensation for our NEOs, who are our CEO and CFO and administers our
Equity Incentive Plans, which are currently the 2004 Equity Incentive Plan (as amended) and the 2004 Employee Stock
Purchase Plan. The Compensation Committee has a written charter, which can be found on the Investor page, under the
Corporate Governance section, of our website, which is www.cutera.com.
Duties of the Compensation Committee
The responsibilities of the Compensation Committee include:
(i) Establishing the following for our NEOs and such other executive officers as appropriate:
(a) annual base salary;
(b) annual incentive bonus, which may include the setting of specific goals and target amounts;
(c) equity compensation;
(d) agreements for employment, severance and change-of-control payments and benefits; and
(e) any other benefits, compensation or arrangements, other than benefits generally available to our employees.
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Proxy Statement
(ii) Reviewing and making recommendations to our Board, at such intervals as may be decided by the Compensation
Committee from time to time, regarding:
(a) general compensation goals and guidelines for our employees and the criteria by which bonuses and stock
compensation awards to our employees are determined; and,
(b) other policies and plans for the provision of compensation to our employees, directors and consultants.
(iii) Acting as Administrator of our 2004 Equity Incentive Plan (as amended), 2004 Employee Stock Purchase Plan and
any other equity compensation plans adopted by our Board.
(iv) Reviewing and making recommendations to our Board with respect to policies relating to the issuance of equity
incentives to employees, directors and consultants.
(v) Evaluating the compensation of the independent members of our Board.
(vi) Preparing the report that follows this Compensation Discussion and Analysis.
Compensation Committee Members
The members of the Compensation Committee are appointed by our Board. The members of the Compensation Committee
as of the Record Date were Dr. David B. Apfelberg, Mr. Jerry P. Widman and Mr. Gregory Barrett (chairman). Each member
of the Compensation Committee is an “outside director” for purposes of Section 162(m) of the Internal Revenue Code, a
“non-employee director” for purposes of Exchange Act Rule 16b-3 and satisfies the independence requirements imposed by
NASDAQ.
Role of the Compensation Committee and its Consultant in Setting Executive Compensation
The Compensation Committee establishes the compensation for our NEOs to ensure consistency with market compensation
rates for similar positions, our compensation philosophy and corporate governance guidelines. Following the SEC’s reforms
relating to executive compensation disclosure, the Compensation Committee assumed an active role in reviewing market data
and working with a compensation consultant on executive compensation matters. Because certain components of executive
compensation—such as bonus targets—are driven by operational priorities, as to which management has greater insight than
our Board or the Compensation Committee, the Compensation Committee has directed management to interface with the
Committee and the compensation consultant to help establish appropriate target levels.
The Compensation Committee engaged an independent compensation consultant, Compensia, in December 2011 to perform
a complete study and then again in June 2014 to update the analysis with current market data. The compensation consultants
performed the following activities for each of our NEOs:
● Review the components of the total compensation package;
● Evaluate and develop a group of public companies that would be suitable to use as a Peer Group;
● Gather competitive market data with respect to compensation of executive officers of the Peer Group;
● Compare our NEOs’ compensation against the Peer Group;
● Recommend any adjustments that should be considered for cash-based and equity-based compensations; and
● Recommend compensation components that would make the compensation variable, based on the performance of
our company
Due to the significant cost associated with services provided by a compensation consultant, the Compensation Committee
plans to not engage our compensation consultant every year but only from time to time as determined by our Compensation
Committee and our CEO and CFO.
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Proxy Statement
Role of our Executives in Setting Compensation
On occasion, the Compensation Committee meets with members of our management team, including our CEO and CFO, to
obtain recommendations with respect to Company compensation programs, practices and packages for our executive officers,
other employees and directors. Management may make recommendations to the Compensation Committee on all components
of compensation. The Compensation Committee considers, but is not bound to and does not always accept, management’s
recommendations with respect to these matters. The Compensation Committee has the ultimate authority to make decisions
with respect to the compensation of our NEOs and does not delegate any of its compensation functions to others.
Competitive Positioning
In developing, reviewing, and approving the annual compensation for our NEOs, the Compensation Committee develops and
maintains a Peer Group of public companies from which to gather competitive market data. The Compensation Committee,
with the assistance of an independent compensation consultant, refined its approach to reviewing market compensation data
for our NEOs and approved a set of selection criteria for determining the companies to comprise the compensation Peer
Group. Going forward, companies should meet the following criteria to be included in our compensation Peer Group:
(i) U.S.-based companies with a primary focus on health care equipment and supplies;
(ii) revenue of between 0.5x to 2.0x Cutera (approximately $39 million and $154 million); and
(iii) market capitalization of between 0.5x to 2.5x Cutera (approximately $64 million and $320 million).
This set of selection criteria led the independent compensation consultants to revise in 2014 the then-existing Peer Group to
include the following companies:
AtriCure
Atrion Corporation
BIOLASE
Cardiovascular Systems
CryoLife
Cynosure
Derma Sciences
IRIDEX
LeMaitre Vascular
Photomedex
RTI Surgical
SPECTRANETICS
SurModics
Synergetics USA
Vascular Solutions
Zeltiq Aesthetics
Executive Compensation Actions
In 2012, our Compensation Committee conducted a full review of our executive compensation policies and practices and
engaged Compensia, an independent management consulting firm providing executive compensation advisory services, to
study the design, pay mix, and pay levels of our executives; compare our program to that of our peers; and then make
recommendations for changes to our policies or practices that were inconsistent with “best practices.” In 2014, our
Compensation Committee requested Compensia to prepare an update to the 2012 full report to reflect current market
compensation data of our peers and as to any recommended changes that need to be made.
In 2015, our Compensation Committee re-evaluated the compensation of our NEO and recommended the following
modifications to their compensation arrangements, which our Board approved:
1) Cash Compensation was modified effective June 1, 2015, to be as follows:
a) Mr. Connors’ base salary was increased from $533,000 to $600,000 and his target bonus participation rate
remained unchanged at 70%; and
b) Mr. Santilli’s base salary was increased from $341,000 to $367,000 and his target bonus participation rate
remained unchanged at 50%.
2) Management Bonus Program (“Bonus Program”) was modified effective April 1, 2015 by reducing the revenue
growth rate multiplier from 15 to 7.5.
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Proxy Statement
3) The ‘Annual’ Target Equity Grant Amount was increased by approximately 40% in 2015 as compared to 2014,
and the awards granted were split between 50% RSUs and 50% PSUs. In order to align the financial performance
measurement criteria of PSU awards to the Company’s fiscal year with effect from January 1, 2016, instead of
granting a full-years’ worth of equity awards, the Board granted half of the annual target equity grant amount in
2015. As a result, Mr. Connors and Mr. Santilli were granted approximately $563,000 and $295,000, respectively,
of grant date fair value of equity awards in 2015.
4) Established the Performance Goals for the PSUs granted. The goals established are detailed below in the section
titled ‘Equity Incentive Compensation.’
5) Change of Control and Severance Agreements were:
a) Renewed for both Mr. Connors and Mr. Santilli’s with a revised expiration date of December 31, 2018, which
shall renew automatically for an additional one (1) year term unless either party provides the other party with
written notice of non-renewal at least sixty (60) days prior to the date of automatic renewal.
b) Mr. Santilli’s COC Agreement was modified such that if his employment with the Company is terminated by
the Company without “cause,” or by Mr. Santilli for “good reason,” and such termination occurs within three
months prior to, or twelve months after a Change of Control of the Company (commonly referred to as “double
trigger”), then the lump sum severance payment payable would be increased as follows:
i) Salary payable was increased from twelve to eighteen months.
ii) Target Bonus Payout: increased from 100% to 150% of the rate payable for the fiscal year in which the
termination occurs or, if greater, his annual target bonus rate in effect immediately prior to the Change of
Control.
iii) COBRA Coverage: increased from twelve to eighteen months.
iv) All other provisions remained unchanged.
c) The terms of the COC Agreement for Mr. Connors remained unchanged.
The Compensation Committee concluded that the changes to the compensation of our NEOs strengthen the alignment of their
interests with those of our stockholders, should be sufficient to maintain competitiveness with the executives in comparable
positions at the companies in our Peer Group, and promote retention of our NEOs. Further, the Compensation Committee
also took into consideration the fact that, consistent with our compensation objectives, the equity awards granted increase
our NEOs’ stake in the Company, thereby reinforcing their incentive to manage our business as owners and subject a
significant portion of their total compensation to fluctuations in the market price of our common stock in alignment with
stockholder interests.
Compensation Components
Our NEOs are compensated with cash, equity and non-equity incentives, and other customary employee benefits.
Cash Compensation
Cash compensation consists of base salary, participation in a Discretionary Management Bonus Program (“Bonus Program”)
and participation in a profit-sharing plan. Our cash compensation goals for our NEOs are based upon the following principles:
● Total cash compensation should generally be set at or above the 50th percentile of the Peer Group;
● Base salary should be positioned to reflect each individual’s experience, performance and potential;
● A significant portion of cash compensation should be “at risk”; and
● The amount of bonuses payable for any quarter should be based on revenue growth and the improvement of the
operating profit before stock-based compensation and non-operational expenses, or “adjusted operating profit,”
compared with the same quarter in the prior year.
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Proxy Statement
3) The ‘Annual’ Target Equity Grant Amount was increased by approximately 40% in 2015 as compared to 2014,
Base Salary and Total Target Cash Compensation
and the awards granted were split between 50% RSUs and 50% PSUs. In order to align the financial performance
measurement criteria of PSU awards to the Company’s fiscal year with effect from January 1, 2016, instead of
granting a full-years’ worth of equity awards, the Board granted half of the annual target equity grant amount in
2015. As a result, Mr. Connors and Mr. Santilli were granted approximately $563,000 and $295,000, respectively,
of grant date fair value of equity awards in 2015.
4) Established the Performance Goals for the PSUs granted. The goals established are detailed below in the section
titled ‘Equity Incentive Compensation.’
5) Change of Control and Severance Agreements were:
a) Renewed for both Mr. Connors and Mr. Santilli’s with a revised expiration date of December 31, 2018, which
shall renew automatically for an additional one (1) year term unless either party provides the other party with
written notice of non-renewal at least sixty (60) days prior to the date of automatic renewal.
b) Mr. Santilli’s COC Agreement was modified such that if his employment with the Company is terminated by
the Company without “cause,” or by Mr. Santilli for “good reason,” and such termination occurs within three
months prior to, or twelve months after a Change of Control of the Company (commonly referred to as “double
trigger”), then the lump sum severance payment payable would be increased as follows:
i) Salary payable was increased from twelve to eighteen months.
ii) Target Bonus Payout: increased from 100% to 150% of the rate payable for the fiscal year in which the
termination occurs or, if greater, his annual target bonus rate in effect immediately prior to the Change of
Control.
iii) COBRA Coverage: increased from twelve to eighteen months.
iv) All other provisions remained unchanged.
c) The terms of the COC Agreement for Mr. Connors remained unchanged.
The Compensation Committee concluded that the changes to the compensation of our NEOs strengthen the alignment of their
interests with those of our stockholders, should be sufficient to maintain competitiveness with the executives in comparable
positions at the companies in our Peer Group, and promote retention of our NEOs. Further, the Compensation Committee
also took into consideration the fact that, consistent with our compensation objectives, the equity awards granted increase
our NEOs’ stake in the Company, thereby reinforcing their incentive to manage our business as owners and subject a
significant portion of their total compensation to fluctuations in the market price of our common stock in alignment with
stockholder interests.
Compensation Components
Cash Compensation
Our NEOs are compensated with cash, equity and non-equity incentives, and other customary employee benefits.
Cash compensation consists of base salary, participation in a Discretionary Management Bonus Program (“Bonus Program”)
and participation in a profit-sharing plan. Our cash compensation goals for our NEOs are based upon the following principles:
● Total cash compensation should generally be set at or above the 50th percentile of the Peer Group;
● Base salary should be positioned to reflect each individual’s experience, performance and potential;
● A significant portion of cash compensation should be “at risk”; and
● The amount of bonuses payable for any quarter should be based on revenue growth and the improvement of the
operating profit before stock-based compensation and non-operational expenses, or “adjusted operating profit,”
compared with the same quarter in the prior year.
Total target cash compensation for each Named Executive Officer includes his annual base salary, annual target bonus
opportunity (described below) and annual profit-sharing payments.
In 2015, the Compensation Committee increased Mr. Connor’s annual base salary compensation to $600,000 and maintained
his target bonus percentage at 70%. In 2015, the Compensation Committee increased Mr. Santilli’s annual base salary
compensation to $367,000 and maintained his target bonus percentage at 50%.
Discretionary Management Bonus Program
In addition to base salary, we provided cash bonus opportunities for our NEOs in 2015 pursuant to which cash bonuses were
determined quarterly based on the Company’s performance for the then-preceding quarter. Payments under the Bonus
Program are made quarterly and are at the discretion of our Compensation Committee.
Effective April 1, 2015, our Board of directors, upon the recommendation of the Compensation Committee, amended the
Bonus Program such that the ‘Revenue Growth Rate’ multiplier, compared to the same period in the prior year, was decreased
from 15 to 7.5. All other terms of the program remained unchanged.
Given our Bonus Program is discretionary, the NEOs reduced the revenue growth rate factor from 15.0 to 5.0 for the first
quarter of 2015 and from 7.5 to 5.25 for the third quarter of 2015.
As However, given payments per the Bonus Program are at the discretion of the Compensation Committee, is discretionary,
the NEOs proposed to reduce the bonus payouts as calculated accortding to the terms of the Bonus Program by changing the
revenue growth rate factor to 5.00 and 5.25 for the first and third quarter of 2015, respectively.
Target Bonus Opportunities
For 2015, the target cash bonuses were designed to reward our NEOs based on the Company’s overall financial performance
and were established based on the recommendation that the compensation consultants provided to the Compensation
Committee. As in prior years, the Compensation Committee determined that the target cash bonus for each NEO should be
determined as a percentage of their base salary.
In 2015, the Compensation Committee maintained the target bonus opportunity for Mr. Connors and Mr. Santilli at 70% and
50% of base salary, respectively. The target bonus opportunity is reviewed annually by the Compensation Committee and is
based on several factors, including the scope of the NEOs’ performance, contributions, responsibilities, experience, prior
years’ target cash bonus and market conditions.
Corporate Performance Measures
For 2015, the Board , based on recommendations from the Compensation Committee, maintained the corporate performance
measures for determining the bonuses payable to the NEOs as follows:
1) Revenue Growth Rate; and
2) Adjusted Operating Profit Improvement.
The Board believed that these corporate performance measures continue to align the bonus payment with the achievement of
the Company’s annual operating goals and enhancing long-term stockholder value creation.
With effect from April 1, 2015, the Board modified the Bonus Program by reducing the Revenue Growth Rate’ multiplier
from 15 to 7.5.Adjusted Operating Profits was defined as operating profit less stock-based compensation expense and non-
operational expenses. The Compensation Committee decided that non-operational expenses should be excluded from the
operating profit amount as they were deemed unrelated to quarterly “operating” performance.
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Proxy Statement
Using these measures, each fiscal quarter the Compensation Committee compared our performance against the same fiscal
quarter in the prior year, and applied the associated multiplying factor to the percentage improvement for that quarter to
determine our quarterly performance for that measure. If one performance measure’s percentage improvement for a fiscal
quarter in 2015 was negative, when compared to the same fiscal quarter for the prior year, the multiplier for that measure was
set to zero.
For example, with the revenue growth factor of 7.5 and the adjusted operating profit improvement factor of 5, at 10% revenue
growth and 10% adjusted operating profit improvement, an individual would be eligible to receive 125% of his or her target
bonus opportunity for that quarter. At 15% revenue growth and 15% adjusted operating profit improvement, an individual
would be eligible to receive 188% of his or her target bonus opportunity. Based on the actual quarterly revenue growth and
adjusted operating profit improvement for each of the quarters in 2015, the NEOs earned the following bonus payout
multipliers of their respective target bonus opportunity.
Revenue
Growth
(expressed
as a
Fiscal Period
First quarter* ......... 17.80%
Second quarter ....... 27.30%
Third quarter*........ 23.27%
Fourth quarter ........ 17.82%
percentage) Factor
5.00*
7.50
5.25*
7.50
Adjusted
Operating
Profit
Improvement
(expressed as
a percentage) Factor
5.00
5.00
5.00
5.00
0.98%
5.28%
7.01%
12.27%
Revenue
Growth
Multiplier
89.01%
204.76%
122.18%
133.62%
Adjusted
Operating
Profit
Multiplier
Total
Payout
Multiplier
93.91%
4.90%
26.40% 231.16%
35.05% 157.23%
61.34% 194.96%
* According to the Bonus Program, the revenue growth rate factor for the first and third quarters of 2015 was 15 and 7.5,
respectively. As payments per the Bonus Program are at the discretion of the Compensation Committee, the NEOs proposed
to reduce the bonus payouts as calculated according to the terms of the Bonus Program by changing the revenue growth rate
factor to 5.00 and 5.25, for the first and third quarter of 2015, respectively.
On an annual basis, the cash bonus opportunity, and the amount actually earned, for fiscal 2015 was as follows:
Named Executive Officer
Mr. Connors .............................................................................
Annual Cash
Bonus Target(1)
$400,458
Annual Cash
Bonus Paid for 2015(1)
$679,219
Mr. Santilli ...............................................................................
$179,115
$303,872
(1) The Annual Cash Bonus Target and the Annual Cash Bonus Paid for each of the quarters in 2015 was based on the
corporate performance measures and the target bonus percentage that the respective NEOs were entitled to, per the Bonus
Plan as applicable for each of the quarters. According to the Bonus Program, the revenue growth rate factor for the first and
third quarters of 2015 was 15 and 7.5 respectively. However, given the Bonus Program is discretionary, the Compensation
Committee reduced the revenue growth rate factor to 5.00 and 5.25, for the first and third quarters of 2015, respectively.
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Proxy Statement
Profit-Sharing Program
We have a profit sharing program for our NEOs and other employees pursuant to which quarterly cash payments are made.
Target profit-sharing payments are calculated based upon half of the quarterly pre-tax Adjusted Operating Profit percentage
(pre-tax Adjusted Operating Profit divided by revenue) multiplied by the NEOs’ gross salary earned during that quarter.
In 2015, our CEO and our CFO earned $7,925 and $4,952 in profit sharing payments respectively.
Long-Term Incentive Program
We believe that equity-based compensation promotes and encourages long-term successful performance by our NEOs that is
aligned with the organization’s goals and the generation of stockholder value. Our equity compensation goals for our NEOs
are based upon the following principles:
● Stockholder and executive officer interests should be aligned;
● Key and high-performing employees, who have a demonstrable impact on our performance and /or stockholder
value, should be provided this benefit;
● The program should be structured to provide meaningful retention incentives to participants;
● The equity awards should reflect each individual’s experience, performance, potential and be comparable to what
the Peer Group awards for the respective position; and
● Actual awards should be tailored to reflect individual performance and attraction/retention goals.
Equity Incentive Compensation
Under our 2004 Equity Incentive Plan (as amended), we are permitted to grant stock options, stock appreciation rights,
restricted shares, RSU awards, performance shares and other stock-based awards. Under this Plan, we grant options to our
executive officers, directors and employees to purchase shares of our common stock at an exercise price equal to the fair
market value of such stock on the date of grant. The grant date for stock options to our NEOs is typically the date of a
regularly scheduled Board meeting, or, for annual merit grants, on or around June 1st of each year. Our non-employee
directors are granted RSUs annually on the date of our Annual Meeting of Stockholders that vest on the one-year anniversary
of the grant date. We have no program, plan or practice to select option grant dates (or set board meeting and annual
stockholder meeting dates) to correspond with the release of material non-public information.
In August 2015, our Board, with the approval of our non-employee directors, increased the ‘annual’ target equity grant
amount by approximately 40%, compared to 2014. Further, the awards granted were split between 50% RSUs and 50% PSUs.
In order to align the financial performance measurement criteria of PSU awards to the Company’s fiscal year with effect
from January 1, 2016, instead of granting a full-years’ worth of equity awards, the Board granted half of the annual target
equity grant amount in 2015. In granting these awards, our Board considered the recommendations of the compensation
consultants hired by the Compensation Committee; individual performance and contribution to the Company’s performance;
its own subjective assessment of market conditions; its ability to retain the individual NEO; and the goal of increasing the
value of our company, in arriving at the amounts awarded to each NEO.
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Proxy Statement
Stock Option
Awards:
Number
of Securities
Underlying
Options
Number of
Restricted
Stock Unit
Awards –
Shares(1)
Number of
Performance
Share Unit
Awards for
Target
Performance-
Shares(2)
Base Price of
RSU and PSU
Awards
Grant
Date Fair
Value of
All Equity
Award
—
—
18,667
18,667 $
15.07 $
562,623
9,800
9,800 $
15.07 $
295,372
Names
Mr. Connors ..................
Mr. Santilli ....................
(1) These RSU awards vest as to one third of the shares on each of June 1, 2016, 2017 and 2018, subject to the recipient’s
continuing service.
(2) The PSU awards reflect the number of shares of stock that was expected to vest on March 15, 2016 assuming 100%
achievement of each of the performance targets discussed below. The actual number of shares that vested on March
15, 2016, were 14,522 for Mr. Connors and 7,624 for Mr. Santilli representing a 77.8% of achievement of each of
the performance targets.
Restricted Stock Unit Awards:
The RSU awards granted to our NEOs vest as to one-third of the shares on each of June 1, 2016, 2017 and 2018, subject to
the recipient's continuing service.
Performance Stock Unit Awards:
In August 2015, our Board, upon the recommendation of our Compensation Committee, granted PSUs to the NEOs and
established the below mentioned performance goals. The number of PSUs awarded to the NEOs resulted in a varying number
of shares of common stock that would have vested on March 15, 2016 based on the degree of achievement of three
performance goals as set forth below and subject to the recipient continuing to provide service to the Company through the
vesting date. The PSU awards represent the aggregate number of shares that could have been earned from achievement of
the three performance goals at targets that were pre-determined by the Board.
Performance Goal
Weighting of Goal
(1) Actual revenue achievement, compared to the target established by the Company’s Board .......
(2) Degree of improvement of the Company’s operating loss, compared to the target established
by the Company’s Board. ..........................................................................................................
(3) Average per share price of the Company’s stock for the period, compared to the target
established by the Company’s Board. .......................................................................................
33%
33%
34%
The following matrix provides an example of the number of common stock that was expected to vest on March 15, 2016,
based on the performance at varying degrees of achievement of all three performance criteria:
Name
Mr. Connors ...............
Mr. Santilli .................
Number of Shares of Common Stock that Would Have Vested on March 15, 2016
At 100% of
Target
Performance
At 90% of
Target
Performance
At 110% of
Target
Performance
If Minimum
Thresholds
are Not Met
At 200% of
Target
Performance
56,281
29,547
—
—
14,906
7,825
18,667
9,800
22,428
11,775
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Proxy Statement
Benefits
We provide the following benefits to our NEOs generally on the same basis as the benefits provided to all employees. These
benefits are consistent with those offered by other companies and specifically with those companies with which we compete
for employees:
● Health, dental and vision insurance;
● Life insurance;
● Short-term and long-term disability insurance;
● 401(k) plan with 25% employer matching contributions, capped at 6% of total cash compensation; and
● Flexible Spending Accounts.
Employee Stock Purchase Plan
We maintain a 2004 Employee Stock Purchase Plan that provides eligible employees with the opportunity to purchase shares
of our common stock at a 15% discounted price to the lower of the fair market value at either the beginning or the end of the
applicable offering period.
Post-Employment Compensation
Except for COC Agreements, we do not have employment agreements with any of our NEOs. We have COC Agreements
with each of our NEOs. The purpose of these agreements is to provide incentives to our NEOs to continue their employment
with the Company and not be distracted by the possibility of loss of employment as a result of an acquisition of the Company
or for other reasons. For a summary of the material terms and conditions of these COC Agreements, see Potential Payments
upon Termination or Change in Control below.
Internal Revenue Code Section 162(m) and Limitations on Executive Compensation
Section 162(m) of the Code generally disallows public companies a tax deduction for federal income tax purposes of
remuneration in excess of $1 million paid to the chief executive officer and each of the three other most highly-compensated
executive officers (other than the chief financial officer) in any taxable year. However, remuneration in excess of $1 million
may generally be deducted if it is qualified performance based compensation within the meaning of Section 162(m) of the
Code. In this regard, the compensation income realized upon the exercise of stock options granted under a stockholder-
approved stock option plan generally will be deductible so long as the options are granted by a committee whose members
are non-employee directors and certain other conditions are satisfied.
The Compensation Committee believes that, in establishing the cash and equity incentive compensation plans and
arrangements for our executive officers, the potential deductibility of the compensation payable under those plans and
arrangements should be only one of a number of relevant factors taken into consideration, and not the sole governing factor.
For that reason, the Compensation Committee may deem it appropriate to provide one or more of our executive officers with
the opportunity to earn incentive compensation, whether through cash incentive awards tied to our financial performance or
equity incentive awards tied to the executive officer’s continued service, which may be in excess of the amount deductible
by reason of Section 162(m) or other provisions of the Code.
The Compensation Committee believes it is important to maintain cash and equity incentive compensation at the requisite
level to attract and retain the individuals essential to our financial success, even if all or part of that compensation may not
be deductible by reason of the Section 162(m) limitation.
Stock options granted under the 2004 Equity Incentive Plan (as amended) are not subject to the deduction limitation; however,
to preserve our ability to deduct the compensation income associated with stock options granted to such executive officers
pursuant to Section 162(m) of the Internal Revenue Code, our 2004 equity plan provides that no optionee may be granted
option(s) to purchase more than 500,000 shares of Cutera common stock in any one fiscal year. However, in the fiscal year
in which the optionee is hired, an optionee may be granted an option to purchase up to 1,000,000 shares of Cutera common
stock. In the future, the Compensation Committee may, in its judgment, authorize compensation payments that do not comply
with an exemption from the deductibility limit when it believes that such payments are appropriate to attract and retain
executive talent.
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Proxy Statement
Accounting for Stock-Based Compensation
We follow Financial Accounting Standard Board Accounting Standards Codification Topic 718 (“ASC 718”) for our stock-
based compensation awards. ASC 718 requires companies to measure the compensation expense for all share-based payment
awards made to employees and directors, including stock options, based on the grant date “fair value” of these awards. This
calculation is performed for accounting purposes and reported in the compensation tables below, even though our executive
officers may never realize any value from their awards. ASC Topic 718 also requires companies to recognize the
compensation cost of their stock-based awards in their income statements over the period that an employee is required to
render service in exchange for the award.
Securities Authorized for Issuance Under Equity Compensation Plans
Our stockholders have approved each of our equity compensation plans, which are as follows:
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-
2004 Equity Incentive Plan (as amended); and
2004 Employee Stock Purchase Plan (“ESPP”).
The following table provides information regarding the shares of Cutera common stock that may be issued upon the exercise
of stock options, RSUs, PSUs, and the projected ESPP contributions under our equity compensation plans as of December
31, 2015.
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a)) (c)
Weighted-
average exercise
price of
outstanding
options,
warrants and
rights (b)
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights (a)
2,180,541 $
9.33(1)
2,081,666
Plan category
Equity compensation plans approved by security holders
Equity compensation plan not approved by security
holders ...........................................................................
Total ..............................................................................
—
2,180,541 $
—
9.33(1)
—
2,081,666
(1) The weighted average exercise price does not take into account outstanding RSUs or PSUs, which have no exercise
price.
Other Compensation Practices and Policies
Stock Ownership Guidelines
To enhance our overall corporate governance practices and executive compensation program, our Board adopted stock
ownership guidelines for our executive officers, which the Compensation Committee intends to review annually. These
guidelines are designed to align our executive officers’ interests with our stockholders’ long-term interests by promoting
long-term ownership of our common stock, which reduces the incentive for excessive short-term risk taking. These guidelines
provide that, within five years of the later of the adoption of the guidelines or his or her first date of employment, our CEO
and CFO must hold shares of our common stock having a value not less than three times and one time respectively of their
annual salary.
-34-
Proxy Statement
As of April 25, 2016, the NEOs’ holdings and targeted guidelines were as follows:
Named Executive Officer
Mr. Connors ...............................................................
Mr. Santilli .................................................................
Stock Ownership
as of April 25, 2016
549,595
47,493
Minimum Stock Ownership
Required by April 27, 2017(1)
153,584
31,314
(1) Based of the closing stock price of $11.72 on April 25, 2016.
Insider Trading Compliance Program
According to our Insider Trading Compliance Program, no employee of the Company, including, but not limited to, our
executive officers and directors, may invest in derivatives of the Company’s securities. This prohibition includes, but is not
limited to, trading in put or call options related to securities of the Company.
2015 Summary Compensation Table
The following table sets forth summary compensation information for the fiscal years ended December 31, 2015, 2014 and
2013 for our NEOs.
Name and Principal
Position
Kevin P. Connors,
President and CEO
Salary
Bonus(1)
Option
Awards(2)
Stock
Awards(2)
All Other
Compensation(3)
Total
2015 ...................... $
2014 ......................
2013 ......................
572,083 $
525,500
481,667
687,144 $
382,002
41,914
— $
—
294,307
562,623 $
797,600
240,579
14,003 $ 1,835,853
1,718,699
13,597
1,070,902
12,435
Ronald J. Santilli,
EVP and CFO
2015 ...................... $
2014 ......................
2013 ......................
358,229 $
328,083
310,000
308,824 $
176,246
19,156
— $
—
153,039
295,372 $
418,740
120,285
11,894 $
11,662
3,825
974,319
934,731
606,305
(1) The amounts reported in this column represent the bonus earned for each of the years covered in the table in
accordance with our discretionary management Bonus Plan (see section above describing our Discretionary
Management Bonus Program).
(2) The amounts reported in this column represent the aggregate grant date fair value of stock awards granted during
each of the fiscal years in 2015, 2014 and 2013 calculated in accordance with ASC Topic 718. See Note 6 of the
Consolidated Notes to Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2015 filed with the SEC on March 15, 2016 for a discussion of the valuation assumptions for stock-
based compensation.
(3) Amounts represent 401(k) employer-match contributions and a non-cash benefit associated with a Company
sponsored, non-business event for achieving sales targets in accordance with our commission incentive plan.
-35-
Proxy Statement
2015 Grants of Plan-Based Awards Table
The following table lists grants of plan-based RSU and PSU awards made to our NEOs during the fiscal year ended December
31, 2015. There were no stock option grants to our NEOs during the fiscal year ended December 31, 2015.
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
Name
Grant Date Threshold Target
Maximum
All Other
Stock
Awards:
Number
of
Shares of
Stock or
Units
All Other
Option
Awards:
Number of
Securities Base Price
Underlying
Options
of
Awards(1)
Grant
Date
Fair Value
of
Awards(1)
Mr. Connors .... 08/03/2015
Mr. Santilli ...... 08/03/2015
—
—
—
—
—
—
37,334
19,600
— $
— $
15.07 $ 562,623
15.07 $ 295,372
(1) The amounts reported in this column reflect the grant date fair value of equity awards calculated in accordance with
ASC Topic 718. See Note 6 of the Notes to Consolidated Financial Statements included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 15, 2016 for a discussion of
the valuation assumptions for our stock-based compensation.
2015 Outstanding Equity Awards at Fiscal Year-End Table
The following table lists the outstanding equity incentive awards held by our NEOs as of December 31, 2015.
Option Awards
Number of
Securities
Underlying
Unexercised
Unearned
Options
Option
Exercise
Price
Option
Expiration
Date
Stock Awards
Market
Value
of Shares or
Units of
Stock
that Have
Not
Vested
Number of
Shares or
Units of
Stock that
Have Not
Vested
Date
Awards
Will be
Fully
Vested
Number of
Securities
Underlying
Unexercised
Earned
Options
Name
Mr. Connors ........
120,000
120,000
120,000
91,000
69,444
$
—
—
—
—
13,889(1)
8.66 6/08/2016
10.24 5/14/2017
8.72 5/27/2018
6.88 7/27/2019
8.91 6/10/2020
Mr. Santilli ..........
80,000
32,500
36,111
—
—
7,222(1)
8.72 5,/27/2018
6.88 7/27/2019
8.91 6/10/2020
18,667(2) $
26,666(4)
18,667(5)
238,751(2) 3/15/2016(2)
341,058(4) 6/01/2017(4)
238,751(5) 6/01/2018(5)
9,800(2)
2,250(3)
14,000(4)
9,800(5)
125,342(2) 3/15/2016(2)
28,778(3) 6/01/2016(3)
179,060(4) 6/01/2017(4)
125,342(5) 6/01/2018(5)
(1) One-third of the shares underlying each of these stock options vest on the first anniversary of the vesting
commencement date and 1/36th of the underlying shares vest each month thereafter.
(2) These PSU awards reflect the number of shares of stock that was expected to vest on March 15, 2016 assuming
100% achievement of each of the performance targets discussed below. The actual number of shares that vested on
March 15, 2016, were 14,522 for Mr. Connors and 7,624 for Mr. Santilli representing a 77.8% of achievement of
the performance targets.
-36-
Proxy Statement
(3) One-third of the shares underlying this award vest on the first, second and third anniversary of the vesting
commencement date of June 1, 2013.
(4) One-third of the shares underlying this award vest on the first, second and third anniversary of the vesting
commencement date of June 1, 2014.
(5) One-third of the shares underlying this award vest on the first, second and third anniversary of the vesting
commencement date of June 1, 2015.
2015 Options Exercised and Stock Vested Table
The following table lists the stock options exercised by, and stock awards vested to, our NEOs in the fiscal year ended
December 31, 2015.
Name
Mr. Connors .........................................................
Mr. Santilli ...........................................................
Option Awards
Stock Awards
Number of
Shares
Acquired
on Exercise
Value Realized
on Exercise
Number of
Shares
Acquired on
Vesting
Value
Realized
Upon
Vesting(1)
133,300 $
173,700 $
367,527
769,898
49,819 $
30,488 $
745,587
455,995
(1) The amounts reported in this column represent the fair market value of the shares of our common stock on the vesting
date of each Named Executive Officer’s outstanding RSU awards.
Pension Benefits
We did not sponsor any defined benefit pension or other actuarial plan for our executive officers, including our NEOs, during
2015.
Nonqualified Deferred Compensation
We did not maintain any nonqualified defined contribution or other deferred compensation plans or arrangements for our
executive officers, including our NEOs, during 2015.
Employment Agreements
We do not have employment agreements with any of our NEOs.
Potential Payments Upon Termination or Change in Control
Single Trigger:
We have entered into COC Agreements with each of our NEOs. These agreements provide that if a Named Executive
Officer’s employment with the Company is terminated by the Company without “cause” (as defined in the agreement) or by
the Named Executive Officer for “good reason” (as defined in the agreement) either prior to three months before or after 12
months following a Change of Control (as defined in the agreement) of the Company but not in connection with a Change of
Control (commonly referred to as “single trigger”), the Named Executive Officer will receive, subject to signing a release of
claims in favor of the Company:
●
a lump sum severance payment equal to 200% of the annual base salary as in effect immediately prior to such
termination for our CEO and 100% of the annual base salary as in effect immediately prior to such termination for
our CFO; and
● up to 24 months for our CEO and up to 12 months for our CFO of reimbursement for premiums paid for COBRA
coverage.
-37-
Proxy Statement
Double Trigger
These agreements also provide that if a Named Executive Officer’s employment with the Company is terminated by the
Company without “cause” or by the Named Executive Officer for “good reason” and such termination occurs within the
period beginning three months before, and ending 12 months following, a Change of Control of the Company and in
connection with a Change of Control (commonly referred to as “double trigger”), the Named Executive Officer will receive,
subject to signing a release of claims in favor of the Company:
● A lump sum severance payment equal to 200% of the annual base salary as in effect immediately prior to such
termination or, if greater, at the level in effect immediately prior to the Change of Control for our CEO and 150% of
the annual base salary as in effect immediately prior to such termination or, if greater, at the level in effect
immediately prior to the Change of Control for our CFO;
● A lump sum severance payment equal to 200% of the annual target bonus for the fiscal year in which the termination
occurs or, if greater, his annual target bonus in effect immediately prior to the Change of Control for our CEO and
150% of the annual target bonus for the fiscal year in which the termination occurs or, if greater, his annual target
bonus in effect immediately prior to the Change of Control for our CFO;
● Automatic vesting in full of all outstanding and unvested equity awards held by the Named Executive Officer as of
the date of the Change of Control; and
● Reimbursement for premiums paid for COBRA coverage of up to 24 months for our CEO and up to 18 months for
our CFO.
Each of these agreements were renewed in 2015 for another initial term of three years, and will extend for an additional year
unless the Company or the applicable Named Executive Officer provides written notice at least 60 days prior to the third
anniversary of the agreement.
For purposes of these agreements, “cause” means a Named Executive Officer’s termination of employment only upon (i) his
willful failure to substantially perform his duties (subject to notice and a reasonable period to cure), other than a failure
resulting from his complete or partial incapacity due to physical or mental illness or impairment; (ii) his willful act which
constitutes gross misconduct and which is injurious to the Company; (iii) his willful breach of a material provision of the
agreement (subject to notice and reasonable period to cure); or (iv) his knowing, material and willful violation of a federal or
state law or regulation applicable to the business of the Company.
For purposes of these agreements, “good reason” means a Named Executive Officer’s termination of employment within 90
days following the expiration of any cure period following the occurrence of one or more of the following, without his
consent: (i) a material reduction in his authority, duties, or responsibilities relative to duties, position or responsibilities in
effect immediately prior to such reduction; (ii) a material reduction in his base salary as in effect immediately prior to such
reduction; or (iii) a material change in the geographic location at which he must perform services (in other words, the
relocation of the Named Executive Officer to a facility that is more than 50 miles from his then-current location).
The following table lists our NEOs and the estimated payments and benefits that each of them would have received had their
employment with the Company been terminated without “cause” or had they resigned for “good reason” on December 31,
2015.
Estimated
Total Value
of Cash
Payment
1,200,000 $
367,000 $
Estimated
Total Value
of Health
Coverage
Continuation
46,856
20,928
Name
Mr. Connors ..................................................................................................................... $
Mr. Santilli ....................................................................................................................... $
-38-
Proxy Statement
The following table lists our NEOs and the estimated payments and benefits that each of them would have received had their
employment with the Company been terminated without “cause” or had they resigned for “good reason” in connection with
a change in control of the Company on December 31, 2015.
Name
Mr. Connors ....................................................................................... $
Mr. Santilli ......................................................................................... $
Estimated
Total Value
of Cash
Payment
Estimated
Total Value of
Health
Coverage
Continuation
Value of
Accelerated
Equity(1)
2,040,000 $
825,750 $
46,856 $
31,391 $
872,449
486,543
(1) We estimated the value of acceleration of the outstanding and unvested stock options, RSU and PSU awards (assuming
paid at 100% of target) held by each of our NEOs based on a market price of $12.79 per share for Cutera common stock
as of December 31, 2015.
Severance payments upon termination or change in control would be payable to the recipient only if the executive signs and
does not revoke a release of claims with the Company (in a form reasonably acceptable to the Company) and provided that
such release of claims becomes effective no later than sixty (60) days following the termination date. In addition, the executive
would need to have complied with the terms of any confidential information agreement executed by executive in favor of the
Company and the provisions of the severance agreements.
-39-
Proxy Statement
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item
402(b) of SEC Regulation S-K with management. Based on such review and discussion, the Compensation Committee has
recommended to the Board of Directors that the Compensation Discussion and Analysis be included in Cutera’s proxy
statement.
The foregoing report is provided by the undersigned members of the Compensation Committee.
David B. Apfelberg
Gregory Barrett
Jerry P. Widman
(1) The material in this report is not deemed soliciting material or filed with the SEC and is not to be incorporated by
reference in any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended, whether made before or after the date of this Proxy Statement and irrespective of any general
incorporation language in those filings.
-40-
Proxy Statement
RELATED PARTY TRANSACTIONS
We describe below transactions and series of similar transactions, since the beginning of our last fiscal year, to which we
were a party or will be a party, in which:
●
●
the amounts involved exceeded or will exceed $120,000; and
any of our directors, nominees for director, executive officers or beneficial holders of more than 5% of our
outstanding common stock, or any immediate family member of, or person sharing the household with, any of these
individuals or entities (each, a related party), had or will have a direct or indirect material interest.
Consulting Agreement
We have a consulting agreement with Mr. Gollnick, a director of the Company, pursuant to which he is compensated for
services that he provides to us, including product development, clinical sales and marketing support. Payments to Mr.
Gollnick under this agreement in fiscal year 2015 were $45,240 plus travel expenses.
Other Transactions
We have entered into change of control severance agreements with our NEOs. See “Named Executive Officers and Executive
Compensation — Potential Payments Upon Termination or Change in Control.”
We have entered into indemnification agreements with our directors and executive officers. The indemnification agreements
and our certificate of incorporation and bylaws require us to indemnify our directors and executive officers to the fullest
extent permitted by Delaware law.
Policies and Procedures for Related Party Transactions
Our board of directors has adopted a written policy that our executive officers, directors, nominees for election as a director,
beneficial owners of more than 5% of any class of our common stock and any members of the immediate family of any of
the foregoing persons are not permitted to enter into a related person transaction with us without the prior consent of our
audit committee. Any request for us to enter into a transaction with an executive officer, director, nominee for election as a
director, beneficial owner of more than 5% of any class of our common stock or any member of the immediate family of any
of the foregoing persons in which the amount involved exceeds $120,000 and such person would have a direct or indirect
interest must first be presented to our audit committee for review, consideration and approval. In approving or rejecting any
such proposal, our audit committee is to consider the material facts of the transaction, including, but not limited to, whether
the transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or
similar circumstances and the extent of the related person’s interest in the transaction. We did not have a formal review and
approval policy for related party transactions at the time of any of the transactions described above. However, all of the
transactions described above were entered into after presentation, consideration and approval by our board of directors and/or
our audit committee.
-41-
Proxy Statement
Fiscal Year 2015 Annual Report and SEC Filings
OTHER MATTERS
Our financial statements for our fiscal year ended December 31, 2015 are included in our Annual Report on Form 10-K,
which we will make available to stockholders at the same time as this proxy statement. This proxy statement and our annual
report are posted on our website atand are available from the SEC at its website at www.sec.gov. A copy of our annual report
may be obtained, without charge, by sending a written request to Cutera, Inc., Attention: Investor Relations, 3240 Bayshore
Boulevard, Brisbane, California.
We are not aware of any other business to be presented at the meeting. As of the date of this proxy statement, no stockholder
had advised us of the intent to present any business at the meeting. Accordingly, the only business that our Board intends to
present at the meeting is as set forth in this proxy statement.
If any other matter or matters are properly brought before the meeting, the proxies will use their discretion to vote on such
matters in accordance with their best judgment.
By order of the Board of Directors,
/s/ Ronald J. Santilli
Ronald J. Santilli, Executive Vice President and Chief Financial Officer
Brisbane, California
April 29, 2016
-42-
Proxy Statement
Fiscal Year 2015 Annual Report and SEC Filings
2016 ANNUAL MEETING OF STOCKHOLDERS
OTHER MATTERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF CUTERA, INC.
The undersigned stockholder of Cutera, Inc., a Delaware corporation, hereby acknowledges receipt of the Notice of Annual
Meeting of Stockholders and Proxy Statement each dated April 29, 2016 and hereby appoints Kevin P. Connors (our President
and Chief Executive Officer) and Ronald J. Santilli (our Chief Financial Officer), each as proxy and attorney-in-fact, with
full power of substitution, on behalf and in the name of the undersigned to represent the undersigned at the 2016 Annual
Meeting of Stockholders of Cutera, Inc. to be held on June 15, 2016 at 10:00 a.m., local time, at Cutera’s offices located at
3240 Bayshore Blvd., Brisbane, California 94005-1021, and at any postponement or adjournment thereof, and to vote all
shares of common stock which the undersigned would be entitled to vote if then and there personally present, on the matters
set forth below:
SEE REVERSE SIDE
Our financial statements for our fiscal year ended December 31, 2015 are included in our Annual Report on Form 10-K,
which we will make available to stockholders at the same time as this proxy statement. This proxy statement and our annual
report are posted on our website atand are available from the SEC at its website at www.sec.gov. A copy of our annual report
may be obtained, without charge, by sending a written request to Cutera, Inc., Attention: Investor Relations, 3240 Bayshore
Boulevard, Brisbane, California.
We are not aware of any other business to be presented at the meeting. As of the date of this proxy statement, no stockholder
had advised us of the intent to present any business at the meeting. Accordingly, the only business that our Board intends to
present at the meeting is as set forth in this proxy statement.
If any other matter or matters are properly brought before the meeting, the proxies will use their discretion to vote on such
matters in accordance with their best judgment.
By order of the Board of Directors,
/s/ Ronald J. Santilli
Brisbane, California
April 29, 2016
Ronald J. Santilli, Executive Vice President and Chief Financial Officer
FOLD AND DETACH HERE
-42-
-43-
Proxy Statement
The Board of Directors of Cutera, Inc. recommends a vote FOR the following proposals:
Please mark your votes as indicated:☒
1. Election of Directors: Class III Nominees:
Gregory Barrett
J. Daniel Plants
Jerry P. Widman
FOR
☐
☐
☐
WITHHOLD
☐
2. Ratification of BDO USA, LLP as
our Independent Registered
Public Accounting Firm for the
fiscal year ending December 31,
2016.
☐
☐
FOR
AGAINST
ABSTAIN
☐
☐
☐
3. Non-binding advisory vote on the
FOR
AGAINST
ABSTAIN
compensation of our Named
Executive Officers.
☐
☐
☐
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS INDICATED, WILL BE
VOTED AS FOLLOWS: (1) FOR THE ELECTION OF THE NOMINATED CLASS III DIRECTORS; (2) FOR THE
RATIFICATION OF THE APPOINTMENT OF BDO USA, LLP AS OUR INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM; (3) FOR THE APPROVAL, BY NON-BINDING VOTE, OF EXECUTIVE COMPENSATION;
AND (4) AS THE PROXY HOLDERS DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY COME BEFORE
THE MEETING.
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS HEREON. IF THE STOCK IS REGISTERED IN THE NAME
OF TWO OR MORE PERSONS, EACH SHOULD SIGN. EXECUTORS, ADMINISTRATORS, TRUSTEES,
GUARDIANS AND ATTORNEYS-IN-FACT SHOULD ADD THEIR TITLES. IF SIGNER IS A CORPORATION,
PLEASE GIVE FULL CORPORATE NAME AND HAVE A DULY AUTHORIZED OFFICER SIGN, STATING
TITLE. IF SIGNER IS A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
PLEASE SIGN, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN ENVELOPE,
WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
SIGNATURE(S) SIGNATURE(S)
DATE:
NOTE: This Proxy should be marked, signed by the stockholder(s) exactly as his or her name appears hereon, and returned
promptly in the enclosed envelope. Persons signing in fiduciary capacity should so indicate. If shares are held by joint tenants
or as community property, both should sign.
-44-
Proxy Statement
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2015
Commission file number: 000-50644
Cutera, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
77-0492262
(I.R.S. Employer Identification Number)
3240 Bayshore Blvd.
Brisbane, California 94005
(415) 657-5500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.001 par value per share
Name of Each Exchange on Which Registered
The NASDAQ Stock Market, LLC
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 than 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the
definition 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 ☐
(Do not check if a smaller reporting company)
Smaller reporting company ☐
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock, held by non-affiliates of the registrant as of June 30, 2015 (which is the
last business day of registrant’s most recently completed second fiscal quarter) based upon the closing price of such stock on the NASDAQ
Global Select Market on June 30, 2015, was approximately $116 million. For purposes of this disclosure, shares of common stock held by
entities and individuals who own 5% or more of the outstanding common stock and shares of common stock held by each officer and
director have been excluded in that such persons may be deemed to be “affiliates” as that term is defined under the Rules and Regulations
of the Securities Exchange Act of 1934. This determination of affiliate status is not necessarily conclusive.
The number of shares of Registrant’s common stock issued and outstanding as of February 29, 2016 was 12,992,503.
Part III incorporates by reference certain information from the registrant’s definitive proxy statement for the 2016 Annual Meeting of
Stockholders.
DOCUMENTS INCORPORATED BY REFERENCE
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TABLE OF CONTENTS
Page
PART I
Item 1.
Business ...........................................................................................................................................................
Item 1A. Risk Factors ....................................................................................................................................................
Item 1B. Unresolved Staff Comments .........................................................................................................................
Properties .......................................................................................................................................................
Item 2.
Item 3.
Legal Proceedings ..........................................................................................................................................
Item 4. Mine Safety Disclosures .................................................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ............................................................................................................................................
Item 6.
Selected Financial Data .................................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ..................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..................................................................
Financial Statements and Supplementary Data ..........................................................................................
Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................
Item 9A. Controls and Procedures ...............................................................................................................................
Item 9B. Other Information .........................................................................................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance .........................................................................
Item 11. Executive Compensation ...............................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ............................................................................................................................................................
Item 13. Certain Relationships and Related Transactions, and Director Independence .......................................
Item 14. Principal Accounting Fees and Services ......................................................................................................
PART IV
1
18
31
31
31
31
32
34
35
48
49
81
81
83
83
83
83
83
83
Item 15. Exhibits, Financial Statement Schedules .....................................................................................................
84
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ITEM 1. BUSINESS
PART I
We are a global medical device company founded as a Delaware corporation in 1998, headquartered in Brisbane, California,
specializing in the design, development, manufacture, marketing and servicing of laser and other energy based aesthetics
systems for practitioners worldwide. We offer easy-to-use products based on the following key product platforms:
enlightenTM, excel HRTM, truSculptTM, excel VTM, and xeo®— each of which enables physicians and other qualified
practitioners to perform safe and effective aesthetic procedures for their customers. Each of our laser and other energy-based
platforms consists of one or more hand pieces and a console that incorporates a universal graphical user interface, a laser or
other energy-based module, control system software and high voltage electronics. However, depending on the application,
the laser or other energy-based module is sometimes contained in the hand piece itself.
Our trademarks include: "Cutera®," “CoolGlide,”“enlighten,” “excel HR,” “excel V,” “GenesisPlus,”“solera,” “titan,”
“truSculpt,” and “xeo.” Our logo and our other trade names, trademarks and service marks appearing in this document are
our property. Other trade names, trademarks and service marks appearing in this annual report on Form 10-K are the property
of their respective owners. Solely for convenience, our trademarks and trade names referred to in this annual report on Form
10-K appear without the ™ or ® symbols, but those references are not intended to indicate, in any way, that we will not assert,
to the fullest extent under applicable law, our rights, or the right of the applicable licensor to these trademarks and trade
names.
A description of each of our hand pieces, and the aesthetic conditions they are designed to treat, is contained in the section
below entitled “Products” and a summary of the features of our primary products is as follows:
●
●
●
●
enlighten- In December 2014, we introduced our enlighten platform, a dual wavelength (1064 nm + 532 nm) and
dual pulse duration (750 picosecond, or “ps,” and 2 nanosecond, or “ns”) laser system for tattoo removal and the
treatment of benign pigmented lesions. In June 2015 we added a low-energy 532 nm enhancement to this platform,
which significantly extended the treatment settings, enabling more effective treatment of benign pigmented lesions.
excel HR- In June 2014, we introduced our excel HR platform, a premium hair removal solution for all skin types,
combining Cutera’s proven long-pulse 1064 nm Nd:YAG laser and a high-power 755 nm Alexandrite laser with
sapphire contact cooling.
truSculpt- In August 2012, we commenced shipments of our truSculpt platform with a 25cm2 hand piece. truSculpt
is a high-powered radio frequency (“RF”) platform designed for deep tissue heating. This system is designed to treat
all body areas and with its unique electrode design is able to achieve comfortable, uniform heating of subcutaneous
tissue. In the fourth quarter of 2012, we commenced shipping a larger 40cm2 hand piece that enables faster treatments
of larger areas. In the third quarter of 2013, we commenced shipping a smaller 16 cm2 hand piece.
excel V- In February 2011, we introduced our excel V platform, a high-performance, vascular and benign pigmented
lesion treatment platform designed specifically for the core-market of Dermatologists and Plastic Surgeons. This
platform provides a combination of the 532 nanometer, or “nm” green laser with Cutera’s award-winning 1064 nm
Nd:YAG technology, to provide a single, compact and efficient system that treats the entire range of cosmetic
vascular and benign pigmented lesion conditions, without the need for costly consumables.
● xeo- In 2003, we introduced the xeo platform, which can combine pulsed light and laser applications in a single
system. The xeo is a multi-application platform on which a customer can purchase hand piece applications for the
removal of unwanted hair, treatment of vascular lesions, and skin revitalization by treating discoloration, and treating
fine lines and laxity.
Other than the above mentioned five primary systems, we continue to generate revenue from our legacy products such as
GenesisPlusTM, CoolGlide®, solera®, and a third-party sourced system called myQTM for the Japanese market.
We offer our customers the ability to select the systems and applications that best fit their practice and to subsequently
upgrade their systems to add new applications. This upgrade path allows our customers to cost-effectively build their aesthetic
practices and provides us with a source of incremental revenue.
In addition to systems and upgrades, we generate revenue from the sale of post warranty services, Titan hand piece refills,
and skincare products (Japanese market only).
1
The Structure of Skin and Conditions that Affect Appearance
The skin is the body’s largest organ and is comprised of two layers called the epidermis and dermis. The epidermis is the
outer layer, and serves as a protective barrier for the body. It contains cells that determine pigmentation, or skin color. The
underlying layer of skin, the dermis, contains hair follicles and large and small blood vessels that are found at various depths
below the epidermis. Collagen, also found within the dermis, provides strength and flexibility to the skin.
Many factors, including advancing age, smoking, and sun damage, can result in aesthetically unpleasant changes in the
appearance of the skin. These changes can include:
● Undesirable hair growth;
● Enlargement or swelling of blood vessels due to circulatory changes that become visible at the skin’s surface in the
form of unsightly veins;
● Deterioration of collagen, leading to uneven texture, wrinkles and skin laxity; and
● Uneven pigmentation or sun spots due to long-term sun exposure.
In addition to these skin conditions, people seek removal of unwanted tattoos as well as removal of fat in certain body areas
in order to improve their appearance and confidence.
The Market for Non-Surgical Aesthetic Procedures
The market for non-surgical aesthetic procedures has grown significantly over the past several years. Medical Insight, an
independent industry research and analysis firm, estimated that in 2015 total sales of products in the global aesthetic market
exceeded $7 billion and indicates that total sales should increase 11.8% annually through 2019. For North America, the
American Society of Plastic Surgeons estimates that in 2014 there were over 13.9 million minimally-invasive aesthetic
procedures performed, a 4% increase over 2013 and a 154% increase over 2000.
We believe there are several factors contributing to the global growth of aesthetic treatment procedures and aesthetic laser
equipment sales, including:
●
Improved Economic Environment and Expanded Physician Base- The improvements in overall global economic
conditions since the last recession has created increased demand for aesthetic procedures, which in turn has resulted
in an expanding physician base to satisfy the demand.
● Aging Demographics of Industrialized Countries- The aging population of industrialized countries, the amount of
discretionary income available to the “baby boomer” demographic segment ─ ages 51 to 69 in 2015 ─ and their
desire to retain a youthful appearance, has increased the demand for aesthetic procedures. In 2015, there were
approximately 75 million people in the baby boomer category, which is nearly 25%, of the U.S. population.
● Broader Range of Safe and Effective Treatments- Technical developments, as well as advances in treatable
conditions with new product introductions, have led to safe, effective, easy-to-use and low-cost treatments with
fewer side effects, resulting in broader adoption of aesthetic procedures by practitioners. In addition, technical
developments have enabled practitioners to offer a broader range of treatments. These technical developments have
reduced the required treatment and recovery times, which in turn have led to greater patient demand.
● Broader Base of Customers- Managed care and government payer reimbursement restrictions on physicians, has
motivated them to establish or seek to expand their elective aesthetic practices with procedures that are paid for
directly by patients. As a result, in addition to the core users such as dermatologists and plastic surgeons, many other
non-core practitioners, such as gynecologists, family practitioners, primary care physicians, physicians offering
aesthetic treatments in non-medical offices, and other qualified practitioners have expanded their practices and are
offering aesthetic procedures.
● Reductions in Cost per Procedure: Due in part to increased competition in the aesthetic market, the cost per
procedure has been reduced in the past few years. This has attracted a broader base of clients and patients for aesthetic
procedures.
● Wide Acceptance of Aesthetic Procedures and Increased Focus on Body Image and Appearance- According to an
ASAPS survey in 2010, 51% of Americans (including 53% of women and 49% of men) approved of cosmetic
surgery, and 67% of Americans responded that they would not be embarrassed if their friends or family knew they
had undergone a cosmetic procedure. Broader social acceptance of aesthetic treatments, has also driven the growth
in aesthetic procedures.
2
Non-Surgical Aesthetic Procedures for Improving the Skin’s Appearance and Their Limitations
Many alternative therapies are available for improving a person’s appearance by treating specific structures within the skin.
These procedures utilize injections or abrasive agents to reach different depths of the dermis and the epidermis. In addition,
non-invasive and minimally-invasive treatments have been developed that employ laser and other energy-based technologies
to achieve similar therapeutic results. Some of these more common therapies and their limitations are described below.
Hair Removal- Techniques for hair removal include waxing, depilatories, tweezing, shaving, electrolysis and laser and other
energy-based hair removal. The only techniques that provide a long-lasting solution are electrolysis and other energy-based
hair removal. Electrolysis is usually painful, time-consuming and expensive for large areas, but is the most common method
for removing light-colored hair. During electrolysis, an electrologist inserts a needle directly into a hair follicle and activates
an electric current in the needle. Since electrolysis only treats one hair follicle at a time, the treatment of an area as small as
an upper lip may require numerous visits and many hours of treatment. In addition, electrolysis can cause blemishes and
infection related to needle use.
Leg and Facial Veins- Current aesthetic treatment methods for leg and facial veins include sclerotherapy and laser and other
energy-based treatments. With these treatments, patients seek to eliminate visible veins and improve overall skin appearance.
Sclerotherapy requires a skilled practitioner to inject a saline or detergent-based solution into the target vein, which breaks
down the vessel causing it to collapse and be absorbed into the body. The need to correctly position the needle on the inside
of the vein makes it difficult to treat smaller veins, which limits the treatment of facial vessels and small leg veins. The
American Society of Plastic Surgeons estimates that approximately 321,000 sclerotherapy procedures were performed in
2013.
Tattoo removal- The only effective way to remove tattoos on the body is to utilize laser systems that deliver very short pulse
durations with high peak power intensity in order to break up the ink particles that tattoos are comprised of. According to a
Tattoo Incidence Study published in ORC International in June 2015, up to 27% of Americans have one or more tattoos, and
that 1 in 4 tattoo bearing American adults have “tattoo regret”. Despite the effectiveness of lasers for tattoo removal, common
complaints concerning laser tattoo removal center upon a low rate of complete clearance (sometimes no better than 50% after
several treatments) as well as the high number of treatments for satisfactory clearance (often 10 or more treatments spaced
4-8 weeks apart). The latest generation of picosecond pulse duration lasers, pulses in the trillionths of a second, meaningfully
improve clearance as well as a reduction in total number of treatments.
Skin Rejuvenation- Skin rejuvenation treatments include a broad range of popular alternatives, including Botox and collagen
injections, chemical peels, microdermabrasions, radio frequency treatments and lasers and other energy-based treatments.
With these treatments, patients hope to improve overall skin tone and texture, reduce pore size, tighten skin and remove other
signs of aging, including mottled pigmentation, diffuse redness and wrinkles. All of these procedures are temporary solutions
and must be repeated within several weeks or months to sustain their effect, thereby increasing the cost and inconvenience
to patients. For example, the body absorbs Botox and collagen and patients require supplemental injections every three to six
months to maintain the benefits of these treatments.
Some skin rejuvenation treatments, such as chemical peels and microdermabrasion, can have undesirable side effects.
Chemical peels use acidic or caustic solutions to peel away the epidermis, and microdermabrasion generally utilizes sand
crystals to resurface the skin. These techniques can lead to stinging, redness, irritation and scabbing. In addition, more serious
complications, such as changes in skin color, can result from deeper chemical peels. Patients that undergo these deep chemical
peels are also advised to avoid exposure to the sun for several months following the procedure. The American Society of
Plastic Surgeons estimates that in 2014, approximately 6.7 million injections of Botulinum Toxin and 2.3 million injections
of collagen and other soft-tissue fillers were administered; and 1.25 million chemical peels and 882,000 microdermabrasion
procedures were performed.
In radio frequency tissue tightening, energy is applied to heat the dermis of the skin with the goal of shrinking and tightening
collagen fibers. This approach may result in a more subtle and incremental change to the skin than a surgical facelift.
Drawbacks to this approach may include surface irregularities that may however resolve over time, and the risk of burning
the treatment area.
Laser and other energy-based non-surgical treatments for hair removal, veins, skin rejuvenation and body contouring are
discussed in the following section and in the section entitled “Our Applications and Procedures” below.
3
Laser and Other Energy-Based Aesthetic Treatments
Laser and other energy-based aesthetic treatments can achieve therapeutic results by affecting structures within the skin. The
development of safe and effective aesthetic treatments has created a well-established market for these procedures.
Ablative skin resurfacing is a method of improving the appearance of the skin by removing the outer layers of the skin.
Ablative skin resurfacing procedures are considered invasive or minimally invasive, depending on how much of the epidermis
is removed during a treatment. Non-ablative skin resurfacing is a method of improving the appearance of the skin by treating
the underlying structure of the skin without damaging the outer layers of the skin. Practitioners can use laser and other energy-
based technologies to selectively target hair follicles, veins or collagen in the dermis, as well as cells responsible for
pigmentation in the epidermis, without damaging surrounding tissue. Practitioners can also use these technologies to safely
remove portions of the epidermis and deliver heat to the dermis as a means of generating new collagen growth.
Safe and effective laser and energy-based treatments require an appropriate combination of the following four parameters:
● Energy Level- the amount of light or radio frequency emitted to heat a target;
● Pulse Duration- the time interval over which the energy is delivered;
● Spot Size or Electrode Size- the diameter of the energy beam, which affects treatment depth and area; and
● Wavelength or Frequency- the position in the electromagnetic spectrum which impacts the absorption and therefore
the effective depth of the energy delivered.
For example, in the case of hair removal, by utilizing the correct combination of these parameters, a practitioner can use a
laser or other light source to selectively target melanin within the hair follicle to absorb the laser energy and destroy the
follicle, without damaging other delicate structures in the surrounding tissue. Wavelength and spot size permit the practitioner
to target melanin in the base of the hair follicle, which is found in the dermis. The combination of pulse duration and energy
level may vary, depending upon the thickness of the targeted hair follicle. A shorter pulse length with a high energy level is
optimal to destroy fine hair, whereas coarse hair is best treated with a longer pulse length with lower energy levels. If
treatment parameters are improperly set, non-targeted structures within the skin may absorb the energy thereby eliminating
or reducing the therapeutic effect. In addition, improper setting of the treatment parameters or failure to protect the surface
of the skin may cause burns, which can result in blistering, scabbing and skin discoloration.
Technology and Design of Our Systems
Our unique xeo, GenesisPlus, excel V, truSculpt, excel HR and enlighten platforms provide the long-lasting benefits of laser
and other energy-based aesthetic treatments. Our technology allows for a combination of a wide variety of applications
available in a single system. Key features of our solutions include:
● Multiple Applications Available in a Single System- Our platforms feature multiple-applications that enable
practitioners to perform a variety of aesthetic procedures using a single device. These procedures include hair
removal, vascular treatments and skin rejuvenation ─ including the treatment of discoloration, fine lines, and uneven
texture. Because practitioners can use our systems for multiple indications, the cost of a unit may be spread across a
potentially greater number of patients and procedures and therefore may be more rapidly recovered.
● Technology and Design Leadership- We offer innovative laser and other energy-based solutions for the aesthetic
market. Our laser technology combines long wavelength, adjustable energy levels, variable spot sizes and a wide
range of pulse durations, allowing practitioners to customize treatments for each patient and condition. Our
proprietary pulsed light hand pieces for the treatment of discoloration, hair removal and vascular treatments optimize
the wavelength used for treatments and incorporate a monitoring system to increase safety. Our Titan hand pieces
utilize a novel light source that had not been previously used for aesthetic treatments. Our Pearl and Pearl Fractional
hand pieces, with proprietary YSGG technology, represent the first application of the 2790 nm wavelength for
minimally-invasive cosmetic dermatology. excel V is a stand-alone laser device that combines a new high power
green laser with Cutera's award winning Nd:YAG technology, to provide a system that treats the entire range of
cosmetic vascular conditions, without the need for costly consumables. truSculpt is a mono-polar radio frequency
platform and has a unique electrode design that delivers high-powered energy at 1 MHz for the deep and uniform
heating of the subcutaneous tissues at sustained therapeutic temperatures. This system includes real-time skin
temperature sensing and a large 40cm2 surface area for faster treatments over large areas of the body.
● Upgradeable Platform- We have designed some of our products to allow our customers to cost-effectively upgrade
to our multi-application systems (solera and xeo), which provide our customers with the option to add additional
applications to their existing systems and provides us with a source of incremental revenue. We believe that product
4
upgradeability allows our customers to take advantage of our latest product offerings and provide additional
treatment options to their patients, thereby expanding the opportunities for their aesthetic practices.
● Treatments for Broad Range of Skin Types and Conditions- Our products remove hair safely and effectively on
patients of all skin types, including harder-to-treat patients with dark or tanned skin. In addition, the wide parameter
range of our systems allows practitioners to effectively treat patients with both fine and coarse hair. Practitioners
may use our products to treat spider and reticular veins (unsightly small veins in the leg); facial veins; and perform
skin rejuvenation procedures for discoloration, texture, fine lines, and wrinkles on any type of skin. The ability to
customize treatment parameters enables practitioners to offer safe and effective therapies to a broad base of their
patients.
● Ease of Use- We design our products to be easy to use. Our proprietary hand pieces are lightweight and ergonomic,
minimizing user fatigue, and allow for clear views of the treatment area, reducing the possibility of unintended
damage and increasing the speed of application. Our control console contains a universal graphical user interface
with three simple, independently adjustable controls from which to select a wide range of treatment parameters to
suit each patient’s profile. The clinical navigation user interface on the xeo platform provides recommended clinical
treatment parameter ranges based on patient criteria entered. And our Pearl and Pearl Fractional hand pieces include
a scanner with multiple scan patterns to allow simple and fast treatments of the face. Risks involved in the use of our
products include risks common to other laser and other energy-based aesthetic procedures, including the risk of
burns, blistering and skin discoloration.
Strategy
Our goal is to maintain and expand our position as a leading, worldwide, provider of energy-based aesthetic devices and
complementary aesthetic products by executing the following strategies:
●
● Continue to Expand our Product Offering- Though we believe that our current portfolio of products is
comprehensive, our research and development group has a pipeline of potential products under development that we
expect to commercialize in the future. We launched GenesisPlus in 2010, excel V in 2011, truSculpt in 2012, the
ProWave LX and truSculpt 16 cm2 hand pieces in 2013 and excel HR and enlighten in 2014. Such products will allow
us to leverage our existing customer call points and provide us with new customer call points which will enhance
the productivity of our distribution channels.
Increasing Revenue and Improving Productivity- We believe that the market for aesthetic systems will continue to
offer growth opportunities. We continue to build brand recognition, add additional products to our international
distribution channel, and are focused on enhancing our global distribution network, all of which we expect will
increase our revenue.
Increasing Focus on Practitioners with Established Medical Offices- We believe there is growth opportunity in
targeting our products to a broad customer base. We believe that our customers’ success is largely dependent upon
having an existing medical practice, in which our systems provide incremental revenue sources to augment their
practice revenue. The success of our excel V platform has resulted from strong adoption by core customers in
dermatology and plastic and reconstructive surgery.
●
● Leveraging our Installed Base - With the introduction of excel V, truSculpt, and now excel HR and enlighten, we
are able to effectively offer additional platforms into our existing installed base. In addition, each of these platforms
allows for potential future upgrades to offer additional indications or capabilities. We believe this program aligns
our interest in generating revenue with our customers’ interest in improving the return on their investment by
expanding the range of applications that can be performed in their practice.
● Generating Revenue from Services and Refillable Hand Pieces- Our Titan and pulsed-light hand pieces are
refillable products, which provide us with a source of recurring revenue from our existing customers. We offer post-
warranty services to our customers either through extended service contracts to cover preventive maintenance or
through direct billing for parts and labor. These post-warranty services serve as additional sources of recurring
revenue.
5
Products
Our CoolGlide, xeo, solera, GenesisPlus, excel V, truSculpt, myQ, excel HR and enlighten platforms allow for the delivery
of multiple laser and energy-based aesthetic applications from a single system. With our xeo and solera platforms,
practitioners can purchase customized systems with a variety of our multi-technology applications.
The following table lists our currently offered products and each checked box represents the applications that were included
in the product in the years noted. In the fourth quarter of 2014, we discontinued the manufacture and sale of the VariLite
product, but continue to provide services for this product to our existing installed base of customers.
Applications:
Hair
Removal:
Vascular
Lesions:
Skin Rejuvenation
Non
Invasive
Body
Contouring*:
System
Platforms:
CoolGlide .............. CV
Products:
Excel
Vantage
xeo .......................... Nd:YAG
OPS600
LP560
Titan S
ProWave 770
AcuTip 500
Titan V/XL
LimeLight
Pearl
Pearl Fractional
ProWave LX
solera ..................... Titan S
ProWave 770
OPS 600
LP560
AcuTip 500
Titan V/XL
LimeLight
GenesisPlus ...........
excel V ...................
myQ ........................
truSculpt ................
excel HR .................
enlighten ................
Year:
2000
2001
2002
2003
2003
2004
2004
2005
2005
2006
2006
2007
2008
2013
2004
2005
2005
2005
2005
2006
2006
2010
2011
2011
2012
2014
2014
Energy
Source:
a
a
a
a
b
b
c
b
b
c
b
d
d
b
c
b
b
b
b
c
b
a
e
e
g
h
e
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Dyschromia:
Texture,
Lines and
Wrinkles:
Skin
Laxity:
Melasma
&Tattoo
Removal:
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
* Our CE Mark allows us to market the truSculpt in the European Union, Australia and certain other countries outside the
U.S. for fat reduction, body shaping and body contouring. In the U.S. we have 510(k) clearance for the purpose of elevating
tissue temperature for the treatment of selected medical conditions such as relief of pain, muscle spasms, increase in local
circulation, and the temporary improvement in the appearance of cellulite.
Energy Source: a. 1064nm Nd:YAG laser; b. flashlamp; c. Infrared laser; d. 2790 nm YSGG laser; e. combined frequency-
doubled 532 nm and 1064 nm Nd:YAG laser; f. combined frequency-doubled 532 nm and 940 nm diode laser; g. radio
frequency at 1 MHz; h. combined frequency 755 nm Alexandrite laser and 1064 nm Nd:YAG laser
Each of our products consists of a control console and one or more hand pieces, depending on the model.
6
Control Console
Our control console includes a universal graphical user interface, control system software and high voltage electronics. All
CoolGlide systems, GenesisPlus, excel V and some models of the xeo platform, include our laser module which consists of
electronics, a visible aiming beam, a focusing lens, and an Nd:YAG and/or flashlamp laser that functions at wavelengths that
permit penetration over a wide range of depths and is effective across all skin types. The interface allows the practitioner to
set the appropriate laser or flashlamp parameters for each procedure through a user-friendly format. The control system
software ensures that the operator’s instructions are properly communicated from the graphic user interface to the other
components within the system. Our high voltage electronics produce over 10,000 watts of peak laser energy, which permits
therapeutic effects at short pulse durations. Our solera console platform comes in two configurations—Opus and Titan—
both of which include a universal graphical user interface, control system software and high voltage electronics. The solera
Opus console is designed specifically to drive our flashlamp hand pieces while the solera Titan console is designed
specifically to drive the Titan hand pieces. The control system software is designed to ensure that the operator’s instructions
are properly communicated from the graphical user interface to the other components within the system and includes real-
time calibration to control the output energy as the pulse is delivered during the treatment. Our truSculpt control console
includes a high-powered, mono-polar RF generator at 1MHz capable of delivering up to 300 watts of energy. The truSculpt
system dynamically adjusts current, voltage and power during treatment as needed to reach and maintain the appropriate
treatment levels.
Hand Pieces
1064 nm Nd:YAG Hand Piece- Our 1064nm Nd:YAG hand piece delivers laser energy to the treatment area for hair removal,
leg and facial vein treatment, and skin rejuvenation procedures to treat skin texture and fine lines. The 1064nm Nd:YAG
hand piece consists of an energy-delivery component, consisting of an optical fiber and lens, and a copper cooling plate with
imbedded temperature monitoring. The hand piece weighs approximately 14 ounces, which is light enough to be held with
one hand. The lightweight nature and ergonomic design of the hand piece allows the operation of the device without user
fatigue. Its design allows the practitioner an unobstructed view of the treatment area, which reduces the possibility of
unintended damage to the skin and can increase the speed of treatment. The 1064nm Nd:YAG hand piece also incorporates
our cooling system, providing integrated pre- and post-cooling of the treatment area through a temperature-controlled copper
plate to protect the outer layer of the skin. The hand piece is available in either a fixed 10 millimeter spot size for our
CoolGlide CV system, or a user-controlled variable 3, 5, 7 or 10 millimeter spot size for our CoolGlide Excel and CoolGlide
Vantage systems.
excel V Hand Piece- The excel V system introduced in February 2011 delivers 1064 nm and 532 nm laser energy to the skin
for the treatment of vascular and benign pigmented lesion. The excel V system supports two hand pieces, both consisting of
an energy-delivery component housing an optical fiber and lens. One hand piece includes a sapphire window cooling plate
with temperature monitoring. This hand piece offer a spot size range from 1.5 to 12 mm in 0.1 mm increments, and is capable
of delivering either the 1064 nm or 532 nm laser energy. The second hand piece does not have a cooling plate and includes
a non-contact temperature sensor to monitor the treatment area temperature. In addition, this second hand piece includes dual
aiming beams that facilitate consistent treatments by maintaining the correct distance of the hand piece to the skin to ensure
that the fixed 8 mm spot size is maintained.
GenesisPlus Hand Piece- Our GenesisPlus system launched in 2010 delivers 1064 nm laser energy to the treatment area for
the temporary increase of clear nail in patients with onychomycosis and for the treatment of fine wrinkles, diffuse redness
and rosacea. This lightweight 1064nm Nd:YAG hand piece consists of an energy-delivery component, housing an optical
fiber and lens. The hand piece includes a non-contact temperature sensor to monitor the treatment area temperature. In
addition, the hand piece includes dual, coaxial aiming beams that facilitate consistent treatments by maintaining the correct
distance of the hand piece to the skin. This hand piece offers a single 5 mm spot size.
Pulsed Light Hand Piece- The LP560, ProWave 770, ProWave LX, AcuTip 500, and LimeLight hand pieces are designed to
produce a pulse of light over a wavelength spectrum to treat discoloration such as age and sun spots and other dyschromia,
hair removal, and superficial facial vessels. The hand pieces each consist of a custom flashlamp, proprietary wavelength
filter, closed-loop power control and embedded temperature monitor, and weigh approximately 13 ounces. The filter in the
AcuTip 500 eliminates long and short wavelengths, transmitting only the therapeutic range required for safe and effective
treatment. The filter in the LP560, ProWave 770, ProWave LX, and LimeLight eliminates short wavelengths, allowing longer
wavelengths to be transmitted to the treatment area. In addition, the wavelength spectrum of the ProWave 770 and the
LimeLight can be shifted based on the setting of the control console. Our power control includes a monitoring system to
ensure that the desired energy level is delivered. The hand pieces protect the epidermis by regulating the temperature of the
7
hand piece window through the embedded temperature monitor. These hand pieces are available on the xeo and solera
platforms.
Titan Hand Piece- The Titan hand pieces are designed to produce a sustained pulse of light over a wavelength spectrum
tailored to induce heating in the dermis. We are aware that some practitioners use the Titan hand piece to treat skin laxity
(although the hand piece is cleared in the U.S. by the U.S. Food and Drug Administration, or FDA, only for deep dermal
heating). The hand piece consists of a custom light source, proprietary wavelength filter, closed-loop power control, sapphire
cooling window and embedded temperature monitor, and weighs approximately three pounds. The temperature of the
epidermis is controlled by using a sapphire window to provide cooling before, during and after the delivery of energy to the
treatment site. We offer two different Titan hand pieces—Titan V and Titan XL.
● Titan V- Titan V has a treatment tip that extends beyond the hand piece housing to provide enhanced visibility of the
skin’s surface to effectively treat delicate areas such as the skin around the eyes and nose.
● Titan XL- Titan XL, like the Titan V, has a treatment tip that extends beyond the housing for improved visibility. It
also has a larger treatment spot size to treat larger body areas faster, such as the arms, abdomen and legs.
The Titan hand pieces can be used on the xeo and solera platforms. The Titan hand piece requires a periodic “refilling”
process, which includes the replacement of the optical source, after a set number of pulses have been used. This provides us
with a source of recurring revenue.
Pearl Hand Piece- The Pearl hand piece, introduced in 2007, is designed to treat fine lines, uneven texture and dyschromia
through the application of proprietary YSGG laser technology. This hand piece can safely remove a small portion of the
epidermis, while coagulating the remaining epidermis, leading to new collagen growth. The Pearl hand piece consists of a
custom monolithic laser source, scanner and power monitoring electronics. The scanner includes multiple scan patterns to
allow simple and fast treatments of the face. The hand piece includes an attachment for a smoke evacuator, allowing the
practitioner to use one hand during treatment.
Pearl Fractional Hand Piece- The Pearl Fractional hand piece, introduced in 2008, also uses proprietary YSGG technology
and is designed to treat wrinkles and deep dermal imperfections (although it is cleared in the U.S. by the FDA only for skin
resurfacing and coagulation). This hand piece penetrates the deep dermis producing a series of micro-columns across the
skin, which can result in the removal of damaged tissue and the production of new collagen. The Pearl Fractional hand piece
consists of a custom monolithic laser source, scanner and power monitoring electronics. The scanner includes multiple scan
patterns to allow simple and fast treatments of the face. The hand piece includes an attachment for a smoke evacuator,
allowing the practitioner to use one hand during treatment.
truSculpt Hand Pieces- The truSculpt product introduced in August 2012 is used for the non-invasive heating of subcutaneous
tissue. We sold three different truSculpt hand pieces in 2013. The original 25cm2 hand piece (now discontinued), 40 cm2 for
larger body parts and the 16cm2 for smaller parts of the body. Each of the truSculpt hand pieces is light weight and
ergonomically designed for operator comfort, which allows for the uniform heat distribution delivered by the hand pieces. In
addition, the hand pieces have a built-in, real time, temperature sensing system to monitor the temperature during the
treatment.
excel HR Hand Piece- The dual wavelength excel HR system introduced in June 2014 delivers 1064 nm and 755 nm laser
energy to the treatment area for hair removal. excel HR’s single hand piece consists of an energy-delivery component housing
an optical fiber and lens. The hand piece features a sapphire window and peripheral cooling plate with temperature
monitoring. The sapphire window allows for 30 watts of temperature regulation with user selectable settings ranging from 4
to 20 degrees centigrade and provides cooling of the skin before, during, and immediately after each laser pulse. This “pre,
parallel, and post” cooling provides an anesthetic benefit that makes treatments more comfortable than systems without
contact cooling, and also increases the safety profile of treatments by reducing the chances of burning skin. The hand piece
has a wide spot-size range between 3 to 18 mm (5 to 18 mm, alexandrite mode).
enlighten Hand Piece- The dual wavelength and dual pulse mode enlighten system introduced in December 2014 delivers
532 nm and 1064 nm laser energy to treat benign pigmented lesions as well as the removal of multi-color tattoos. enlighten’s
single hand piece consists of an energy-delivery component housing a motorized focus lens assembly connected to an
articulated arm. The hand piece features spot size adjustability from 2 to 8mm, adjustable in 1 mm increments. As with all
Cutera laser and light-based systems, the hand piece does not require manual power calibration through a separate calibration
port. The power calibration is automatic and built into the laser system.
8
Upgrades
Our excel V, xeo and solera platforms are multi-application products that are designed to allow our customers to cost-
effectively upgrade to our newest technologies, which provide our customers the option to add applications to their system
and provides us with a source of additional revenue, which we treat as Product revenue.
Service
We offer post-warranty services to our customers through extended service contracts (that cover preventive maintenance
and/or replacement parts and labor), or by direct billing for detachable hand piece replacements, parts and labor. These post-
warranty services serve as additional sources of recurring revenue from our installed base.
Hand Piece Refills
We treat our customer’s purchase of replacement Titan or truSculpt hand pieces as “refill” revenue, which provides us with
a source of recurring revenue from existing customers. Following the launch of truSculpt product in 2012, we charged
customers for hand piece refills, however, beginning in the third quarter of 2013 we now include truSculpt refills as part of
our standard warranty and service contract product offerings.
Skincare
We distribute ZO Skin Health, Inc.’s (“ZO”) physician-dispensed, topical skincare products and through the second quarter
of 2014, we also distributed Merz’s Radiesse® dermal filler product to physicians in the Japanese market.
Our Applications and Procedures
Our products are designed to allow the practitioner to select an appropriate combination of energy level, spot size and pulse
duration for each treatment. The ability to manipulate the combinations of these parameters allows our customers to treat the
broadest range of conditions available with a single energy-based system.
Hair Removal- Our laser technology allows our customers to treat all skin types and hair thicknesses. Our 1064 nm Nd:YAG
and 755 nm Alexandrite lasers permits energy to safely penetrate through the epidermis of any skin type and into the dermis
where the hair follicle is located. Using the universal graphic user interface on our control console, the practitioner sets
parameters to deliver therapeutic energy with a large spot size and variable pulse durations, allowing the practitioner to treat
fine or coarse hair. Our 1064nm Nd:YAG and 755 nm Alexandrite hand pieces allows our customers to treat all skin types,
while our ProWave 770 and ProWave LX hand pieces, with pulsed light technology, treat the majority of skin types quickly
and effectively.
For hair removal treatments, the treatment site on the skin is first cleaned and shaved. The practitioner then applies a thin
layer of gel to improve contact and aid gliding of the hand piece across the skin. If using the CoolGlide 1064nm Nd:YAG
hand piece, the hand piece is applied directly to the skin to cool the area to be treated, then moved and a laser pulse is delivered
to the pre-cooled area. To remove hair using the excel HR, excel V, ProWave 770 and ProWave LX hand pieces, cooling is
provided by a sapphire window placed directly on the skin, allowing the pulse of light to be applied while the treatment area
is being cooled. In the case of both hand pieces, delivery of light which is converted to heat destroys the hair follicles and
prevents hair re-growth. This procedure is then repeated at the next treatment site on the body, and can be done in a gliding
motion to increase treatment speed. Patients receive on average three to six treatments. Each treatment can take between five
minutes to one hour depending on the size of the area and the condition being treated. On average, there are six to eight weeks
between treatments.
Vascular Lesions- Our laser technology allows our customers to treat the widest range of aesthetic vein conditions, including
spider and reticular veins and small facial veins. Our CoolGlide and xeo 1064nm Nd:YAG hand piece’s adjustable spot size
of 3, 5, 7 or 10 millimeters; the excel V 1064 nm and 532 nm hand piece with adjustable spot sizes from 1.5 to 12 mm; and
the excel HR 1064 nm and 755 nm hand pieces with adjustable spot sizes from 3 mm to 18 mm, allows the practitioner to
control treatment depth to target different sized veins. Selection of the appropriate energy level and pulse duration ensures
effective treatment of the intended target. Our AcuTip 500 hand piece, with its 6 millimeter spot size, uses pulsed-light
technology and is designed for the treatment of facial vessels.
The vein treatment procedure when using the 1064nm Nd:YAG hand piece is performed in a substantially similar manner to
the laser hair removal procedure. The laser hand piece is used to cool the treatment area both before and after the laser pulse
9
has been applied. With the excel V and excel HR hand pieces the cooling can be performed pre, during and post-delivery of
the laser pulse. With the AcuTip 500 hand piece, the pulse of light is delivered while the treatment area is being cooled with
the sapphire tip. The delivered energy damages the vein and, over time, it is absorbed by the body. Patients receive on average
between one and six treatments, with six weeks or longer between treatments.
Skin Rejuvenation- Our Nd:YAG laser and other energy based technologies allow our customers to perform non-invasive and
minimally-invasive treatments that reduce redness, fine lines and wrinkles, improve skin texture, and treat other aesthetic
conditions.
Tattoo Removal- Our enlighten dual wavelength, dual pulse duration system featuring picosecond technology and our myQ
Q-switched laser can be used for tattoo removal, for the treatment of benign pigmented lesions, and for laser skin toning.
Texture, Lines and Wrinkles- When using a 1064nm Nd:YAG laser to improve skin texture and treat fine lines, cooling is not
applied and the hand piece is held directly above the skin. A large number of pulses are directed at the treatment site,
repeatedly covering an area, such as the cheek. By delivering many pulses of laser light to a treatment area, a gentle heating
of the dermis occurs and collagen growth is stimulated to rejuvenate the skin and reduce wrinkles. Patients typically receive
four to six treatments for this procedure. The treatment typically takes less than a half hour and there are typically two to four
weeks between treatments.
When treating texture and fine lines with a Pearl hand piece, the hand piece is held at a controlled distance from the skin and
the scanner delivers a preset pattern of spots to the treatment area. Cooling is not applied to the epidermis during the treatment.
The energy delivered by the hand piece ablates a portion of the epidermis while leaving a coagulated portion that will gently
peel off over the course of a few days. Heat is also delivered into the dermis which can result in the production of new
collagen. Treatment of the full face can usually be performed in 15 to 30 minutes. Patients receive on average between one
and three treatments at monthly intervals.
When treating wrinkles and deep dermal imperfections with a Pearl Fractional hand piece, the hand piece is held at a
controlled distance from the skin and the scanner delivers a preset pattern of spots to the treatment area. Cooling is not applied
to the epidermis during the treatment. The energy delivered by the hand piece penetrates the deep dermis producing a series
of micro-columns across the skin, which can result in the removal of damaged tissue and the production of new collagen.
Treatment of the full face can usually be performed in less than an hour. Patients receive on average between one and three
treatments at monthly intervals.
Our CE Mark allows us to market Pearl Fractional in the European Union, Australia and certain other countries outside the
U.S. for the treatment of wrinkles and deep dermal imperfections. However, in the U.S. we have a 510(k) clearance only for
skin resurfacing and coagulation.
Toenail Fungus- In addition to performing skin rejuvenation, our CE Mark allows us to market GenesisPlus in the European
Union, Australia and certain other countries outside the U.S. for the treatment of onychomycosis (“toenail fungus”). Tiny
pulses of light from an Nd:YAG laser pass through the toenail to the fungus underneath, which is irradiated without any
damage to the surrounding nail or skin. The GenesisPlus has dual aiming beams that facilitate consistent treatments by
maintaining the correct distance of the hand piece to the skin. In addition, during the treatment an integrated sensor is used
to actively monitor the temperature of the treatment area. In the U.S. we have 510(k) clearance to market GenesisPlus for the
temporary increase of clear nail in patients with onychomycosis.
Dyschromia- Our pulsed-light technologies allow our customers to safely and effectively treat red and brown dyschromia,
which is skin discoloration, benign pigmented lesions, and rosacea. The practitioner delivers a narrow spectrum of light to
the surface of the skin through our LP560 or LimeLight hand pieces. These hand pieces include one of our proprietary
wavelength filters, which reduce the energy level required for therapeutic effect and minimize the risk of skin injury.
In treating benign pigmented lesions with a pulsed-light technology, the hand piece is placed directly on the skin and then
the light pulse is triggered. The cells forming the pigmented lesion absorb the light energy, darken and then flake off over the
course of two to three weeks. Several treatments may be required to completely remove the lesion. The treatment takes a few
minutes per area treated and there are typically three to four weeks between treatments.
The 532 nm wavelength green laser option of the excel V and enlighten systems, as well as the 755 nm infrared wavelength
of the excel HR, can be used to treat benign pigmented lesions in substantially the same way as described above with the
pulsed light devices.
10
Practitioners can also treat dyschromia and other skin conditions with our Pearl hand piece. During these treatments, the heat
delivered by the Pearl hand piece will remove the outer layer of the epidermis while coagulating a portion of the epidermis.
That coagulated portion will gently peel off over the course of a few days, revealing a new layer of skin underneath. Treatment
of the full face can usually be performed in 15 to 30 minutes. Patients receive on average between one and three treatments
at monthly intervals.
Skin Laxity- Our Titan technology allows our customers to use deep dermal heating to tighten lax skin. The practitioner
delivers a spectrum of light to the skin through our Titan hand piece. This hand piece includes our proprietary light source
and wavelength filter which tailors the delivered spectrum of light to provide heating at the desired depth in the skin.
In treating skin laxity, the hand piece is placed directly on the skin and then the light pulse is triggered. A sustained pulse
causes significant heating in the dermis. This heating can cause immediate collagen contraction while also stimulating long-
term collagen re-growth. Several treatments may be required to obtain the desired degree of tightening of the skin. The
treatment of a full face can take over an hour and there are typically four weeks between treatments.
Our CE Mark allows us to market the Titan in the European Union, Australia and certain other countries outside the U.S. for
the treatment of wrinkles through skin tightening. However, in the U.S. we have a 510(k) clearance for only deep dermal
heating.
Non-Invasive Body Contouring- our truSculpt technology allows physicians to apply a hand piece directly to the skin and
deliver high-powered RF energy that results in the deep and uniform heating of the subcutaneous fat tissue at sustained
therapeutic temperatures. This heating can cause selective destruction of fat cells, which are eliminated from the treatment
area through the body’s natural wound healing processes. The treatment takes approximately 45 minutes and two or more
treatments may be required to obtain the desired aesthetic results.
Our CE Mark allows us to market the truSculpt in the European Union, Australia and certain other countries outside the U.S.
for fat reduction, body shaping and body contouring. In the U.S. we have 510(k) clearance for the purpose of elevating tissue
temperature for the treatment of selected medical conditions such as relief of pain, muscle spasms, increase in local
circulation, and the temporary improvement in the appearance of cellulite.
Sales and Marketing
In the U.S. we market and sell our products primarily through a direct sales organization. Generally, each direct sales
employee is assigned a specific territory. As of December 31, 2015, we had a U.S. direct sales force of 34 employees. We
internally manage our U.S. and Canadian sales organization as one North American sales region with 40 territories as of
December 31, 2015.
International sales are generally made through a worldwide distributor network in over 40 countries, as well as a direct
international sales force of 32 employees, as of December 31, 2015. As of December 31, 2015, we had direct sales offices in
Australia, Belgium, Canada, France, Japan and Switzerland. Our international revenue as a percentage of total revenue
represented 48% in 2015, 55% in 2014 and 58% in 2013.
We also sell certain items like Titan hand piece refills and marketing brochures through the internet.
Although specific customer requirements can vary depending on applications, customers generally demand quality,
performance, ease of use, and high productivity in relation to the cost of ownership. We have responded to these customer
demands by introducing new products focused on these requirements in the markets we serve. Specifically, we believe that
we introduce new products and applications that are innovative, address the specific aesthetic procedures in demand, and are
upgradeable on our customers’ existing systems. In addition, we provide attractive upgrade pricing to new product families.
To increase market penetration, in addition to marketing to the core specialties of plastic surgeons and dermatologists, we
also market to the non-core aesthetic practices consisting of gynecologists, primary care physicians, family practitioners,
physicians offering aesthetic treatments in non-medical offices, podiatrists and other qualified practitioners.
We seek to establish strong ongoing relationships with our customers through the upgradeability of our products, sales of
extended service contracts, the refilling of Titan hand pieces, ongoing training and support, and distributing (in Japan only)
skincare products. We primarily target our marketing efforts to practitioners through office visits, workshops, trade shows,
webinars and trade journals. We also market to potential patients through brochures, workshops and our website. In addition,
we offer clinical forums with recognized expert panelists to promote advanced treatment techniques using our products to
further enhance customer loyalty and uncover new sales opportunities.
11
Competition
Our industry is subject to intense competition. Our products compete against conventional non-energy-based treatments, such
as electrolysis, Botox and collagen injections, chemical peels, microdermabrasion and sclerotherapy. Our products also
compete against laser and other energy-based products offered by public companies, such as Cynosure, Elen (in Italy),
Lumenis (acquired by XIO Group in September 2015), Syneron and Zeltiq, as well as private companies, including, Alma,
Sciton, and several others.
Competition among providers of laser and other energy-based devices for the aesthetic market is characterized by extensive
research efforts and innovative technology. While we attempt to protect our products through patents and other intellectual
property rights, there are few barriers to entry that would prevent new entrants or existing competitors from developing
products that would compete directly with ours. There are many companies, both public and private, that are developing
innovative devices that use both energy-based and alternative technologies. Some of these competitors have greater resources
than we do or product applications for certain sub-markets in which we do not participate. Additional competitors may enter
the market, and we are likely to compete with new companies in the future. To compete effectively, we have to demonstrate
that our products are attractive alternatives to other devices and treatments by differentiating our products on the basis of
performance, brand name, service and price. We have encountered, and expect to continue to encounter, potential customers
who, due to existing relationships with our competitors, are committed to, or prefer, the products offered by these competitors.
Competitive pressures may result in price reductions and reduced margins for our products.
Research and Development
Our research and development group develops new products and applications and builds clinical support to address unmet or
underserved market needs. As of December 31, 2015, our research and development activities were conducted by a staff of
34 employees with a broad base of experience in lasers, optoelectronics, software and other fields. We have developed
relationships with outside contract engineering and design consultants, giving our team additional technical and creative
breadth. We work closely with thought leaders and customers, to understand unmet needs and emerging applications in
aesthetic medicine. Research and development expenses were approximately $10.7 million in 2015, $10.7 million in 2014
and $9.2 million in 2013.
Service and Support
Our products are engineered to enable quick and efficient service and support. There are several separate components of our
products, each of which can easily be removed and replaced. We believe that quick and effective delivery of service is
important to our customers. As of December 31, 2015, we had a 45-person global service department. Internationally, we
provide direct service support through our Australia, Belgium, Canada, France, Hong Kong, Japan, Spain and Switzerland
offices, and also through the network of distributors and third-party service providers in over 40 countries.
We provide a standard one-year warranty coverage for all of our systems. We provide initial warranties on our products to
cover parts and service and offer extended service plans that vary by the type of product and the level of service desired. Our
standard warranty on system consoles covers parts and service for a standard period of one year. From time to time, we also
have promotions whereby we include a post-warranty service contract with the sale of our products. Customers are notified
before their initial warranty expires and are able to purchase extended service plans covering replacement parts and labor.
In countries where we are represented by distributor partners, our customers are serviced through the distributor network.
Distributors are generally provided 14 months warranty coverage for parts only, with labor being provided to the end customer
by the distributor.
In the event a customer does not purchase an extended service plan, we will offer to service the customer’s system and charge
the customer for time and materials. With respect to the truSculpt and other hand pieces, if a customer’s system is out of
warranty, and they have not purchased an extended service contract that covers hand piece replacements, then the customer
is charged for their replacement hand piece.
Our Titan hand pieces generally include a warranty for a set number of shots, instead of for a period of time.
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Manufacturing
We manufacture our products with components and subassemblies supplied by vendors. We assemble and test each of our
products at our Brisbane, California facility. Quality control, cost reduction and inventory management are top priorities of
our manufacturing operations.
We purchase certain components and subassemblies from a limited number of suppliers. We have flexibility with our
suppliers to adjust the number of components and subassemblies as well as the delivery schedules. The forecasts we use are
based on historical demands and sales projections. Lead times for components and subassemblies may vary significantly
depending on the size of the order, time required to fabricate and test the components or subassemblies, specific supplier
requirements and current market demand for the components and subassemblies. We reduce the potential for disruption of
supply by maintaining sufficient inventories and identifying additional suppliers. The time required to qualify new suppliers
for some components, or to redesign them, could cause delays in our manufacturing. To date, we have not experienced
significant delays in obtaining any of our components or subassemblies.
We use small quantities of common cleaning products in our manufacturing operations, which are lawfully disposed of
through a normal waste management program. We do not forecast any material costs due to compliance with environmental
laws or regulations.
We are required to manufacture our products in compliance with the FDA’s Quality System Regulation, or QSR. The QSR
covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging,
storage and shipping of our products. The FDA enforces the QSR through periodic unannounced inspections. We had an
FDA full quality system audit for three weeks during March 2014. There were no significant findings as a result of this audit
and our responses have been accepted by the FDA. Our failure to maintain compliance with the QSR requirements could
result in the shutdown of our manufacturing operations and the recall of our products, which would have a material adverse
effect on business. In the event that one of our suppliers fails to maintain compliance with our quality requirements, we may
have to qualify a new supplier and could experience manufacturing delays as a result. We have opted to maintain quality
assurance and quality management certifications to enable us to market our products in the U.S., the member states of the
European Union, the European Free Trade Association and countries which have entered into Mutual Recognition
Agreements with the European Union. In January 2016, we passed our surveillance recertification audit establishing
compliance with the most current requirements of EN ISO 13485:2012, CAN/CSA ISO 13485:2003, and MDD 93/42/EEC.
Our manufacturing facility is ISO 13485 certified.
Patents and Proprietary Technology
We rely on a combination of patent, copyright, trademark and trade secret laws, and non-disclosure, confidentiality and
invention assignment agreements to protect our intellectual property rights. As of December 31, 2015, we had 34 issued U.S.
patents and 4 pending U.S. patent applications. In the U.S. and several foreign countries, we have registered our Company
name and several of our product names as trademarks, including Cutera, Acutip 500, CoolGlide, CoolGlide Excel, enlighten,
Limelight, myQ, Pearl, ProWave 770, ProWave LX, solera, Titan, xeo and truSculpt. We may have common law rights in
other product names, including excel V, Pearl Fractional, solera Titan and excel HR. We intend to file for additional patents
and trademarks to continue to strengthen our intellectual property rights.
We licensed certain patents from Palomar (acquired by Cynosure in 2013) and paid ongoing royalties based on sales of
applicable hair-removal products. The royalty rate on these products ranged from 3.75% to 7.50% of revenue. The remaining
U.S. patents expired in February 2015 and the remaining international patents expired in February 2016. As a result, all our
revenue from February 2016 onwards will not be subject to royalties. Our revenue from systems that do not include hair-
removal capabilities (such as our solera Titan, xeo SA, GenesisPlus, myQ, excel V and enlighten), and other revenue from
service contracts, Titan, skincare products, were not subject to these royalties. In addition, in 2006 we capitalized $1.2 million
as an intangible asset representing the ongoing license for these patents, which was being amortized on a straight-line basis
over their expected useful life of 9-10 years.
Our employees and technical consultants are required to execute confidentiality agreements in connection with their
employment and consulting relationships with us. We also require them to agree to disclose and assign to us all inventions
conceived in connection with the relationship. We cannot provide any assurance that employees and consultants will abide
by the confidentiality or assignability terms of their agreements. Despite measures taken to protect our intellectual property,
unauthorized parties may copy aspects of our products or obtain and use information that we regard as proprietary.
13
Government Regulation
Our products are medical devices subject to extensive and rigorous regulation by the U.S. Food and Drug Administration, as
well as other regulatory bodies. FDA regulations govern the following activities that we perform and will continue to perform
to ensure that medical products distributed domestically or exported internationally are safe and effective for their intended
uses:
● Product design and development;
● Product testing;
● Product manufacturing;
● Product safety;
● Product labeling;
● Product storage;
● Recordkeeping;
● Pre-market clearance or approval;
● Advertising and promotion;
● Production;
● Product sales and distribution; and
● Complaint Handling.
FDA’s Pre-market Clearance and Approval Requirements
Unless an exemption applies, each medical device we wish to commercially distribute in the U.S. will require either prior
510(k) clearance or pre-market approval from the FDA. The FDA classifies medical devices into one of three classes. Devices
deemed to pose lower risks are placed in either class I or II, which requires the manufacturer to submit to the FDA a pre-
market notification requesting permission to commercially distribute the device. This process is generally known as 510(k)
clearance. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risk,
such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously
cleared 510(k) device, are placed in class III, requiring pre-market approval. All of our current products are class II devices.
14
510(k) Clearance Pathway
When a 510(k) clearance is required, we must submit a pre-market notification demonstrating that our proposed device is
substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28,
1976 for which the FDA has not yet called for the submission of Pre-Market Approval, or PMA, applications. By regulation,
the FDA is required to clear or deny a 510(k), pre-market notification within 90 days of submission of the application. As a
practical matter, clearance often takes significantly longer. The FDA may require further information, including clinical data,
to make a determination regarding substantial equivalence. Laser devices used for aesthetic procedures, such as hair removal,
have generally qualified for clearance under 510(k) procedures.
The following table details the indications for which we received a 510(k) clearance for our products and when these
clearances were received.
FDA Marketing Clearances:
Laser-based products:
Date Received:
- treatment of vascular lesions .................................................................................................................
- hair removal ..........................................................................................................................................
- permanent hair reduction ......................................................................................................................
- treatment of benign pigmented lesions and pseudo folliculitis barbae, commonly referred to as razor
bumps, and for the reduction of red pigmentation in scars ..................................................................
- treatment of wrinkles ............................................................................................................................
- treatment to increase clear nail in patients with onychomycosis ..........................................................
- expanded spot size to 5 mm for clear nail in patients with onychomycosis ..........................................
- addition of Alexandrite 755 nm laser wavelength for hair removal, permanent hair reduction and the
December 2013
treatment of vascular and benign pigmented lesions ...........................................................................
- enlighten picosecond and nanosecond 532/1064 nm for the treatment of benign pigmented lesions ...
August 2014
- enlighten picosecond and nanosecond 532/1064 nm for tattoo removal ............................................... November 2014
June 2002
October 2002
April 2011
May 2013
June 1999
March 2000
January 2001
Pulsed-light technologies:
- treatment of pigmented lesions .............................................................................................................
- hair removal and vascular treatments ....................................................................................................
March 2003
March 2005
Infrared Titan technology for deep dermal heating for the temporary relief of minor muscle and joint
pain and for the temporary increase in local circulation where applied .....................................................
February 2004
Solera tabletop console:
- for use with the Titan hand piece ..........................................................................................................
- for use with our pulsed-light hand pieces .............................................................................................
October 2004
January 2005
Pearl product for the treatment of wrinkles .............................................................................................
March 2007
Pearl Fractional product for skin resurfacing and coagulation ..............................................................
August 2008
truSculpt radio frequency (“RF”) product for deep tissue heating for the temporary relief of minor
muscle and joint pain and for a temporary improvement in the appearance of cellulite
- 16cm2 to 25cm2 hand pieces for smaller body parts ..............................................................................
April 2008
- 16cm2 to 40cm2 hand pieces for larger body parts ................................................................................ November 2012
- Product labeling and technology updates for existing clearances ......................................................... September 2014
Pre-Market Approval (“PMA”) Pathway
A PMA must be submitted to the FDA if the device cannot be cleared through the 510(k) process. A PMA must be supported
by extensive data, including but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate
to the FDA’s satisfaction the safety and effectiveness of the device. No device that we have developed to date has required
pre-market approval, although development of future devices or indications may require pre-market approval.
15
Product Modifications
We have modified aspects of our products since receiving regulatory clearance, but we believe that new 510(k) clearances
are not required for these modifications. After a device receives 510(k) clearance or a PMA, any modification that could
significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new
clearance or approval. The FDA requires each manufacturer to make this determination initially, but the FDA can review any
such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with our determination not to seek
a new 510(k) clearance or PMA, the FDA may retroactively require us to seek 510(k) clearance or pre-market approval. The
FDA could also require us to cease marketing and distribution and/or recall the modified device until 510(k) clearance or
pre-market approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or penalties.
Clinical Trials
When FDA approval of a class I, class II or class III device requires human clinical trials, and if the device presents a
“significant risk,” as defined by the FDA, to human health, the device sponsor is required to file an Investigational Device
Exemption, or IDE, application with the FDA and obtain IDE approval prior to commencing the human clinical trial. If the
device is considered a “non-significant” risk, IDE submission to the FDA is not required. Instead, only approval from the
Institutional Review Board, or IRB, overseeing the clinical trial is required. Human clinical studies are generally required in
connection with approval of class III devices and may be required for class I and II devices. The IDE application must be
supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans
and that the testing protocol is scientifically sound. The IDE must be approved in advance by the FDA for a specified number
of patients. Clinical trials for a significant risk device may begin once the application is reviewed and cleared by the FDA
and the appropriate institutional review boards at the clinical trial sites. Future clinical trials of our products may require that
we submit and obtain clearance of an IDE from the FDA prior to commencing clinical trials. The FDA, and the IRB at each
institution at which a clinical trial is being performed, may suspend a clinical trial at any time for various reasons, including
a belief that the subjects are being exposed to an unacceptable health risk.
Pervasive and Continuing Regulation
After a device is placed on the market, numerous regulatory requirements apply. These include:
● Quality system regulations, which require manufacturers, including third-party manufacturers, to follow stringent
design, testing, control, documentation and other quality assurance procedures during all aspects of the
manufacturing process;
● Labeling regulations and FDA prohibitions against the promotion of products for un-cleared, unapproved or “off-
label” uses;
● Medical device reporting regulations, which require that manufacturers report to the FDA if their device may have
caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to
a death or serious injury if the malfunction were to recur; and
● Post-market surveillance regulations, which apply when necessary to protect the public health or to provide
additional safety and effectiveness data for the device.
The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA
and the Food and Drug Branch of the California Department of Health Services, or CDHS, to determine our compliance with
the QSR and other regulations, and these inspections may include the manufacturing facilities of our subcontractors. In the
past, our prior facility has been inspected, and observations were noted. There were no findings that involved a material
violation of regulatory requirements. Our responses to these observations have been accepted by the FDA and CDHS, and
we believe that we are in substantial compliance with the QSR. Our current manufacturing facility has been inspected by the
FDA and the CDHS. The FDA and the CDHS noted observations, but there were no findings that involved a material violation
of regulatory requirements. Our responses to those observations have been accepted by the FDA and CDHS.
We are also regulated under the Radiation Control for Health and Safety Act, which requires laser products to comply with
performance standards, including design and operation requirements, and manufacturers to certify in product labeling and in
reports to the FDA that their products comply with all such standards. The law also requires laser manufacturers to file new
product and annual reports, maintain manufacturing, testing and sales records, and report product defects. Various warning
labels must be affixed and certain protective devices installed, depending on the class of the product.
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Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include
any of the following sanctions:
● Warning letters, fines, injunctions, consent decrees and civil penalties;
● Repair, replacement, recall or seizure of our products;
● Operating restrictions or partial suspension or total shutdown of production;
● Refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses, or
modifications to existing products;
● Withdrawing 510(k) clearance or pre-market approvals that have already been granted; and
● Criminal prosecution.
The FDA also has the authority to require us to repair, replace or refund the cost of any medical device that we have
manufactured or distributed. If any of these events were to occur, they could have a material adverse effect on our business.
We are also subject to a wide range of federal, state and local laws and regulations, including those related to the environment,
health and safety, land use and quality assurance. We believe that compliance with these laws and regulations as currently in
effect will not have a material adverse effect on our capital expenditures, earnings and competitive and financial position.
International
International sales of medical devices are subject to foreign governmental regulations, which vary substantially from country
to country. The time required to obtain clearance or approval by a foreign country may be longer or shorter than that required
for FDA clearance or approval, and the requirements may be different.
The primary regulatory environment in Europe is that of the European Union, which consists of a 28 countries encompassing
most of the major countries in Europe. The member states of the European Free Trade Association have voluntarily adopted
laws and regulations that mirror those of the European Union with respect to medical devices. Other countries, such as
Switzerland, have entered into Mutual Recognition Agreements and allow the marketing of medical devices that meet
European Union requirements. The European Union has adopted numerous directives and European Standardization
Committees have promulgated voluntary standards regulating the design, manufacture, clinical trials, labeling and adverse
event reporting for medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear
CE conformity marking, indicating that the device conforms with the essential requirements of the applicable directives and,
accordingly, can be commercially distributed throughout the member states of the European Union, the member states of the
European Free Trade Association and countries which have entered into a Mutual Recognition Agreement. The method of
assessing conformity varies depending on the type and class of the product, but normally involves a combination of self-
assessment by the manufacturer and a third-party assessment by a Notified Body, an independent and neutral institution
appointed by a country to conduct the conformity assessment. This third-party assessment may consist of an audit of the
manufacturer’s quality system and specific testing of the manufacturer’s device. An assessment by a Notified Body in one
member state of the European Union, the European Free Trade Association or one country which has entered into a Mutual
Recognition Agreement is required in order for a manufacturer to commercially distribute the product throughout these
countries. ISO 9001 and ISO 13845 certification are voluntary harmonized standards. Compliance establishes the
presumption of conformity with the essential requirements for a CE Marking. In February 2000, our facility was awarded the
ISO 9001 and EN 46001 certification. In March 2003, we received our ISO 9001 updated certification (ISO 9001:2000) as
well as our certification for ISO 13485:1996 which replaced our EN 46001 certification. In March 2004, we received our
ISO 13485:2003 certification and in March 2006, March 2010, February 2011 and January 2012 we passed ISO 13485
recertification audits. Our most recent recertification audit occurred in January 2015. We passed the audit establishing
compliance with the most current requirements of EN ISO 13485:2012, CAN/CSA ISO 13485:2003, and MDD 93/42/EEC.
Employees
As of December 31, 2015, we had 262 employees, compared to 266 employees as of December 31, 2014. Of the 262
employees at December 31, 2015, 103 were in sales and marketing, 56 in manufacturing operations, 45 in technical service,
34 in research and development and 24 in general and administrative. We believe that our future success will depend in part
on our continued ability to attract, hire and retain qualified personnel. None of our employees are represented by a labor
union, and we believe our employee relations are good.
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Available Information
We are subject to the reporting requirements under the Securities Exchange Act of 1934. Consequently, we are required to
file reports and information with the Securities and Exchange Commission, or SEC, including reports on the following forms:
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. These reports and other
information concerning the company may be accessed through the SEC’s website at www.sec.gov. Such filings, as well as
our charters for our Audit and Compensation Committees and our Code of Ethics are available on our website at
www.cutera.com. In the event that we grant a waiver under our Code of Ethics to any of our officers and directors, we will
publish it on our website.
ITEM 1A. RISK FACTORS
We operate in a rapidly changing economic and technological environment that presents numerous risks, many of which are
driven by factors that we cannot control or predict. Our business, financial condition and results of operations may be
impacted by a number of factors. In addition to the factors discussed elsewhere in this report, the following risks and
uncertainties could materially harm our business, financial condition or results of operations, including causing our actual
results to differ materially from those projected in any forward-looking statements. The following list of significant risk
factors is not all-inclusive or necessarily in order of importance. Additional risks and uncertainties not presently known to
us, or that we currently deem immaterial, also may materially adversely affect us in future periods. You should carefully
consider these risks and uncertainties before investing in our securities.
Revenue from the U.S. represents a significant part of our total revenue. In 2015, our U.S. revenue increased by 38%,
compared to 2014. Unless our U.S. revenue continues to improve, we could experience a material adverse effect on our
total revenue, profitability, employee retention and stock price.
Revenue from the U.S. represented 52% of our total revenue in 2015 compared to 45% in 2014. U.S revenue increased by
38% in 2015, compared to 2014, due to several factors, including:
●
In 2014 and in 2015, we continued to expand our North American direct sales force, restructured their compensation
arrangements, and hired new sales management experienced in the medical equipment industry.
● Historically, following a new product introduction, we experience revenue growth, compared to the same period in
the prior year. We experienced revenue growth from our new enlighten and excel HR products launched in the fourth
and second quarter of 2014, respectively.
There can be no assurance that we will continue to introduce new products each year, or that the new product introductions
will translate into increased revenue in the long term in the U.S., or that the new direct sales employees and management
hired to replace the departed sales employees will continue to be effective and result in improved sales productivity. Further,
if the current economic recovery does not continue, or there is another recession in the U.S., our future revenue would be
adversely impacted and we could experience a material adverse effect on total revenue, profitability, employee retention and
stock price.
In over seven years we have only had three profitable quarters and we are unable to predict whether we will return to
sustained quarterly profits in the future.
Although we had a profitable fourth quarter in 2009, 2012 and 2015, we have otherwise had net quarterly losses in each
quarter since the third quarter of 2008. There is no guarantee that we will be profitable in the future and you should not rely
on our operating results for any prior quarterly or annual periods as an indication of our future operating performance. Any
predictions about the performance of our operations in the future may not be as accurate as they could be if we had a longer
history of profitability.
Revenue growth in our business is driven by several factors and one such factor is new product introductions. While our
recently released products in 2014 — enlighten- Q4’14 and excel HR- Q2’14 — have resulted in the growth of our revenue
over the last seven quarters ended December 31, 2015, sales of our truSculpt product introduced in 2012 have not penetrated
the market to the degree we had expected.
In an effort to improve our revenue, we have invested in the restructuring and expansion of our global sales force, re-evaluated
and changed the structure of their compensation arrangements, hired new senior sales management with prior experience in
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the aesthetic medical device industry, and increased our marketing and promotional activities. We have also invested heavily
in training our new sales employees to sell our products and in marketing efforts to generate additional revenue.
For the full-year 2015, compared to 2014, our revenue increased by $16.6 million but our combined cost of revenue and
operating expenses increased by $10.5 million. Our ability to return to sustained profitability depends on the extent to which
we can increase revenue and control our costs to be able to leverage our expenses. In addition, we need to be able to counter
any unforeseen difficulties, complications, product delays or other unknown factors that may require additional expenditures.
Because of the numerous risks and uncertainties associated with our growth prospects, product development, sales and
marketing and other efforts, unforeseen litigation expenses, etc., we are unable to predict the extent of our future profitability
or losses.
If our revenue does not continue to improve, or we do not achieve adequate growth in the future, or if we are not able to
control our costs to leverage our expenses, like we had in the four quarters of 2015, then we may not be able to sustain
quarterly profitability or be able to continue to generate cash in our operations in the future.
We rely heavily on our sales professionals to market and sell our products worldwide. If we are unable to hire, effectively
train, manage, improve the productivity of, and retain the sales professionals, our business will be harmed, which would
impair our future revenue and profitability.
Our success largely depends on our ability to hire, train, manage and improve the productivity levels of our sales professionals
worldwide. Because of our focus on the non-core market in the past, several of our sales professionals do not have established
relationships with the core market, consisting of dermatologists and plastic surgeons, or where those relationships exist, they
are not very strong.
We have experienced direct sales employee and sales management turnover in North America for several reasons. One such
reason was a change in sales leadership in 2014. Further, competition for sales professionals who are familiar and trained to
sell in the aesthetic equipment market continues to be strong. As a result, we have lost some of our sales people to our
competitors. However, we have also hired a record number of new sales people, including several from our competitors.
Several of our sales employees and sales management have been recently hired or recently transferred into different roles,
and it will take time for them to be fully trained to improve their productivity. In addition, due to the competition for sales
professionals in our industry, we have recruited sales professionals from outside the industry. Sales professionals from outside
the industry take longer to train and to become familiar with our products and the procedures in which they are used. As a
result of a lack of industry knowledge, these sales professionals may take longer to become productive members of our sales
force.
Over the past approximately fifteen months, we restructured and have been expanding our North American direct sales force
and sales management. We have increased our efforts to hire industry experienced sales professionals but there can be no
guarantee that we will be able to retain all of the hired sales professionals or that they will all become productive in a short
period of time. Our industry is characterized by a few established companies that compete vigorously for talented sales
professionals. Further, as the economy in North America has rebounded from the recent recession, some of those sales
professionals have left our company for jobs that they perceive to be better opportunities, both within and outside of the
aesthetic industry. We believe that the sales employee turnover, restructuring and expansion of the sales force had a negative
impact on our North American productivity in 2014.
We train our existing and recently recruited sales professionals to better understand our existing and new product technologies
and how they can be positioned against our competitors’ products. These initiatives are intended to improve the productivity
of our sales professionals and our revenue and profitability. It takes time for the sales professionals to become productive
following their training and there can be no assurance that the recently recruited sales professionals will be adequately trained
in a timely manner, or that our direct sales productivity will improve, or that we will not experience significant levels of
attrition in the future.
Measures we implement in an effort to recruit, retain, train and manage our sales professionals, strengthen their relationships
with core market physicians, and improve their productivity may not be successful and may instead contribute to instability
in our operations, additional departures from our sales organization, or further reduce our revenue and harm our business. If
we are not able to improve the productivity and retention of our North American and international sales professionals, then
our total revenue, profitability and stock price may be adversely impacted.
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If our revenue does not improve, or if our cost of revenue and/or operating expenses increase by a greater percentage
than our revenue, our gross margins and operating margins may be adversely impacted, our loss from operations will
increase, and our cash used in operating activities will increase, which could reduce our assets and have a material adverse
effect on our stock price.
Our gross margin (revenue less cost of revenue) was 57% in 2015, compared to 56% in 2014. Our gross margin is impacted
by the revenue that we generate and the costs incurred to generate the revenue. To the extent that our revenue declines, it is
difficult to improve our gross margins as our fixed costs must be spread over a lower revenue base. Our future revenue may
be adversely affected by a number of factors including the competitive market environment in which we operate, which may
result in a decrease in the number of units sold, a decrease in the number of applications per system purchased by customers,
a decrease in the average selling prices achieved for our product sales, a shift in our product mix towards products with lower
average selling prices, or a shift in our product mix towards products with lower margins.
Our cost of revenue may also be adversely impacted by various factors such as obsolescence of our inventory, impairment of
our intangibles, increased expenses associated with the repair of defective products covered by our warranty program,
utilization of our relatively fixed manufacturing costs, and a shift in our product mix towards products that have a higher cost
of manufacturing.
We have also been investing significant resources in our research and development and sales and marketing activities. We
have expanded our global direct sales force, and while the increase in revenue exceeded the increase in sales and marketing
expenses in 2015, the productivity of our new sales professionals may not continue to improve and be accretive to our
operating income. We plan to continue making such investments in order to bring new products to market and to distribute
them effectively. If these investments do not yield increased revenue, our profitability may not improve in the future.
If our revenue does not improve, or if our cost of revenue increases by a greater percentage than our revenue, or if we are not
able to reduce expenses in the event of a decline in revenue, we may continue to generate losses from operations and use
cash, which could reduce our assets and have a material adverse effect on our operations and stock price.
In February 2016, a lawsuit was filed against us by Kendall Jenner and Kendall Jenner Inc. (“Plaintiffs”), alleging
trademark infringement, false endorsement and violation of Jenner’s right of publicity. There can be no assurance
regarding the potential outcome of this litigation, or its impact upon us, at this time. The expense of defending and
resolving this lawsuit may adversely impact our future earnings, cash flows and stock price.
On February 11, 2016, Kendall Jenner and Kendall Jenner Inc. (“Plaintiffs”), filed a lawsuit against the Company in the U.S.
District Court, Central District of California, alleging trademark infringement, false endorsement and violation of Jenner’s
right of publicity. The claims arise out of alleged advertising referring to news articles describing Jenner’s blog posting
regarding her use of our Laser Genesis treatment for her acne. In their complaint, the Plaintiffs state that they are seeking “at
least $10 million” in compensatory damages and reasonable costs and attorney’s fees. We are presently investigating the
matter and intend to defend the matter vigorously.
While we believe we have meritorious defenses to the claims made, there can be no assurance regarding the potential outcome
of this litigation, or its impact upon us, at this time. The expense of defending and resolving this lawsuit may adversely impact
our future earnings, cash flows and stock price.
The aesthetic equipment market is characterized by rapid innovation. To compete effectively, we must develop and/or
acquire new products, market them successfully, and identify new markets for our technology.
We have created products to apply our technology to body contouring, hair removal, treatment of veins, tattoo removal, and
skin rejuvenation, including the treatment of diffuse redness, skin laxity, fine lines, wrinkles, skin texture, pore size and
benign pigmented lesions, etc. In the fourth quarter of 2014, we launched enlighten, a dual wavelength, dual pulse duration
tattoo removal and benign pigmented lesions treatment system featuring picosecond technology. Additionally, in the second
quarter of 2014 we launched excel HR, a premium hair removal platform for all skin types. To grow in the future, we must
continue to develop and/or acquire new and innovative aesthetic products and applications, identify new markets, and
successfully launch the newly acquired or developed product offerings.
To successfully expand our product offerings, we must, among other things:
● Develop and acquire new products that either add to or significantly improve our current product offerings;
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● Convince our existing and prospective customers that our product offerings are an attractive revenue-generating
addition to their practice;
Identify new markets and alternative applications for our technology;
● Sell our product offerings to a broad customer base;
●
● Protect our existing and future products with defensible intellectual property; and
● Satisfy and maintain all regulatory requirements for commercialization.
Historically, product introductions have been a significant component of our financial performance. To be successful in the
aesthetics industry, we need to continue to innovate. Our business strategy has therefore been based, in part, on our
expectation that we will continue to increase our product offerings. We need to continue to devote substantial research and
development resources to make new product introductions, which can be costly and time consuming to our organization.
We also believe that, to increase revenue from sales of new products, we need to continue to develop our clinical support,
further expand and nurture relationships with industry thought leaders and increase market awareness of the benefits of our
new products. However, even with a significant investment in research and development, we may be unable to continue to
develop, acquire or effectively launch and market new products and technologies regularly, or at all. If we fail to successfully
commercialize new products, our business may be harmed.
While we attempt to protect our products through patents and other intellectual property, there are few barriers to entry that
would prevent new entrants or existing competitors from developing products that compete directly with ours. We expect
that any competitive advantage we may enjoy from current and future innovations may diminish over time as companies
successfully respond to our, or create their own, innovations. Consequently, we believe that we will have to continuously
innovate and improve our products and technology to compete successfully. If we are unable to innovate successfully, our
products could become obsolete and our revenue could decline as our customers and prospects purchase our competitors’
products.
Demand for our products in any of our markets could be weakened by several factors, including:
● Our ability to develop and market our products to the core market specialties of dermatologists and plastic surgeons;
● Poor financial performance of market segments that try introducing aesthetic procedures to their businesses;
● The inability to differentiate our products from those of our competitors;
● Reduced patient demand for elective aesthetic procedures;
● Failure to build and maintain relationships with opinion leaders within the various market segments;
● An increase in malpractice lawsuits that result in higher insurance costs; and
● The lack of credit financing for some of our potential customers.
If we do not achieve anticipated demand for our products, there could be a material adverse effect on our total revenue,
profitability, employee retention and stock price.
Macroeconomic political and market conditions, and catastrophic events may adversely affect our business, results of
operations, financial condition and stock price.
Our business is influenced by a range of factors that are beyond our control, including:
● General economic and business conditions;
● The overall demand for our products by the core market specialties of dermatologists and plastic surgeons;
● Governmental budgetary constraints or shifts in government spending priorities;
● General political developments;
● Natural disasters; and
● Currency exchange rate fluctuations.
Macroeconomic developments, like the global recession and the financial crisis in the U.S. and certain countries in the
European Union during 2007 to 2009, could negatively affect our business, operating results or financial condition which, in
turn, could adversely affect our stock price. A general weakening of, and related declining corporate confidence in, the global
economy or the curtailment in government or corporate spending could cause current or potential customers to reduce their
budgets or be unable to fund product or upgrade application purchases, which could cause customers to delay, decrease or
cancel purchases of our products and services or cause customers not to pay us or to delay paying us for previously purchased
products and services.
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In addition, political unrest in regions like the Middle East, terrorist attacks around the globe and the potential for other
hostilities in various parts of the world, potential public health crises and natural disasters continue to contribute to a climate
of economic and political uncertainty that could adversely affect our results of operations and financial condition, including
our revenue growth and profitability.
Macroeconomic declines, negative political developments, adverse market conditions and catastrophic events may cause a
decline in our revenue, negatively affect our operating results, adversely affect our cash flow and could result in a decline in
our stock price.
To successfully market and sell our products internationally, we must address many issues that are unique to our
international business.
While our international revenue in 2015 increased by 8%, compared to 2014, it was negatively impacted by the appreciation
of the U.S. Dollar versus the major currencies in which we transact. International revenue is a material component of our
business strategy, and represented 48% of our total revenue in 2015, compared to 55% in 2014. We depend on third-party
distributors and a direct sales force to sell our products internationally, and if they underperform, we may be unable to increase
or maintain our level of international revenue. For example, our direct business in Japan declined in 2015, negatively
impacting our revenue from international operations.
We have experienced significant turnover of our European sales team in the past. While we continue to have a direct sales
and service organization in France, Belgium, Spain, Switzerland and the United Kingdom, a significant portion of our
European revenue is generated through our network of distributors. Though we continue to evaluate and replace non-
performing distributors, and have recently brought greater focus on collaborating with our distributor partners, there can be
no assurance given that these initiatives will result in improved European-sourced revenue or profitability in the future.
To grow our business, we will need to improve productivity in current sales territories and expand into new territories.
However, direct sales productivity may not improve and distributors may not accept our business or commit the necessary
resources to market and sell our products to the level of our expectations. If we are not able to increase or maintain
international revenue growth, our total revenue, profitability and stock price may be adversely impacted.
We believe, as we continue to manage our international operations and develop opportunities in additional international
territories, our international revenue will be subject to a number of risks, including:
● Fluctuating foreign currency exchange rates;
● Difficulties in staffing and managing our foreign operations;
● Political and economic instability;
● Foreign certification and regulatory requirements;
● Lengthy payment cycles and difficulty in collecting accounts receivable;
● Export restrictions, trade regulations and foreign tax laws;
● Customs clearance and shipping delays;
● Lack of awareness of our brand in international markets;
● Preference for locally-produced products; and
● Reduced protection for intellectual property rights in some countries.
If one or more of these risks were realized, it could require us to dedicate significant resources to remedy the situation; and
if we were unsuccessful at finding a solution, we may not be able to sell our products in a particular market and, as a result,
our revenue may decline.
We are subject to fluctuations in the exchange rate of the U.S. Dollar and foreign currencies.
Foreign currency fluctuations could result in volatility of our revenue. We do not actively hedge our exposure to currency
rate fluctuations. While we transact business primarily in U.S. Dollars, and a significant proportion of our revenue is
denominated in U.S. Dollars, a portion of our costs and revenue is denominated in other currencies, such as the Euro, Japanese
Yen, Australian Dollar and Canadian Dollar. As a result, changes in the exchange rates of these currencies to the U.S. Dollar
will affect our results from operations. For example, as a result of the recent strengthening of the U.S. Dollar, relative to
many other major currencies, our products priced in U.S. Dollars have become more expensive relative to products of our
foreign competitors. In addition, our revenue earned in foreign currencies, such as our locally generated revenue in Japan,
has been negatively impacted upon translation into U.S. Dollars. Both these factors had a negative impact on our international
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revenue in 2015, compared to 2014. Future foreign currency fluctuations could adversely impact and increase the volatility
of our revenue, profitability and stock price.
Our ability to effectively compete and generate additional revenue from new and existing products depends upon our
ability to distinguish our company and our products from our competitors and their products, and to develop and
effectively market new and existing products. Our success is dependent on many factors, including the following:
Identification and development of clinical support for new indications of our existing products;
● Speed of new and innovative product development;
● Effective strategy and execution of new product launches;
●
● Product performance;
● Product pricing;
● Quality of customer support;
● Development of successful distribution channels, both domestically and internationally; and
●
Intellectual property protection.
To compete effectively, we have to demonstrate that our new and existing products are attractive alternatives to other devices
and treatments, by differentiating our products on the basis of such factors as innovation, performance, brand name, service,
and price. This is difficult to do, especially in a crowded aesthetic market. Some of our competitors have newer or different
products and more established customer relationships than we do, which could inhibit our market penetration efforts. For
example, we have encountered, and expect to continue to encounter, situations where, due to pre-existing relationships,
potential customers decided to purchase additional products from our competitors. Potential customers also may need to
recoup the cost of products that they have already purchased from our competitors and may decide not to purchase our
products, or to delay such purchases. If we are unable to increase our market penetration or compete effectively, our revenue
and profitability will be adversely impacted.
We compete against companies that offer alternative solutions to our products, or have greater resources, a larger installed
base of customers and broader product offerings than ours. If we are not able to effectively compete with these companies,
it may harm our business.
Our industry is subject to intense competition. Our products compete against similar products offered by public companies,
such as Cynosure, Elen (in Italy), Lumenis (acquired by XIO Group in September 2015), Solta (acquired by Valeant
Pharmaceuticals International, Inc. in January 2014), Syneron, as well as private companies such as Alma, Sciton and several
other companies. Recently, there has been consolidation in the aesthetic industry leading to companies combining their
resources. For example, XIO Group acquired Lumenis in September 2015, and Valeant acquired Solta in January 2014 and
Cynosure acquired Palomar in June 2013. We are likely to compete with new companies in the future. Competition with
these companies could result in reduced selling prices, reduced profit margins and loss of market share, any of which would
harm our business, financial condition and results of operations.
The energy-based aesthetic market faces competition from non-energy-based medical products, such as Botox, an injectable
compound used to reduce wrinkles, and collagen injections. Other alternatives to the use of our products include electrolysis,
a procedure involving the application of electric current to eliminate hair follicles, and chemical peels. We may also face
competition from manufacturers of pharmaceutical and other products that have not yet been developed.
If there is not sufficient consumer demand for the procedures performed with our products, practitioner demand for our
products could be inhibited, resulting in unfavorable operating results and reduced growth potential.
Continued expansion of the global market for laser and other-energy-based aesthetic procedures is a material assumption of
our business strategy. Most procedures performed using our products are elective procedures not reimbursable through
government or private health insurance, with the costs borne by the patient. The decision to utilize our products may therefore
be influenced by a number of factors, including:
● Consumer disposable income and access to consumer credit, which as a result of the unstable economy, may have
been significantly impacted;
● The cost of procedures performed using our products;
● The cost, safety and effectiveness of alternative treatments, including treatments which are not based upon laser or
other energy-based technologies and treatments which use pharmaceutical products;
● The success of our sales and marketing efforts; and
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● The education of our customers and patients on the benefits and uses of our products, compared to competitors’
products and technologies.
If, as a result of these factors, there is not sufficient demand for the procedures performed with our products, practitioner
demand for our products could be reduced, which could have a material adverse effect on our business, financial condition,
revenue and result of operations.
The U.S. Food and Drug Administration (the “FDA”), federal and state agencies and international regulatory bodies
have broad enforcement powers. If we fail to comply with applicable regulatory requirements, it could result in
enforcement action by the FDA, federal and state agencies or international regulatory bodies.
The FDA, state authorities and international regulatory bodies have broad enforcement powers. If we fail to comply with any
U.S. law or any of the applicable regulatory requirements of the FDA, or federal or state agencies, or one of the international
regulatory bodies, it could result in enforcement action by the agencies, which may include any of the following sanctions:
● Warning letters, fines, injunctions, consent decrees and civil penalties;
● Repair, replacement, refund, recall or seizure of our products;
● Operating restrictions or partial suspension or total shutdown of production;
● Refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses, or
modifications to existing products;
● Withdrawing 510(k) clearance or pre-market approvals that have already been granted; and
● Criminal prosecution.
If we fail to obtain or maintain necessary FDA clearances for our products and indications, if clearances for future
products and indications are delayed or not issued, if there are federal or state level regulatory changes or if we are found
to have violated applicable FDA marketing rules, our commercial operations would be harmed.
Our products are medical devices that are subject to extensive regulation in the U.S. by the FDA for manufacturing, labeling,
sale, promotion, distribution and shipping. Before a new medical device, or a new use of or labeling claim for an existing
product, can be marketed in the U.S., it must first receive either 510(k) clearance or pre-market approval from the FDA,
unless an exemption applies. Either process can be expensive and lengthy. In the event that we do not obtain FDA clearances
or approvals for our products, our ability to market and sell them in the U.S. and revenue derived from the U.S. market may
be adversely affected.
Medical devices may be marketed in the U.S. only for the indications for which they are approved or cleared by the FDA. If
we fail to comply with these regulations, it could result in enforcement action by the FDA which could lead to such
consequences as warning letters, adverse publicity, criminal enforcement action and/or third-party civil litigation, each of
which could adversely affect us.
We have obtained 510(k) clearance for the indications for which we market our products. However, our clearances can be
revoked if safety or effectiveness problems develop. We also are subject to Medical Device Reporting regulations, which
require us to report to the FDA if our products cause or contribute to a death or serious injury, or malfunction in a way that
would likely cause or contribute to a death or serious injury. Our products are also subject to state regulations, which are, in
many instances, frequently changing. Changes in state regulations may impede sales. For example, federal regulations allow
our products to be sold to, or on the order of, “licensed practitioners,” as determined on a state-by-state basis. As a result, in
some states, non-physicians may legally purchase our products. However, a state could change its regulations at any time,
thereby disallowing sales to particular types of end users. We cannot predict the impact or effect of future legislation or
regulations at the federal or state levels.
Federal regulatory reforms and changes occurring at the FDA could adversely affect our ability to sell our products
profitably and financial condition.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions
governing the clearance or approval, manufacture and marketing of a device. It is impossible to predict whether legislative
changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if
any, may be.
In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly
affect our business and our products. Changes in FDA regulations may lengthen the regulatory approval process for medical
24
devices and require additional clinical data to support regulatory clearance for the sale and marketing of our new products.
In addition, it may require additional safety monitoring, labeling changes, restrictions on product distribution or use, or other
measures after the introduction of our products to market. Either of these changes lengthen the duration to market, increase
our costs of doing business, adversely affect the future permitted uses of approved products, or otherwise adversely affect
the market for our products.
If we fail to comply with the FDA’s Quality System Regulation and laser performance standards, our manufacturing
operations could be halted, and our business would suffer.
We are currently required to demonstrate and maintain compliance with the FDA’s Quality System Regulation (the “QSR”).
The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, control,
manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. Because our products involve
the use of lasers, our products also are covered by a performance standard for lasers set forth in FDA regulations. The laser
performance standard imposes specific record-keeping, reporting, product testing and product labeling requirements. These
requirements include affixing warning labels to laser products, as well as incorporating certain safety features in the design
of laser products.
The FDA enforces the QSR and laser performance standards through periodic unannounced inspections. We have had
multiple quality system audits by the FDA, our Notified Body, and other foreign regulatory agencies, with the most recent
inspection by the FDA occurring over three weeks in March 2014. There were no significant findings and only one
observation as a result of this audit. Our response to this observation was accepted by the FDA. Failure to take satisfactory
corrective action in response to an adverse QSR inspection or our failure to comply with applicable laser performance
standards could result in enforcement actions, including a public warning letter, a shutdown of our manufacturing operations,
a recall of our products, civil or criminal penalties, or other sanctions, such as those described in the preceding paragraph,
which would cause our sales and business to suffer.
If we modify one of our FDA-approved devices, we may need to seek re-approval, which, if not granted, would prevent us
from selling our modified products or cause us to redesign our products.
Any modifications to an FDA-cleared device that would significantly affect its safety or effectiveness or that would constitute
a major change in its intended use would require a new 510(k) clearance or possibly a pre-market approval. We may not be
able to obtain additional 510(k) clearance or pre-market approvals for new products or for modifications to, or additional
indications for, our existing products in a timely fashion, or at all. Delays in obtaining future clearance would adversely affect
our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenue and future
profitability.
We have made modifications to our devices in the past and may make additional modifications in the future that we believe
do not or will not require additional clearance or approvals. If the FDA disagrees, and requires new clearances or approvals
for the modifications, we may be required to recall and to stop marketing the modified devices, which could harm our
operating results and require us to redesign our products.
We may be unable to obtain or maintain international regulatory qualifications or approvals for our current or future
products and indications, which could harm our business.
Sales of our products outside the U.S. are subject to foreign regulatory requirements that vary widely from country to country.
In addition, exports of medical devices from the U.S. are regulated by the FDA. Complying with international regulatory
requirements can be an expensive and time-consuming process and approval is not certain. The time required for obtaining
clearance or approvals, if required by other countries, may be longer than that required for FDA clearance or approvals, and
requirements for such clearances or approvals may significantly differ from FDA requirements. We may be unable to obtain
or maintain regulatory qualifications, clearances or approvals in other countries. We may also incur significant costs in
attempting to obtain and in maintaining foreign regulatory approvals or qualifications. If we experience delays in receiving
necessary qualifications, clearances or approvals to market our products outside the U.S., or if we fail to receive those
qualifications, clearances or approvals, we may be unable to market our products or enhancements in international markets
effectively, or at all, which could have a material adverse effect on our business and growth strategy.
25
Any defects in the design, material or workmanship of our products may not be discovered prior to shipment to customers,
which could materially increase our expenses, adversely impact profitability and harm our business.
The design of our products is complex. To manufacture them successfully, we must procure quality components and employ
individuals with a significant degree of technical expertise. If our designs are defective, or the material components used in
our products are subject to wearing out, or if suppliers fail to deliver components to specification, or if our employees fail to
properly assemble, test and package our products, the reliability and performance of our products will be adversely impacted.
If our products contain defects that cannot be repaired easily, inexpensively, or on a timely basis, we may experience:
● Damage to our brand reputation;
● Loss of customer orders and delay in order fulfillment;
Increased costs due to product repair or replacement;
●
●
Inability to attract new customers;
● Diversion of resources from our manufacturing and research and development departments into our service
department; and
● Legal action.
The occurrence of any one or more of the foregoing could materially increase expenses, adversely impact profitability and
harm our business.
We depend on skilled and experienced personnel to operate our business effectively. If we are unable to recruit, hire, train
and retain these employees, our ability to manage and expand our business will be harmed, which would impair our future
revenue and profitability.
Our success largely depends on the skills, experience and efforts of our officers and other key employees. Except for Change
of Control and Severance Agreements for our executive officers and a few key employees, we do not have employment
contracts with any of our officers or other key employees. Any of our officers and other key employees may terminate their
employment at any time. We do not have a succession plan in place for each of our officers and key employees. In addition,
we do not maintain “key person” life insurance policies covering any of our employees. The loss of any of our senior
management team members could weaken our management expertise and harm our business.
Our ability to retain our skilled labor force and our success in attracting and hiring new skilled employees are critical factors
in determining whether we will be successful in the future. We may not be able to meet our future hiring needs or retain
existing personnel. The staff we hire to perform administrative functions may become stretched due to our increased growth
and they may not be able to perform their jobs effectively or efficiently as a result.
We may face particularly significant challenges and risks in hiring, training, managing and retaining engineering and sales
and marketing employees. Failure to attract, train and retain personnel, particularly technical and sales and marketing
personnel, would materially harm our ability to compete effectively and grow our business.
Product liability suits could be brought against us due to a defective design, material or workmanship or misuse of our
products and could result in expensive and time-consuming litigation, payment of substantial damages and an increase
in our insurance rates.
If our products are defectively designed, manufactured or labeled, contain defective components or are misused, we may
become subject to substantial and costly litigation by our customers or their patients. Misusing our products or failing to
adhere to operating guidelines could cause significant eye and skin damage, and underlying tissue damage. In addition, if our
operating guidelines are found to be inadequate, we may be subject to liability. We have been involved, and may in the future
be involved, in litigation related to the use of our products. Product liability claims could divert management’s attention from
our core business, be expensive to defend and result in sizable damage awards against us. We may not have sufficient
insurance coverage for all future claims. We may not be able to obtain insurance in amounts or scope sufficient to provide us
with adequate coverage against all potential liabilities. Any product liability claims brought against us, with or without merit,
could increase our product liability insurance rates or prevent us from securing continuing coverage, could harm our
reputation in the industry and could reduce product sales. In addition, we historically experienced steep increases in our
product liability insurance premiums as a percentage of revenue. If our premiums continue to rise, we may no longer be able
to afford adequate insurance coverage.
26
If customers are not trained and/or our products are used by non-physicians, it could result in product misuse and adverse
treatment outcomes, which could harm our reputation, result in product liability litigation, distract management, result
in additional costs, all of which could harm our business.
Because we do not require training for users of our products, and sell our products at times to non-physicians, there exists an
increased potential for misuse of our products, which could harm our reputation and our business. U.S. federal regulations
allow us to sell our products to or on the order of “licensed practitioners.” The definition of “licensed practitioners” varies
from state to state. As a result, our products may be purchased or operated by physicians with varying levels of training, and
in many states, by non-physicians, including nurse practitioners, chiropractors and technicians. Outside the U.S., many
jurisdictions do not require specific qualifications or training for purchasers or operators of our products. We do not supervise
the procedures performed with our products, nor do we require that direct medical supervision occur. We and our distributors
generally offer but do not require product training to the purchasers or operators of our products. In addition, we sometimes
sell our systems to companies that rent our systems to third parties and that provide a technician to perform the procedures.
The lack of training and the purchase and use of our products by non-physicians may result in product misuse and adverse
treatment outcomes, which could harm our reputation and our business, and, in the event these result in product liability
litigation, distract management and subject us to liability, including legal expenses.
In the past we entered into strategic alliances to distribute third party products internationally. To successfully market
and sell these products, we must address many issues that are unique to these businesses and could reduce our available
cash reserves and negatively impact our profitability.
In the past we entered into distribution arrangements pursuant to which we utilize our sales force and distributors to sell
products manufactured by other companies. In Japan, we have a non-exclusive right to distribute a Q-switched laser product
manufactured by a third party OEM. We also have an exclusive agreement with ZO to distribute certain of their proprietary
skincare products, in Japan. Each of these agreements requires us to purchase annual minimum dollar amounts of their
product. If we do not make these minimum purchases, we could lose distribution rights of these products to physicians in
Japan. Finally, we had an agreement with Merz Aesthetics to distribute its Radiesse dermal filler product in Japan, but
terminated this agreement in the second quarter of 2014.
Each of these distribution agreements presents its own unique risks and challenges. For example, to sell skincare products
we need to invest in creating a sales structure that is experienced in the sale of these products and not in capital equipment.
We need to commit resources to training this sales force, obtaining regulatory licenses in Japan and developing new marketing
materials to promote the sale of skincare products. In addition, the minimum commitments and other costs of distributing
products manufactured by these companies may exceed the incremental revenue that we derive from the sale of their products
thereby negatively impacting our profitability and reducing our available cash reserves.
Adverse conditions in the global banking industry and credit markets may adversely impact the value of our marketable
investments or impair our liquidity.
We invest our excess cash primarily in money market funds and in highly liquid debt instruments of the U.S. government
and its agencies and U.S. municipalities, in commercial paper and high grade corporate debt. As of December 31, 2015, our
balance in marketable investments was $38 million. The longer the duration of a security, the more susceptible it is to changes
in market interest rates and bond yields. As yields increase, those securities with a lower yield-at-cost show a mark-to-market
unrealized loss. For example, assuming a hypothetical increase in interest rates of one percentage point, the fair value of our
total investment portfolio as of December 31, 2015 would have potentially decreased by approximately $242,000, resulting
in an unrealized loss that would subsequently adversely impact our earnings. As a result, changes in the market interest rates
will affect our future net income (loss).
27
The price of our common stock may fluctuate substantially due to several factors, some of which are discussed below.
Further, we have a limited number of shares of common stock outstanding, a large portion of which is held by a small
number of investors, which could result in the increase in volatility of our stock price.
As of December 31, 2015, approximately 52% of our outstanding shares of common stock were held by 10 institutional
investors. As a result of our relatively small public float, our common stock may be less liquid than the stock of companies
with broader public ownership. Among other things, trading of a relatively small volume of our common stock may have a
greater impact on the trading price for our shares than would be the case if our public float were larger. The public market
price of our common stock has in the past fluctuated substantially and, due to the current concentration of stockholders, may
continue to do so in the future. The market price for our common stock could also be affected by a number of other factors,
including:
● Litigation surrounding executive compensation has increased. If we are involved in a lawsuit related to compensation
matters or any other matters not covered by our D&O insurance, there could be material expenses involved, fines,
or remedial actions which could negatively affect our stock price;
● The general market conditions unrelated to our operating performance;
● Sales of large blocks of our common stock, including sales by our executive officers, directors and our large
institutional investors;
● Quarterly variations in our, or our competitors’, results of operations;
● Changes in analysts’ estimates, investors’ perceptions, recommendations by securities analysts or our failure to
achieve analysts’ estimates;
● The announcement of new products or service enhancements by us or our competitors;
● The announcement of the departure of a key employee or executive officer by us or our competitors;
● Regulatory developments or delays concerning our, or our competitors’ products; and
● The initiation of any other litigation by us or against us.
Actual or perceived instability and/or volatility in our stock price could reduce demand from potential buyers of our stock,
thereby causing our stock price to either remain depressed or to decline further.
Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply shortages and
price fluctuations, which could harm our business.
Many of the components and materials that comprise our products are currently manufactured by a limited number of
suppliers. A supply interruption or an increase in demand beyond our current suppliers’ capabilities could harm our ability
to manufacture our products until a new source of supply is identified and qualified. Our reliance on these suppliers subjects
us to a number of risks that could harm our business, including:
Interruption of supply resulting from modifications to or discontinuation of a supplier’s operations;
●
● Delays in product shipments resulting from uncorrected defects, reliability issues or a supplier’s variation in a
component;
● A lack of long-term supply arrangements for key components with our suppliers;
Inability to obtain adequate supply in a timely manner, or on reasonable terms;
●
Inability to redesign one or more components in our systems in the event that a supplier discontinues manufacturing
●
such components and we are unable to source it from other suppliers on reasonable terms;
● Difficulty locating and qualifying alternative suppliers for our components in a timely manner;
● Production delays related to the evaluation and testing of products from alternative suppliers and corresponding
regulatory qualifications; and
● Delay in supplier deliveries.
Any interruption in the supply of components or materials, or our inability to obtain substitute components or materials from
alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers, which
would have an adverse effect on our business.
28
Intellectual property rights may not provide adequate protection for some or all of our products, which may permit third
parties to compete against us more effectively.
We rely on patent, copyright, trade secret and trademark laws and confidentiality agreements to protect our technology and
products. At December 31, 2015, we had 34 issued U.S. patents. Some of our components, such as our laser module,
electronic control system and high-voltage electronics, are not, and in the future may not be, protected by patents.
Additionally, our patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous
to us. Any patents we obtain may be challenged, invalidated or legally circumvented by third parties. Consequently,
competitors could market products and use manufacturing processes that are substantially similar to, or superior to, ours. We
may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants,
vendors, former employees or current employees, despite the existence generally of confidentiality agreements and other
contractual restrictions. Monitoring unauthorized uses and disclosures of our intellectual property is difficult, and we do not
know whether the steps we have taken to protect our intellectual property will be effective. Moreover, the laws of many
foreign countries will not protect our intellectual property rights to the same extent as the laws of the U.S.
The absence of complete intellectual property protection exposes us to a greater risk of direct competition. Competitors could
purchase one of our products and attempt to replicate some or all of the competitive advantages we derive from our
development efforts, design around our protected technology, or develop their own competitive technologies that fall outside
of our intellectual property rights. If our intellectual property is not adequately protected against competitors’ products and
methods, our competitive position and our business could be adversely affected.
We may be involved in future costly intellectual property litigation, which could impact our future business and financial
performance.
Our competitors or other patent holders may assert that our present or future products and the methods we employ are covered
by their patents. In addition, we do not know whether our competitors own or will obtain patents that they may claim prevent,
limit or interfere with our ability to make, use, sell or import our products. Although we may seek to resolve any potential
future claims or actions, we may not be able to do so on reasonable terms, or at all. If, following a successful third-party
action for infringement, we cannot obtain a license or redesign our products, we may have to stop manufacturing and selling
the applicable products and our business would suffer as a result. In addition, a court could require us to pay substantial
damages, and prohibit us from using technologies essential to our products, any of which would have a material adverse
effect on our business, results of operations and financial condition.
We may become involved in litigation not only as a result of alleged infringement of a third party’s intellectual property
rights but also to protect our own intellectual property. For example, we have been, and may hereafter become, involved in
litigation to protect the trademark rights associated with our company name or the names of our products. Infringement and
other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate, and could divert
management’s attention from our core business.
We offer credit terms to some qualified customers and also to leasing companies to finance the purchase of our products.
In the event that any of these customers default on the amounts payable to us, our earnings may be adversely affected.
While we qualify customers to whom we offer credit terms (generally net 30 to 90 days), we cannot provide any assurance
that the financial position of these customers will not change adversely before we receive payment. For example, as of
December 31, 2015, one distributor partner accounted for 10% of our outstanding accounts receivable balance. Our general
and administrative expenses and earnings are negatively impacted by customer defaults and cause an increase in the allowance
for doubtful accounts. In the event that there is a default by any customers to whom we have provided credit terms in the
future, we may recognize a bad debt charge in our general and administrative expenses and this could negatively affect our
earnings and results of operations.
The expense and potential unavailability of insurance coverage for our customers could adversely affect our ability to sell
our products, and therefore adversely affect our financial condition.
Some of our customers and prospective customers have had difficulty procuring or maintaining liability insurance to cover
their operation and use of our products. Medical malpractice carriers are withdrawing coverage in certain states or
substantially increasing premiums. If this trend continues or worsens, our customers may discontinue using our products and
potential customers may opt against purchasing laser based products due to the cost or inability to procure insurance coverage.
The unavailability of insurance coverage for our customers and prospects could adversely affect our ability to sell our
products, and that could harm our financial condition.
29
Healthcare reform legislation may have an adverse effect on our profitability and financial condition.
In December 2009, the President and members of Congress passed legislation relating to healthcare reform. Procedures
performed by our products are not reimbursed by insurance companies or federal or state governments and as a result this
legislation had a limited impact on our business. Medical device manufacturers were required to pay an excise tax of 2.3%
on certain U.S. medical device revenues on sales after January 1, 2013. Though there were some exceptions to the excise tax,
this excise tax did apply to all or most of our products sold within the U.S. In December 2015, President Obama signed into
law the Consolidated Appropriations Act (“Appropriations Act”). The Appropriations Act includes a two-year moratorium
on the medical device excise tax such that medical device revenues in 2016 and 2017 will be exempt from the excise
tax. Unless there is further legislative action during that two-year period, the tax will be automatically reinstated for sales of
medical devices on or after January 1, 2018 and will have an adverse effect on our operating profitability and financial
conditions in 2018 and beyond.
Our ability to use net operating losses and tax credit carryforwards to offset future tax liabilities may be limited.
As of December 31, 2015, we had cumulative net operating loss carry-forwards (“NOLs”) for federal and state income tax
reporting purposes of approximately $41.8 million and $11.2 million, respectively, and research and development tax credits
(“R&D tax credits”) for federal and state income tax purposes of approximately $4.7 million and $5.7 million, respectively.
A lack of future taxable income would adversely affect our ability to utilize these NOLs and R&D tax credit carryforwards.
In addition, under Section 382 of the U.S. Internal Revenue Code, or the Code, a corporation that experiences a more-than
50% ownership change over a three-year testing period is subject to limitations on its ability to utilize its pre-change NOLs
and R&D tax credit carryforwards to offset future taxable income. We have not conducted a study to-date to assess whether
a limitation would apply under Section 382 of the Code. In the event it is determined that we previously experienced an
ownership change, or should we experience an ownership change in the future, the amount of NOLs and R&D tax credit
carryovers available in any taxable year, could be limited and may expire unutilized, and any such adjustment is not reflected
in the NOL and R&D tax credits balances reported.
From time to time we may become subject to income tax audits or similar proceedings, and as a result we may incur
additional costs and expenses or owe additional taxes, interest and penalties that may negatively impact our operating
results.
We are subject to income taxes in the United States and certain foreign jurisdictions where we operate through a subsidiary
including Australia, Belgium, Canada, France, Hong Kong, Japan, Spain, Switzerland and the United Kingdom. Our
determination of our tax liability is subject to review by applicable domestic and foreign tax authorities.
In July 2015, our Japan subsidiary underwent an income tax audit for the years 2012 to 2014. Although this audit resulted in
a minimal adjustment, the final timing and resolution of any tax examinations are subject to significant uncertainty and could
result in our having to pay amounts to the applicable tax authority in order to resolve examination of our tax positions, which
could result in an increase or decrease of our current estimate of unrecognized tax benefits and may negatively impact our
financial position, results of operations or cash flows.
Any acquisitions that we make could result in operating difficulties, dilution, and other consequences that may adversely
impact our business and results of operations.
While we from time to time evaluate potential acquisitions of businesses, products and technologies, and anticipate continuing
to make these evaluations, we have no present understandings, commitments or agreements with respect to any material
acquisitions or collaborative projects We may not be able to identify appropriate acquisition candidates or strategic partners,
or successfully negotiate, finance or integrate any businesses, products or technologies that we acquire.
We have limited experience as a team with acquiring companies and products. Furthermore, the integration of any acquisition
and management of any collaborative project may divert management’s time and resources from our core business and disrupt
our operations and we may incur significant legal, accounting and banking fees in connection with such a transaction.
Acquisitions could diminish our available cash balances for other uses, result in the incurrence of debt, contingent liabilities,
or amortization expenses, and restructuring charges. Also, the anticipated benefits or value of our acquisitions or investments
may not materialize and could result in an impairment of goodwill and/or purchased long-lived assets, similar to the $650,000
charge we recorded in the fourth quarter of 2014 related to an acquisition completed in 2012.
30
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and
investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated
liabilities, and harm our business and our financial condition or results.
Anti-takeover provisions in our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware law,
contain provisions that could discourage a takeover.
Our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware law, contain provisions that might enable
our management to resist a takeover, and might make it more difficult for an investor to acquire a substantial block of our
common stock. These provisions include:
● A classified board of directors;
● Advance notice requirements to stockholders for matters to be brought at stockholder meetings;
● Limitations on stockholder actions by written consent; and
● The right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership
of a potential hostile acquirer.
These provisions, as well as Change of Control and Severance Agreements entered into with each of our executive officers
and certain key employees, might discourage, delay or prevent a change in control of our company or a change in our
management. The existence of these provisions could adversely affect the voting power of holders of common stock and limit
the price that investors might be willing to pay in the future for shares of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our corporate headquarters and U.S. operations are located in an approximately 66,000 square foot facility in Brisbane,
California. We lease these premises under a non-cancelable operating lease which expires on December 31, 2017. In addition,
we have leased office facilities in certain countries as follows:
Country
Japan ..............
Approximately 5,896
Square Footage
Lease termination or Expiration
France ............
Approximately 2,239
Two leases, one of which expires in March 2018 and one which expires in
December 2017.
One lease which expires in October 2021 but can be terminated with six
months’ notice prior to October 2018.
We believe that these facilities are suitable and adequate for our current and future needs for at least the next twelve months.
ITEM 3. LEGAL PROCEEDINGS
We were not a party to any pending litigation that we believe will have a material impact to our results of operations as of
December 31, 2015.
On February 11, 2016, Kendall Jenner and Kendall Jenner Inc. (“Plaintiffs”), filed a lawsuit against the Company in the U.S.
District Court, Central District of California, alleging trademark infringement, false endorsement and violation of Jenner’s
right of publicity. The claims arise out of alleged advertising referring to news articles describing Jenner’s blog posting
regarding her use of our Laser Genesis treatment for her acne. In their complaint, the Plaintiffs state that they are seeking “at
least $10 million” in compensatory damages and reasonable costs and attorney’s fees. We are presently investigating the
matter and intend to defend the matter vigorously. While we believe we have meritorious defenses to the matter, the potential
outcome of this litigation, or its impact on us, cannot be predicted at this time.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
31
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Exchange Listing
Our common stock trades on The NASDAQ Global Select Market under the symbol “CUTR.” As of February 29, 2016, the
closing sale price of our common stock was $11.83 per share.
Common Stockholders
We had 9 stockholders of record as of February 29, 2016. Since many stockholders choose to hold their shares under the
name of their brokerage firm, we estimate that the actual number of stockholders was over 2,000 shareholders.
Stock Prices
The following table sets forth quarterly high and low closing sales prices of our common stock for the indicated fiscal periods:
Common Stock
2015
2014
High
Low
High
Low
4th Quarter ................................................................................... $
3rd Quarter ...................................................................................
2nd Quarter ..................................................................................
1st Quarter ....................................................................................
14.52 $
15.60
15.98
14.26
11.99 $
13.07
12.87
10.86
11.04 $
10.75
11.73
11.24
9.66
9.27
9.25
9.00
Issuer Purchases of Equity Securities
The following table summarizes the activity related to stock repurchases for the years ended December 31, 2015 and 2014
(in thousands except per share data):
Total
Number
of Shares
Purchased
Average
Price
Paid
Period
January 1-December 31, 2014 ......................................................
As of December 31, 2014 ..................................................
Additional amount approved February 18, 1015 ..........................
February18-28, 2015 ....................................................................
March 1-31, 2015 .........................................................................
April 1-30, 2015 ...........................................................................
May 1-31, 2015 ............................................................................
June 1-30, 2015 ............................................................................
July 1-31, 2015 .............................................................................
August 1-31, 2015 ........................................................................
September 1-30, 2015 ..................................................................
October 1-31, 2015 .......................................................................
As of December 31, 2015 ..................................................
per Share
—
—
—
12.85
13.55
13.57
14.38
14.75
14.94
14.41
14.44
13.70
14.19
— $
— $
— $
56 $
330 $
284 $
296 $
298 $
95 $
1,040 $
210 $
209 $
2,818 $
Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
Approximate
Dollar Value
of Shares
That May
Yet Be
Purchased
Under the
Plans
or Programs
10,000
10,000
40,000
39,276
34,806
30,946
26,693
22,294
20,878
5,898
2,860
—
—
— $
— $
— $
56 $
330 $
284 $
296 $
298 $
95 $
1,040 $
210 $
209 $
2,818 $
As of January 1, 2014, there was $10.0 million authorized for the repurchase of our common stock under the Company’s
Stock Repurchase Program. There were no repurchases of common stock in 2014. On February 18, 2015, our Board of
Directors approved the expansion of our Stock Repurchase Program from $10 million to $40 million, under which we were
32
authorized to repurchase shares of our common stock. In the year ended December 31, 2015, we repurchased 2,818,038
shares of our common stock for approximately $40.0 million.
On February 8, 2016, our Board of Directors approved the expansion of our Stock Repurchase Program by an additional $10
million. We plan to make the repurchases from time to time through open market transactions at prevailing prices and/or
through privately-negotiated transactions, and/or through a pre-arranged Rule 10b5-1 trading plan.
Sales of Unregistered Securities
We did not sell any unregistered securities during the period covered by this Annual Report on Form 10-K.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this Item regarding equity compensation plans is incorporated by reference to the information
set forth in Part III Item 12 of this Annual Report on Form 10-K.
Performance Graph
Below is a graph showing the cumulative total return to our stockholders during the period from December 31, 2010 through
December 31, 2015 in comparison to the cumulative return on the NASDAQ Composite Index (U.S.) and the NASDAQ
Medical Equipment Index during that same period.
33
The information under “Performance Graph” is not deemed filed with the Securities and Exchange Commission and is not
to be incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, whether made before or after the date of this 10-K and irrespective of any general incorporation
language in those filings.
Dividend Policy
We have never paid a cash dividend and have no present intention to pay cash dividends in the foreseeable future. We intend
to retain any future earnings for use in our business.
ITEM 6. SELECTED FINANCIAL DATA
The table set forth below contains certain consolidated financial data for each of our last five fiscal years. The following
selected consolidated financial data should be read in conjunction with Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing in
Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Year Ended December 31,
Consolidated Statements of Operations Data
(in thousands, except per share data):
Net revenue ................................................................................ $ 94,761 $ 78,138 $ 74,594 $ 77,277 $ 60,290
25,978
Cost of revenue .......................................................................... 40,478
34,312
Gross profit ...................................................................... 54,283
34,765 32,712 35,737
43,373 41,882 41,540
2012
2013
2011
2015
2014
Operating expenses:
Sales and marketing ......................................................... 35,942
Research and development .............................................. 10,733
General and administrative .............................................. 12,129
Total operating expenses .......................................... 58,804
(4,521)
293
(4,228)
212
25,499
9,141
10,104
44,744
(10,432)
Loss from operations ..................................................................
614
Interest and other income, net ....................................................
(9,818)
Loss before income taxes ...........................................................
Income tax (benefit) provision ...................................................
243
Net loss ....................................................................................... $ (4,440) $ (10,612) $ (4,747) $ (6,548) $ (10,061)
Net loss per share:
32,246 27,984 28,664
9,216
10,543
8,427
11,203
9,938 11,276
53,992 47,138 48,367
(6,827)
(5,256)
(10,619)
497
455
226
(6,330)
(4,801)
(10,393)
218
(54)
219
Basic and diluted ............................................................. $
(0.32) $
(0.74) $
(0.33) $
(0.46) $
(0.73)
Weighted-average number of shares used in per share
calculations:
Basic and diluted ............................................................. 13,960
14,254 14,421 14,089
13,807
As of December 31,
Consolidated Balance Sheet Data (in thousands):
Cash, cash equivalents and marketable investments .................. $ 48,407 $ 81,146 $ 83,073 $ 85,572 $ 88,686
Long-term investments ...............................................................
3,027
Working capital (current assets less current liabilities) .............. 49,398 81,900 84,654 88,788 89,075
Total assets ................................................................................. 77,518 108,913 108,669 112,794 111,353
Retained earnings (accumulated deficit) .................................... (29,672) (25,232) (14,620)
(3,325)
Total stockholders’ equity .......................................................... 50,034 80,508 84,265 90,774 91,567
2011
2013
2012
2014
(9,873)
2015
—
—
—
—
34
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with our audited financial statements and notes thereto for the fiscal
year ended December 31, 2015. This Annual Report on Form 10-K, 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 7, the forward-looking statements are based upon our current expectations, estimates and projections
and that 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. The 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, improve the performance
of our worldwide sales and distribution network, and to the outlook regarding long term prospects. We caution you not to
place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this
Annual Report on Form 10-K. We undertake no obligation to update forward-looking statements to reflect events or
circumstances occurring after the date of this Form 10-K.
Some of the important factors that could cause our results to differ materially from those in our forward-looking statements,
and a discussion of other risks and uncertainties, are discussed in Item 1A—Risk Factors commencing on page 18. We
encourage you to read that section carefully as well as other risks detailed from time to time in our filings with the SEC.
Introduction
The Management’s Discussion and Analysis, or MD&A, is organized as follows:
● Executive Summary. This section provides a general description and history of our business, a brief discussion of
our product lines and the opportunities, trends, challenges and risks we focus on in the operation of our business.
● Critical Accounting Policies and Estimates. This section describes the key accounting policies that are affected by
critical accounting estimates.
● Recent Accounting Guidance. This section describes the issuance and effect of new accounting pronouncements that
are or may be applicable to us.
● Results of Operations. This section provides our analysis and outlook for the significant line items on our
Consolidated Statements of Operations.
● Liquidity and Capital Resources. This section provides an analysis of our liquidity and cash flows, as well as a
discussion of our commitments that existed as of December 31, 2015.
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 skincare products. 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, 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, Hong Kong, Japan, Spain and Switzerland. Sales and Service outside of these direct markets are made
through a worldwide distributor network in over 40 countries. As of December 31, 2015, we had a U.S. direct sales force of
34 employees and a direct international sales force of 32 employees.
35
Products Revenue.
Our Products revenue is derived from the sale of Products, Hand piece refills, and Skincare 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 other energy based module, control system software and high voltage electronics; as well as one or more hand pieces.
However, depending on the application, the laser or other energy based module is sometimes contained in the hand piece
such as with 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 additional revenue, which we treat as Product revenue.
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 and is classified as Hand piece
revenue.
Skincare revenue relates to the distribution of ZO’s skincare products in Japan, and through the second quarter of 2014, also
included Merz Pharma GmbH’s (“Merz”) Radiesse dermal filler product.
Service 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.
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.
● 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).
● Customer demand for our products.
● Strengthening against the U.S, dollar of key international currencies in which we transact (Australian Dollar,
Japanese Yen, Euro, and British Pound).
● Consumer demand for the application of our products.
● Marketing to physicians in the core dermatology and plastic surgeon specialties, as well as outside those specialties.
● Generating ongoing revenue from our growing installed base of customers through the sale of Service, system
upgrades, Hand piece refills, and Skincare products.
For a detailed discussion of the significant business trends impacting our business, please see “Results of Operations” below.
Factors that May Impact Future Performance
Our industry is impacted by numerous competitive, regulatory and other significant factors. Our industry is highly
competitive and our future performance depends on our ability to compete successfully. Additionally, our future performance
is dependent upon our ability to continue to expand our product offerings with 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 I, Item 1A “Risk Factors.”
Critical Accounting Policies and Estimates
The preparation of our Consolidated Financial Statements and related disclosures in conformity with generally accepted
accounting principles in the U.S. (“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.
36
Critical accounting estimates, as defined by the Securities and Exchange Commission (“SEC”), are those that are most
important to the portrayal of our financial condition and results of operations and require our management’s most difficult
and subjective judgments and estimates of matters that are inherently uncertain. Our critical accounting estimates are as
follows:
Revenue Recognition
We earn revenue from the sale of Products, Hand piece refills, Skincare products and Service. We recognize revenue when
persuasive evidence of an arrangement exists, transfer of title to the customer has occurred, the sales price is fixed or
determinable, and collectability is reasonably assured. We defer revenue in the event that any of these revenue recognition
criteria is not met.
● Persuasive evidence of an arrangement exists: We use customer purchase agreements or contracts, or customer
purchase orders to determine the existence of an arrangement;
● Transfer of title: Our standard terms generally specify that title transfers upon shipment to the customer. We
generally use third party shipping documents and/or signed customer acknowledgements to verify that title has
transferred. For service revenue, we use the date that services have been rendered;
● Sales price is fixed or determinable: We assess whether the sales price is fixed or determinable at the time of the
transaction. Sales prices are documented in the customer purchase agreement or purchase order received prior to
shipment. Our standard terms do not allow for trial or evaluation periods, rights of return or refund, payments
contingent upon the customer obtaining financing or other terms that could impact the customer's obligation; and
● Collectability is reasonably assured: We assess whether collection is reasonably assured based on a number of
factors, including receipt of cash or credit card payment, customer's past transaction history, credit worthiness, or
the receipt of an irrevocable letter of credit.
Multiple-Element Arrangements
For Product revenue, all of the tangible products, including the embedded software, are delivered to the customer at the time
of sale. In some circumstances, in conjunction with the purchase of a system or upgrade, customers purchase service contracts
for one or more years to cover their products. For these transactions, the following multiple-element arrangement exists: a
tangible product delivered to the customer at the inception of the revenue arrangement; and a service contract for delivery of
services to the customer over a contractually stated period of time defined in the service contract.
For multiple-element arrangements, judgments are required as to the allocation of the proceeds received from an arrangement
to the multiple elements of the arrangement. For multiple element arrangements entered into on or after January 1, 2010, we
allocate revenue to all deliverables based on their relative selling prices. Because we have neither vendor-specific objective
evidence (“VSOE”) nor third-party evidence of selling price (“TPE”) for our systems, the allocation of revenue has been
based on our best estimate of selling prices (“BESP”). The objective of BESP is to determine the price at which we would
transact a sale if the product or service was sold on a stand-alone basis. We determine BESP for our deliverables by
considering multiple factors including, but not limited to, features and functionality of the system, geographies, type of
customer and market conditions.
Revenue under service contracts is recognized on a straight-line basis over the period of the applicable service contract.
Service revenue, not under a service contract, is recognized as the services are provided.
Hand Piece Refills
When customers purchase a hand piece refill, we ship a previously refurbished unit and recognize revenue upon shipment.
With respect to our truSculpt product, prior to the third quarter of 2013, we sold the system and hand piece and then charged
the customer an incremental fee for any future refills and we treated the refills as a separate deliverable under FASB ASC
605-25. In addition, we also provided promotions that included an unlimited number of “free” hand piece replacements during
a stated trial period of 3 months or 12 months. We determined that these free refills were an undelivered element under FASB
ASC 605-25 in the original revenue transaction. As such, we deferred the relative fair value related to the estimated number
of hand piece replacements to be delivered during the promotional period and recognized that deferred revenue over the free
refills promotion period. Commencing with the third quarter of 2013, we included unlimited hand piece replacements in the
truSculpt standard warranty contract and concluded that this no longer was a separate deliverable under the multiple-element
arrangement revenue guidance. Following this change, we recognized the revenue under the warranty model, in which the
revenue for the system sale was recognized up-front along with an estimate of the costs which will be incurred under the
warranty obligation recorded in cost of revenue.
37
Shipping and Handling Costs
We expense shipping and handling costs as incurred and include them in cost of revenue. In those cases where we bill shipping
and handling costs to customers, we classify the amounts billed as revenue.
Stock-based Compensation Expense
Stock Options
We account for stock-based compensation in accordance with the fair value recognition provisions of U.S. GAAP. To value
options, we use the Black-Scholes option-pricing model, which requires the input of highly subjective assumptions. These
assumptions include:
● Estimating the length of time employees will retain their vested stock options before exercising them (“expected
term”);
● Estimated volatility of our common stock price over the expected term;
● Number of options that will ultimately not complete their vesting requirements (“forfeiture rate”); and
● Expected risk-free interest rate and dividend rate over the expected term.
The assumptions for expected volatility and expected term are the two assumptions that significantly affect the grant date fair
value.
The expected term represents the weighted-average period that our stock options are expected to be outstanding. The expected
term is based on the observed and expected time to post-vesting exercise of options by employees. We use historical exercise
patterns of previously granted options in relation to stock price movements to derive an employee behavioral pattern used to
forecast expected exercise patterns.
We estimate volatility based on historical volatility and we also consider implied volatility when there is sufficient volume
of freely traded options with comparable terms and exercise prices in the open market.
Changes in expected risk-free interest rate and dividend rate do not significantly impact the calculation of fair value, and
determining this input is not highly subjective.
Changes in the subjective assumptions of expected term, volatility and forfeiture rate can materially affect the estimate of
fair value of stock-based compensation and, consequently, the related amount recognized on the Consolidated Statements of
Operations.
Restricted Stock Units
We grant restricted stock unit (“RSU”) awards to our management employees, officers and directors. RSUs are measured
based on the fair market values of the underlying stock on the dates of grant and the stock-based compensation expense is
recognized over the vesting period. Shares are issued on the vesting dates net of the minimum statutory tax withholding
requirements to be paid by us on behalf of our employees. As a result, the actual number of shares issued will be fewer than
the actual number of RSUs outstanding. Furthermore, we record the liability for withholding amounts to be paid by us as a
reduction to additional paid-in capital.
Performance Stock Units
Performance stock unit (“PSU”) awards are granted to our officers and other members of management. The final number of
shares of common stock issuable at the end of the performance measurement period, subject to the recipient’s continued
service through that date, is determined based on the degree of achievement of the performance goals. The fair value of PSUs
that have operational goals is measured based on the market price of our stock on the date of grant, whereas PSUs with
market-based measurement goals are measured using a Monte-Carlo simulation option-pricing model. The Monte-Carlo
simulation option-pricing model uses the same input assumptions as the Black-Scholes model; however, it also further
incorporates into the fair-value determination, the possibility that the market condition may not be satisfied.
Stock-based compensation expense for PSUs with operational goals is recognized based on the expected degree of
achievement of the performance goals over the vesting period. However, stock-based compensation expense for market-
38
based PSU awards are recognized regardless of whether the market condition is satisfied, provided that the requisite service
has been provided.
On the vesting date of PSU awards, we issue fully-paid up common stock, net of the minimum statutory tax withholding
requirements to be paid by us and record the liability for withholding amounts as a reduction to additional paid-in capital.
Forfeiture Rates
In accounting for share-based compensation expenses, we are required to develop an estimate of the number of share-based
awards that will be forfeited due to employee turnover. Adjustments in the estimated forfeiture rates can have a significant
effect on our reported share-based compensation, as we recognize the cumulative effect of the rate adjustments for all expense
amortization in the period the estimated forfeiture rates were adjusted. We estimate and adjust forfeiture rates based on a
periodic review of recent forfeiture activity and expected future employee turnover. If a revised forfeiture rate is higher than
previously estimated forfeiture rate, we may make an adjustment that will result in a decrease to the expense recognized in
the financial statements during the period when the rate was changed. Adjustments in the estimated forfeiture rates could also
cause changes in the amount of expense that we recognize in future periods.
Intangible Assets
Our intangible assets include identifiable intangibles and goodwill. Identifiable intangibles include sub-licenses, rights
acquired from a former distributor and those acquired in conjunction with an acquisition in 2012. All of our identifiable
intangibles have finite lives.
In February 2012, we acquired the global aesthetic business unit of IRIDEX Corporation, which included various laser
systems (such as the VariLite and Gemini) and an installed base of customers, whose products are being serviced by us. This
acquisition was considered a business combination for accounting purposes, and as such, in addition to valuing all the assets,
we recorded goodwill associated with the expected synergies from leveraging the customer relationships and integrating new
product offerings into our 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.
Identifiable intangible assets with finite lives are subject to impairment testing and are reviewed for impairment when events
or circumstances indicate that such assets may not be recoverable at their carrying value. We evaluate the recoverability of
the carrying value of these identifiable intangibles based on estimated undiscounted cash flows to be generated from such
assets. If the cash flow estimates or the significant operating assumptions upon which they are based change in the future, we
may be required to record additional impairment charges. When events or changes in circumstances indicate that the carrying
amount of long-lived assets may not be recoverable, we recognize such impairment in the event the net book value of such
assets exceeds the future undiscounted cash flows attributable to such assets.
The valuation and classification of intangible assets and goodwill and the assignment of useful amortization lives for the
intangible assets involves judgments and the use of estimates. The evaluation of these intangibles and goodwill for
impairment under established accounting guidelines is required on a recurring basis. Changes in business conditions could
potentially require future adjustments to asset valuations. If we determine that the remaining useful lives of assets are shorter
than we had originally estimated, we accelerate the rate of amortization over the assets’ new, shorter useful lives. A
considerable amount of judgment is required in assessing impairment, which includes financial forecasts. Should conditions
be different from management’s current estimates, material write-downs of long-lived assets may be required, which would
adversely affect our operating results.
As of December 31, 2015 we determined that there was no impairment to our long-lived assets. As of December 31, 2014,
we evaluated the recoverability of our long-lived assets. Relating to the purchased intangible assets associated with the Iridex
acquisition in 2012, due to the discontinuation of the manufacture and sale of all products acquired, reduction in projected
future service revenue, and reduction in projected revenue expected from the distributor relationships acquired, we
determined based on an undiscounted cash flow model that the remaining carrying value of these assets was impaired. Based
on a discounted cash flow model, we measured the impairment of the purchased intangible assets and recorded an impairment
charge of $650,000 in cost of revenue in the year ended December 31, 2014. There were no impairment charges or accelerated
amortization recorded in the year ended December 31, 2013. Our valuation model relied on unobservable inputs, referred to
as Level 3 in the fair value hierarchy, that are supported by little or no market activity and reflect the use of significant
management judgment and included expected future cash flow streams as well as a market discount rate. Our valuation model
is subject to uncertainties that are difficult to predict.
39
Valuation of Inventories
We state our inventories at the lower of cost or market, computed on a standard cost basis, which approximates actual cost
on a first-in, first-out basis and market being determined as the lower of replacement cost or net realizable value. Standard
costs are monitored and updated quarterly or as necessary, to reflect changes in raw material costs, labor to manufacture the
product and overhead rates. We provide for excess and obsolete inventories when conditions indicate that the selling price
could be less than cost due to physical deterioration, usage, obsolescence, reductions in estimated future demand and
reductions in selling prices. Inventory provisions are measured as the difference between the cost of inventory and estimated
market value and charged to cost of revenue to establish a lower cost basis for the inventories. We balance the need to
maintain strategic inventory levels with the risk of obsolescence due to changing technology, timing of new product
introductions and customer demand levels. Unfavorable changes in market conditions may result in a need for additional
inventory provisions that could adversely impact our gross margins. Conversely, favorable changes in demand could result
in higher gross margins when product that had previously been written down is sold.
Warranty Obligations
We provide a one-year standard warranty on all systems. For direct sales to end customers, warranty coverage provided is
for labor and parts necessary to repair the systems during the warranty period. For sales to distributors, we provide a 14-
month warranty for parts only. The distributor provides the labor to their end customer. Commencing with the third quarter
of 2013, for sales of our truSculpt product, we included free hand piece refills during the warranty period.
We provide for the estimated future costs of warranty obligations in cost of revenue when the related revenue is recognized.
The accrued warranty costs represent our best estimate at the time of sale, and as reviewed and updated quarterly, of the total
costs that we expect to incur during the warranty period to repair or replace product parts that fail, including the refurbishment
of any truSculpt refills included as part of the original sale. Accrued warranty costs include costs of material, technical
support, labor and associated overhead. The amount of accrued estimated warranty costs obligation for established products
is primarily based on historical experience as to product failures adjusted for current information on repair costs. Actual
warranty costs could differ from the estimated amounts. On a quarterly basis, we review the accrued balances of our warranty
obligations and update based on historical warranty cost trends. If we were required to accrue additional warranty cost in the
future due to actual product failure rates, material usage, service delivery costs or overhead costs differing from our estimates,
revisions to the estimated warranty liability would be required, which would negatively impact our operating results.
Provision for Income Taxes
We are subject to taxes on earnings in both the U.S. and various foreign jurisdictions. As a global taxpayer, significant
judgments and estimates are required in evaluating our uncertain tax positions and determining our provision for income
taxes on earnings. We perform a two-step approach to recognizing and measuring uncertain tax positions. The first step is to
evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The
second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax
outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as
the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different
than the amounts recorded, such differences will impact the provision for income taxes in the period in which such
determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that
are considered appropriate, as well as the related net interest.
Our effective tax rates have differed from the statutory rate primarily due to changes in the valuation allowance, foreign
operations, research and development tax credits, state taxes, and certain benefits realized related to stock option activity.
Our current effective tax rate does not assume U.S. taxes on undistributed profits of foreign subsidiaries. These earnings
could become subject to incremental foreign withholding or U.S. federal and state taxes, should they either be deemed or
actually remitted to the U.S. The effective tax rate in 2015, 2014 and 2013 was approximately (5)%, (2)%, and 1%,
respectively. Our future effective tax rates could be adversely affected by earnings being lower in countries where we have
lower statutory rates and being higher in countries where we have higher statutory rates, or by changes in tax laws, accounting
principles, interpretations thereof, net operating loss carryback, research and development tax credits, and due to changes in
the valuation allowance of our U.S. deferred tax assets. In addition, we are subject to the examination of our income tax
returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes
resulting from these examinations to determine the adequacy of our provision for income taxes.
40
At December 31, 2015, we had an aggregate of approximately $2.8 million of unremitted earnings of foreign subsidiaries
that have been, or are intended to be, indefinitely reinvested for continued use in foreign operations. Depending on the timing
and nature of the distribution, if the total undistributed earnings of foreign subsidiaries were remitted while the Company is
able to utilize its net operating losses, it is likely there would be no material additional tax resulting from the distribution.
Our deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences
between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards.
A valuation allowance reduces deferred tax assets to estimated realizable value, which assumes that it is more likely than not
that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize the net carrying value.
We have fully reserved our U.S. federal and state deferred tax assets due to our history of operating losses.
Litigation
We have been, and may in the future become, subject to legal proceedings related to securities litigation, intellectual property,
product liability claims, contractual disputes, trademark and copyright, and other matters. Based on all available information
at the balance sheet dates, we assess the likelihood of any adverse judgments or outcomes for these matters, as well as
potential ranges of probable loss. If losses are probable and reasonably estimable, we record an estimated liability.
Results of Operations
The following table sets forth selected consolidated financial data expressed as a percentage of net revenue.
Year Ended December 31,
2014
2013
2015
Net revenue .......................................................................................
Cost of revenue .................................................................................
Gross profit ................................................................................
Operating expenses:
Sales and marketing .......................................................................
Research and development ............................................................
General and administrative ............................................................
Total operating expenses ............................................................
Loss from operations .........................................................................
Interest and other income, net ........................................................
Loss before income taxes ..................................................................
Income tax (benefit) provision .......................................................
Net loss ..............................................................................................
100%
43%
57%
38%
11%
13%
62%
(5)%
—%
(5)%
—%
(5)%
100%
44%
56%
41%
14%
14%
69%
(13)%
—%
(13)%
—%
(13)%
100%
44%
56%
38%
12%
13%
63%
(7)%
1%
(6)%
—%
(6)%
41
Net Revenue
The following table sets forth selected consolidated revenue by major geographic area and product category with changes
thereof.
(Dollars in thousands)
Revenue mix by geography:
United States ........................................................ $
Percent of total .................................................
Japan..................................................................... $
Asia, excluding Japan ...........................................
Europe ..................................................................
Rest of the world ..................................................
Total international revenue ...............................
Percent of total .................................................
Total consolidated revenue ............................... $
Revenue mix by product category:
Product – North America ..................................... $
Product – Rest of World ......................................
Total Product ....................................................
Hand Piece Refills ................................................
Skincare ................................................................
Service ..................................................................
Total consolidated revenue ............................... $
Revenue by Geography:
% Change
Year Ended December 31,
2014
% Change
2015
2013
48,916
52%
11,504
15,596
7,728
11,017
45,845
48%
94,761
40,528
30,695
71,223
2,910
2,889
17,739
94,761
38% $
(14)% $
41%
(1)%
5%
8%
21% $
35,494
45%
13,328
11,023
7,792
10,501
42,644
55%
78,138
13% $
(6)% $
(2)%
6%
2%
(1)%
5% $
31,487
42%
14,205
11,263
7,358
10,281
43,107
58%
74,594
49% $
18%
34%
(22)%
(17)%
(1)%
21% $
27,122
25,984
53,106
3,714
3,479
17,839
78,138
16% $
4%
10%
(13)%
(18)%
1%
5% $
23,414
24,960
48,374
4,267
4,264
17,689
74,594
Our U.S. revenue increased by 38% in 2015, compared to 2014. The increase in U.S. revenue was primarily a result of
revenue generated by our most recently introduced enlighten and excel HR products, continued growth of our excel V, xeo
and truSculpt products, partially offset by a declines in revenue from other legacy products.
Our U.S. revenue increased by 13% in 2014, compared to 2013. The increase in U.S. revenue was primarily a result of
revenue generated by our newly introduced enlighten and excel HR products, continued growth of excel V product revenue,
partially offset by reduced productivity of our U.S. sales force, caused in part by field sales and management turnover, and a
decline in revenue from our xeo, GenesisPlus and truSculpt products.
Our total international revenue increased by 8% in 2015, compared to 2014, and represented 48% of our total revenue. The
increase in international revenue was primarily a result of increases in our distributor business in Asia Pacific and Europe as
well as our direct business in Australia. This was partially offset by a decline in our direct business in Japan and the negative
impact associated with the appreciation of the U.S. Dollar against the Euro, Japanese Yen and the Australian Dollar.
Our total international revenue decreased by 1% in 2014, compared to 2013, and represented 55% of our total revenue. The
decrease in international revenue was primarily a result of decreased revenue from Canada, the decline in 2014 of the Japanese
Yen versus the U.S. Dollar compared to 2013, partially offset by growth in revenue from Australia and the Benelux region.
Revenue by Product Category:
Our Product revenue increased by 34% in 2015, compared to 2014. This increase in Product revenue was primarily
attributable to revenue generated by our most recently introduced enlighten and excel HR products, the continued growth in
excel V sales and increases in sales of truSculpt, partially offset by declines in our legacy products.
Our Product revenue increased by 10% in 2014, compared to 2013. This increase in Product revenue was primarily
attributable to revenue generated by our newly introduced enlighten and excel HR products and the continued growth in excel
V sales, partially offset by declines in xeo, GenesisPlus and truSculpt sales.
42
Our Hand Piece Refills revenue decreased by 22% and 13% in 2015 and 2014, compared to the respective prior year periods.
These decreases were due primarily to declines in Titan hand piece refill revenue caused by reduced utilization.
Our Skincare business decreased by 17% and 18% in 2015 and 2014, compared to the respective prior year periods. These
decreases were primarily a result of the discontinuation of the distribution of the Merz Radiesse filler product in Japan in the
second quarter of 2014. In addition, the continued devaluation of the Japanese Yen versus the U.S. Dollar by approximately
14% in 2015 and 9% in 2014, compared to the respective prior year periods, had an adverse impact on our revenue.
Our Service revenue decreased by 1% in 2015 and increased by 1% in 2014, compared to the respective prior year periods.
The ratable recognition of service contract fees is the primary component of our Service revenue.
Gross Profit
(Dollars in thousands)
Gross Profit .......................................................... $
As a percentage of total revenue ..........................
Year Ended December 31,
2014
2015
% Change
25% $
54,283
57%
% Change
4 % $
43,373
56%
2013
41,882
56%
Our cost of revenue consists primarily of materials, personnel expenses, royalty expense, warranty and manufacturing
overhead expenses. Gross margin as a percentage of net revenue improved to 57% in 2015, compared to 2014, which was
primarily attributable to the following:
● A $16.6 million increase in total revenue, which improved the leverage of our manufacturing department expenses;
and
● A one-time impairment charge in 2014 of $650,000 for purchased intangibles related to a previous acquisition, which
did not reoccur in 2015; partially offset
● A partial shift in product mix towards lower margin products, primarily as a result of our newly introduced excel HR
and enlighten products in 2014, which have a high initial cost structure.
Gross margin as a percentage of net revenue was flat at 56% in 2014, compared to 2013, which was primarily attributable to
the following:
● A $3.5 million increase in total revenue, which improved the leverage of our manufacturing department expenses;
offset by
● A one-time impairment charge of $650,000 for purchased intangibles related to a previous acquisition; and
● A partial shift in product mix towards lower margin products, primarily as a result of our newly introduced excel HR
and enlighten products in 2014 that had a high initial cost structure.
Sales and Marketing
(Dollars in thousands)
Sales and marketing ............................................. $
As a percentage of total revenue ..........................
Year Ended December 31,
2014
2015
% Change
11% $
35,942
38%
% Change
15 % $
32,246
41%
2013
27,984
38%
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 $3.7 million
in 2015, compared to 2014, which was primarily attributable to the following:
● $2.6 million increase in personnel related expenses in North America, due primarily to higher commissions as a
result of increased North American revenue and an increase in severance costs;
● $1.1 million increase in non-Japan international spending, primarily as a result of higher international sales
headcount as well as the expansion of our international operations;
● $713,000 of increased promotional spending, primarily in North America; partially offset by
● $1.1 million of decreased Japan expenses resulting primarily from the continued devaluation of the Japanese Yen
versus the U.S. Dollar.
43
Sales and marketing expenses increased by $4.3 million in 2014, compared to 2013, which was primarily attributable to the
following:
● $2.6 million increase in personnel related expenses in North American, driven primarily by the expansion of our
sales force;
● $1.4 million increase in non-Japan international spending, primarily as a result of higher international sales
headcount as well as the expansion of our international operations;
● $752,000 of increased promotional spending, primarily in North America;
● $541,000 of increased North American travel and entertainment expenses due to increased sales and management
travel activity; partially offset by
● $941,000 of decreased Japan expenses resulting primarily from the continued devaluation of the Japanese Yen versus
the U.S. Dollar.
Sales and marketing expenses as a percentage of net revenue, decreased to 38% in 2015, compare to 41% in 2014. This
decrease was attributable to an increase in revenue greater than the increase in expenses, resulting in the leverage of our sales
and marketing expenses. Sales and marketing expenses as a percentage of net revenue, increased to 41% in 2014, compared
to 38% in 2013. This increase was due to a larger increase in expenses, compared to the increase in revenue.
Research and Development (“R&D”)
(Dollars in thousands)
Research and development ................................... $
As a percentage of total revenue ...............
Year Ended December 31,
2014
2015
% Change
2% $
10,733
11%
% Change
14 % $
10,543
14%
2013
9,216
12%
Research and development expenses consist primarily of personnel, clinical and regulatory expenses, as well as material
costs. R&D expenses increased $190,000 in 2015, compared to 2014, which was primarily attributable to:
● $739,000 of higher personnel expenses;
● $262,000 increase in expensed tools and equipment spending; partially offset by
● A decrease of $900,000 in material spending.
R&D expenses increased $1.3 million in 2014, compared to 2013, which was primarily attributable to:
● $1.0 million higher personnel expenses as a result of increased headcount;
● $398,000 increase in material spending due to product development efforts related to two new launched products,
enlighten and excel HR; partially offset by
● A decrease of $110,000 in expensed tools and equipment spending.
General and Administrative (“G&A”)
(Dollars in thousands)
General and administrative ................................... $
As a percentage of total revenue ...............
Year Ended December 31,
2014
2015
% Change
8% $
12,129
13%
% Change
13 % $
11,203
14%
2013
9,938
13%
General and administrative expenses consist primarily of: personnel expenses, legal fees, accounting, audit and tax consulting
fees, and other general and administrative expenses. G&A expenses increased by $926,000 in 2015, compared to 2014, which
was primarily attributable to:
● $1.2 million of increased personnel related expenses;
● $182,000 of increased excise tax, due to increased sales in the U.S.; partially offset by
● $304,000 of decreased legal fees and costs of settlements; and
● A reduction of $200,000 in fees resulting from the conclusion of a management consulting engagement in 2014 that
did not reoccur in 2015.
44
G&A expenses increased by $1.3 million in 2014, compared to 2013, which was primarily attributable to:
● $1.3 million of increased personnel related expenses;
● $407,000 of increased legal fees and costs of settlements; partially offset by
● A reduction of $600,000 in fees resulting from the conclusion of a management consulting engagement in 2014 that
commenced in 2013.
Interest and Other Income, Net
The components of “Interest and Other Income, Net” are as follows:
(Dollars in thousands)
Interest income ................................................... $
Other income (expense), net ...............................
Total interest and other income, net ........ $
% Change
Year Ended December 31,
2014
% Change
2015
330
(37)
293
(19)% $
(79)%
30% $
406
(180 )
226
(4)% $
(629)%
(50)% $
2013
421
34
455
Interest income decreased 19% in 2015, compared to 2014, and decreased 4% in 2014, compared to 2013. These decreases
were primarily attributable to decreases in our cash, cash equivalents and marketable investments balances and decreased
yields on our investments. Our cash, cash equivalents and marketable investments at December 31, 2015, 2014 and 2013
were $48.4 million, $81.1 million and $83.1 million, respectively. The large decrease in the investment balance in 2015 was
attributable to $40 million of share repurchases of the Company’s stock.
Income Tax (Benefit) Provision
(Dollars in thousands)
Loss before income taxes ................................. $
Income tax (benefit) provision .........................
Effective tax rate ....................................
2015
(4,228)
212
$ Change
$
Year Ended December 31,
2014
(10,393)
219
6,165 $
(7)
$ Change
(5,592) $
$
273
(5)%
(2)%
2013
(4,801 )
(54 )
1 %
In 2015, 2014 and 2013, we recorded an income tax provision of $212,000, and $219,000 and an income tax benefit of
$54,000, respectively. Our tax provisions for both 2015 and 2014 are primarily related to foreign tax expenses. Our tax benefit
for 2013 was primarily related to releases of reserves for Uncertain Tax Positions due to lapses in the applicable statutes of
limitations, offset by foreign tax expenses. A full valuation allowance was applied against all U.S. federal and state deferred
tax assets arising during each of these years.
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 employee stock purchases. We
actively manage our cash usage and investment of liquid cash to ensure the maintenance of sufficient funds to meet our daily
needs. The majority of our cash and investments are held in U.S. banks and our foreign subsidiaries maintain a limited amount
of cash in their local banks to cover their short-term operating expenses. The following table summarizes our cash and cash
equivalents and marketable investments (in thousands):
(Dollars in thousands)
Cash, cash equivalents and marketable securities:
Year ended December 31,
2014
2015
Change
Cash and cash equivalents ....................................................... $
Marketable investments ...........................................................
Total ................................................................................. $
10,868 $
37,539
48,407 $
9,803 $
71,343
81,146 $
1,065
(33,804 )
(32,739 )
45
Cash Flows
In summary, our cash flows were as follows:
(Dollars in thousands)
Cash flows provided by (used in):
Year ended December 31,
2014
2015
2013
Operating activities .................................................................. $
Investing activities ...................................................................
Financing activities ..................................................................
(1,359) $
32,646
(30,222)
(4,286 ) $
(5,611 )
3,458
3,513
(5,848 )
(4,969 )
Net increase (decrease) increase in cash and cash
equivalents ..................................................................... $
1,065 $
(6,439 ) $
(7,304 )
Cash Flows from Operating Activities
We used net cash of $1.4 million in operating activities during 2015, which was primarily attributable to:
● $1.1 million provided by operations based on a net loss of $4.4 million after adjusting for non-cash related items of
$5.5 million, consisting primarily of stock-based compensation expense of $4.1 million and depreciation and
amortization expense of $1.2 million;
● $2.7 million generated from an increase in accrued liabilities, primarily associated with personnel costs; offset by
● $2.3 million used as a result of a decrease in deferred revenue due primarily from the amortization of service
contracts from previous years;
● $1.1 million used to pay down a high accounts payable balance as of December 31, 2014; and
● $1.1 million used to increase raw material and finished goods inventories due to an expanded product line.
We used net cash of $4.3 million in operating activities during 2014, which was primarily attributable to:
● $5.1 million used for operations based on a net loss of $10.6 million after adjusting for non-cash related items of
$5.5 million, consisting primarily of stock-based compensation expense of $3.3 million, depreciation and
amortization expense of $1.3 million and $0.7 million of an impairment of intangible assets;
● $2.0 million used to increase inventories for the addition of the new product line in 2014;
● $1.5 million used as a result of an increase in accounts receivable that resulted from increased product sales in the
three-month period ended December 31, 2014, compared to the same period in 2013; partially offset by
● $1.7 million generated from an increase in accrued liabilities;
● $1.4 million generated from an increase in deferred revenue due primarily to a “two years-for the price of one”
service contract pricing promotion; and
● $1.3 million generated from an increase in accounts payable resulting from the higher purchases of inventories
relating to the new product lines added in 2014.
Cash Flows from Investing Activities
We generated net cash of $32.6 million in investing activities in 2015, which was primarily attributable to:
● $33.4 million in proceeds from the sales and maturities, net of purchases, of marketable investments for financing
our stock repurchase and operations; partially offset by
● $0.7 million of cash used to purchase property and equipment.
We used net cash of $5.6 million in investing activities in 2014, which was primarily attributable to:
● $4.9 million of cash used to purchase, net of proceeds from the sales and maturities of marketable investments; and
● $0.7 million of cash used to purchase property and equipment.
Cash Flows from Financing Activities
Net cash used in financing activities in 2015 was $30.2 million, which was primarily due to:
the repurchase of common stock for $40.1 million; partially offset by
●
● proceeds of $10.1 million from the issuance of common stock due to employees exercising their stock options and
purchasing stock through the Employee Stock Purchase Plan (or “ESPP”) program.
46
Net cash provided by financing activities in 2014 was $3.5 million, which resulted primarily from employees exercising their
stock options and purchasing stock through the ESPP program.
Adequacy of cash resources to meet future needs
We had cash, cash equivalents and marketable investments of $48.4 million as of December 31, 2015. We believe that our
existing cash resources are sufficient to meet our anticipated cash needs for working capital and capital expenditures for at
least the next several years, as well as for financing the $10 million Stock Repurchase Program approved by our Board in
February 2016.
Contractual Obligations
The following are our contractual obligations, consisting of future minimum lease commitments related to facility and vehicle
leases as of December 31, 2015:
Payments Due by Period ($’000’s)
Contractual Obligations
Operating leases ................................................... $
Capital leases ........................................................
Total leases ........................................................... $
Purchase Commitments
Total
Less Than
1 Year
3,913 $
505
4,418 $
1-3 Years 3-5 Years
4 $
—
4 $
2,027 $
234
2,261 $
1,882 $
271
2,153 $
More Than
5 Years
—
—
—
We maintain certain open inventory purchase commitments with our suppliers to ensure a smooth and continuous supply for
key components. Our 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. Our open inventory purchase
commitments were not material at December 31, 2015. As a result, this amount is not included in the contractual obligations
table above.
Income Tax Liability
We have included in our Consolidated Balance Sheet a $78,000 long-term income tax liability for unrecognized tax benefits
and accrued interest as of December 31, 2015. At this time, we are unable to make a reasonably reliable estimate of the timing
of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes. As a result, this
amount is not included in the contractual obligations table above.
Off-Balance Sheet Arrangements
We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such
as entities often referred to as structured finance, variable interest or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
As of December 31, 2015, we were not involved in any unconsolidated transactions.
Other
In the normal course of business, we enter into agreements that contain a variety of representations, warranties, and
indemnification obligations. For example, we have entered into indemnification agreements with each of our directors and
executive officers. Our exposure under the various indemnification obligations is unknown and not reasonably estimable as
they involve future claims that may be made against us. As such, we have not accrued any amounts for such obligations.
47
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
Our exposure to interest rate risk relates primarily to our investment portfolio. Fixed rate securities may have their fair market
value adversely impacted due to fluctuations in interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to
changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value
due to changes in interest rates. The primary objective of our investment activities is to preserve principal while at the same
time maximizing yields without significantly increasing risk. To achieve this objective, we invest in debt instruments of the
U.S. Government and its agencies and municipal bonds, and, by policy, restrict our exposure to any single type of investment
or issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain
investments at a weighted average maturity of generally less than eighteen months. Based on discounted cash flow modeling
with respect to our total investment portfolio as of December 31, 2015, assuming a hypothetical increase in interest rates of
one percentage point, the fair value of our total investment portfolio would potentially decline by approximately $242,000.
Foreign Currency Exchange
In 2015 and 2014, our international revenue was approximately 48% and 55%, respectively, of our total revenue.
Approximately 49% and 48%, of our international revenue was denominated in U.S. Dollars. All of the remaining revenue
was denominated in Japanese Yen, Euros, Australian Dollars and Swiss Francs. Our Japanese Yen denominated revenue
represents the majority of our foreign currency denominated revenue. In 2015 and 2014, the Japanese Yen, compared to the
U.S. Dollar, devalued by approximately 14% and 9%, respectively, which had a significant adverse foreign exchange impact
on our revenue − both from a re-measurement loss upon the conversion of our Japanese Yen denominated revenue as well as
the additional negative revenue impact due to the effective price increase for the local customers importing our U.S. Dollar
denominated systems into Japan. In addition, the Japanese Yen devaluation had a favorable foreign currency translation
impact on our local cost of sales and operating expenses.
We have historically not engaged in hedging activities relating to our foreign currency denominated transactions, given we
have a natural hedge resulting from our foreign cash receipts being utilized to fund our respective local currency expenses.
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CUTERA, INC. AND SUBSIDIARY COMPANIES
ANNUAL REPORT ON FORM 10-K
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Registrant and its subsidiaries are required to be included in Item 8:
Reports of Independent Registered Public Accounting Firms ...........................................................................................
Page
50
Consolidated Balance Sheets .............................................................................................................................................
52
Consolidated Statements of Operations .............................................................................................................................
53
Consolidated Statements of Comprehensive Loss .............................................................................................................
54
Consolidated Statements of Stockholders’ Equity .............................................................................................................
55
Consolidated Statements of Cash Flows ............................................................................................................................
56
Notes to Consolidated Financial Statements ......................................................................................................................
57
The following Consolidated Financial Statement Schedule of the Registrant and its subsidiaries for the years ended December
31, 2015, 2014 and 2013 is filed as a part of this Report as required to be included in Item 15(a) and should be read in
conjunction with the Consolidated Financial Statements of the Registrant and its subsidiaries:
Schedule
II
Valuation and Qualifying Accounts ............................................................................................................
Page
80
All other required schedules are omitted because of the absence of conditions under which they are required or because the
required information is given in the Consolidated Financial Statements or the Notes thereto.
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Cutera, Inc.
Brisbane, California
We have audited the accompanying consolidated balance sheets of Cutera, Inc. as of December 31, 2015 and 2014, and the
related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the two
years in the period ended December 31, 2015. In connection with our audits of the financial statements, we have also audited
the financial statement schedule listed in the accompanying index. These financial statements and schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Cutera, Inc. at December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the
two years ended December 31, 2015 and 2014, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Cutera Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated March 15, 2016 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
San Jose, California
March 15, 2016
50
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Cutera, Inc.:
We have audited the accompanying consolidated statements of operations, comprehensive loss, stockholders’ equity, and
cash flows for the year ended December 31, 2013 of Cutera, Inc. Our audit also included the financial statement schedule at
Item 15(a) for the year ended December 31, 2013. These financial statements and schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of
operations, comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2013, in conformity
with US generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information
set forth therein.
/s/ Ernst & Young LLP
Redwood City, California
March 17, 2014
51
CUTERA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents ............................................................................................ $
Marketable investments ................................................................................................
Accounts receivable, net of allowance for doubtful accounts of $4 and $0,
respectively ................................................................................................................
Inventories ....................................................................................................................
Deferred tax assets ........................................................................................................
Other current assets and prepaid expenses ...................................................................
Total current assets ............................................................................................
Property and equipment, net .............................................................................................
Deferred tax assets, net of current portion........................................................................
Intangibles, net .................................................................................................................
Goodwill...........................................................................................................................
Other long-term assets ......................................................................................................
Total assets ......................................................................................................... $
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable .......................................................................................................... $
Accrued liabilities .........................................................................................................
Deferred revenue ..........................................................................................................
Total current liabilities .......................................................................................
Deferred revenue, net of current portion ......................................................................
Income tax liability .......................................................................................................
Other long-term liabilities ............................................................................................
Total liabilities ...................................................................................................
Commitments and contingencies (Note 11)
Stockholders’ equity:
Convertible preferred stock, $0.001 par value:
December 31,
2015
2014
10,868 $
37,539
11,669
12,078
—
1,675
73,829
1,473
350
143
1,339
384
77,518 $
1,959 $
13,834
8,638
24,431
2,287
182
584
27,484
9,803
71,343
11,137
10,988
26
1,591
104,888
1,461
269
595
1,339
361
108,913
3,083
11,007
8,898
22,988
4,346
145
926
28,405
Authorized: 5,000,000 shares; Issued and outstanding: none .......................................
—
—
Common stock, $0.001 par value:
Authorized: 50,000,000 shares; Issued and outstanding: 12,980,807 and 14,446,950
shares at December 31, 2015 and 2014, respectively ................................................
Additional paid-in capital .............................................................................................
Accumulated deficit ......................................................................................................
Accumulated other comprehensive income .................................................................
Total stockholders’ equity ..................................................................................
Total liabilities and stockholders’ equity ........................................................... $
13
79,782
(29,672 )
(89 )
50,034
77,518 $
14
105,721
(25,232)
5
80,508
108,913
The accompanying notes are an integral part of these consolidated financial statements.
52
CUTERA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Net revenue:
Products .......................................................................................... $
Service ............................................................................................
Total net revenue .....................................................................
Cost of revenue:
Products ..........................................................................................
Service ............................................................................................
Total cost of revenue ...............................................................
Gross profit ..............................................................................
Operating expenses:
Sales and marketing ........................................................................
Research and development .............................................................
General and administrative .............................................................
Total operating expenses .........................................................
Loss from operations ..........................................................................
Interest and other income, net ............................................................
Loss before income taxes ...................................................................
Income tax (benefit) provision ...........................................................
Net loss ............................................................................................... $
Year Ended December 31,
2014
2015
2013
77,022 $
17,739
94,761
32,402
8,076
40,478
54,283
35,942
10,733
12,129
58,804
(4,521)
293
(4,228)
212
(4,440) $
60,299 $
17,839
78,138
26,796
7,969
34,765
43,373
32,246
10,543
11,203
53,992
(10,619 )
226
(10,393 )
219
(10,612 ) $
56,905
17,689
74,594
24,179
8,533
32,712
41,882
27,984
9,216
9,938
47,138
(5,256 )
455
(4,801 )
(54 )
(4,747 )
Net loss per share:
Basic and diluted ............................................................................ $
Weighted-average number of shares used in per share calculations:
Basic and diluted ............................................................................
(0.32) $
(0.74 ) $
(0.33 )
13,960
14,254
14,421
The accompanying notes are an integral part of these consolidated financial statements.
53
CUTERA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Net loss ............................................................................................... $
Other comprehensive loss:
Available-for-sale investments
Net change in unrealized loss on available-for-sale investments
Less: Reclassification adjustment for net gains on investments
recognized during the year .....................................................
Net change in unrealized loss on available-for-sale investments
Tax provision (benefit) ................................................................
Other comprehensive loss, net of tax ..............................................
Comprehensive loss ........................................................................... $
Year Ended December 31,
2014
2015
2013
(4,440) $
(10,612 ) $
(4,747 )
(87)
(42 )
(21 )
(7)
(94)
—
(94)
(4,534) $
(4 )
(46 )
—
(46 )
(10,658 ) $
(9 )
(30 )
—
(30 )
(4,777 )
The accompanying notes are an integral part of these consolidated financial statements.
54
CUTERA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
Common Stock
Shares
Amount Capital Deficit)
Additional
Paid-in
Retained
Earnings
(Accumulated
Accumulated
Other
Comprehensive
Income (loss)
Total
Stockholders’
Equity
Balance at December 31, 2012 ..... 14,233,476 $
Issuance of common stock for
14 $ 100,552 $
(9,873) $
81 $
90,774
51,338
612,210
—
1
362
5,048
—
—
—
—
362
5,049
employee purchase plan .............
Exercise of stock options..............
Issuance of common stock in
settlement of restricted stock
units, net of shares withheld for
employee taxes, and stock
awards ........................................
95,256
Repurchase of common stock ...... (1,060,447)
Stock-based compensation
expense ......................................
Net loss .........................................
Net change in unrealized loss on
—
—
available-for-sale investments ...
—
Balance at December 31, 2013 ..... 13,931,833
Issuance of common stock for
52,759
396,970
employee purchase plan .............
Exercise of stock options..............
Issuance of common stock in
settlement of restricted and
performance stock units, net of
shares withheld for employee
taxes, and stock awards ..............
Stock-based compensation
expense ......................................
Net loss .........................................
Net change in unrealized loss on
—
(1)
(222)
(10,030)
—
—
—
—
—
14
—
—
3,110
—
—
(4,747)
—
98,820
—
(14,620)
451
3,307
—
—
65,388
—
(156)
—
—
—
—
—
3,299
—
—
(10,612)
available-for-sale investments ...
—
Balance at December 31, 2014 ..... 14,446,950
Issuance of common stock for
employee purchase plan .............
55,872
Exercise of stock options.............. 1,141,904
Issuance of common stock in
settlement of restricted and
performance stock units, net of
shares withheld for employee
taxes, and stock awards ..............
154,119
Repurchase of common stock ...... (2,818,038)
Stock-based compensation
—
—
14 105,721
—
(25,232)
—
2
577
10,500
—
—
—
(3)
(1,018)
(40,082)
—
—
expense ......................................
Net loss .........................................
Net change in unrealized loss on
—
—
—
—
4,084
—
—
(4,440)
available-for-sale investments ...
—
Balance at December 31, 2015 ..... 12,980,807 $
—
13 $
—
79,782 $
—
(29,672) $
The accompanying notes are an integral part of these consolidated financial statements.
55
—
—
—
—
(30)
51
—
—
—
—
—
(46)
5
—
—
—
—
—
—
(94)
(89) $
(222)
(10,031)
3,110
(4,747)
(30)
84,265
451
3,307
(156)
3,299
(10,612)
(46)
80,508
577
10,502
(1,018)
(40,085)
4,084
(4,440)
(94)
50,034
CUTERA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net loss ....................................................................................... $
Adjustments to reconcile net loss to net cash used in operating
activities:
Stock-based compensation ...................................................
Depreciation and amortization .............................................
Impairment of intangible assets ...........................................
Other ....................................................................................
Changes in assets and liabilities:
Accounts receivable .............................................................
Inventories ...........................................................................
Other current assets and prepaid expenses ...........................
Other long-term assets .........................................................
Accounts payable .................................................................
Accrued liabilities ................................................................
Other long-term liabilities ....................................................
Deferred revenue ..................................................................
Income tax liability ..............................................................
Net cash provided by (used in) operating activities ..........
Cash flows from investing activities:
Acquisition of property, equipment and software .......................
Acquisition of intangible asset ....................................................
Disposal of property and equipment ...........................................
Proceeds from sales of marketable investments ..........................
Proceeds from maturities of marketable investments ..................
Purchase of marketable investments ...........................................
Net cash provided by (used in) investing activities ..........
Cash flows from financing activities:
Repurchase of common stock ..................................................
Proceeds from exercise of stock options and employee stock
purchase plan .......................................................................
Payments on capital lease obligation .......................................
Net cash provided by (used in) financing activities ..........
Net increase (decrease) in cash and cash equivalents .........................
Cash and cash equivalents at beginning of year .................................
Cash and cash equivalents at end of year ........................................... $
Supplemental cash flow information:
Cash paid for interest .................................................................. $
Cash paid for income taxes ......................................................... $
Supplemental non-cash investing and financing activities:
Year Ended December 31,
2014
2015
2013
(4,440) $
(10,612 ) $
(4,747)
4,084
1,186
—
227
(536)
(1,090)
241
(23)
(1,124)
2,687
(289)
(2,319)
37
(1,359)
(746)
—
—
21,171
35,918
(23,697)
32,646
3,299
1,336
650
206
(1,460 )
(1,982 )
239
(37 )
1,263
1,650
(285 )
1,410
37
(4,286 )
(734 )
—
—
12,354
26,915
(44,146 )
(5,611 )
3,110
1,304
—
243
(857)
2,108
345
73
(287)
(371)
(218)
3,114
(304)
3,513
(517)
(155)
63
15,578
36,030
(56,847)
(5,848)
(40,085)
—
(10,031)
10,061
(198)
(30,222)
1,065
9,803
10,868 $
20 $
160 $
3,602
(144 )
3,458
(6,439 )
16,242
9,803 $
26 $
225 $
5,189
(127)
(4,969)
(7,304)
23,546
16,242
19
337
577
Assets acquired under capital lease ............................................. $
285 $
70 $
The accompanying notes are an integral part of these consolidated financial statements.
56
CUTERA, INC.
NOTES TO 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®, GenesisPlus, excel
V, truSculpt, excel HR and enlighten. The Company’s products offer multiple hand pieces and applications, which allow
customers to upgrade their systems. The sales of systems, upgrades, hand pieces, hand piece refills (Titan® and truSculpt) and
the distribution of third party manufactured skincare products are classified as “Products” 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 Products revenue, the Company generates revenue from the sale of post-warranty service contracts, parts,
detachable hand piece replacements (except for Titan and truSculpt) 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 that are currently operational in Australia,
Belgium, Canada, France, Hong Kong, Japan, Spain and Switzerland, that market, sell and service its products outside of the
United States. The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All inter-
company transactions and balances have been eliminated.
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with generally accepted accounting principles in the United
States of America (“GAAP”) requires the Company’s management to make estimates and assumptions that affect the amounts
reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from those
estimates. On an ongoing basis, the Company evaluates their estimates, including those related to warranty obligation, sales
commission, accounts receivable and sales allowances, valuation of inventories, fair values of acquired intangible assets, useful
lives of intangible assets and property and equipment, fair values of options to purchase the Company’s common stock and other
share based awards, recoverability of deferred tax assets, and effective income tax rates, among others. Management bases their
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.
Cash, Cash Equivalents, and Marketable Investments
The Company invests its cash primarily in money market funds and in highly liquid debt instruments of U.S. federal and
municipal governments and their agencies, commercial paper and corporate debt securities. All highly liquid investments with
stated maturities of three months or less from date of purchase are classified as cash equivalents; all highly liquid investments
with stated maturities of greater than three months are classified as marketable investments. The majority of the Company’s cash
and investments are held in U.S. banks and its foreign subsidiaries maintain a limited amount of cash in their local banks to cover
their short term operating expenses.
The Company determines the appropriate classification of its investments in marketable securities at the time of purchase and
re-evaluates such designation at each balance sheet date. The Company’s marketable securities have been classified and
accounted for as available-for-sale. Investments with remaining maturities more than one year are viewed by the Company as
available to support current operations, and are classified as current assets under the caption marketable investments in the
accompanying Consolidated Balance Sheets. Investments in marketable securities are carried at fair value, with the unrealized
gains and losses reported as a component of stockholders’ equity. Any realized gains or losses on the sale of marketable securities
are determined on a specific identification method, and such gains and losses are reflected as a component of interest and other
income, net.
Fair Value Measurements
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. In determining fair value, the Company utilizes valuation techniques that
57
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. Carrying amounts of the Company’s financial instruments, including cash
equivalents, accounts receivable, accounts payable and accrued liabilities, approximate their fair values as of the balance sheet
dates because of their generally short maturities.
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.
Impairment of Marketable Investments
After determining the fair value of available-for-sales debt instruments, gains or losses on these securities are recorded to other
comprehensive income, until either the security is sold or the Company determines that the decline in value is other-than-
temporary. The primary differentiating factors that the Company considers in classifying impairments as either temporary or
other-than-temporary impairments are the Company’s intent and ability to retain the investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in market value or the maturity of the investment, the length of the time and the
extent to which the market value of the investment has been less than cost and the financial condition and near-term prospects of
the issuer. There were no other-than-temporary impairments in the years ended December 31, 2015, 2014, and 2013.
Allowance for Sales Returns and Doubtful Accounts
The allowance for sales returns is based on the Company’s estimates of potential future product returns and other allowances
related to current period product revenue. The Company analyzes historical returns, current economic trends and changes in
customer demand and acceptance of our products.
The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The
Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the
accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to concentrations of risk consist principally of cash, cash equivalents,
marketable investments and accounts receivable. The Company’s cash and cash equivalents are primarily invested in deposits
and money market accounts with three major financial institutions in the U.S. In addition, the Company has operating cash
balances in banks in each of the international locations in which it operates. Deposits in these banks may exceed the amount of
insurance provided on such deposits, if any. Management believes that these financial institutions are financially sound and,
accordingly, believes that minimal credit risk exists. The Company has not experienced any losses on its deposits of cash and
cash equivalents.
The Company invests in debt instruments, including bonds of the U.S. Government, its agencies and municipalities. The
Company has also invested in other high grade investments such as commercial paper and corporate bonds. By policy, the
Company restricts its exposure to any single issuer by imposing concentration limits. To minimize the exposure due to adverse
shifts in interest rates, the Company maintains investments at an average maturity of generally less than eighteen months.
58
Accounts receivable are typically unsecured and are derived from revenue earned from worldwide customers. The Company
performs credit evaluations of its customers and maintains reserves for potential credit losses. As of December 31, 2015, there
was one customer who represented more than 10% of the Company’s net accounts receivable. No single customer represented
more than 10% of net accounts receivable as of December 31, 2014.
During the years ended December 31, 2015, 2014, and 2013, domestic revenue accounted for 52%, 45%, and 42%, respectively,
of total revenue, while international revenue accounted for 48%, 55%, and 58%, respectively, of total revenue. No single
customer represented more than 10% of total revenue for any of the years ended December 31, 2015, 2014, and 2013.
The Company is also subject to risks common to companies in the medical device industry, including, but not limited to, new
technology innovations, dependence on key personnel, dependence on key suppliers, protection of proprietary technology,
product liability, Food and Drug Administration and/or international regulatory approvals required for new products and
compliance with government regulations.
Inventories
Inventories are stated at the lower of cost or market, cost being determined on a standard cost basis, which approximates actual
cost on a first-in, first-out basis, and market being determined as the lower of replacement cost or net realizable value.
The Company includes demonstration units within inventories. Demonstration units are carried at cost and amortized over an
estimated economic life of two years. Amortization expense related to demonstration units is recorded in Products cost of revenue
or in the respective operating expense line based on which function and purpose for which the demonstration units are being
used. Proceeds from the sale of demonstration units are recorded as revenue and all costs incurred to refurbish the systems prior
to sale are charged to cost of revenue.
As of December 31, 2015 and 2014, demonstration inventories, net of accumulated depreciation, included in Finished goods
inventory balance was $2.3 million.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation recognized is on a straight-line basis
over the estimated useful lives of the assets, generally as follows:
Leasehold improvements ..............................................................................
Office equipment and furniture .....................................................................
Machinery and equipment .............................................................................
Useful Lives (years)
Lesser of useful life or term of lease
3
3
Upon sale or retirement of property and equipment, the costs and related accumulated depreciation and amortization are removed
from the balance sheet and the resulting gain or loss is reflected in operating expenses. Maintenance and repairs are charged to
operations as incurred.
Depreciation expense related to property and equipment for 2015, 2014 and 2013, was $734,000, $562,000 and $602,000
respectively. Amortization expense for vehicles leased under capital leases is included in depreciation expense.
Goodwill and Intangible Assets
Goodwill, which represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets,
is not subject to amortization, but is subject to at least an annual assessment for impairment, applying a fair-value based test.
The Company’s intangible assets are comprised of purchased technology sub-licenses, acquired customer relationships, and those
assets acquired in conjunction with an asset acquisition in February 2012 including, existing customer relationships, product
portfolio and a manufacturing process for the products acquired. All identifiable intangibles have finite lives and are carried at
cost, net of accumulated amortization. Amortization was recorded using the straight-line method, except for a portion of the
purchased intangibles which are being amortized on a declining-balance basis, over their respective useful lives, which range
from approximately 11 months to 10 years.
Impairment of Long-lived Assets
59
Goodwill is not amortized, but is tested for impairment at least annually or as circumstances indicate their value may no longer
be recoverable. The goodwill impairment test is generally performed annually during the fourth fiscal quarter (or earlier if
impairment indicators arise). The Company continues to operate in one segment, which is considered to be the sole reporting
unit and therefore, goodwill was tested for impairment at the enterprise level. As of December 31, 2015, there has been no
impairment of goodwill.
The Company evaluates the recoverability of its long-lived assets, which include amortizable intangible and tangible assets.
Acquired intangible assets with definite useful lives are amortized over their useful lives. The Company evaluates long-lived
assets for impairment whenever events or changes in circumstances indicate that the carrying value of long-lived assets may not
be recoverable. The Company recognizes such impairment in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. In 2014, the Company’s impairment review indicated that certain purchased
long-lived assets associated with the Iridex acquisition were impaired and an impairment charge of $650,000 was recognized.
No other impairment losses were incurred in the periods presented.
Warranty Obligations
The Company provides a standards one-year warranty on all systems sold to end-customers. Warranty coverage provided is for
labor and parts necessary to repair the systems during the warranty period. For sales to distributors, the Company generally
provides a 14-month warranty for parts only, with labor being provided to the end customer by the distributor.
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.
Revenue Recognition
Products revenue is recognized when title and risk of ownership has been transferred, provided that:
● Persuasive evidence of an arrangement exists;
● The price is fixed or determinable;
● Delivery has occurred or services have been rendered; and
● Collectability is reasonably assured.
Transfer of title and risk of ownership occurs when the product is shipped to the customer or when the customer receives the
product, depending on the nature of the arrangement. Revenue is recorded net of customer and distributor discounts. When
collectability is not reasonably assured, the Company recognizes revenue upon receipt of cash payment. Sales to customers and
distributors do not include any return or exchange rights. In addition, the Company’s distributor agreements obligate the
distributor to pay the Company for the sale regardless of whether the distributor is able to resell the product. Shipping and
handling charges are invoiced to customers based on the amount of products sold. Shipping and handling fees are recorded as
revenue and the related expense as a component of Products cost of revenue.
Multiple-element arrangements
A multiple-element arrangement includes the sale of one or more tangible product offerings with one or more associated services
offerings, each of which are individually considered separate units of accounting. The Company determined that its multiple-
element arrangements are generally comprised of the following elements that are recognized as separate units of accounting:
Product and service contracts.
For multiple-element arrangements revenue is allocated to each element based on their relative selling prices. Relative selling
prices are based on vendor specified objective evidence (“VSOE”), if available, third-party evidence of selling price (“TPE”)
when VSOE does not exist, and on best estimate of selling price (“BESP”) if VSOE and TPE do not exist. Because the Company
has neither VSOE nor TPE for its systems and service contracts, the allocation of revenue is based on the Company’s BESPs for
each element. The objective of BESP is to determine the price at which the Company would transact a sale if the product or
service was sold on a stand-alone basis. The Company determines BESP for its products or services by considering multiple
factors including, prices charged for stand-alone sales, features and functionality of the products and services, geographies, type
of customer, and market conditions. Revenue allocated to each element is then recognized when the other revenue recognition
criteria are met for the element.
60
In the first and second quarter of 2013, with respect to the sale of its truSculpt product, the Company provided promotions that
included an unlimited number of “free” hand piece replacements during a stated trial period of 3 months or 12 months. These
free refills were treated as an undelivered element under FASB ASC 605-25 in the original revenue transaction. The Company
deferred the relative fair value related to the estimated number of hand piece replacements to be delivered during the promotional
period and recognized that deferred revenue over the free refills promotion period. Commencing in the third quarter of 2013, the
Company now includes unlimited refills as part of the truSculpt standard warranty and the Company no longer accounts for the
truSculpt warranty as a separate deliverable under the multiple-element arrangement revenue guidance. Upon a truSculpt sale,
the Company recognizes the estimated costs which will be incurred under the warranty obligation in Products cost of revenue.
The Company also offers customers extended service contracts. Revenue under service contracts is recognized on a straight-line
basis over the period of the applicable service contract. Service revenue billed on a time and material basis, from customers
whose systems are not under a service contact, is recognized as the services are provided. Service revenue for the years ended
December 31, 2015, 2014, and 2013 was $17.7 million, $17.8 million, and $17.7 million, respectively.
Cost of Revenue
Cost of revenue consists primarily of material, finished and semi-finished products purchased from third-party manufacturers,
labor, stock-based compensation expenses, overhead involved in our internal manufacturing processes, technology license
amortization and royalties, costs associated with product warranties and any inventory or intangible write-downs.
The Company's system sales include a control console, universal graphic user interface, control system software, high voltage
electronics and a combination of applications (referred to as hand pieces). Hand pieces are programmed to have a limited number
of uses to ensure the safety of the device to patients. The Company sells refurbished hand pieces, or "refills," of its Titan product
and provides for refurbishment of other hand pieces under warranty or service contracts. When customers purchase a replacement
hand piece (or “refill”) or are provided a replacement hand piece under a warranty or service contract, Cutera ships the customer
a previously refurbished unit. Upon the receipt of the expended hand piece from the customer the Company capitalizes the
expended hand piece as inventory at the estimated fair value. Cost of revenue includes the costs incurred to refurbish hand pieces.
Research and Development Expenditures
Costs related to research, design, development and testing of products are charged to research and development expense as
incurred. Expenses incurred primarily relate to employees, facilities, material, third party contractors and clinical and regulatory
fees.
Advertising Costs
Advertising costs are included as part of sales and marketing expense and are expensed as incurred. Advertising expenses for
2015, 2014 and 2013 were $1.2 million, $1.6 million and $1.6 million, respectively.
Stock-based Compensation
The Company accounts for its employee stock options under the fair value method of accounting using a Black-Scholes valuation
model to measure stock option expense at the date of grant. The fair value of Restricted Stock Units (“RSUs”) is measured at the
market price of the Company’s stock on the date of grant. The fair value of Performance Stock Units (“PSUs”) that have
operational measurement goals, are measured at the market price of the Company’s stock on the date of grant. PSUs with market-
based measurement goals are valued using the Monte-Carlo simulation option-pricing model. The Monte-Carlo simulation
option-pricing model uses the same input assumptions as the Black-Scholes model, however, it further incorporates into the fair-
value determination the possibility that the market condition may not be satisfied. Stock-based compensation expense for market-
based PSU awards is recognized regardless of whether the market condition is satisfied, provided that the requisite service has
been provided.
Stock-based compensation expense, net of estimated forfeitures, is recognized over the requisite service period.
For RSUs and PSUs, the Company issues shares on the vesting dates, net of the minimum tax withholding requirements to be
paid by the Company on behalf of its employees. As a result, the actual number of shares issued will be fewer than the actual
number of RSUs and PSUs that vest. The Company records the liability for withholding amounts to be paid by the Company as
a reduction to additional paid-in capital when the shares are issued.
61
Cash flows resulting from the tax benefits due to tax deductions in excess of the compensation cost recognized for stock-based
awards for options exercised and for RSUs and PSUs vested during the period (excess tax benefits), are classified as financing
cash flows.
Income Taxes
The Company recognizes income taxes under the liability method. The Company recognizes deferred income taxes for
differences between the financial reporting and tax bases of assets and liabilities at enacted statutory tax rates in effect for the
years in which differences are expected to reverse. The Company recognizes the effect on deferred taxes of a change in tax rates
in income in the period that includes the enactment date. For deferred tax assets which are not subject to a valuation allowance,
the Company has determined that its future taxable income will be sufficient to recover all of the deferred tax assets. However,
should there be a change in the recoverability of the deferred tax assets, the Company could be required to record a valuation
allowance against the net carrying value of its deferred tax assets. This would result in an increase to the Company’s tax provision
in the period in which they determined that the recovery was not probable.
The measurement of deferred taxes often involves an exercise of judgment related to the computation and realization of tax basis.
The deferred tax assets and liabilities reflect management’s assessment that tax positions taken, and the resulting tax basis, are
more likely than not to be sustained if they are audited by taxing authorities. Also, assessing tax rates that the Company expects
to apply and determining the years when the temporary differences are expected to affect taxable income requires judgment about
the future apportionment of the Company’s income among the states in which the Company operates. These matters, and others,
involve the exercise of significant judgment. Any changes in the Company’s practices or judgments involved in the measurement
of deferred tax assets and liabilities could materially impact the Company’s financial condition or results of operations.
Valuation allowances are established when necessary to reduce deferred income tax assets to amounts that the Company believes
are more likely than not to be recovered. The Company evaluates its deferred tax assets quarterly to determine whether
adjustments to the Company’s valuation allowance are appropriate. In making this evaluation, the Company relies on its recent
history of pre-tax earnings, estimated timing of future deductions and benefits represented by the deferred tax assets, and its
forecasts of future earnings, the latter two of which involve the exercise of significant judgment. The Company maintains a full
valuation allowance against its U.S. federal and state deferred tax asset due to a history of operating losses.
The Company establishes reserves for uncertain tax positions in accordance with the Income Taxes subtopic of ASC 740. The
subtopic prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial
statements. Additionally, the subtopic provides guidance on de-recognition, measurement, classification, interest and penalties,
and transition of uncertain tax positions. The impact of an uncertain income tax position on income tax expense must be
recognized at the largest amount that is more-likely-than-not to be sustained. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained. The Company has provided taxes and related interest and
penalties due for potential adjustments that may result from examinations of open U.S. Federal, state and foreign tax years. The
Company will reverse the liability and recognize a tax benefit during the period in which the Company makes the determination
that the tax position is effectively settled through examination, negotiation, or litigation, or the statute of limitations for the
relevant taxing authority to examine and challenge the tax position has expired. The Company will record an additional charge
in the Company’s provision for taxes in the period in which the Company determines that the recorded tax liability is less than
the Company expects the ultimate assessment to be.
Computation of Net Loss per Share
Basic net income per share is computed using the weighted-average number of shares outstanding during the period. Diluted net
income per share is computed using the weighted-average number of shares and dilutive potential shares outstanding during the
period. Dilutive potential shares primarily consist of employee stock options. Diluted earnings per share is the same as basic
earnings per share for the periods presented because the inclusion of outstanding common stock equivalents would be anti-
dilutive.
U.S. GAAP requires that employee equity share options, non-vested shares and similar equity instruments granted by the
Company be treated as potential common shares outstanding in computing diluted earnings per share. In periods of net income,
diluted shares outstanding include the dilutive effect of in-the-money options, which is calculated based on the average share
price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must
pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized,
and the amount of tax benefits that would be recorded in additional-paid-in-capital when the award becomes deductible are all
assumed to be used to repurchase shares.
62
Comprehensive Loss
Comprehensive loss includes all changes in stockholders’ equity except those resulting from investments or contributions by
stockholders. For the periods presented, the accumulated other comprehensive income (loss) consisted solely of the unrealized
gains or losses on the Company's available-for-sale investments, net of tax.
Foreign Currency
The U.S. Dollar is the functional currency of the Company’s subsidiaries. Monetary assets and liabilities are re-measured into
U.S. Dollars at the applicable period end exchange rate. Sales and operating expenses are re-measured at average exchange rates
in effect during each period. Gains or losses resulting from foreign currency transactions are included in net income (loss) and
are insignificant for each of the three years ended December 31, 2015. The effect of exchange rate changes on cash and cash
equivalents was insignificant for each of the three years presented in the period ended December 31, 2015.
Segments
The Company operates in one segment. Management uses one measurement of profitability and does not segregate its business
for internal reporting. As of December 31, 2015 and 2014, 68% and 71%, respectively, of all long-lived assets were maintained
in the U.S. See Note 10 for details relating to revenue by geography.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates (“ASU”) No. 2014-
09, Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be
entitled to for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue
recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect
transition method. Early adoption is not permitted. The updated standard becomes effective for the Company in the first quarter
of fiscal year 2018. The Company has not yet selected a transition method and is currently evaluating the effect that the updated
standard will have on the Consolidated Financial Statements and related disclosures.
In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting of Fees Paid in Cloud Computing Arrangement,
guidance on accounting for fees paid in cloud computing arrangements. If a cloud computing arrangement includes a software
license, then the customer should account for the software license element of the arrangement consistent with the acquisition of
other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for
the arrangement as a services contract. All software licenses recognized under this guidance will be accounted for consistent with
other licenses of intangible assets. The guidance becomes effective for the Company for the first quarter of fiscal 2016. The
guidance is not expected to have a material effect on the Company's Consolidated Financial Statements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. Currently, an entity is required to
measure its inventory at the lower of cost or market, whereby market can be replacement cost, net realizable value, or net
realizable value less an approximately normal profit margin. The changes require that inventory be measured at the lower of cost
and net realizable value, thereby eliminating the use of the other two market methodologies. Net realizable value is defined as
the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and
transportation. These changes do not apply to inventories measured using LIFO (last-in, first-out) or the retail inventory method.
These changes become effective on January 1, 2017. Management is currently evaluating the effect that the updated standard
will have on the Consolidated Financial Statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases. This guidance requires that lease arrangements longer than twelve
months result in a lessee recognizing a lease asset and liability. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the income statement. The updated guidance is effective for interim
and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating
the impact of the updated guidance on the Company's Consolidated Financial Statements.
Adopted Accounting Pronouncements
In November 2015, FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, requiring all deferred tax
assets and liabilities, and any related valuation allowance, to be classified as non-current on the balance sheet. The classification
change for all deferred taxes as non-current simplifies entities’ processes as it eliminates the need to separately identify the net
current and net non-current deferred tax asset or liability in each jurisdiction and allocate valuation allowances. The Company
63
elected to prospectively adopt this accounting standard in the fourth quarter of fiscal 2015. No prior periods were retrospectively
adjusted and the adoption of this guidance did not have a material effect on the Company’s Consolidated Financial Statements
and related disclosures.
NOTE 2—INVESTMENT SECURITIES
The following tables summarize cash, cash equivalents and marketable securities (in thousands):
Cash and cash equivalents:
Cash ................................................................................................................... $
Cash equivalents:
Money market funds ...................................................................................
Commercial paper .......................................................................................
Total cash and cash equivalents ...........................................................
Marketable securities:
U.S. government notes ................................................................................
U.S. government agencies ..........................................................................
Municipal securities ....................................................................................
Commercial paper .......................................................................................
Corporate debt securities ............................................................................
Total marketable securities ..................................................................
December 31,
2015
2014
9,830 $
1,000
38
10,868
7,779
12,608
4,346
4,040
8,766
37,539
7,761
242
1,800
9,803
18,361
19,800
3,607
10,695
18,880
71,343
Total cash, cash equivalents and marketable securities ...................... $
48,407 $
81,146
The following table summarizes unrealized gains and losses related to the Company’s marketable investments (in thousands):
December 31, 2015
Cash and cash equivalents
Marketable investments
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Market
Value
$
10,868 $
— $
— $
10,868
U.S. government notes ..........................................................
U.S. government agencies .....................................................
Municipal securities ..............................................................
Commercial paper .................................................................
Corporate debt securities .......................................................
Total marketable securities ................................................
7,780
12,630
4,344
4,041
8,783
37,578
1
3
2
1
—
7
(2)
(25)
—
(2)
(17)
(46)
7,779
12,608
4,346
4,040
8,766
37,539
Total cash, cash equivalents and marketable securities ..... $
48,446 $
7 $
(46) $
48,407
64
December 31, 2014
Cash and cash equivalents ............................................................ $
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Market
Value
9,803 $
— $
— $
9,803
Marketable investments
U.S. government notes ..........................................................
U.S. government agencies .....................................................
Municipal securities ..............................................................
Commercial paper .................................................................
Corporate debt securities .......................................................
Total marketable securities ................................................
18,345
19,768
3,607
10,693
18,875
71,288
17
33
3
2
13
68
(1)
(1)
(3)
—
(8)
(13)
18,361
19,800
3,607
10,695
18,880
71,343
Total cash, cash equivalents and marketable securities ..... $
81,091 $
68 $
(13) $
81,146
No investments were in a continuous unrealized loss position for longer than 12 months as of December 31, 2015 and 2014.
The following table summarizes the estimated fair value of the Company’s marketable investments classified by the contractual
maturity date of the security as of December 31, 2015 (in thousands):
Due in less than one year (fiscal year 2016) .................................................................................................. $
Due in 1 to 3 years (fiscal year 2017-2018) ..................................................................................................
Total marketable securities ......................................................................................................... $
25,558
11,981
37,539
Amount
Fair Value Measurements
The following table summarizes 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 (in thousands):
December 31, 2015
Cash equivalents:
Level 1
Level 2
Level 3
Total
Money market funds .......................................................... $
Commercial paper .............................................................
1,000 $
—
— $
38
Short term marketable investments:
Available-for-sale securities ..............................................
Total assets at fair value ............................................. $
—
1,000 $
37,539
37,577 $
— $
—
—
— $
1,000
38
37,539
38,577
December 31, 2014
Cash equivalents:
Level 1
Level 2
Level 3
Total
Money market funds .......................................................... $
Commercial paper .............................................................
242 $
—
— $
1,800
Short term marketable investments:
Available-for-sale securities ..............................................
Total assets at fair value ............................................. $
—
242 $
71,343
73,143 $
— $
—
—
— $
242
1,800
71,343
73,385
The Company’s Level 1 financial assets are money market funds with fair values that are based on quoted market prices 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 December 31, 2015 is less than 36 months and all of these investments are rated by
S&P and Moody’s at A or better.
At December 31, 2014, the Company evaluated the fair values of its intangible assets, which are classified within Level 3 of the
fair value hierarchy. With respect to the purchased intangible assets associated with the Iridex acquisition in 2012, the Company
determined that there was impairment in the value of these intangible assets based on an undiscounted cash flow model. The
recorded impairment charge of the purchased intangibles was estimated using a discounted cash flow model. This model relied
65
on Level 3 inputs that included expected future cash flow streams as well as a market discount rate that are subject to uncertainties
that are difficult to predict.
NOTE 3—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 were being amortized over 5 years on a straight-line basis. Other
intangible assets were being amortized over 11 months to 5 years from the date of acquisition on a straight-line basis.
As of December 31, 2014, the Company evaluated the recoverability of the purchased intangible assets, due to the discontinuation
of the manufacture and sale of all products acquired, lower than projected future service revenue, and lower than projected
revenue expected from the distributor relationships acquired. As a result, the Company recorded an impairment charge of
$650,000 in cost of revenue. The unamortized purchased intangibles are being amortized on a declining-balance basis over the
remaining useful economic life of 5 years from the date of acquisition.
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 ............................................................................................................................................
Customer relationship intangible assets ..............................................................................................
Other identified intangible assets .......................................................................................................
Goodwill .............................................................................................................................................
Deferred service revenue ....................................................................................................................
Accrued warranty liability ..................................................................................................................
Total ................................................................................................................................................ $
1,552
2,510
780
1,339
(780 )
(310 )
5,091
The identifiable intangible assets and goodwill identified above shall be deductible for income taxes over a useful economic life
of 15 years.
NOTE 4—BALANCE SHEET DETAIL
Inventories
Inventories consist of the following (in thousands):
Raw materials ................................................................................................................... $
Finished goods .................................................................................................................
Total .............................................................................................................................. $
7,982 $
4,096
12,078 $
7,185
3,803
10,988
December 31,
2015
2014
66
Property and Equipment, net
Property and equipment, net, consists of the following (in thousands):
Leasehold improvements.................................................................................................. $
Office equipment and furniture ........................................................................................
Machinery and equipment ................................................................................................
Less: Accumulated depreciation ......................................................................................
Property and equipment, net .................................................................................. $
December 31,
2015
2014
822 $
2,970
4,662
8,454
(6,981 )
1,473 $
641
2,964
4,140
7,745
(6,284)
1,461
Included in machinery and equipment are financed vehicles used by the Company’s North American sales employees. As of
December 31, 2015 and 2014, the gross capitalized value of the leased vehicles was $862,000 and $647,000 and the related
accumulated depreciation was $374,000 and $253,000, respectively.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets comprise a patent sublicense acquired from Palomar in 2006, intangible assets and goodwill
related to the acquisition of Iridex’s aesthetic business unit, and, customer relationships in the Benelux countries acquired from
a former distributor in 2013. The components of intangible assets at December 31, 2015 and 2014 were as follows (in thousands):
Accumulated
Amortization
&
Impairment
Amount
Gross
Carrying
Amount
Net
Amount
December 31, 2015
Patent sublicense ................................................................................ $
Customer relationship intangible related to acquisition .....................
Other identified intangible assets related to acquisition .....................
Other intangible ..................................................................................
Goodwill.............................................................................................
Total ................................................................................................... $
December 31, 2014
Patent sublicense ................................................................................ $
Customer relationship intangible related to acquisition .....................
Other identified intangible assets related to acquisition .....................
Other intangible ..................................................................................
Goodwill.............................................................................................
Total ................................................................................................... $
1,218 $
2,510
780
155
1,339
6,002 $
1,218 $
2,510
780
155
1,339
6,002 $
1,218 $
2,367
780
155
—
4,520 $
1,206 $
1,998
780
84
—
4,068 $
—
143
—
—
1,339
1,482
12
512
—
71
1,339
1,934
As of December 31, 2014, the Company evaluated the recoverability of its long-lived assets. Relating to the purchased intangible
assets associated with the Iridex acquisition in 2012, due to the discontinuation of the manufacture and sale of all products
acquired, lower than projected future service revenue, and lower than projected revenue expected from the distributor
relationships acquired, the Company concluded based on future undiscounted cash flows that the remaining carrying value of
these assets was impaired. As a result, the Company recorded an impairment charge of $650,000 in cost of revenue.
Amortization expense (excluding the impairment charge described above) in the 2015, 2014, and 2013 fiscal years for intangible
assets was $452,000, $773,000, and $702,000, respectively.
67
Based on intangible assets recorded at December 31, 2015, and assuming no subsequent additions to, or impairment of the
underlying assets, the remaining annual amortization expense will be as follows (in thousands):
Year ending December 31,
2016 ............................................................................................................................................................... $
2017 ...............................................................................................................................................................
Total ................................................................................................................................................... $
Amount
142
1
143
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
December 31,
2015
2014
Accrued payroll and related expenses .............................................................................. $
Accrued sales tax ..............................................................................................................
Warranty liability .............................................................................................................
Other accrued liabilities ...................................................................................................
Total ................................................................................................................................. $
7,726 $
1,935
1,819
2,354
13,834 $
5,533
1,789
1,167
2,518
11,007
NOTE 5—WARRANTY AND SERVICE CONTRACTS
The Company has a direct field service organization in the U.S. Internationally, the Company provides direct service support
through its wholly-owned subsidiaries in Australia, Belgium, Canada, France Hong Kong, Spain, Japan and Switzerland, as well
as through a network of distributors and third-party service providers in several other countries where it does not have a direct
presence. The Company provides a warranty with its products, depending on the type of product. After the original warranty
period, maintenance and support are offered on a service contract basis or on a time and materials basis. The Company currently
provides for the estimated cost to repair or replace products under warranty at the time of sale.
Warranty Accrual (in thousands)
Balance at beginning of year ............................................................................................ $
Add: Accruals for warranties issued during the year .......................................................
Less: Settlements made during the year ...........................................................................
Balance at end of year ........................................................................................... $
1,167 $
4,134
(3,482 )
1,819 $
1,202
2,497
(2,532)
1,167
December 31,
2015
2014
Deferred Service Contract Revenue (in thousands)
Balance at beginning of year ............................................................................................ $
Add: Payments received ...................................................................................................
Less: Revenue recognized ................................................................................................
Balance at end of year ........................................................................................... $
12,949 $
10,378
(12,858 )
10,469 $
11,637
13,913
(12,601)
12,949
Costs incurred under service contracts in 2015, 2014 and 2013 amounted to $6.2 million, $6.6 million, and $6.9 million,
respectively, and are recognized as incurred.
December 31,
2015
2014
68
NOTE 6—STOCKHOLDERS’ EQUITY, STOCK PLANS AND STOCK-BASED COMPENSATION EXPENSE
As of December 31, 2015, the Company had the following stock-based employee compensation plans:
2004 Equity Incentive Plan and 1998 Stock Plan
In 1998, the Company adopted the 1998 Stock Plan, or 1998 Plan, under which 4,650,000 shares of the Company’s common
stock were reserved for issuance to employees, directors and consultants.
On January 12, 2004, the Board of Directors adopted the 2004 Equity Incentive Plan. A total of 1,750,000 shares of common
stock were originally reserved for issuance pursuant to the 2004 Equity Incentive Plan. In addition, the shares reserved for
issuance under the 2004 Equity Incentive Plan included shares reserved but un-issued under the 1998 Plan and shares returned
to the 1998 Plan as the result of termination of options or the repurchase of shares. In 2012 the stockholders approved a “fungible
share” provision whereby each full-value award issued under the 2004 Equity Incentive Plan results in a requirement to subtract
2.12 shares from the shares reserved under the Plan.
Options granted under the 1998 Plan and 2004 Equity Incentive Plan may be incentive stock options or non-statutory stock
options. Stock purchase rights may also be granted under the 2004 Equity Incentive Plan. Incentive stock options may only be
granted to employees. The Board of Directors determines the period over which options become exercisable. Options granted
under the Plan to employees generally vest over a four year term from the vesting commencement date and become exercisable
25% on the first anniversary of the vesting commencement date and an additional 1/48th on the last day of each calendar month
until all of the shares have become exercisable. During 2013 and 2012 the officers of the Company were granted options that
vest over a three year term at the rate of 1/3rd on the one year anniversary of the vesting commencement date and 1/36th thereafter.
In 2014 the officers of the Company were granted RSUs and PSUs but were not granted any options. The contractual term of the
options granted in 2013 and 2012 was seven years.
In accordance with the 2004 Equity Incentive Plan, prior to 2012, the Company’s non-employee directors were granted $60,000
of grant date fair value, fully vested, stock awards annually on the date of the Company’s Annual Meeting of stockholders.
Commencing with 2012, the Company’s non-employee directors get $60,000 of RSUs annually that cliff-vest on the one year
anniversary of the grant date. In the years ended December 31, 2015, 2014 and 2013, the Company issued 21,020, 38,688 and
40,674 RSUs to its non-employee directors, respectively.
In the years ended December 31, 2015, 2014 and 2013 the Company’s Board of Directors granted 107,417, 211,250 and 148,004
respectively, of RSUs to its executive officers and certain members of the Company’s management. The RSUs granted to the
employees vest at the rate of one-fourth on the one-year anniversary of the grant date, and one-fourth in each of the subsequent
three years. The RSUs granted to the executive officers vest at the rate of one-third on the one-year anniversary of the grant date,
and one-third in each of the subsequent two years. The Company measured the fair market values of the underlying stock on the
dates of grant and recognizes the stock-based compensation expense over the vesting period.
In the years ended December 31, 2015, 2014 and 2013 the Company’s Board of Directors granted its executive officers and
certain senior management employees 74,667, 105,000 and 33,751 of PSUs. The PSUs vest over a period of 8.5 months, 12
months and 12 months, respectively, subject to the recipient’s continued service and achievement of the pre-established
operational goals related to revenue and operating income improvement. For the 2015 PSU awards, in addition to operational
goals, there was a market-based goal as well. At the vest date, the Company issues fully-paid up common stock, based on the
degree of achievement of the pre-established targets.
2004 Employee Stock Purchase Plan
On January 12, 2004, the Board of Directors adopted the 2004 Employee Stock Purchase Plan. Under the 2004 Employee Stock
Purchase Plan, or 2004 ESPP, eligible employees are permitted to purchase common stock at a discount through payroll
deductions. The 2004 ESPP offering and purchase periods are for approximately six months. The 2004 ESPP has an evergreen
provision based on which shares of common stock eligible for purchase are increased on the first day of each fiscal year by an
amount equal to the lesser of:
i. 600,000 shares;
ii. 2.0% of the outstanding shares of common stock on such date; or
iii. an amount as determined by the Board of Directors.
69
The Company’s Board of Directors did not increase the shares available for future grant on January 1, 2015, 2014 and 2013. The
price of the common stock purchased is the lower of 85% of the fair market value of the common stock at the beginning or end
of a six month offering period. In the years ended December 31, 2015, 2014 and 2013, under the 2004 ESPP, the Company issued
55,872, 52,579 and 51,338 shares, respectively. At December 31, 2015, 849,985 shares remained available for future issuance.
Option Activity
Activity under the 1998 Plan and 2004 Equity Incentive Plan is summarized as follows:
Options Outstanding
Weighted-
Average
Remaining
Contractual
Life
Weighted-
Average
Exercise
Price
(in years)
Shares
Available
For Grant
Number of
Shares
Aggregate
Intrinsic
Value
(in $
millions)(1)
2.6
4.3 $
—
391,033
(399,997 )
81,257
Balances as of December 31, 2012 ..................... 1,644,356 3,788,239 $
Options granted ................................................... (1,007,166 ) 1,007,166 $
(612,210) $
Options exercised .................................................
(391,033) $
Options cancelled (expired or forfeited) .............
—
Stock awards granted ...........................................
—
Stock awards cancelled (expired or forfeited) ......
709,483 3,792,162 $
Balances as of December 31, 2013 .....................
Additional shares reserved(2) ................................
—
200,000
486,300 $
(486,300 )
Options granted ...................................................
(396,970) $
—
Options exercised .................................................
(418,925) $
418,925
Options cancelled (expired or forfeited) .............
—
(764,394 )
Stock awards granted ...........................................
—
52,046
Stock awards cancelled (expired or forfeited) ......
129,760 3,462,567 $
Balances as of December 31, 2014 .....................
Additional shares reserved(3) ................................ 1,300,000
—
Options granted ...................................................
129,000 $
(129,000 )
— (1,141,904) $
Options exercised .................................................
(300,866) $
Options cancelled (expired or forfeited) .............
—
Stock awards granted ...........................................
—
Stock awards cancelled (expired or forfeited) ......
Balances as of December 31, 2015 .................. 1,263,425 2,148,797 $
Exercisable as of December 31, 2015 ................
1,561,916 $
Expected to vest, net of estimated forfeitures,
300,866
(430,580 )
92,379
9.44
8.97
8.16
10.37
—
—
9.42
—
9.78
8.33
11.15
—
—
9.39
13,.26
9.20
12.37
—
—
9.31
9.05
4.2 $
5.1
3.4 $
5.7
3.4 $
2.8 $
7.9
6.1
1.5
as of December 31, 2015 ..................................
505,631 $
9.92
4.91 $
(1) Based on the closing stock price of the Company’s stock of $12.79 on December 31, 2015, $10.68 on December 31,
2014, $10.18 on December 30, 2013 and $9.00 on December 31, 2012.
(2) Approved by Board of Directors in 2014, approved by stockholders in 2015.
(3) Approved by stockholders in 2015.
70
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the
Company’s closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-
the-money options) that would have been received by the option holders had all option holders exercised their options on
December 31, 2015. The aggregate intrinsic amount changes based on the fair market value of the Company’s common stock.
Total intrinsic value of options exercised in 2015, 2014 and 2013 was $5.1 million, $824,000, and $2.1 million, respectively. The
options outstanding and exercisable at December 31, 2015 were in the following exercise price ranges:
Options Outstanding
Options Exercisable
Range of Exercise Prices
$6.88 .........................................................................
$7.11 – $8.66 .....................................................................
$8.72 .........................................................................
$8.80 .........................................................................
$8.91 – $9.63 .....................................................................
$9.65 – $10.03 ...................................................................
$10.24 .........................................................................
$10.32 – $14.04 .................................................................
$15.32 .........................................................................
$21.84 .........................................................................
$6.88 – $21.84 ...................................................................
Number
Outstanding
299,090
239,152
345,057
325,116
225,345
251,399
250,034
175,604
8,000
30,000
2,148,797
Weighted-
Average
Remaining
Contractual
Life
(in years)
Number
Outstanding
Weighted-
Average
Exercise
Price
3.51
0.85
2.35
4.30
4.61
5.56
1.34
5.49
6.56
0.47
3.38
259,407 $
236,110
345,057
158,434
157,506
85,671
250,034
39,697
—
30,000
1,561,916 $
6.88
8.51
8.72
8.80
9.11
9.82
10.24
11.18
—
21,.84
9.05
As of December 31, 2014 there were 2,330,762 options that were exercisable at a weighted average exercise price of $9.62.
Stock Awards (RSU and PSU) Activity Table
Information with respect to restricted stock units’ and performance stock units’ activity is as follows (in thousands):
Number
of Shares
Weighted-
Average
Grant-Date
Fair Value
Aggregate
Fair Value(1)
(in thousands)
Aggregate
Intrinsic
Value(2)
(in thousands)
1,338
$
Outstanding at December 31, 2012 ..........
Granted ........................................................
Vested (3) .....................................................
Forfeited ......................................................
Outstanding at December 31, 2013 ..........
Granted ........................................................
Vested (3) .....................................................
Forfeited ......................................................
Outstanding at December 31, 2014 ..........
Granted ........................................................
Vested (3) .....................................................
Forfeited ......................................................
Outstanding at December 31, 2015 ..........
148,709 $
188,678 $
(119,505) $
(38,417) $
179,465 $
360,563 $
(81,157) $
(24,550) $
434,321 $
203,104 $
(222,220) $
(43,575) $
371,630 $
6.99
8.94
7.68 $
8.11
8.34
9.72
8.62 $
8.14
9.31
14.81
11.79 $
9.09
12.39
1,091(4)
$
1,827
777(5)
$
4,639
3,285(6)
$
4,753
(1) Represents the value of the Company’s stock on the date that the restricted stock units vest.
(2) Based on the closing stock price of the Company’s stock of $12.79 on December 31, 2015, $10.68 on December 31,
2014, $10.18 on December 30, 2013 and $9.00 on December 31, 2012.
(3) The number of restricted stock units vested includes shares that the Company withheld on behalf of the employees to
satisfy the statutory tax withholding requirements.
(4) On the grant date, the fair value for these vested awards was $917,000.
(5) On the grant date, the fair value for these vested awards was $699,000.
(6) On the grant date, the fair value for these vested awards was $2.6 million.
71
Stock-Based Compensation
Stock-based compensation expense for stock options, restricted stock units, stock awards and ESPP shares for the year ended
December 31, 2015, 2014 and 2013 was as follows (in thousands):
Stock options ...................................................................................... $
RSUs ..................................................................................................
PSUs ...................................................................................................
ESPP ..................................................................................................
Total stock-based compensation expense ........................................... $
1,438 $
1,297
1,167
182
4,084 $
1,811 $
875
455
158
3,299 $
2,201
631
162
116
3,110
Year Ended December 31,
2014
2015
2013
As of December 31, 2015, the unrecognized compensation cost, net of expected forfeitures, was $4.2 million for stock options
and stock awards, which will be recognized over an estimated weighted-average remaining amortization period of 1.78 years.
For the ESPP, the unrecognized compensation cost, net of expected forfeitures, was $82,000, which will be recognized over an
estimated weighted-average amortization period 0.33 years.
The Company issues new shares of common stock upon the exercise of stock options, vesting of RSUs and PSUs, and the issuance
of ESPP shares. The amount of cash received from these issuances, net of taxes withheld and paid, in 2015, 2014 and 2013 was
$10.1 million, $3.6 million and $5.2 million. There was no direct tax benefit (deficit) in 2015, 2014 or 2013. The Company
elected to account for the indirect effects of stock-based awards, primarily the research and development tax credit, through the
Statement of Operations.
Total stock-based compensation expense recognized during the year ended December 31, 2015, 2014 and 2013 was recorded in
the Statement of Operations as follows (in thousands):
Cost of revenue .................................................................................. $
Sales and marketing ...........................................................................
Research and development .................................................................
General and administrative .................................................................
Total stock-based compensation expense ................................... $
447 $
1,054
662
1,921
4,084 $
560 $
641
581
1,517
3,299 $
638
744
397
1,331
3,110
Year Ended December 31,
2014
2015
2013
Valuation Assumptions and Fair Value of Stock Options and ESPP Grants
The Company uses the Black-Scholes option pricing model to estimate the fair value of options granted under its equity incentive
plans and rights to acquire stock granted under its employee stock purchase plan. The Company based the weighted average
estimated values of employee stock option grants and rights granted under the employee stock purchase plan, as well as the
weighted average assumptions used in calculating these values, on estimates at the date of grant, as follows:
2015
Stock Options
2014
2013
Stock Purchase Plan
2014
2015
2013
Expected term (in years)(1) ...........
Risk-free interest rate(2) ................
Volatility(3) ...................................
Dividend yield(4) ...........................
3.24
0.90%
30%
—%
4.18
1.31%
41%
—%
4.30
1.13%
43%
—%
0.50
0.17%
36%
—%
0.50
0.06%
37%
—%
0.50
0.08%
44%
—%
Weighted average estimated fair
value at grant date ..................... $
4.78 $
3.36 $
3.22 $
3.51 $
2.65 $
2.84
(1) The expected term represents the period during which the Company’s stock-based awards are expected to be
outstanding. The estimated term is based on historical experience of similar awards, giving consideration to the
contractual terms of the awards, vesting requirements, and expectation of future employee behavior, including post-
vesting terminations.
72
(2) The risk-free interest rate is based on U.S. Treasury debt securities with maturities close to the expected term of the
option as of the date of grant.
(3) Estimated volatility is based on historical volatility. The Company also considers implied volatility when there is
sufficient volume of freely traded options with comparable terms and exercise prices in the open market.
(4) The Company has not historically issued any dividends and does not expect to do so in the foreseeable future.
The Company periodically estimates forfeiture rates based on its historical experience within separate groups of employees and
adjusts the stock-based payment expense accordingly. The forfeiture rates used in 2015 ranged from 0% to 16%.
Stock Awards Withholdings
For Stock Awards granted to employees, the number of shares issued on the date the Stock Awards vest is net of the tax
withholding requirements paid on behalf of the employees. In 2015, 2014 and 2013, the Company withheld 68,101, 15,769, and
24,249 shares of common stock, respectively, to satisfy its employees’ tax obligations of $1.0 million, $156,000, and $222,000,
respectively. The Company paid this amount in cash to the appropriate taxing authorities. Although shares withheld are not
issued, they are treated as common stock repurchases for accounting and disclosure purposes, as they reduce the number of shares
that would have been issued upon vesting.
Stock Repurchase Program
On August 5, 2013, the Company’s Board of Directors modified Cutera, Inc.’s Stock Repurchase Program, originally adopted in
November 2012, to permit an additional $10 million of its issued and outstanding common shares to be repurchased. As modified,
the Stock Repurchase Program permitted the Company to purchase an aggregate of $20 million of its common stock through a
10b5-1 program based on predetermined pricing and volume as well as open-market purchases that are subject to management
discretion and regulatory restrictions
In the year ended December 31, 2013, the Company repurchased 1,060,447 shares of its common stock at an average price of
$9.43 per share, for approximately $10.0 million. The Company did not repurchase any shares of its common stock in the year
ended December 31, 2014. As of December 31, 2014, there remained $10.0 million available under the modified Stock
Repurchase Program to repurchase the Company’s common stock.
On February 18, 2015, the Company’s Board of Directors approved the expansion of its stock repurchase program from $10
million to $40 million. In the year ended December 31, 2015, the Company repurchased 2,818,038 shares of its common stock
at an average price of $14.19 per share, for approximately $40.0 million.
NOTE 7—INCOME TAXES
The Company files income tax returns in the U.S. federal and various state and local jurisdictions and foreign jurisdictions. The
Company’s loss before provision for income taxes consisted of the following (in thousands):
U.S. .................................................................................................... $
Foreign ...............................................................................................
Loss before income taxes ............................................................ $
(4,588) $
360
(4,228) $
(10,592 ) $
199
(10,393 ) $
(4,919 )
118
(4,801 )
Year Ended December 31,
2014
2015
2013
73
The components of the provision for income taxes are as follows (in thousands):
Current:
Federal ..................................................................................... $
State .........................................................................................
Foreign ....................................................................................
Total Current ..................................................................................
Deferred:
Federal .....................................................................................
State .........................................................................................
Foreign ....................................................................................
Total Deferred ................................................................................
Tax provision (benefit) ............................................................... $
Year Ended December 31,
2014
2015
2013
(7) $
23
218
234
33
—
(55)
(22)
212 $
(7 ) $
19
110
122
32
—
65
97
219 $
(329 )
7
159
(163 )
33
—
76
109
(54 )
The Company’s deferred tax asset consists of the following (in thousands):
December 31,
2015
2014
Net operating loss ............................................................................................................. $
Stock-based compensation ...............................................................................................
Other accruals and reserves ..............................................................................................
Credits ..............................................................................................................................
Foreign .............................................................................................................................
Accrued warranty .............................................................................................................
Depreciation and amortization .........................................................................................
Other ................................................................................................................................
Deferred tax asset before valuation allowance ..........................................................
Valuation allowance .........................................................................................................
Deferred tax asset after valuation allowance .............................................................
Deferred tax liability on goodwill ....................................................................................
Net deferred tax asset ............................................................................................... $
14,231 $
2,462
4,679
4,477
350
657
1,105
5
27,966
(27,616 )
350
(103 )
247 $
12,138
3,884
4,735
3,808
295
417
998
66
26,341
(26,046)
295
(71)
224
The Company’s deferred tax asset balance is reported in the following captions in the Consolidated Balance Sheets (in
thousands):
Deferred tax asset (current portion) .................................................................................. $
Deferred tax asset, net of current portion .........................................................................
Accrued liabilities (non-current deferred tax liability) .....................................................
Net deferred tax asset after valuation allowance ....................................................... $
— $
350
(103 )
247 $
26
269
(71)
224
December 31,
2015
2014
74
The differences between the U.S. federal statutory income tax rates to the Company’s effective tax rate are as follows:
Year Ended December 31,
2014
2013
2015
U.S. federal statutory income tax rate ...............................................
State tax rate, net of federal benefit ...................................................
Benefit for research and development credit .....................................
Income tax refund .............................................................................
Foreign rate differential .....................................................................
Changes in unrecognized tax benefits ...............................................
Meals and entertainment ...................................................................
Stock-based compensation ................................................................
Valuation allowance ..........................................................................
Other .................................................................................................
Effective tax rate ...............................................................................
34.00%
1.94
15.92
0.18
(1.47)
(1.15)
(3.23)
(19.19)
(31.63)
(0.38)
(5.01)%
34.00%
1.62
7.24
0.08
(1.04)
(0.53)
(1.11)
(5.56)
(36.58)
(0.22)
(2.10)%
35.00%
1.57
19.91
0.19
(4.53)
2.60
(2.10)
(34.33)
(17.82)
0.63
1.12%
The Company recognizes deferred tax assets for the expected future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. The Company
records a valuation allowance to reduce the deferred tax assets to their estimated realizable value, when it is more likely than not
that it will not be able to generate sufficient future taxable income to realize the net carrying value. The Company has recorded
a full valuation allowance against its U.S. federal and state deferred tax assets due to its history of operating losses. In the years
ended December 31, 2015, 2014 and 2013, there was a net increase in the valuation allowance of $1.6 million, $3.3 million, and
$0.9 million, respectively.
As of December 31, 2015, the Company had cumulative net operating loss carry-forwards for federal and state income tax
reporting purposes of approximately $41.8 million and $11.2 million, respectively. The federal net operating loss carry-forwards
if not utilized will begin to expire beginning in 2029 through the year 2035 and the state net operating loss carry-forwards if not
utilized will expire beginning in 2029 through the year 2035. The Company maintained a valuation allowance against these net
operating loss carry-forwards as of December 31, 2015.
As of December 31, 2015, the Company had research and development tax credits for federal and state income tax purposes of
approximately $4.7 million and $5.7 million, respectively. The federal research and development tax credits if not utilized will
expire beginning in 2024 through the year 2035. The state research and development credits can be carried forward indefinitely,
except for $284,000, which will expire at various dates through the year 2020. The Company maintained a valuation allowance
against these tax credits as of December 31, 2015.
Included in the net operating loss and research and development tax credit carryforwards are approximately $5.2 million of
excess tax benefits from employee stock option exercises, for which the Company has not recorded a deferred tax asset. When
such excess tax benefits are ultimately realized, the Company will record the deferred tax asset and the credit to additional paid
in capital.
Utilization of U.S. net operating losses and tax credit carryforwards may be limited by “ownership change” rules, as defined in
Section 382 of the Internal Revenue Code. Similar rules may apply under state tax laws. The Company has not conducted a study
to-date to assess whether a limitation would apply under Section 382 of the Internal Revenue Code as and when it starts utilizing
its net operating losses and tax credits. The Company will continue to monitor activities in the future. In the event the Company
previously experienced an ownership change, or should experience an ownership change in the future, the amount of net operating
losses and research and development credit carryovers available in any taxable year could be limited and may expire unutilized.
Undistributed earnings of the Company’s foreign subsidiaries at December 31, 2015 and 2014 were approximately $2.8 million
and $2.6 million, respectively, and are considered to be indefinitely reinvested and, accordingly, no provision for federal and
state income taxes has been provided thereon. If these foreign earnings were to be repatriated in the future, the related U.S. tax
liability would be reduced by any foreign income taxes previously paid on these earnings. Because of the availability of U.S.
foreign tax credits, the determination of the unrecognized deferred tax liability on these earnings is not practicable.
75
Uncertain Tax Positions
The Company establishes reserves for uncertain tax positions based on the largest amount that is more-likely-than-not to be
sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The
Company has provided taxes and related interest and penalties due for potential adjustments that may result from examinations
of open U.S. federal, state and foreign tax years. If the Company ultimately determines that payment of these amounts are not
more-likely-than-not, the Company will reverse the liability and recognize a tax benefit during the period in which the Company
makes the determination. The Company will record an additional charge in the Company’s provision for taxes in the period in
which the Company determines that the recorded tax liability is less than the Company expects the ultimate assessment to be.
The Company’s policy is to include interest and penalties related to gross unrecognized tax benefits within the provision for
income taxes.
The Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2005
through 2015 tax years generally remain subject to examination by U.S., federal and California state tax authorities due to the
Company’s net operating loss and credit carryforwards. For significant foreign jurisdictions, the 2010 through 2015 tax years
generally remain subject to examination by their respective tax authorities.
The following table summarizes the activity related to the Company’s gross unrecognized tax benefits in December 31, 2013 to
December 31, 2015 (in thousands):
Balance at beginning of year .............................................................. $
Increases related to prior year tax positions .......................................
Increases related to current year tax positions ....................................
Decreases related to lapsing of statute of limitations .........................
Balance at end of year ........................................................................ $
597 $
—
54
—
651 $
535 $
—
62
—
597 $
536
36
116
(153 )
535
Year Ended December 31,
2014
2015
2013
The Company’s total unrecognized tax benefits that, if recognized, would affect its effective tax rate at December 31, 2015 and
2014, were approximately $33,000. As of December 31, 2015 and 2014, the Company had accrued approximately $45,000 and
$41,000 for payment of interest, respectively. Interest included in the provision for income taxes was not significant in all the
periods presented. The Company has not accrued any penalties related to its uncertain tax positions as it believes that it is more
likely than not that there will not be any assessment of penalties. The Company expects that the amount of unrecognized tax
benefits will not materially change within the next 12 months.
NOTE 8—NET LOSS PER SHARE
Diluted earnings per share is the same as basic earnings per share for the periods presented because the inclusion of outstanding
common stock equivalents would be anti-dilutive. The following number of weighted 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 years presented
because including them would have had an anti-dilutive effect (in thousands):
Options to purchase common stock ....................................................
Restricted stock units .........................................................................
Employee stock purchase plan shares ................................................
Performance stock units .....................................................................
Total ................................................................................................
NOTE 9—DEFINED CONTRIBUTION PLAN
Year Ended December 31,
2014
2015
2013
2,575
296
93
24
2,988
3,489
213
86
37
3,825
3,830
173
72
34
4,109
In the U.S., the Company has an employee savings plan (“401(k) Plan”) that qualifies as a deferred salary arrangement under
Section 401(k) of the Internal Revenue Code. Eligible employees may make voluntary contributions to the 401(k) Plan up to
100% of their annual compensation, subject to statutory annual limitations. In 2015, 2014 and 2013, the Company made
discretionary contributions under the 401(k) Plan of $244,000, $211,000 and $184,000, respectively.
For the Company’s Japanese subsidiary, a discretionary employee retirement plan has been established. In addition, for some of
the Company’s other foreign subsidiaries, the Company deposits funds with insurance companies, third-party trustees, or into
76
government-managed accounts consistent with the requirements of local laws. The Company has fully funded or accrued for its
obligations as of December 31, 2015, and the related expense for each of the three years then ended was not significant.
NOTE 10—SEGMENT INFORMATION AND REVENUE BY GEOGRAPY AND PRODUCTS
Operating segments are identified as components of an enterprise about which separate discrete financial information is available
for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources
and assess performance. The Company’s chief decision maker, as defined under the FASB’s ASC 280 guidance, is a combination
of the Chief Executive Officer and the Executive Vice President and Chief Financial Officer. To date, the Company’s chief
decision maker has viewed its operations, managed its business, and used one measurement of profitability for the one operating
segment – which sells aesthetic medical equipment and services, and distributes skincare products, to qualified medical
practitioners. Substantially all of the Company’s long-lived assets are located in the U.S.
The following table summarizes revenue by geographic region, based on the location of the customer, and by product category
(in thousands):
Revenue mix by geography:
United States ............................................................................ $
Japan ........................................................................................
Asia, excluding Japan ..............................................................
Europe .....................................................................................
Rest of the world .....................................................................
Consolidated total ............................................................. $
Revenue mix by product category:
Products ................................................................................... $
Hand Piece Refills ...................................................................
Skincare ...................................................................................
Total product revenue .......................................................
Service .....................................................................................
Consolidated total ............................................................. $
NOTE 11—COMMITMENTS AND CONTINGENCIES
Facility Leases
Year Ended December 31,
2014
2015
2013
48,916 $
11,504
15,596
7,728
11,017
94,761 $
71,223 $
2,910
2,889
77,022
17,739
94,761 $
35,494 $
13,328
11,023
7,792
10,501
78,138 $
53,106 $
3,714
3,479
60,299
17,839
78,138 $
31,487
14,205
11,263
7,358
10,281
74,594
48,374
4,267
4,264
56,905
17,689
74,594
As of December 31, 2015, the Company was committed to minimum lease payments for facilities and other leased assets under
long-term non-cancelable operating leases as follows (in thousands):
Year Ending December 31,
2016 .............................................................................................................................................................. $
2017 ..............................................................................................................................................................
2018 ..............................................................................................................................................................
2019 ..............................................................................................................................................................
2020 ..............................................................................................................................................................
Future minimum rental payments................................................................................................................. $
Amount
1,882
1,857
154
16
4
3,913
Gross rent expense recognized in the years ended December 31, 2015, 2014 and 2013 was $1.5 million, $1.5 million and $1.6
million, respectively.
77
Vehicle Leases
As of December 31, 2015, the Company was committed to minimum lease payments for vehicles leased under long-term non-
cancelable capital leases as follows (in thousands):
Year Ending December 31,
2016 .............................................................................................................................................................. $
2017 ..............................................................................................................................................................
2018 ..............................................................................................................................................................
2019 ..............................................................................................................................................................
Future minimum lease payments .................................................................................................................. $
Amount
271
102
113
19
505
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 December 31, 2015.
Indemnifications
In the normal course of business, the Company enters into agreements that contain a variety of representations, warranties, and
indemnification obligations. For example, the Company has entered into indemnification agreements with each of its directors
and executive officers and certain key employees. The Company’s exposure under its various indemnification obligations is
unknown and not reasonably estimable as they involve future claims that may be made against the Company. As such, the
Company has not accrued any amounts for such obligations.
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 December 31, 2015 and 2014, the Company had accrued $110,000 and $74,000, respectively,
related to pending product liability and contractual lawsuits.
NOTE 12—SUBSEQUENT EVENTS
On February 8, 2016, the Company announced that its Board of Directors approved the expansion of its Stock Repurchase
Program by $10 million, under which the Company is authorized to repurchase shares of its common stock.
On February 11, 2016, Kendall Jenner and Kendall Jenner Inc. (“Plaintiffs”), filed a lawsuit against the Company in the U.S.
District Court, Central District of California, alleging trademark infringement, false endorsement and violation of Jenner’s right
of publicity. The claims arise out of alleged advertising referring to news articles describing Jenner’s blog posting regarding her
use of Cutera’s Laser Genesis treatment for her acne. In their complaint, the Plaintiffs state that they are seeking “at least $10
million” in compensatory damages and reasonable costs and attorney’s fees. The Company is presently investigating the matter
and intends to defend the matter vigorously. While the Company believes it has meritorious defenses to the matter, the potential
outcome of this litigation, or its impact upon the Company, cannot be predicted at this time.
78
SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts)
Quarter ended:
Net revenue ............................. $
Cost of revenue .......................
Gross profit ..............................
Operating expenses:
Sales and marketing ................
Research and development ......
General and administrative .....
Total operating expenses .........
Income (loss) from operations
Interest and other income, net .
Income (loss) before income
taxes ....................................
Income tax provision ...............
Net income (loss) .................... $
Net income (loss) per share—
Dec. 31,
2015
Sept. 30,
2015
June 30,
2015
March 31,
2015
Dec. 31,
2014
Sept. 30,
2014
June 30,
2014
March 31,
2014
30,042 $
12,145
17,897
23,085 $
9,594
13,491
22,563 $
9,687
12,876
19,071 $
9,052
10,019
25,499 $
11,679
13,820
18,726 $
7,935
10,791
17,724 $
7,848
9,876
9,899
2,812
3,189
15,900
1,997
105
8,790
2,748
2,937
14,475
(984)
84
9,066
2,728
3,014
14,808
(1,932)
96
8,187
2,445
2,989
13,621
(3,602)
8
9,356
2,649
3,407
15,412
(1,592)
8
7,805
2,628
2,897
13,330
(2,539)
—
7,754
2,622
2,335
12,711
(2,835)
138
2,102
52
2,050 $
(900)
57
(957) $
(1,836)
53
(1,889) $
(3,594)
50
(3,644) $
(1,584)
41
(1,625) $
(2,539)
97
(2,636) $
(2,697)
44
(2,741) $
16,189
7,303
8,886
7,331
2,644
2,564
12,539
(3,653)
80
(3,573)
37
(3,610)
basic .................................... $
0.16 $
(0.07) $
(0.13) $
(0.25) $
(0.11) $
(0.18) $
(0.19) $
(0.26)
Net income (loss) per share—
diluted ................................. $
0.15 $
(0.07) $
(0.13) $
(0.25) $
(0.11) $
(0.18) $
(0.19) $
(0.26)
Weighted average number of
shares used in per share
calculations:
Basic ..........................
Diluted .......................
12,978
13,591
13,827
13,827
14,441
14,441
14,611
14,611
14,425
14,425
14,334
14,334
14,231
14,231
14,021
14,021
79
SCHEDULE II
CUTERA, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
For the Years Ended December 31, 2015, 2014 and 2013
Deferred tax assets valuation allowance
Year ended December 31, 2015 ........................................ $
Year ended December 31, 2014 ........................................ $
Year ended December 31, 2013 ........................................ $
26,046 $
22,762 $
21,907 $
3,327 $
3,780 $
3,437 $
1,757 $
496 $
2,582 $
27,616
26,046
22,762
Balance at
Beginning
of Year
Additions Deductions
Balance
at End of
Year
Allowance for doubtful accounts receivable
Year ended December 31, 2015 ........................................ $
Year ended December 31, 2014 ........................................ $
Year ended December 31, 2013 ........................................ $
— $
19 $
— $
4 $
4 $
19 $
— $
23 $
— $
4
—
19
Balance at
Beginning
of Year
Additions Deductions
Balance
at End of
Year
80
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Attached as exhibits to this Annual Report are certifications of the Company’s Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”), which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as
amended (Exchange Act). This Controls and Procedures section includes the information concerning the controls evaluation
referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding
of the topics presented.
The Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and
procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Exchange Act) (Disclosure Controls) as of the end of
the period covered by this Report required by Exchange Act Rules 13a-15(b) or 15d-15(b). The controls evaluation was
conducted under the supervision and with the participation of the Company’s management, including the CEO and CFO.
Based on this evaluation, the CEO and our CFO have concluded that as of the end of the period covered by this report the
Company’s disclosure controls and procedures were effective at a reasonable assurance level.
Definition of Disclosure Controls
Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in
the Company’s reports filed under the Exchange Act, such as this Report, is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure
that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. The Company’s Disclosure Controls include components
of its internal control over financial reporting, which consists of control processes designed to provide reasonable assurance
regarding the reliability of its financial reporting and the preparation of financial statements in accordance with generally
accepted accounting principles in the U.S. To the extent that components of the Company’s internal control over financial
reporting are included within its Disclosure Controls, they are included in the scope of the Company’s annual controls
evaluation.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the
participation of the Company’s management, including the CEO and CFO, the Company conducted an evaluation of the
effectiveness of its internal control over financial reporting based on criteria established in the framework in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Based on this evaluation, the Company’s management concluded that the Company’s internal control over
financial reporting was effective as of December 31, 2015. The effectiveness of our internal control over financial reporting
as of December 31, 2015 has been audited by BDO USA LLP, an Independent Registered Public Accounting Firm, as stated
in their report, which is included herein.
Limitations on the Effectiveness of Controls
The Company’s management, including the CEO and CFO, does not expect that the Company’s disclosure controls or internal
control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the
design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can
occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The design of any system of controls is based
in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed
81
in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal
quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of Cutera, Inc.
We have audited Cutera, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established
in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Cutera, Inc.’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying “Item 9A, Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to
express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Cutera, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet of Cutera, Inc.' as of December 31, 2015 and 2014 and the related consolidated statements of
operations, comprehensive loss, stockholders’ equity, and cash flows for the years ended December 31, 2015 and 2014 and
our report dated March 15, 2015 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
San Jose, California
March 15, 2016
82
ITEM 9B. OTHER INFORMATION
The Company has established that the 2016 Annual Meeting of Stockholders will be held at its principal executive offices
located at 3240 Bayshore Blvd., Brisbane, CA 94005-1021 on June 15, 2016 at 10:00 a.m. and the record date for the purposes
of voting in that meeting shall be April 19, 2016.
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K because we will file a Definitive
Proxy Statement (the “Proxy Statement”) for our 2016 Annual Meeting of Stockholders with the Securities and Exchange
Commission within 120 days after the end of our fiscal year ended December 31, 2015.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item is incorporated herein by reference to the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the Proxy Statement.
83
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(1)
(2)
(3)
The financial statements required by Item 15(a) are filed as Item 8 of this Annual Report.
The financial statement schedule required by Item 15(a) filed as Item 8 of this Annual Report.
Exhibits.
Exhibit No. Description
3.2(1) Amended and Restated Certificate of Incorporation of the Registrant (Delaware).
3.4(1) Bylaws of the Registrant.
4.1(4) Specimen Common Stock certificate of the Registrant.
10.1(1) Form of Indemnification Agreement for directors and executive officers.
10.2(1) 1998 Stock Plan.
10.4(5) 2004 Employee Stock Purchase Plan.
10.6(1)
10.10(2)
Brisbane Technology Park Lease dated August 5, 2003 by and between the Registrant and Gal-Brisbane, L.P.
for office space located at 3240 Bayshore Boulevard, Brisbane, California.
Settlement Agreement and Non-Exclusive Patent License, each between the Registrant and Palomar Medical
Technologies, Inc. dated June 2, 2006.
10.11(3) Form of Performance Unit Award Agreement.
10.14(6) 2004 Equity Incentive Plan, as amended by its Board of Directors on April 27, 2012.
10.19(7)
First Amendment to Brisbane Technology Park Lease dated August 11, 2010 by and between the Company and
BMR-Bayshore Boulevard LLC, as successor-in-interest to Gal-Brisbane, L.P., the original landlord, for office
space located at 3240 Bayshore Boulevard.
16.1(8) Letter regarding change in certifying accountants.
23.1(9) Consent of Independent Registered Public Accounting Firm.
23.2(9) Consent of Independent Registered Public Accounting Firm.
24.1 Power of Attorney.
31.1(9) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2(9) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1(9)
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following materials from Cutera Inc.’s Annual Report on Form 10-K for the year ended December 31,
2014, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii)
Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated
Statement of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated
Financial Statements, tagged at Level I through IV.
101(9)
(1) Incorporated by reference from our Registration Statement on Form S-1 (Registration No. 333-111928) which was
declared effective on March 30, 2004.
(2) Incorporated by reference from our Current Report on Form 8-K filed on June 2, 2006.
(3) Incorporated by reference from our Quarterly Report on Form 10-Q filed on November 14, 2005.
(4) Incorporated by reference from our Quarterly Report on Form 10-Q filed on November 8, 2006.
(5) Incorporated by reference from our 2006 Annual Report on Form 10-K filed on March 16, 2007.
(6) Incorporated by reference from our Definitive Proxy Statement on Form 14A filed with the SEC on April 30, 2012.
(7) Incorporated by reference from our Quarterly Report on Form 10-Q filed on November 1, 2010.
(8) Incorporated by reference from Current Report on Form 8-K filed April, 2, 2014.
(9) Filed herewith.
84
Pursuant to the requirements of Section 13 or 15(d) of The Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Brisbane, State of California,
on the 15th day of March, 2016.
SIGNATURES
CUTERA, INC.
By:
/s/ KEVIN P. CONNORS
Kevin P. Connors
President and Chief Executive Officer
Power of Attorney
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Kevin P. Connors, his attorney-in-fact, for him or her in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with
the U.S. Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute,
may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ KEVIN P. CONNORS
Kevin P. Connors
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date
March 15, 2016
/s/ RONALD J. SANTILLI
Ronald J. Santilli
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)
March 15, 2016
David B. Apfelberg
Director
/s/ GREGORY A. BARRETT
Gregory A. Barrett
/s/ DAVID A. GOLLNICK
David A. Gollnick
Director
Director
J. Daniel Plants
Director
/s/ CLINT H. SEVERSON
Clint H. Severson
/s/ TIM O’SHEA
Tim O’Shea
/s/ JERRY P. WIDMAN
Jerry P. Widman
Director
Director
Director
85
March 15, 2016
March 15, 2016
March 15, 2016
March 15, 2016
March 15, 2016
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 15 U.S.C. SECTION 7241, AS
ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Kevin P. Connors, certify that:
1.
I have reviewed this annual report on Form 10-K of Cutera, Inc.:
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this annual report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: March 15, 2016
/s/ KEVIN P. CONNORS
Kevin P. Connors
President, Chief Executive Officer and Director
(Principal Executive Officer)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 15 U.S.C. SECTION 7241, AS
ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Ronald J. Santilli, certify that:
1.
I have reviewed this annual report on Form 10-K of Cutera, Inc.:
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this annual report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: March 15, 2016
/s/ RONALD J. SANTILLI
Ronald J. Santilli
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT 32.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report on Form 10-K of Cutera, Inc. a Delaware corporation, for the period ended
December 31, 2015, as filed with the Securities and Exchange Commission, each of the undersigned officers of Cutera, Inc.
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to
his respective knowledge:
(1)
(2)
the annual report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended; and
the information contained in the annual report fairly presents, in all material respects, the financial condition and
results of operations of Cutera, Inc. for the periods presented therein.
Date: March 15, 2016
Date: March 15, 2016
/s/ KEVIN P. CONNORS
Kevin P. Connors
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ RONALD J. SANTILLI
Ronald J. Santilli
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Corporate Information (as of April 29, 2016)
ABOUT US
Brisbane, California-based Cutera is a
leading provider of laser, light and other
energy-based aesthetic systems for
practitioners worldwide. Since 1998, we
have been developing innovative, easy-to-
use products that enable physicians and
other qualified practitioners to offer safe
and effective aesthetic treatments to their
patients. For more information, call 1-888-
4CUTERA or visit www.cutera.com.
BOARD OF DIRECTORS
Kevin P. Connors, President and Chief
Executive Officer, Cutera, Inc.
David B. Apfelberg, MD3,5, Adjunct
Clinical Professor of Plastic Surgery,
Stanford University Medical Center
Gregory Barrett4,5, President and Chief
Executive Officer, DFINE, Inc.
David A. Gollnick, Former Vice President
of North American Sales and Former
Executive Vice President of Research
and Development, Cutera, Inc.
Timothy J. O'Shea1,6,7, Former Managing
Director, Oxo Capital
J. Daniel Plants5,8, Managing Partner,
Voce Capital Management LLC
Clint H. Severson1, President and Chief
Executive Officer, Abaxis, Inc.
Jerry P. Widman2,3,5, Former Chief
Financial Officer, Ascension Health
1- Audit Committee member
2- Chairman of Audit Committee
3- Compensation Committee member
4- Chairman of Compensation Committee
5- Nominating and Corporate Governance
Committee member
6- Chairman of Nominating and Corporate
Governance Committee
7- Strategic Transactions Committee member
8- Chairman of Strategic Transactions Committee
MANAGEMENT TEAM
Kevin P. Connors, President, Chief
Executive Officer and Director
Ronald J. Santilli, Executive Vice
President and Chief Financial Officer
Larry E. Laber, Executive Vice President,
Sales, North America
Miguel A. Pardos, Executive Vice
President, International
Jonathan T. Pearson, Executive Vice
President, Marketing and Clinical
Development
Lukas Hunziker, Vice President,
Research and Development
Rajesh Madan, Vice President, Finance
and Legal
Bradley J. Renton, Vice President,
Regulatory and Medical Affairs &
Compliance Officer
Stephen M. Singer, Vice President,
Manufacturing and Service
ANNUAL MEETING
Annual meeting of stockholders will be
held on June 15, 2016, 10:00 a.m. (PDT)
at: 3240 Bayshore Blvd., Brisbane,
California 94005.
TRANSFER AGENT
Computershare Trust Company, Inc.
350 Indiana St., Suite 800
Golden, Colorado 80401
303-262-0600
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
2014 and 2015: BDO USA, LLP,
San Jose, California
2013: Ernst & Young LLP,
Redwood City, California
CORPORATE LEGAL COUNSEL
Wilson, Sonsini, Goodrich & Rosati, P.C.,
Palo Alto, California
CORPORATE/STOCKHOLDER
INFORMATION
Our Form 10-K was filed with the
Securities and Exchange Commission on
March 15, 2016. For additional copies of
this report, Form 10-K, or other financial
information, without charge, please visit
the Investor Relations page on our website
at: www.cutera.com or write to
ir@cutera.com.
STOCK LISTING
AND MARKET DATA
Our common stock is traded on The
NASDAQ Global market under the symbol
"CUTR." We have not declared or paid any
cash dividends on our capital stock since
our inception. We currently expect to retain
future earnings, if any, for use in the
operation and expansion of our business
and do not anticipate paying any cash
dividends in the foreseeable future. As of
April 29, 2016, we had approximately
1,900 holders of record of our common
stock.
The following table sets forth quarterly
high and low closing sales prices per
share of our common stock as reported on
The NASDAQ Global Market for the
periods indicated.
Common Stock
2015
2014
High Low High Low
$ 14.52 $ 11.99 $ 11.04 $
15.60 13.07 10.75
15.98 12.87 11.73
14.26 10.86 11.24
9.66
9.27
9.25
9.00
4th Qtr.
3rd Qtr.
2nd Qtr.
1st Qtr.