The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Description of Operations and Principles of Consolidation
Cutera, Inc. (
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 system platforms:
enlighten
®
, excel HR
®
, truSculpt
®
, excel V
®
, and xeo
®
.
The Company’s systems offer multiple hand pieces and applications, which allow customers to upgrade their systems. The sales of (i) systems, system upgrades and hand pieces (classified as “Systems” revenue); (ii) hand piece refills applicable to
Titan
®
and
truSculpt
(classified as “Hand Piece Refills”); and (iii) the distribution of third party manufactured skincare products (classified as "Skincare” revenue); and collectively classified as “Products” revenue. 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, Switzerland and the United Kingdom. These subsidiaries market, sell and service the Company
’s products outside of the United States. The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All inter-company accounts, transactions and balances have been eliminated.
Unaudited Interim Financial Information
The interim financial information included in this report is unaudited. The Condensed Consolidated Financial Statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for the fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The December 31, 2016 Condensed Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). The results for interim periods are not necessarily indicative of the results for the entire year or any other interim period. The Condensed Consolidated Financial Statements should be read in conjunction with the Company
’s previously filed audited financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2017.
Use of Estimates
The preparation of interim Condensed Consolidated Financial Statements in conformity with GAAP requires the Company
’s management to make estimates and assumptions that affect the amounts reported and disclosed in the Condensed Consolidated Financial Statements and the accompanying notes. These estimates are based on management's best knowledge of current events and actions we may undertake in the future. Actual results could differ materially from those estimates. On an ongoing basis, the Company evaluates these estimates, including those related to revenue elements, warranty obligations, sales commissions, accounts receivable and sales allowances, provision for excess and obsolete inventories, fair values of marketable investments, useful lives of property and equipment, fair values of performance stock units and options to purchase the Company’s stock, recoverability of deferred tax assets, legal matters and claims, and effective income tax rates, among others. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Recent Accounting Pronouncements Not Yet Adopted
Revenue Recognition
In May 2014, the Financial Accounting Standards Board ("FASB”), jointly with the International Accounting Standards Board, issued
Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. This new standard will replace most of the existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either the retrospective or the modified retrospective method (or cumulative effect transition method).
The standard's core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying this new guidance to contracts within its scope, an entity will: (1) identify the contract(s) with a customer, (2) identify the performance obligation in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, this new guidance would require significantly expanded disclosures about revenue. The new standard is effective for annual reporting periods (including interim reporting periods within those annual periods) beginning after December 15, 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new standard.
While the Company has not completed its evaluation,
the Company currently plans to adopt this accounting standard in the first quarter of fiscal year 2018 using the modified retrospective method. Based on the
analysis performed through the third quarter of 2017, t
he Company believes that the timing and measurement of revenue recognition under its contracts with customers for its
Products and Services w
ill not change significantly.
However, the basis of revenue recognition will change to one based on the transfer of control of products and services. Also based on the analysis performed,
the Company expects that incremental contract acquisition costs of obtaining revenue generating contracts, such as sales commissions paid in connection with system sales with multi-year post-warranty service contracts, would be capitalized and amortized over the
customer relationship period
. Under the current guidance, the Company expenses such costs when incurred. The Company is in the process of calculating the adjustment that would be required for capitalizing the sales commissions to accumulated deficit
and completing the analysis and documentation required for the implementation of ASC 606
upon adoption of the standard on January 1, 2018.
The new revenue standard is principle-based and interpretation of those principles may vary from company to company based on their unique circumstances. It is possible that interpretation, industry practice, and guidance may evolve as companies and the accounting profession work to implement this new standard.
As the Company completes its evaluation of this new standard, new information may arise that could change the Company’s current understanding of the impact to revenue and expense recognized. Additionally, the Company will continue to monitor industry activities and any additional guidance provided by regulators, standards setters, or the accounting profession and adjust the Company’s assessment and implementation plans accordingly.
The new standard requires comprehensive disclosures of quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company is in the process of preparing the expanded disclosures required under ASC 606.
Accounting for Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). The new standard also requires expanded disclosures regarding leasing arrangements. The new standard becomes effective for the Company in the first quarter of fiscal year 2019 and early adoption is permitted. The new standard is required to be adopted using the modified retrospective approach and requires application of the new standard at the beginning of the earliest comparative period presented. The Company generally does not finance purchases of equipment or other capital, but does lease some of its facilities. Several of the Company
’s customers finance purchases of its system products through third party lease companies and not directly with the Company. The Company does not believe that the new standard will change customer buying patterns or behaviors for its products. T
he Company expects that upon adoption, right-of-use assets and lease liabilities will be recognized in the balance sheet in amounts that will be material.
Accounting for Income Taxes
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This ASU will be effective for the Company in the first quarter of 2018. This ASU is required to be adopted using the modified retrospective approach, with a cumulative catch-up adjustment to retained earnings in the period of adoption. The Company does not believe that adopting this ASU will have a material impact on the financial Statements.
Adopted Accounting Pronouncement
Beginning fiscal year 2017, the Company adopted ASU No. 2016-09, Improvements to Employee Share-based Payment Accounting, which changes among other things, how the tax effects of share-based awards are recognized. ASU No. 2016-09 requires excess tax benefits and tax deficiencies to be recognized in the provision for income taxes as discrete items in the period when the awards vest or are settled, whereas previously such income tax effects were generally recorded as part of additional paid-in capital. The provision for income taxes for the three and nine months ended September 30, 2017, included excess tax benefits
of $50,000 and $160,000, respectively. The recognized excess tax benefits resulted from share-based compensation awards primarily associated with employee equity plans that were vested or settled in the three and nine months ended September 30, 2017. This ASU also eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the consolidated statements of cash flows. The Company also excluded the related tax benefits when applying the treasury stock method for computing diluted shares outstanding on a prospective basis as required by this ASU. In addition, the Company elected to continue its current practice of estimating expected forfeitures. The amount of excess tax benefits and deficiencies recognized in the provision for income taxes will fluctuate from period to period based on the price of the Company’s stock, the volume of share-based instruments settled or vested, and the value assigned to share-based instruments under GAAP.
Significant Accounting Policies
There have been no
additional new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, that are of significance or potential significance to the Company.
Note 2. Cash, Cash Equivalents and Marketable Investments
The Company invests its cash primarily in money market funds, commercial paper, corporate notes and bonds, municipal bonds, and debt securities issued by the U.S. government and its agencies. The Company considers all highly liquid investments, with an original maturity of three months or less at the time of purchase, to be cash equivalents. Investments with maturities of greater than three months at the time of purchase are accounted for as “available-for-sale,” are carried at fair value with unrealized gains and losses reported as a component of stockholders
’ equity, are held for use in current operations and are classified in current assets as “marketable investments.”
The following tables summarize the components, and the unrealized gains and losses position, related to the Company
’s cash, cash equivalents and marketable investments (in thousands):
September
30, 2017
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Market
Value
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
6,703
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,703
|
|
Money market funds
|
|
|
1,636
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,636
|
|
Commercial paper
|
|
|
6,445
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,445
|
|
Total cash and cash equivalents
|
|
|
14,784
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government notes
|
|
|
5,133
|
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
5,129
|
|
U.S. government agencies
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Municipal securities
|
|
|
201
|
|
|
|
—
|
|
|
|
—
|
|
|
|
201
|
|
Commercial paper
|
|
|
15,942
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
15,942
|
|
Corporate debt securities
|
|
|
14,419
|
|
|
|
9
|
|
|
|
(8
|
)
|
|
|
14,420
|
|
Total marketable investments
|
|
|
35,695
|
|
|
|
10
|
|
|
|
(13
|
)
|
|
|
35,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and
marketable investments
|
|
$
|
50,479
|
|
|
$
|
10
|
|
|
$
|
(13
|
)
|
|
$
|
50,476
|
|
December 31, 2016
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Market
Value
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
6,672
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,672
|
|
Money market funds
|
|
|
6,053
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,053
|
|
Commercial paper
|
|
|
1,050
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,050
|
|
Total cash and cash equivalents
|
|
|
13,775
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government notes
|
|
|
8,403
|
|
|
|
4
|
|
|
|
(9
|
)
|
|
|
8,398
|
|
U.S. government agencies
|
|
|
3,918
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
3,916
|
|
Municipal securities
|
|
|
1,325
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,325
|
|
Commercial paper
|
|
|
12,299
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
12,299
|
|
Corporate debt securities
|
|
|
14,366
|
|
|
|
3
|
|
|
|
(8
|
)
|
|
|
14,361
|
|
Total marketable investments
|
|
|
40,311
|
|
|
|
9
|
|
|
|
(21
|
)
|
|
|
40,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable investments
|
|
$
|
54,086
|
|
|
$
|
9
|
|
|
$
|
(21
|
)
|
|
$
|
54,074
|
|
As of
September 30, 2017 and December 31, 2016, total gross unrealized losses were $13,000 and $21,000, respectively, and were related to interest rate changes on available-for-sale marketable investments. The Company has concluded that it is more- likely- than- not that the securities will be held until maturity or the recovery of their cost basis. No securities were in an unrealized loss position for more than 12 months.
The following table summarizes the contractual maturities of the Company
’s available-for-sale securities, classified as marketable investments as of September 30, 2017 (in thousands):
|
|
Amount
|
|
Due in less than one year
|
|
$
|
30,410
|
|
Due in 1 to 3 years
|
|
|
5,282
|
|
Total marketable investments
|
|
$
|
35,692
|
|
Note 3. Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources
(observable inputs)
and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (
unobservable inputs
). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1)
and the lowest priority to unobservable inputs
(Level 3).
The three levels of the fair value hierarchy are described below:
|
●
|
Level 1:
Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
|
|
●
|
Level 2:
Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
|
|
●
|
Level 3:
Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
|
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.
As of
September 30, 2017, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows (in thousands):
September
30, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
1,636
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,636
|
|
Commercial paper
|
|
|
—
|
|
|
|
6,445
|
|
|
|
—
|
|
|
|
6,445
|
|
Marketable investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
—
|
|
|
|
35,692
|
|
|
|
—
|
|
|
|
35,692
|
|
Total assets at fair value
|
|
$
|
1,636
|
|
|
$
|
42,137
|
|
|
$
|
—
|
|
|
$
|
43,773
|
|
As of December 31, 2016, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above was as follows (in thousands):
December 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
6,053
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,053
|
|
Commercial paper
|
|
|
—
|
|
|
|
1,050
|
|
|
|
—
|
|
|
|
1,050
|
|
Marketable investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
—
|
|
|
|
40,299
|
|
|
|
—
|
|
|
|
40,299
|
|
Total assets at fair value
|
|
$
|
6,053
|
|
|
$
|
41,349
|
|
|
$
|
—
|
|
|
$
|
47,402
|
|
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 weighted average remaining maturity of the Company’s Level 2 investments as of September 30, 2017 is less than 1 year and all of these investments are rated by S&P and Moody’s at A- or better.
Note 4. Balance Sheet Details
Inventories
As of
September 30, 2017 and December 31, 2016, inventories consist of the following (in thousands):
|
|
September
30, 2017
|
|
|
December 31, 2016
|
|
Raw materials
|
|
$
|
18,201
|
|
|
$
|
10,966
|
|
Finished goods
|
|
|
5,527
|
|
|
|
4,011
|
|
Total
|
|
$
|
23,728
|
|
|
$
|
14,977
|
|
Accrued Liabilities
As of
September 30, 2017 and December 31, 2016, accrued liabilities consist of the following (in thousands):
|
|
September
30, 2017
|
|
|
December 31, 2016
|
|
Accrued payroll and related expenses
|
|
$
|
10,869
|
|
|
$
|
9,036
|
|
Sales
and marketing programs
|
|
|
3,060
|
|
|
|
706
|
|
Warranty liability
|
|
|
2,940
|
|
|
|
2,461
|
|
Sales tax
|
|
|
2,206
|
|
|
|
2,373
|
|
Other
|
|
|
3,128
|
|
|
|
2,821
|
|
Total
|
|
$
|
22,203
|
|
|
$
|
17,397
|
|
Note 5. Warranty
The Company provides a standard one-year 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 to 16 month warranty for parts only. The distributor provides the labor to their end customer.
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, Japan, Switzerland and the United Kingdom. In several other countries
where it does not have a direct presence, the Company provides service through a network of distributors and third-party service providers.
After the original warranty period, maintenance and support are offered on a service contract basis or on a time and materials basis. The Company provides for the estimated cost to repair or replace products under warranty at the time of sale. The following table provides the changes in the product warranty accrual for the three and
nine months ended September 30, 2017 and 2016 (in thousands):
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Beginning Balance
|
|
$
|
2,877
|
|
|
$
|
2,000
|
|
|
$
|
2,461
|
|
|
$
|
1,819
|
|
Add: Accruals for warranties issued during the period
|
|
|
959
|
|
|
|
1,202
|
|
|
|
5,038
|
|
|
|
3,634
|
|
Less: Warranty related expenses during the period
|
|
|
(896
|
)
|
|
|
(1,102
|
)
|
|
|
(4,559
|
)
|
|
|
(3,353
|
)
|
Ending Balance
|
|
$
|
2,940
|
|
|
$
|
2,100
|
|
|
$
|
2,940
|
|
|
$
|
2,100
|
|
Note 6. Deferred Service Contract Revenue
The Company generates Service revenue from the sale of extended service contracts and from time and material services provided to customers who are not under a warranty or extended service contract. Service contract revenue is recognized on a straight-line basis over the period of the applicable contract. Service revenue from time and material services is recognized as the services are provided.
The following table provides changes in the deferred service contract revenue balance for the three and
nine month ended September 30, 2017 and 2016 (in thousands):
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Beginning Balance
|
|
$
|
10,013
|
|
|
$
|
10,223
|
|
|
$
|
9,431
|
|
|
$
|
10,469
|
|
Add: Payments received
|
|
|
3,178
|
|
|
|
2,517
|
|
|
|
10,290
|
|
|
|
8,825
|
|
Less: Revenue recognized
|
|
|
(3,233
|
)
|
|
|
(3,447
|
)
|
|
|
(9,763
|
)
|
|
|
(10,001
|
)
|
Ending Balance
|
|
$
|
9,958
|
|
|
$
|
9,293
|
|
|
$
|
9,958
|
|
|
$
|
9,293
|
|
Costs incurred by the Company for servicing extended service contracts were $1.2 million and $1.7 million for the three months ended September 30, 2017 and 2016, respectively; and $4.2 million and $4.9 million for the nine months ended September 30, 2017 and 2016, respectively.
Note 7. Stockholders
’ Equity and Stock-based Compensation Expense
Amended and Restated 2004 Equity Incentive Plan
T
he Company’s Board of Directors (“Board”) and stockholders approved the amendment and restatement of the 2004 equity incentive plan (“Amended and Restated 2004 Equity Incentive Plan”) in April and June 2017, respectively. The amendments included the extension of the term of the plan to the date of the annual meeting of the Company’s stockholders in 2022, an increase in the number of shares available for future grant by 1,600,000 shares, and other terms of the plan. The Amended and Restated 2004 Equity Incentive Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock, restricted stock units ("RSUs"), stock appreciation rights, performance stock units ("PSUs"), performance shares, and other stock or cash awards.
Activity under the Company
’s Amended and Restated 2004 Equity Incentive Plan for the nine months ended September 30, 2017 is summarized as follows:
|
|
|
|
|
|
Options Outstanding
|
|
|
|
Shares
Available
for Grant
|
|
|
Number of
Stock Options
Outstanding
|
|
|
Weighted-
Average Exercise
Price
|
|
Balance as of December 31, 2016
|
|
|
721,657
|
|
|
|
1,116,472
|
|
|
$
|
9.56
|
|
Additional shares reserved
|
|
|
1,600,000
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(154,000
|
)
|
|
|
154,000
|
|
|
|
21.82
|
|
Stock awards granted
(1) (2)
|
|
|
(558,694
|
)
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
—
|
|
|
|
(447,673
|
)
|
|
|
8.90
|
|
Options canceled
|
|
|
53,393
|
|
|
|
(53,393
|
)
|
|
|
16.58
|
|
Stock awards canceled
(1)
|
|
|
110,278
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2017
|
|
|
1,772,634
|
|
|
|
769,406
|
|
|
$
|
11.91
|
|
|
(1)
|
The Company has a “fungible share” provision in its Amended and Restated 2004 Equity Incentive Plan whereby for each full-value award issued or canceled under the Amended and Restated 2004 Equity Incentive Plan requires the subtraction or addition of 2.12 shares from or to the shares available for grant, as applicable.
|
|
(2)
|
Included in the 'Stock awards granted' total of
558,694
, are 221,540 fungible shares relating to 104,500 of PSUs granted. These PSUs may result in a lower number of shares of common stock that may be released on January 1, 2018, based on PSUs forfeited due to employment terminations and the degree of achievement of two performance goals compared to targets that were pre-determined by the Board and disclosed in a Current Report on Form 8-K filed with the SEC on January 11, 2017.
|
As of September 30, 2017, unrecognized compensation expense, net of projected forfeitures, related to non-vested equity awards issued under the Company
’s Amended and Restated 2004 Equity Incentive Plan and the 2004 Employee Stock Purchase Plan (“ESPP”),
was approximately
$4.9 million. This expense is expected to be recognized over the remaining weighted-average period of 1.88 years. The actual expense recorded in the future may be higher or lower based on a number of factors, including, actual forfeitures experienced and the degree of achievement of the performance goals related to the granted PSUs.
Pursuant to the Company
’s Amended and Restated 2004 Equity Incentive Plan and the ESPP, the Company issued the following number of shares of common stock during the three and nine months ended September 30, 2017 and 2016:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Stock options
|
|
|
77,511
|
|
|
|
413,588
|
|
|
|
447,673
|
|
|
|
706,522
|
|
Stock awards
, net of shares withheld to satisfy employees’ minimum income tax withholding
|
|
|
9,881
|
|
|
|
8,107
|
|
|
|
152,972
|
|
|
|
114,832
|
|
ESPP
|
|
|
—
|
|
|
|
—
|
|
|
|
51,185
|
|
|
|
41,980
|
|
Total stock issued
|
|
|
87,392
|
|
|
|
421,695
|
|
|
|
651,830
|
|
|
|
863,334
|
|
Stock Repurchase Program
On February 8, 2016, the Company announced that Board approved the expansion of its Stock Repurchase Program by $10 million, under which the Company is authorized to repurchase shares of its common stock. As of December 31, 2016, there remained an additional $5.1 million in the Stock Repurchase Program to use for repurchasing the Company
’s common stock. On February 13, 2017 and July 28, 2017 the Company’s Board of Directors approved the expansion of its Stock Repurchase Program by an additional $5 million and $25 million, respectively.
In the three and nine
months ended September 30, 2017, the Company repurchased 184,536 and 518,780 shares of its common stock for approximately $6.7 million and $13.8 million, respectively. As of September 30, 2017, there remained an additional $21.4 million available in the Stock Repurchase Program to repurchase shares of common stock. All shares repurchased were retired and returned to authorized but unissued status.
Stock-based Compensation Expense
Stock-based compensation expense
by department recognized during the three and nine months ended September 30, 2017 and 2016, were as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Cost of revenue
|
|
$
|
101
|
|
|
$
|
73
|
|
|
$
|
377
|
|
|
$
|
254
|
|
Sales and marketing
|
|
|
394
|
|
|
|
239
|
|
|
|
1,215
|
|
|
|
844
|
|
Research and development
|
|
|
157
|
|
|
|
131
|
|
|
|
633
|
|
|
|
416
|
|
General and administrative
|
|
|
345
|
|
|
|
127
|
|
|
|
1,398
|
|
|
|
1,138
|
|
Total stock-based compensation expense
|
|
$
|
997
|
|
|
$
|
570
|
|
|
$
|
3,623
|
|
|
$
|
2,652
|
|
Note 8.
Lease Termination Income
On May 2, 2017, the Company entered into a building lease with the intent to relocate its corporate headquarters to a new facility in Fremont, California. On July 6, 2017, the Company agreed to terminate this lease in return for a lump sum receipt from the lessor
of $4.0 million. Simultaneously with the execution of the lease termination, the Company entered into an amendment to its existing lease agreement for the Company to maintain its corporate headquarters in its current facility in Brisbane, California. This amendment extends the term of the lease from December 31, 2017 to January 31, 2023. The $4.0 million is reported as “Lease termination income,” as a component of operating expenses, in the Company’s Condensed Consolidated Statements of Operations for the three and nine month periods ending September 30, 2017.
Note
9
. Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted-average number of shares outstanding during the period. In periods of net income, diluted shares outstanding include the dilutive effect of in-the-money equity awards (stock options, restricted stock units, performance stock units and employee stock purchase plan contributions), 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 the equity award, and the amount of compensation cost for future service that the Company has not yet recognized, are all assumed to be used to repurchase shares. Diluted earnings per share is the same as basic earnings per share for the periods in which the Company had a net loss because the inclusion of outstanding common stock equivalents would be anti-dilutive.
The following table sets forth the computation of basic and diluted net
income (loss) and the weighted average number of shares used in computing basic and diluted net income (loss) per share (in thousands, except per share data):
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,188
|
|
|
$
|
1,644
|
|
|
$
|
7,113
|
|
|
$
|
(1,636
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic
|
|
|
13,973
|
|
|
|
13,163
|
|
|
|
13,917
|
|
|
|
13,102
|
|
Dilutive effect of incremental shares and share equivalents
|
|
|
794
|
|
|
|
381
|
|
|
|
816
|
|
|
|
—
|
|
Weighted average shares of common stock outstanding used in computing net income (loss) per share, diluted
|
|
|
14,767
|
|
|
|
13,544
|
|
|
|
14,733
|
|
|
|
13,102
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic
|
|
$
|
0.44
|
|
|
$
|
0.12
|
|
|
$
|
0.51
|
|
|
$
|
(0.12
|
)
|
Net income (loss) per share, diluted
|
|
$
|
0.42
|
|
|
$
|
0.12
|
|
|
$
|
0.48
|
|
|
$
|
(0.12
|
)
|
The following numbers of weighted shares outstanding, prior to the application of the treasury stock method, were excluded from the computation of diluted net income (loss) per common share for the period presented because including them would have had an anti-dilutive effect (in thousands):
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Options to purchase common stock
|
|
|
42
|
|
|
|
1,740
|
|
|
|
31
|
|
|
|
1,952
|
|
Restricted stock units
|
|
|
—
|
|
|
|
334
|
|
|
|
6
|
|
|
|
395
|
|
Performance stock units
|
|
|
—
|
|
|
|
64
|
|
|
|
—
|
|
|
|
81
|
|
Employee stock purchase plan shares
|
|
|
—
|
|
|
|
40
|
|
|
|
—
|
|
|
|
83
|
|
Total
|
|
|
42
|
|
|
|
2,178
|
|
|
|
37
|
|
|
|
2,511
|
|
Note
10
. Income Taxes
The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. When applicable, the year-to-date tax provision reflects adjustments from discrete tax items. In the quarter ended December 31, 2016, the Company adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. As a result of the adoption of the ASU No. 2016-09, the
nine months ended September 30, 2017 tax provision includes the discrete accounting of the net tax benefit of excess compensation cost (“windfalls”). In the periods prior to the adoption of ASU No. 2016-09, the tax benefit of windfalls and tax deficiencies (“shortfalls”) were recorded in equity to the extent of previous windfalls, and then to the income statement.
For the
nine- month period ended September 30, 2016, the Company used a discrete effective tax rate method to calculate the provision for income taxes. The Company determined that since small changes in estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the fiscal nine-month period ended September 30, 2016.
The Company
’s income tax expense of $225,000 and $166,000 for the three and nine months ended September 30, 2017, respectively, related primarily to the Company’s U.S. and non-U.S. operations based on the annual effective tax rate method. In addition, it included a tax benefit for excess tax deductions of approximately $50,000 and $160,000 recorded discretely in the three and nine months ended September 30, 2017, respectively. The Company’s income tax expense for the three and nine months ended September 30, 2016 was $61,000 and $115,000, respectively, and related primarily to income taxes of the Company’s non-U.S. operations.
The Company utilizes the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. In evaluating the ability to recover deferred tax assets, the Company considered available positive and negative evidence giving greater weight to its recent historical financial results and lesser weight to its projected financial results, due to the subjectivity involved in forecasting future periods. The Company also considered, commensurate with its objective verifiability, the forecast of future taxable income including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. As of September 30, 2017 and December 31, 2016 the Company had a 100% valuation allowance against its U.S. deferred tax assets. In the near future, as and when the Company concludes that sufficient positive evidence, including its estimate of future taxable income, exists to support a reversal of all or a portion of the valuation allowance, then the Company expects that a significant portion of any release of the valuation allowance will be recorded as an income tax benefit at the time of release, which will have a material impact on the financial statements. Thereafter, the income tax expense recorded in future quarters could also be significantly higher than it has been since fiscal year 2009, when we recorded a valuation allowance for our U.S. deferred tax assets.
Note 1
1
. Commitments and Contingencies
Operating
Lease
s
The Company leases space for operations in United States, Japan
and France. Future minimum lease commitments under the Company’s facility operating leases as of September 30, 2017 were as follows (in thousands):
Year Ending September 30,
|
|
Amount
|
|
2018
|
|
$
|
2,446
|
|
2019
|
|
|
2,677
|
|
2020
|
|
|
2,743
|
|
2021
|
|
|
2,593
|
|
2022
|
|
|
2,477
|
|
2023 and beyond
|
|
|
838
|
|
Total f
uture minimum lease payments
|
|
$
|
13,774
|
|
In addition to the above facility leases, the Company also routinely leases automobiles for certain sales and field service employees under operating leases for which the remaining committed lease payments are not material.
Contingencies
The Company is named from time to time as a party to product liability, contractual lawsuits and other general corporate matters in the normal course of business. The Company routinely assesses the likelihood of any adverse judgments or outcomes related to legal matters and claims, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after analysis of each known issue, historical experience, whether it is more likely than not that the Company shall incur a loss, and whether the loss is estimable. As of September 30, 2017, there were
no material exposures beyond the amounts accrued in the Company's financial statements.
The Company is not currently a party to any material legal proceedings.