Table Of Contents

 


   UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 


FORM 10-Q

 


(Mark One)

 

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

 

For the quarterly period ended June 30, 2015

 

OR

 

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

 

For the transition period _____ to_____.

 

Commission file number: 000-50644

 

 


Cutera, Inc.

(Exact name of registrant as specified in its charter) 


  

Delaware

 

77-0492262

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. employer identification no.)

 

3240 Bayshore Blvd., Brisbane, California 94005

(Address of principal executive offices)

 

(415) 657-5500

(Registrant’s telephone number, including area code)

 


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

 

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

 

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

 

Large accelerated filer  

Accelerated filer  

Non-accelerated filer  

  Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes        No    

 

The number of shares of Registrant’s common stock issued and outstanding as of July 31, 2015 was 14,137,164.

 


  

 
 

Table Of Contents
 

  

CUTERA, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I

 

FINANCIAL INFORMATION

 

  

 

 

 

 

  

Item 1

 

Financial Statements (unaudited)

 

1

 

 

Condensed Consolidated Balance Sheets

 

1

 

 

Condensed Consolidated Statements of Operations

 

2

 

 

Condensed Consolidated Statements of Comprehensive Loss

 

3

 

 

Condensed Consolidated Statements of Cash Flows

 

4

 

 

Notes to Condensed Consolidated Financial Statements

 

5

         

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

10

         

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

17

         

Item 4

 

Controls and Procedures

 

18

 

 

 

 

  

PART II

 

OTHER INFORMATION

 

  

 

 

 

 

  

Item 1

 

Legal Proceedings

 

18

         

Item 1A

 

Risk Factors

 

19

         

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

         

Item 3

 

Defaults Upon Senior Securities

 

31

         

Item 4

 

Mine Safety Disclosures

 

31

         

Item 5

 

Other Information

 

31

         

Item 6

 

Exhibits

 

32

         

 

 

Signature

 

33

 

 

 

 
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PART I. FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

CUTERA, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 (unaudited)

 

   

June 30, 2015

   

December 31, 2014

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 11,627     $ 9,803  

Marketable investments

    54,708       71,343  

Accounts receivable, net

    8,919       11,137  

Inventories

    13,521       10,988  

Deferred tax asset

    27       26  

Other current assets and prepaid expenses

    1,625       1,591  

Total current assets

    90,427       104,888  
                 

Property and equipment, net

    1,512       1,461  

Deferred tax asset, net of current portion

    283       269  

Intangibles, net

    332       595  

Goodwill

    1,339       1,339  

Other long-term assets

    351       361  

Total assets

  $ 94,244     $ 108,913  
                 

Liabilities and Stockholders' Equity

               

Current liabilities:

               

Accounts payable

  $ 3,597     $ 3,083  

Accrued liabilities

    10,308       11,007  

Deferred revenue

    8,659       8,898  

Total current liabilities

    22,564       22,988  
                 

Deferred revenue, net of current portion

    3,107       4,346  

Income tax liability

    180       145  

Other long-term liabilities

    699       926  

Total liabilities

    26,550       28,405  
                 

Commitments and Contingencies (Note 10)

               
                 

Stockholders’ equity:

               

Convertible preferred stock, $0.001 par value; authorized: 5,000,000 shares; none issued and outstanding

           

Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 14,230,448 and 14,446,950 shares at June 30, 2015 and December 31, 2014, respectively

    14       14  

Additional paid-in capital

    98,428       105,721  

 

Accumulated deficit

    (30,765

)

    (25,232

)

Accumulated other comprehensive income

    17       5  

Total stockholders’ equity

    67,694       80,508  

Total liabilities and stockholders’ equity

  $ 94,244     $ 108,913  

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 
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CUTERA, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (in thousands, except per share data)

 (unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Net revenue:

                               

Products

  $ 18,042     $ 13,171     $ 32,745     $ 24,923  

Service

    4,521       4,553       8,889       8,990  

Total net revenue

    22,563       17,724       41,634       33,913  

Cost of revenue:

                               

Products

    7,621       5,917       14,930       10,994  

Service

    2,066       1,931       3,809       4,157  

Total cost of revenue

    9,687       7,848       18,739       15,151  

Gross profit

    12,876       9,876       22,895       18,762  
                                 

Operating expenses:

                               

Sales and marketing

    9,066       7,754       17,253       15,085  

Research and development

    2,728       2,622       5,173       5,266  

General and administrative

    3,014       2,335       6,003       4,899  

Total operating expenses

    14,808       12,711       28,429       25,250  

Loss from operations

    (1,932

)

    (2,835

)

    (5,534

)

    (6,488

)

Interest and other income, net

    96       138       104       218  

Loss before income taxes

    (1,836

)

    (2,697

)

    (5,430

)

    (6,270

)

Provision for income taxes

    53       44       103       81  

Net loss

  $ (1,889

)

  $ (2,741

)

  $ (5,533

)

  $ (6,351

)

                                 

Net loss per share:

                               

Basic and Diluted

  $ (0.13

)

  $ (0.19

)

  $ (0.37

)

  $ (0.45

)

                                 

Weighted-average number of shares used in per share calculations:

                               

Basic and Diluted

    14,441       14,231       14,758       14,127  

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 
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CUTERA, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 (in thousands)

 (unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Net loss

  $ (1,889

)

  $ (2,741

)

  $ (5,533

)

  $ (6,351

)

Other comprehensive income (loss):

                               

Available-for-sale investments

                               

Net change in unrealized gain (loss) on available-for-sale investments

    (13

)

    26       20       28  

Less: Reclassification adjustment for gains on investments recognized during the year

    (1

)

    (1

)

    (2

)

    (1

)

Net change in unrealized gain (loss) on available-for-sale investments

    (14

)

    25       18       27  

Tax provision (benefit)

    (5

)

    9       6       10  

Other comprehensive income (loss), net of tax

    (9

)

    16       12       17  

Comprehensive loss

  $ (1,898

)

  $ (2,725

)

  $ (5,521

)

  $ (6,334

)

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

  

 
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CUTERA, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (in thousands)

  (unaudited)

 

   

Six Months Ended June 30,

 
   

2015

   

2014

 

Cash flows from operating activities:

               

Net loss

  $ (5,533

)

  $ (6,351

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

               

Stock-based compensation

    1,943       1,318  

Depreciation and amortization

    622       660  

Other

    245       93  

Changes in assets and liabilities:

               

Accounts receivable

    2,218       2,079  

Inventories

    (2,533

)

    (1,024

)

Other current assets and prepaid expenses

    154       (99

)

Other long-term assets

    10       309  

Accounts payable

    514       208  

Accrued liabilities

    (686

)

    (1,885

)

Other long-term liabilities

    (145

)

    (141

)

Deferred revenue

    (1,478

)

    1,305  

Income tax liability

    35       36  

Net cash used in operating activities

    (4,634

)

    (3,492

)

                 

Cash flows from investing activities:

               

Acquisition of property, equipment and software

    (678

)

    (283

)

Proceeds from sales of marketable investments

    7,379       4,681  

Proceeds from maturities of marketable investments

    21,350       19,165  

Purchase of marketable investments

    (12,262

)

    (27,850

)

Net cash provided by (used in) investing activities

    15,789       (4,287

)

                 

Cash flows from financing activities:

               

Repurchase of common stock

    (17,744

)

     

Proceeds from exercise of stock options and employee stock purchase plan

    8,508       2,511  

Payments on capital lease obligations

    (95

)

    (72

)

Net cash provided by (used in) financing activities

    (9,331

)

    2,439  
                 

Net increase (decrease) in cash and cash equivalents

    1,824       (5,340

)

Cash and cash equivalents at beginning of period

    9,803       16,242  

Cash and cash equivalents at end of period

  $ 11,627     $ 10,902  

  

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

  

 
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CUTERA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Summary of Significant Accounting Policies

 

Description of Operations and Principles of Consolidation

 

Cutera, Inc. (“Cutera” or the “Company”) is a global provider of laser and other energy-based aesthetic systems for practitioners worldwide. The Company designs, develops, manufactures, and markets laser and other energy-based product platforms for use by physicians and other qualified practitioners, which enable them to offer safe and effective aesthetic treatments to their customers. The Company currently markets the following key product platforms: CoolGlide®, xeo®, solera®, GenesisPlusTM, excel VTM, truSculptTM, excel HRTM, enlightenTM and myQTM. The Company’s products offer multiple hand pieces and applications, which allow customers to upgrade their systems. The sales of systems, upgrades, hand pieces, Titan refills and the distribution of third party manufactured cosmeceuticals (or “Skincare”) are classified as “Product” revenue. In the second quarter of 2014, the Company terminated its agreement with Merz Pharma GmbH (“Merz”) for the distribution of its Radiesse dermal filler product. In addition to Product revenue, the Company generates revenue from the sale of post-warranty service contracts, parts, detachable hand piece replacements (except for Titan) and service labor for the repair and maintenance of products that are out of warranty, all of which is classified as “Service” revenue.

 

Headquartered in Brisbane, California, the Company has wholly-owned subsidiaries in Australia, Belgium, Canada, France, Hong Kong, Italy, Japan, Spain, Switzerland and the United Kingdom. The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries and all inter-company transactions and balances have been eliminated. The Company markets, sells and services its products outside of the United States through its direct employees as well as a global distributor network.

 

Unaudited Interim Financial Information

 

The interim financial information filed is unaudited. The Condensed Consolidated Financial Statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for the fair statement of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The December 31, 2014 Condensed Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). The results for interim periods are not necessarily indicative of the results for the entire year or any other interim period. The Condensed Consolidated Financial Statements should be read in conjunction with the Company’s previously filed audited financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2015.

 

Use of Estimates

 

The preparation of interim Condensed Consolidated Financial Statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported and disclosed in the Condensed Consolidated Financial Statements and the accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, the Company evaluates these estimates, including those related to revenue elements, warranty obligations, sales commissions, accounts receivable and sales allowances, provision for excess and obsolete inventories, fair values of marketable investments, fair values of acquired intangible assets, useful lives of intangible assets and property and equipment, fair values of performance stock units and options to purchase the Company’s stock, recoverability of deferred tax assets, legal matters and claims, and effective income tax rates, among others. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accountings Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, or ASU 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and shall take effect on January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method and the early application of the standard is not permitted. The Company is presently evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures and has not yet selected a transition method.

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern. This standard update provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new guidance is effective for all annual and interim periods ending after December 15, 2016. The new guidance will not have an impact on the Company's consolidated financial statements.

 

 
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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):

 

June 30, 2015

 

Amortized Cost

   

Gross Unrealized Gains

   

Gross Unrealized Losses

   

Fair Market Value

 

Cash and cash equivalents:

                               

Cash

  $ 6,771     $     $     $ 6,771  

Money market funds

    4,856                   4,856  

Commercial paper

                       

Total cash and cash equivalents

    11,627                   11,627  
                                 

Marketable investments:

                               

U.S. government notes

    14,321       34             14,355  

U.S. government agencies

    14,178       28             14,206  

Municipal securities

    3,919       4             3,923  

Commercial paper

    8,789       5             8,794  

Corporate debt securities

    13,428       6       (4

)

    13,430  

Total marketable investments

    54,635       77       (4

)

    54,708  
                                 

Total cash, cash equivalents and marketable investments

  $ 66,262     $ 77     $ (4

)

  $ 66,335  

 

December 31, 2014

 

Amortized Cost

   

Gross Unrealized Gains

   

Gross Unrealized Losses

   

Fair Market Value

 

Cash and cash equivalents:

                               

Cash

  $ 7,761     $     $     $ 7,761  

Money market funds

    242                   242  

Commercial paper

    1,800                   1,800  

Total cash and cash equivalents

    9,803                   9,803  
                                 

Marketable investments:

                               

U.S. government notes

    18,345       17       (1

)

    18,361  

U.S. government agencies

    19,768       33       (1

)

    19,800  

Municipal securities

    3,607       3       (3

)

    3,607  

Commercial paper

    10,693       2             10,695  

Corporate debt securities

    18,875       13       (8

)

    18,880  

Total marketable investments

    71,288       68       (13

)

    71,343  
                                 

Total cash, cash equivalents and marketable investments

  $ 81,091     $ 68     $ (13

)

  $ 81,146  

 

As of June 30, 2015 and December 31, 2014, total gross unrealized losses were $4,000 and $13,000, respectively, and were related to interest rate changes on available-for-sale marketable investments. The Company has concluded that it is more-likely-than-not that the securities will be held until maturity or the recovery of their cost basis. No securities were in an unrealized loss position for more than 12 months.

  

 

The following table summarizes the contractual maturities of the Company’s available-for-sale securities, classified as marketable investments as of June 30, 2015 (in thousands):

 

   

Amount

 

Due in less than one year

  $ 38,862  

Due in 1 to 3 years

    15,846  
    $ 54,708  

 

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 June 30, 2015, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows (in thousands):

 

June 30, 2015

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Cash equivalents:

                               

Money market funds

  $ 4,856     $     $     $ 4,856  

Commercial paper

                       

Marketable investments:

                               

Available-for-sale securities

          54,708             54,708  

Total assets at fair value

  $ 4,856     $ 54,708     $     $ 59,564  

 

As of December 31, 2014, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above was as follows (in thousands):

 

December 31, 2014

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Cash equivalents:

                               

Money market funds

  $ 242     $     $     $ 242  

Commercial paper

          1,800             1,800  

Marketable investments:

                               

Available-for-sale securities

          71,343             71,343  

Total assets at fair value

  $ 242     $ 73,143     $     $ 73,385  

 

The Company’s Level 2 investments include U.S. government-backed securities and corporate securities that are valued based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The average remaining maturity of the Company’s Level 2 investments as of June 30, 2015 is less than 36 months and all of these investments are rated by S&P and Moody’s at A or better.

  

 
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Note 4. Inventories

 

As of June 30, 2015 and December 31, 2014, inventories consist of the following (in thousands):

 

   

June 30, 2015

   

December 31, 2014

 

Raw materials

  $ 8,449     $ 7,185  

Finished goods

    5,072       3,803  

Total

  $ 13,521     $ 10,988  

 

Note 5. Warranty

 

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

 

The following table provides the changes in the product warranty accrual for the three and six months ended June 30, 2015 and 2014 (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Beginning Balance

  $ 1,203     $ 1,071     $ 1,167     $ 1,202  

Add: Accruals for warranties issued during the period

    736       591       1,552       1,047  

Less: Settlements made during the period

    (685

)

    (582

)

    (1,465

)

    (1,169

)

Ending Balance

  $ 1,254     $ 1,080     $ 1,254     $ 1,080  

  

Note 6. Deferred Service Contract Revenue

 

The Company generates Service revenue from the sale of extended service contracts and from time and material services provided to customers who are not under a warranty or extended service contract. Service contract revenue is recognized on a straight-line basis over the period of the applicable contract. Service revenue, from customers whose systems are not under a service contract, is recognized as the services are provided.

 

The following table provides changes in the deferred service contract revenue balance for the three and six months ended June 30, 2015 and 2014 (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Beginning Balance

  $ 12,528     $ 12,292     $ 12,949     $ 11,637  

Add: Payments received

    2,250       3,856       5,052       7,567  

Less: Revenue recognized

    (3,232

)

    (3,147

)

    (6,455

)

    (6,203

)

Ending Balance

  $ 11,546     $ 13,001     $ 11,546     $ 13,001  

 

Costs for extended service contracts were $1.4 million and $1.8 million for the three months ended June 30, 2015 and 2014, respectively, and $3.1 million and $3.5 million for the six months ended June 30, 2015 and 2014, respectively.

 

Note 7. Stockholders’ Equity and Stock-based Compensation Expense

 

Share Repurchase Program

 

On February 18, 2015, the Company’s Board of Directors modified Cutera, Inc.’s stock buyback program (“Modified Stock Buyback Program”), from $10 million to $40 million, under which the Company’s issued and outstanding common shares can be repurchased through a 10b5-1 program based on predetermined pricing and volume parameters, as well as open-market purchases that are subject to management discretion and regulatory restrictions.

 

In the three months ended June 30, 2015, the Company repurchased 878,454 shares of its common stock for approximately $12.5 million. In the six months ended June 30, 2015, the Company repurchased 1,264,609 shares of its common stock for approximately $17.7 million. As of June 30, 2015, there remained an additional $22.3 million to be purchased under the Modified Stock Buyback Program. The number of shares to be repurchased, and the timing of such repurchases, will be based on several factors, including the price of the Company's common stock, regulatory restrictions, and general market and business conditions. All shares repurchased are retired and returned to authorized but unissued status.

  

 

Stock-based Compensation Expense

 

Stock-based compensation expense by department recognized during the three and six months ended June 30, 2015 and 2014 were as follows (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Cost of revenue

  $ 114     $ 139     $ 217     $ 271  

Sales and marketing

    231       148       416       219  

Research and development

    180       115       362       239  

General and administrative

    457       291       948       589  

Total stock-based compensation expense

  $ 982     $ 693     $ 1,943     $ 1,318  

 

Under the 2004 Equity Incentive Plan, as amended, the Company issued 286,252 and 934,905 shares of common stock during the three and six months ended June 30, 2015, in conjunction with stock options exercised.

 

Activity under the Company’s 2004 Equity Incentive Plan, as amended, is summarized as follows:

 

           

Options Outstanding

 
   

Shares

Available

for Grant

   

Number of

Stock Options

Outstanding

   

Weighted-

Average

Exercise

Price

 

Balance, December 31, 2014

    129,760       3,462,567     $ 9.39  

Additional shares reserved

    1,300,000              

Options granted

    (121,000

)

    121,000       13.12  

Restricted stock units granted*

    (75,302

)

           

Options exercised

          (934,905 )     9.23  

Options canceled

    188,452       (188,452 )     10.91  

Restricted stock units canceled*

    36,040              

Balance, June 30, 2015

    1,457,950       2,460,210     $ 9.51  

 

(*) Stock awards are counted at 2.12 shares for every 1 share granted or canceled when computing the Shares Available for Grant.

 

As of June 30, 2015, there was $4.1 million of unrecognized compensation expense, net of projected forfeitures, related to non-vested equity awards. The expense is expected to be recognized over the remaining weighted-average period of 2.4 years.

 

Note 8. Net Loss Per Share

 

Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the year. Diluted net loss per common share is the same as basic net loss per common share, as the effect of the potential common stock equivalents is anti-dilutive and as such is excluded from the calculations of the diluted net loss per share.

 

The following numbers of shares outstanding, prior to the application of the treasury stock method, were excluded from the computation of diluted net loss per common share for the periods presented because including them would have had an anti-dilutive effect (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Options to purchase common stock

    2,618       3,414       2,903       3,553  

Restricted stock units

    295       149       305       161  

Performance stock units

    96       6       96       6  

Employee stock purchase plan shares

    58       54       58       54  

Total

    3,067       3,623       3,362       3,774  

 

Note 9. Income Taxes

 

The Company’s quarterly income taxes reflect an estimate of the corresponding year’s annual effective tax rate and include, when applicable, adjustments from discrete tax items. For the three and six months ended June 30, 2015, the Company’s tax provision was $53,000 and $103,000, compared to $44,000 and $81,000 for the three and six months ended June 30, 2014, respectively, and was primarily related to income taxes of the Company’s non-U.S. operations as the Company’s U.S. operations were in a loss position and the Company maintains a 100% valuation allowance against its U.S. deferred tax assets.

 

The Company utilizes the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. As of June 30, 2015 and December 31, 2014, the Company had a 100% valuation allowance against its U.S. deferred tax assets. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. In evaluating the ability to recover deferred tax assets, the Company considered available positive and negative evidence giving greater weight to its recent cumulative losses and lesser weight to its projected financial results due to the subjectivity involved in forecasting future periods. The Company also considered, commensurate with its objective verifiability, the forecast of future taxable income including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.

 

Note 10. Commitments and Contingencies

 

Litigation and Litigation Settlements

 

The Company is named from time to time as a party to product liability, contractual lawsuits and other general corporate matters in the normal course of business. The Company routinely assesses the likelihood of any adverse judgments or outcomes related to legal matters and claims, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after analysis of each known issue, historical experience, whether it is more likely than not that the Company shall incur a loss, and whether the loss is estimable. As of June 30, 2015 and December 31, 2014, the Company had an immaterial accrual for legal matters and claims and did not expect to incur any material costs beyond the amounts accrued.

 

 
9

Table Of Contents
 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Caution Regarding Forward-Looking Statements

 

The following discussion should be read in conjunction with the attached condensed consolidated financial statements and notes thereto, and with our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2014 as contained in our annual report on Form 10-K filed with the SEC on March 16, 2015. This quarterly report, including the following sections, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout this report, and particularly in this Item 2, the forward-looking statements are based upon our current expectations, estimates and projections and reflect our beliefs and assumptions based upon information available to us at the date of this report. In some cases, you can identify these statements by words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” and other similar terms. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements. These forward-looking statements include, but are not limited to, statements relating to our future financial performance, the ability to grow our business, increase our revenue, manage expenses, generate additional cash, achieve and maintain profitability, develop and commercialize existing and new products and applications, and improve the performance of our worldwide sales and distribution network, and the outlook regarding long term prospects. These forward-looking statements involve risks and uncertainties. The cautionary statements set forth below and those contained in Part II, Item 1A – “Risk Factors” commencing on page 19 identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. We caution you to not place undue reliance on these forward-looking statements, which reflect management’s analysis and expectations only as of the date of this report. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-Q.

 

Introduction

 

The Management’s Discussion and Analysis, or MD&A, is organized as follows:

 

 

Executive Summary. This section provides a general description and history of our business, a brief discussion of our product lines and the opportunities, trends, challenges and risks we focus on in the operation of our business.

 

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

 

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

 

Liquidity and Capital Resources. This section provides an analysis of our liquidity and cash flows, as well as a discussion of our commitments.

  

Executive Summary

 

Company Description.

 

We are a leading medical device company specializing in the research, development, manufacture, marketing and servicing of laser and other energy-based aesthetics systems for practitioners worldwide. We offer easy-to-use products which enable physicians and other qualified practitioners to perform safe and effective aesthetic procedures, including treatment of vascular conditions and removal of benign pigmented lesions, hair-removal, skin rejuvenation, body contouring, skin resurfacing, tattoo removal and toenail fungus. Our platforms are designed to be easily upgraded to add additional applications and hand pieces, which provide flexibility for our customers as they expand their practices. In addition to systems and upgrade revenue, we generate revenue from the sale of post warranty service contracts, providing services for products that are out of warranty, hand piece refills, and third-party manufactured cosmeceuticals. In the second quarter of 2014, we terminated our agreement with Merz for the distribution of its Radiesse® dermal filler product.

 

Our corporate headquarters and U.S. operations are located in Brisbane, California, from where we conduct our manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. We have wholly-owned subsidiaries in Australia, Belgium, Canada, France, Hong Kong, Italy, Japan, Spain, Switzerland and the United Kingdom. We market, sell and service our products outside of the United States through our direct employees as well as a global distributor network in over 40 countries.

  

 
10

Table Of Contents
 

 

Products

 

Our revenue is derived from the sale of Products and Services. Our Product revenue is derived from the sale of systems and upgrades, Titan refills, and Skincare products (or cosmeceuticals). Product and upgrade revenue includes the sales of new systems and additional applications that customers purchase as their practice grows. A system consists of a console that incorporates a universal graphic user interface, a laser and/or other energy-based module, control system software, high voltage electronics and one or more hand pieces. Our broad portfolio of system platforms include:

 

 

enlighten

 

excel V

 

excel HR

 

xeo

 

truSculpt

 

GenesisPlus

 

CoolGlide

 

solera

 

myQ

   

Service revenue relates to prepaid service contracts, direct billings for detachable hand piece replacements (except for Titan) and revenue for parts and labor on out-of-warranty products. For our Titan hand pieces, after a set number of treatments have been performed, the customer is required to send the hand piece back to the factory for refurbishment, which we refer to as “refilling” the hand piece. In Japan, we distribute ZO Medical Health Inc. (“ZO”) cosmeceutical products and through the second quarter of 2014, we also distributed Merz’s Radiesse® dermal filler product.

 

Significant Business Trends

 

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

 

 

Consumer demand for the applications of our products.

 

Customer (physicians) demand for our products.

 

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

 

Ongoing investment in our global sales and marketing infrastructure.

 

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

 

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

 

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

 

Generating ongoing revenue from our growing installed base of customers through the sale of Service, Products and upgrades, Titan hand piece refills, and Cosmeceutical products.

 

For a detailed discussion of the significant business trends impacting our business, please see the section titled “Results of Operations” below.

 

Factors that May Impact Future Performance.

 

Our industry is impacted by numerous competitive, regulatory, macroeconomic and other significant factors. Our industry is highly competitive and our future performance depends on our ability to compete successfully. Additionally, our future performance is dependent upon our ability to continue to expand our product offerings, develop innovative technologies, obtain regulatory clearances for our products, protect the proprietary technology of our products and our manufacturing processes, manufacture our products cost-effectively, and successfully market and distribute our products in a profitable manner. If we fail to execute on the aforementioned initiatives, our business would be adversely affected. A detailed discussion of these and other factors that could impact our future performance are provided in Part II, Item 1A “Risk Factors” section below.

 

Critical Accounting Policies and Estimates.

 

The preparation of our Condensed Consolidated Financial Statements and related disclosures in conformity with GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates, judgments and assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances. We periodically review our estimates and make adjustments when facts and circumstances dictate. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected.

  

 
11

Table Of Contents
 

 

Critical accounting estimates, as defined by the SEC, are those that are most important to the portrayal of our financial condition and results of operations and require our management’s most difficult and subjective judgments and estimates of matters that are inherently uncertain. The accounting policies and estimates that we consider to be critical, subjective, and requiring judgment in their application are summarized in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 16, 2015. There have been no significant changes to the accounting policies and estimates disclosed in our Form 10-K.

 

Results of Operations

 

The following table sets forth selected consolidated financial data for the periods indicated, expressed as a percentage of total revenue, net. Percentages in this table and throughout our discussion and analysis of financial condition and results of operations may reflect rounding adjustments.

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2015

   

2014

   

2015

   

2014

 
                                 

Net revenue

    100

%

    100

%

    100

%

    100

%

Cost of revenue

    43

%

    44

%

    45

%

    45

%

Gross margin

    57

%

    56

%

    55

%

    55

%

                                 

Operating expenses:

                               

Sales and marketing

    40

%

    44

%

    42

%

    44

%

Research and development

    12

%

    15

%

    12

%

    16

%

General and administrative

    14

%

    13

%

    14

%

    14

%

Total operating expenses

    66

%

    72

%

    68

%

    74

%

                                 

Loss from operations

    (9

)%

    (16

)%

    (13

)%

    (19

)%

Interest and other income, net

    1

%

    1

%

   

%

    1

%

Loss before income taxes

    (8

)%

    (15

)%

    (13

)%

    (18

)%

Provision (benefit) for income taxes

   

%

   

%

   

%

   

%

Net loss

    (8

)%

    (15

)%

    (13

)%

    (18

)%

 

Total Net Revenue

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

(Dollars in thousands)

 

2015

   

% Change

   

2014

   

2015

   

% Change

   

2014

 

Revenue mix by geography:

                                               

United States

  $ 11,036       36 %   $ 8,109     $ 18,828       33 %   $ 14,126  

International

    11,527       20 %     9,615       22,806       15 %     19,787  

Consolidated total revenue

  $ 22,563       27 %   $ 17,724     $ 41,634       23 %   $ 33,913  
                                                 

United States as a percentage of total revenue

    49 %             46 %     45 %             42 %

International as a percentage of total revenue

    51 %             54 %     55 %             58 %

Revenue mix by product category:

                                               

Product – North America

  $ 8,973       56 %   $ 5,734     $ 14,650       53 %   $ 9,566  

Product – Rest of World

    7,646       36 %     5,632       15,207       35 %     11,284  

Hand Piece Refills

    769       (23

)%

    1,005       1,533       (25

)%

    2,046  

Skincare

    654       (18

)%

    800       1,355       (33

)%

    2,027  

Service

    4,521       (1

)%

    4,553       8,889       (1

)%

    8,990  

Consolidated total revenue

  $ 22,563       27 %   $ 17,724     $ 41,634       23 %   $ 33,913  

 

 
12

Table Of Contents
 

  

Discussion of Revenue by Geography:

 

Our U.S. revenue increased by $2.9 million, or 36%, and by $4.7 million, or 33% in the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. These increases were due primarily to an increase in sales of our recently launched enlighten and excel HR products as well as an increase in the sales of excel V, partially offset by declines in sales of some of our legacy products.

 

Our international revenue increased by $1.9 million, or 20%, and by $3.0 million, or 15% in the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. These increases were due primarily to increases in revenue from our distributor business in Europe as well as Asia Pacific countries, along with increase in our direct business in Australia.

 

Discussion of Revenue by Product Type:

 

Product Revenue

 

Product revenue in North America increased by $3.2 million, or 56%, and by $5.1 million, or 53% in the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. These increases were attributable primarily to:

 

 

Revenue from our newly introduced enlighten and excel HR product;

 

Increase in revenue from excel V; which was offset partly by

 

Reduction in revenue from our legacy products.

 

Product revenue outside of North America (“Rest of the World”) increased by $2.0 million, or 36%, and by $3.9 million, or 35% in the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. These increases were attributable primarily to:

 

 

Revenue from our newly introduced enlighten and excel HR product; which was offset partly by

 

Reduction in revenue from some of our other legacy products; and

 

The negative impact associated with the appreciation of the U.S. Dollar against the Euro, Japanese Yen and the Australian Dollar.

 

Hand Piece Refills Revenue

 

Our hand piece refills revenue decreased by $236,000, or 23%, and by $513,000, or 25% in the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. This decrease was caused by reduced utilization and due to the decline in the Japanese Yen relative to the U.S. Dollar.

 

Skincare Revenue

 

Our skincare revenue decreased by $146,000, or 18%, and by $672,000, or 33% in the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. This decline was due primarily to the termination of our agreement with Merz for the distribution of their Radiesse® dermal filler product in the second quarter of 2014 as well as the decline in the Japanese Yen relative to the U.S. Dollar.

 

Service Revenue

 

Our worldwide Service revenue decreased by $32,000, or 1%, and by $101,000, or 1% in the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014.

 

Gross Profit

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

(Dollars in thousands)

 

2015

   

% Change

   

2014

   

2015

   

% Change

   

2014

 

Gross profit

  $ 12,876       30

%

  $ 9,876     $ 22,895       22

%

  $ 18,762  

As a percentage of total net revenue

    57

%

            56

%

    55

%

            55

%

 

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

  

 
13

Table Of Contents
 

 

Gross margin was 57% in the three months ended June 30, 2015, compared to 56% for the same period in 2014. Gross margin was 55% in both of the six months ended June 30, 2015 and 2014. The increase in the three months ended June 30, 2015 was due primarily to:

 

 

Increased leverage resulting from higher revenue;
 

A favorable product mix; and
  Manufacturing cost reductions of our new products; partially offset by
 

Higher volume of distributor sales, which have a lower margin than our direct sales; and
 

Unfavorable impact on our international selling prices due to the strengthening of the U.S. Dollar against the Euro, Japanese Yen and the Australian Dollar.

 

Sales and Marketing

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

(Dollars in thousands)

 

2015

   

% Change

   

2014

   

2015

   

% Change

   

2014

 

Sales and marketing

  $ 9,066       17

%

  $ 7,754     $ 17,253       14

%

  $ 15,085  

As a percentage of total net revenue

    40

%

            44

%

    42

%

            44

%

  

Sales and marketing expenses consist primarily of personnel expenses, expenses associated with customer-attended workshops and trade shows, post-marketing studies, and advertising. Sales and marketing expenses increased by $1.3 million, and represented 40% of total net revenue in the three months ended June 30, 2015, compared to 44% in the same period in 2014. The $1.3 million increase was due primarily to:

 

 

$811,000 net increase in North American personnel related expenses, which were driven primarily by higher commissions due to higher sales; and

 

$397,000 of higher international personnel and travel related expenses due to increased headcount.

  

Sales and marketing expenses increased by $2.2 million, and represented 42% of total net revenue in the six months ended June 30, 2015, compared to 44% in the same period in 2014. The $2.2 million increase was due primarily to:

 

 

$1.6 million net increase in North American personnel related expenses, which was due in part to higher commissions resulting from higher sales and higher severance expense; and

 

$333,000 of higher promotional expenses primarily in North America and Australia; partially offset by

 

$221,000 of other cost reductions in Japan due primarily to the favorable impact of the decline in the Japanese Yen in relation to the U.S. Dollar.

 

Research and Development (“R&D”)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

(Dollars in thousands)

 

2015

   

% Change

   

2014

   

2015

   

% Change

   

2014

 

Research and development

  $ 2,728       4

%

  $ 2,622     $ 5,173       (2

)%

  $ 5,266  

As a percentage of total net revenue

    12

%

            15

%

    12

%

            16

%

 

R&D expenses consist primarily of personnel expenses, clinical research, regulatory and material costs. R&D expenses increased by $106,000, and represented 12% of total net revenue in the three months ended June 30, 2015, compared to 15% for the same period in 2014. This increase in expense was due primarily to:

 

 

$432,000 of increased personnel and consulting related expenses;

 

$71,000 of increased equipment related expense; partially offset by

 

$453,000 of decreased material spending, related to project timing.

 

 
14

Table Of Contents
 

 

R&D expenses decreased by $93,000, and represented 12% of total net revenue in the six months ended June 30, 2015, compared to 16% for the same period in 2014. This decrease in expense was due primarily to:

 

 

$927,000 of decreased material spending, related to project timing; partially offset by

 

$629,000 of increased personnel related expenses;

 

$132,000 of increased equipment related expenses; and

 

$66,000 of increased travel related expenses.

  

General and Administrative (“G&A”)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

(Dollars in thousands)

 

2015

   

% Change

   

2014

   

2015

   

% Change

   

2014

 

General and administrative

  $ 3,014       29

%

  $ 2,335     $ 6,003       23

%

  $ 4,899  

As a percentage of total net revenue

    14

%

            13

%

    14

%

            14

%

 

G&A expenses consist primarily of personnel expenses, legal fees, accounting, audit and tax consulting fees, U.S. medical device excise tax and other general and administrative expenses. G&A expenses increased by $679,000 and represented 14% of total net revenue in both of the three months ended June 30, 2015 and 2014. This increase was due primarily to $652,000 of increased personnel related expenses.

  

G&A expenses increased by $1.1 million and represented 14% of total net revenue in both of the six months ended June 30, 2015 and 2014. This increase was due primarily to $1.1 million of increased personnel related expenses.

   

Interest and Other Income, Net

 

Interest and other income, net, consists of the following:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

(Dollars in thousands)

 

2015

   

% Change

   

2014

   

2015

   

% Change

   

2014

 

Interest income

  $ 88       (11

)%

  $ 99     $ 190       (2

)%

  $ 193  

Other income, net

    8       (79

)%

    39       (86

)

    (444

)%

    25  

Total interest and other income, net

  $ 96       (30

)%

  $ 138     $ 104       (52

)%

  $ 218  

 

 

Interest and other income, net, decreased $42,000 and $114,000 for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. This decrease was primarily attributable to net foreign exchange losses.

 

Provision for Income Taxes

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

(Dollars in thousands)

 

2015

   

% Change

   

2014

   

2015

   

% Change

      20143  

Loss before income taxes

  $ (1,836

)

    (32

)%

  $ (2,697

)

  $ (5,430

)

    (13

)%

  $ (6,270

)

Provision for income taxes

    53       20

%

    44       103       27

%

    81  

 

 

For the three and six months ended June 30, 2015, we recorded an income tax provision was $53,000 and $103,000, compared to $44,000 and $81,000 for the three and six months ended June 30, 2014, respectively, which was primarily related to income taxes of our non-U.S. operations as our U.S. operations were in a loss position and we maintain a 100% valuation allowance against our U.S. deferred tax assets.

 

 

Liquidity and Capital Resources

 

Liquidity is the measurement of our ability to meet potential cash requirements, fund the planned expansion of our operations and acquire businesses. Our sources of cash include operations, stock option exercises and the liquidation of marketable investments. We actively manage our cash usage and investment of liquid cash to ensure the maintenance of sufficient funds to meet our daily needs. The majority of our cash and investments are held in U.S. banks and our foreign subsidiaries maintain a limited amount of cash in their local banks to cover their short-term operating expenses.

  

 
15

Table Of Contents
 

 

Cash, Cash Equivalents and Marketable Investments

 

The following table summarizes our cash, cash equivalents and marketable investments:

 

(Dollars in thousands)

 

June 30, 2015

   

December 31,

2014

   

Change

 

Cash and cash equivalents

  $ 11,627     $ 9,803     $ 1,824  

Marketable investments

    54,708       71,343       (16,635

)

Total

  $ 66,335     $ 81,146     $ (14,811

)

 

Cash Flows

 

   

Six Months Ended June 30,

 

(Dollars in thousands)

 

2015

   

2014

 

Net cash flow provided by (used in):

               

Operating activities

  $ (4,634

)

  $ (3,492

)

Investing activities

    15,789       (4,287

)

Financing activities

    (9,331

)

    2,439  

Net decrease in cash and cash equivalents

  $ 1,824     $ (5,340

)

 

Cash Flows from Operating Activities

 

Net cash used in operating activities in the six months ended June 30, 2015 was $4.6 million, which was due primarily to:

 

 

$2.7 million used due to the net loss of $5.5 million reduced by non-cash related items of $2.8 million consisting primarily of stock-based compensation expense of $1.9 million and depreciation and amortization expenses of $0.6 million;

 

$2.5 million used to increase inventory as a result of our expanded product line;

 

$1.5 million used by a decrease in deferred revenue;

 

$0.7 million used to pay down the high year-end accrued liabilities balance; partially offset by

 

$2.2 million generated from the collection of cash from the seasonally high accounts receivable balance as of December 31, 2014; and

 

$0.5 million generated from an increase in accounts payable.

  

Net cash used in opera