CUTERA INC - Annual Report: 2011 (Form 10-K)

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Delaware		77-0492262
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

 

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 Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.001 par value per share		The NASDAQ Stock Market, LLC

Large accelerated filer  ¨

Accelerated filer  x

Non-accelerated filer (Do not check if a smaller reporting company)  ¨

Smaller reporting company  ¨

 

 

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		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	17
Item 1B.	Unresolved Staff Comments	30
Item 2.	Properties	30
Item 3.	Legal Proceedings	30
Item 4.	Mine Safety Disclosures	30
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	30
Item 6.	Selected Financial Data	33
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 8.	Financial Statements and Supplementary Data	48
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	77
Item 9A.	Controls and Procedures	77
Item 9B.	Other Information	78
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	78
Item 11.	Executive Compensation	78
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	78
Item 13.	Certain Relationships and Related Transactions, and Director Independence	78
Item 14.	Principal Accounting Fees and Services	78
		78
PART IV
Item 15.	Exhibits, Financial Statement Schedules	79

 

ITEM 1.

BUSINESS

●

CoolGlide- In March 2003, our first product platform, CoolGlide, was launched. This platform offers laser applications for hair removal, treatment of a range of vascular lesions, including leg and facial veins, and Laser Genesis—a skin rejuvenation procedure that reduces fine lines, reduces pore size and improves skin texture.

●

Xeo- In 2003, we introduced the Xeo platform, which can combine pulsed light and laser applications in a single system. The Xeo is a fully upgradeable platform on which a customer can use the following applications that we offer: remove unwanted hair, treat vascular lesions and rejuvenate the skin by treating discoloration, improving texture, reducing pore size and treating fine lines and laxity. This product platform represents the largest contributor to our Product revenue.

●

Solera- In 2004, we introduced the Solera platform, a compact tabletop system designed to support a single technology platform. Solera systems use either infrared (Solera Titan) or pulsed light (Solera Opus) and can be used to remove unwanted hair, treat vascular lesions and rejuvenate the skin. The Solera Opus can support one or more pulsed light applications in a single system.

●

GenesisPlus- In 2010, we introduced the GenesisPlus platform, which is a dedicated laser based system for performing skin rejuvenation procedures and for onychomycosis, or toenail fungus. This system has a hand piece that includes real time temperature monitoring of the treatment area, as well as a non-contact distance gauge using two aiming beams, for improving the clinical result of treatment.  In addition, this system can be used to treat patients with skin concerns such as fine wrinkles, diffuse redness, rosacea, skin texture and pore size.

●

Excel V- In February 2011, we introduced our Excel V platform, a high-performance, vascular platform designed specifically for the core-market of Dermatologists and Plastic Surgeons. This platform provides a combination of the 532 nm green laser with Cutera’s award winning 1064 nm Nd:YAG technology, to provide a single, compact and efficient system that treats the entire range of cosmetic vascular conditions, without the need for costly consumables.

●

myQ- In October 2011, we announced a distribution agreement with Quanta System SpA ─ an Italian Original Equipment Manufacturer (OEM) of laser technologies ─ to market and sell the myQ series of Q-switched lasers in Japan. Q-switched lasers are designed to be used in a wide range of popular aesthetic applications, including superficial and deep pigmented lesions (i.e., melasma), skin rejuvenation, laser skin toning and tattoo removal.

●

Undesirable hair growth;

 

 

●

Enlargement or swelling of blood vessels due to circulatory changes that become visible at the skin’s surface in the form of unsightly veins;

●

Deterioration of collagen, which weakens the skin, leading to uneven texture, increased pore size, wrinkles and laxity; and

●

Uneven pigmentation or sun spots due to long-term sun exposure.

●

Aging of the U.S. Population- The “baby boomer” demographic segment ─ ages 47 to 65 in 2011 ─ represented approximately 80 million people, or 26%, of the U.S. population in 2011. The size of this aging segment, and its desire to retain a youthful appearance, has contributed to the growth for aesthetic procedures.

●

Broader Range of Safe and Effective Treatments- Technical developments have led to safe, effective, easy-to-use and low-cost treatments with fewer side effects, resulting in broader adoption of aesthetic procedures by practitioners. In addition, technical developments have enabled practitioners to offer a broader range of treatments. These technical developments have reduced the required treatment and recovery times, which in turn have led to greater patient demand.

●

Broader Base of Customers- Managed care and government payer reimbursement restrictions in the United States, and similar payment related constraints outside the United States, may help motivate qualified practitioners from differing specialties to establish or expand their elective aesthetic practices with procedures that are paid for directly by patients. As a result, in addition to the core users such as dermatologists and plastic surgeons, many other non-core practitioners, such as gynecologists, family practitioners, primary care physicians, physicians offering aesthetic treatments in non-medical offices, and other qualified practitioners are offering aesthetic procedures.

 

●

Energy Level- the amount of light emitted to heat a target;

●

Pulse Duration- the time interval over which the energy is delivered;

●

Spot Size- the diameter of the energy beam, which affects treatment depth and area; and

●

Wavelength- the color of light, which impacts the effective depth and absorption of the energy delivered.

●

Multiple Applications Available in a Single System- Our systems comprise of multi-applications that enable practitioners to perform multiple aesthetic procedures using a single device. These procedures include hair removal, vascular treatments and skin rejuvenation ─ including the treatment of discoloration, laxity, fine lines, pore size and uneven texture. Because practitioners can use our systems for multiple indications, the cost of a unit may be spread across a potentially greater number of patients and procedures and therefore may be more rapidly recovered.

●

Technology and Design Leadership- We offer innovative laser and light-based solutions for the aesthetic market. Our laser technology combines long wavelength, adjustable energy levels, variable spot sizes and a wide range of pulse durations, allowing practitioners to customize treatments for each patient and condition. Our proprietary pulsed light hand pieces for the treatment of discoloration, hair removal and vascular treatments optimize the wavelength used for treatments and incorporate a monitoring system to increase safety. Our Titan hand pieces utilize a novel light source that had not been previously used for aesthetic treatments. Our Pearl and Pearl Fractional hand pieces, with proprietary YSGG technology, represent the first application of the 2790 nm wavelength for minimally-invasive cosmetic dermatology. Further, our GenesisPlus platform for performing skin rejuvenation procedures and toenail fungus has a hand piece that includes real time temperature monitoring of the treatment area, as well as a non-contact distance gauge using two aiming beams, for improving the clinical result of the treatment. Excel V is a stand-alone, laser based product that combines a new high power green laser with Cutera's award winning Nd:YAG technology, to provide a system that treats the entire range of cosmetic vascular conditions, without the need for costly consumables.

 

 

●

Upgradeable Platform- We have designed some of our products to allow our customers to cost-effectively upgrade to our multi-application systems (Solera and Xeo), which provide our customers with the option to add additional applications to their existing systems and provides us with a source of recurring revenue. We believe that product upgradeability allows our customers to take advantage of our latest product offerings and provide additional treatment options to their patients, thereby expanding the opportunities for their aesthetic practices.

●

Treatments for Broad Range of Skin Types and Conditions- Our products remove hair safely and effectively on patients of all skin types, including harder-to-treat patients with dark or tanned skin. In addition, the wide parameter range of our systems allows practitioners to effectively treat patients with both fine and coarse hair. Practitioners may use our products to treat spider and reticular veins (unsightly small veins in the leg) and small facial veins; perform skin rejuvenation procedures for discoloration, texture, pore size, fine lines, and laxity on any type of skin; and treat toenail fungus. The ability to customize treatment parameters enables practitioners to offer safe and effective therapies to a broad base of their patients.

●

Ease of Use- We design our products to be easy to use. Our proprietary hand pieces are lightweight and ergonomic, minimizing user fatigue, and allow for clear views of the treatment area, reducing the possibility of unintended damage and increasing the speed of application. Our control console contains a universal graphic user interface with three simple, independently adjustable controls from which to select a wide range of treatment parameters to suit each patient’s profile. The clinical navigation user interface on the Xeo platform provides recommended clinical treatment parameter ranges based on patient criteria entered. And our Pearl and Pearl Fractional hand pieces include a scanner with multiple scan patterns to allow simple and fast treatments of the face. Risks involved in the use of our products include risks common to other laser and light-based aesthetic procedures, including the risk of burns, blistering and skin discoloration.

 

●

Continue to Expand our Product Offering- Though we believe that our current portfolio of products is comprehensive, our research and development group has a pipeline of potential products under development that we expect to commercialize in the future. In 2010 we launched GenesisPlus and in 2011, we launched Excel V. In addition to products in the laser and light-based aesthetic market, we are expanding our product offering into other complementary aesthetic applications, such as dermal fillers and cosmeceuticals. Such products will allow us to leverage our existing customer call points, and provide us with new customer call points, to generate additional revenue, which will enhance the productivity of our distribution channels.

●

Increasing Revenue and Improving Productivity- We believe that the market for aesthetic systems will continue to offer growth opportunities in the future. We continue to build brand-recognition, add additional products to our international distribution channel and remain focused on enhancing our global distribution network, all of which we expect will increase our revenue. In addition, we plan to grow our U.S. revenue by leveraging our relationship with PSS World Medical Shared Services, Inc., or PSS─ a wholly-owned subsidiary of PSS World Medical ─ that operates medical supply distribution service centers with over 700 sales consultants serving physician offices throughout the United States.

●

Increasing Focus on Practitioners with Established Medical Offices- We believe there is growth opportunity in targeting our products to a broad customer base. However, in response to the 2009 to 2010 global recession, we shifted our focus to the core practitioners and physicians with established medical offices. We believe that our customer success is largely dependent upon having an existing medical practice, in which our systems provide incremental revenue sources to augment their practice revenue.  As such, in 2011 we increased our focus on marketing our GenesisPlus product to podiatrists and our Excel V to dermatologists and plastic surgeons.

●

Leveraging our Installed Base with Sales of Upgrades- In February 2011, we introduced the Excel V and in 2010, we introduced GenesisPlus ─ both stand alone platforms. However in the past, we have introduced new products that allowed existing customers to upgrade their previously purchased systems to offer additional capabilities. We believe that providing upgrades to our existing installed base of customers continues to represent a potentially significant opportunity for recurring revenue. We also believe that our upgrade program aligns our interest in generating revenue with our customers’ interest in improving the return on their investment by expanding the range of applications that can be performed with their existing systems.

·

Generating Revenue from Services and Refillable Hand Pieces- Our Titan hand pieces and pulsed-light hand pieces are refillable products, which provide us with a source of recurring revenue from our existing customers. We offer post-warranty services to our customers either through extended service contracts to cover preventive maintenance or through direct billing for parts and labor. These post-warranty services serve as additional sources of recurring revenue.

 

 

 

 

Applications:

Hair Removal:

Vascular  Lesions:

Skin Rejuvenation

System Platforms:

Products:

Year:

Energy  Source:

Dyschromia:

Texture,  Lines and  Wrinkles:

Skin  Laxity:

Melasma & Tattoo Removal:

CoolGlide

CV

2000

a

x

Excel

2001

a

x

x

Vantage

2002

a

x

x

x

Xeo:

Nd:YAG

2003

a

x

x

x

OPS600

2003

b

x

LP560

2004

b

x

Titan S

2004

c

x

ProWave 770

2005

b

x

AcuTip 500

2005

b

x

Titan V/XL

2006

c

x

LimeLight

2006

b

x

Pearl

2007

d

x

x

Pearl Fractional

2008

d

x

Solera

Titan S

2004

c

x

ProWave 770

2005

b

x

OPS 600

2005

b

x

LP560

2005

b

x

AcuTip 500

2005

b

x

Titan V/XL

2006

c

x

LimeLight

2006

b

x

GenesisPlus

2010

a

x

Excel V

2011

e

x

x

x

myQ

2011

e

x

 

·

Titan V- Titan V has a treatment tip that extends beyond the hand piece housing to provide enhanced visibility of the skin’s surface to effectively treat delicate areas such as the skin around the eyes and nose.

·

Titan XL- Titan XL, like the Titan V, has a treatment tip that extends beyond the housing for improved visibility. It also has a larger treatment spot size to treat larger body areas faster, such as the arms, abdomen and legs.

 

 

 

 

 

 

 

 

·

Product testing;

·

Product manufacturing;

·

Product safety;

·

Product labeling;

·

Product storage;

·

Recordkeeping;

·

Pre-market clearance or approval;

·

Advertising and promotion;

·

Production; and

·

Product sales and distribution.

·

Complaint Handling

 

 

 

FDA Marketing Clearances:		Date Received:
Laser-based products:
- treatment of vascular lesions		June 1999
- hair removal		March 2000
- permanent hair reduction		January 2001
- treatment of benign pigmented lesions and pseudofolliculitis barbae, commonly referred to as razor bumps, and for the reduction of red pigmentation in scars		June 2002
- treatment of wrinkles		October 2002
- treatment of Onychomycosis for the clearance of nails	April 2011
Pulsed-light technologies:
- treatment of pigmented lesions		March 2003
- hair removal and vascular treatments		March 2005
Infrared Titan technology for deep dermal heating for the temporary relief of minor muscle and joint pain and for the temporary increase in local circulation where applied		February 2004
Solera tabletop console:
- for use with the Titan hand piece		October 2004
- for use with our pulsed-light hand pieces		January 2005
Pearl product for the treatment of wrinkles		March 2007
Pearl Fractional product for skin resurfacing and coagulation		August 2008

 

 

·

Quality system egulations, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;

·

Labeling regulations and FDA prohibitions against the promotion of products for un-cleared, unapproved or “off-label” uses;

·

Medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur; and

·

Post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device.

·

Warning letters, fines, injunctions, consent decrees and civil penalties;

·

Repair, replacement, recall or seizure of our products;

·

Operating restrictions or partial suspension or total shutdown of production;

·

Refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses, or modifications to existing products;

·

Withdrawing 510(k) clearance or pre-market approvals that have already been granted; and

·

Criminal prosecution.

 

ITEM 1A.

RISK FACTORS

 

 

 

 

·

Historically, we have introduced a new product every year since 2000, which typically resulted in increased revenue. However, in 2009 and until August 2010, we did not have a new product. In August 2010, we launched GenesisPlus and in February 2011, we launched Excel V. Even though we have introduced these new products and experienced sales increases as a result, there can be no assurance that they will translate into increased revenue in the long term in the U.S.

 

·

Although our U.S. Titan hand piece refill revenue increased by 19% for the year ended December 31, 2011, compared to the same period in 2010, our U.S. Titan hand piece refill revenue was still lower than the levels prior to the second quarter of 2010. That was due to a voluntary recall of certain Titan XL hand pieces in the second quarter of 2010, whereby all customers that had a Titan XL hand piece subject to the recall were provided with a fully refilled Titan XL hand piece. This delayed their purchase of a refill and resulted in a decline of our Titan refill revenue.

 

 

 

 

 

 

 

 

 

 

 

 

 

●	General economic and business conditions;

●	The overall demand for our products by the core market specialties of dermatologists and plastic surgeons;

●	Governmental budgetary constraints or shifts in government spending priorities;

●	General political developments;

●	Natural disasters, such as the March 2011 earthquake and tsunami in Japan; and

●	Currency exchange rate fluctuations.

 

 

 

 

 

 

●	Our ability to develop and market our products to the core market specialties of dermatologists and plastic surgeons;

 

 

 

 

 

 

●	Develop and acquire new products that either add to or significantly improve our current product offerings;

 

 

 

●	Intellectual property protection.

 

 

 

 

 

 

 

 

●	The potential disruption of the company’s ongoing business and diversion of management resources;

 

●	The difficulty of incorporating acquired products, technology and rights into the company’s products and services;

 

●	Unanticipated expenses related to integration of operations;

 

●	Potential periodic impairment of goodwill and intangible assets acquired, if any; and

 

●	Potential inability to retain, integrate and motivate key personnel.

 

 

 

 

●	Consumer disposable income and access to consumer credit, which as a result of the unstable economy, may have been significantly impacted;

 

●	The cost of procedures performed using our products;

 

●	The cost, safety and effectiveness of alternative treatments, including treatments which are not based upon laser or light-based technologies and treatments which use pharmaceutical products;

 

●	The success of our sales and marketing efforts; and

 

●	The education of our customers and patients on the benefits and uses of our products, compared to competitors’ products and technologies.

 

 

 

 

●	Damage to our brand reputation;

 

●	Loss of customer orders and delay in order fulfillment;

 

●	Increased costs due to product repair or replacement;

 

●	Inability to attract new customers;

 

●	Diversion of resources from our manufacturing and research and development departments into our service department; and

 

●	Legal action.

 

 

 

 

 

●	Difficulties in staffing and managing our foreign operations;

●	Export restrictions, trade regulations and foreign tax laws;

●	Fluctuating foreign currency exchange rates;

●	Foreign certification and regulatory requirements;

●	Lengthy payment cycles and difficulty in collecting accounts receivable;

●	Customs clearance and shipping delays;

●	Political and economic instability;

●	Lack of awareness of our brand in international markets;

●	Preference for locally-produced products; and

●	Reduced protection for intellectual property rights in some countries.

 

 

 

 

 

 

 

 

●	Warning letters, fines, injunctions, consent decrees and civil penalties;

●	Repair, replacement, recall or seizure of our products;

●	Operating restrictions or partial suspension or total shutdown of production;

●	Refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses, or modifications to existing products;

●	Withdrawing 510(k) clearance or pre-market approvals that have already been granted; and

●	Criminal prosecution.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

●

Litigation surrounding executive compensation has increased with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. If we are involved in a lawsuit related to compensation matters or any other matters not covered by our D&O insurance, there could be material expenses involved, fines, or remedial actions which could negatively affect our stock price;

 

 

 

 

 

 

 

 

 

●	Interruption of supply resulting from modifications to or discontinuation of a supplier’s operations;

 

●	Delays in product shipments resulting from uncorrected defects, reliability issues or a supplier’s variation in a component;

 

●	A lack of long-term supply arrangements for key components with our suppliers;

 

●	Inability to obtain adequate supply in a timely manner, or on reasonable terms;

 

●	Inability to redesign one or more components in our systems in the event that a supplier discontinues manufacturing such components and we are unable to source it from other suppliers on reasonable terms;

 

●	Difficulty locating and qualifying alternative suppliers for our components in a timely manner;

 

●	Production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications; and

 

●	Delay in supplier deliveries.

 

 

 

 

 

 

 

 

 

 

 

●	A classified board of directors;

●	Advance notice requirements to stockholders for matters to be brought at stockholder meetings;

 

●	Limitations on stockholder actions by written consent; and

●	The right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

ITEM 2.

PROPERTIES

Country		Square Footage		Lease termination or Expiration
Japan		Approximately 5,878		Two leases, one of which expires in December 2013 and one which expires in March 2015.
Switzerland		Approximately 3,174		One lease which expires in March 2013.
France		Approximately 450		One lease which expires in November 2014.
Spain		Approximately 269		Lease automatically renews at the end of each six-month period.

 

ITEM 3.

LEGAL PROCEEDINGS

 

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

	Common Stock
	2011								2010
	High				Low				High				Low
4th Quarter		$	7.93			$	6.96			$	8.39			$	7.01
3rd Quarter			8.74				7.03				9.00				6.99
2nd Quarter			9.46				7.59				12.04				8.62
1st Quarter			9.94				8.08				11.03				8.25

 

 

 

 

ITEM 6.

SELECTED FINANCIAL DATA

			Year Ended December 31,
Consolidated Statements of Operations Data (in thousands, except per share data):			2011				2010				2009				2008				2007
Net revenue		$	60,290			$	53,274			$	53,682			$	83,379			$	101,726
Cost of revenue			25,978				23,058				21,759				32,358				35,002
Gross profit			34,312				30,216				31,923				51,021				66,724
Operating expenses:
Sales and marketing			25,499				24,735				24,286				35,354				38,277
Research and development			9,141				7,004				6,810				7,550				7,169
General and administrative			10,104				9,576				10,320				11,270				11,721
Litigation settlement			—				—				850				—				—
Total operating expenses			44,744				41,315				42,266				54,174				57,167
Income (loss) from operations			(10,432	)			(11,099	)			(10,343	)			(3,153	)			9,557
Interest and other income, net			614				583				1,572				3,046				4,207
Other-than-temporary impairments of long-term investments			—				—				—				(3,554	)			—
Income (loss) before income taxes			(9,818	)			(10,516	)			(8,771	)			(3,661	)			13,764
Provision (benefit) for income taxes			243				2				8,908				(792	)			3,260
Net income (loss)		$	(10,061	)		$	(10,518	)		$	(17,679	)		$	(2,869	)		$	10,504
Net income (loss) available to common stockholders used in basic net income per share		$	(10,061	)		$	(10,518	)		$	(17,679	)		$	(2,869	)		$	10,504
Net income (loss) per share:
Basic		$	(0.73	)		$	(0.78	)		$	(1.33	)		$	(0.22	)		$	0.80
Diluted		$	(0.73	)		$	(0.78	)		$	(1.33	)		$	(0.22	)		$	0.74
Weighted-average number of shares used in per share calculations:
Basic			13,807				13,540				13,279				12,770				13,153
Diluted			13,807				13,540				13,279				12,770				14,228

 

		As of December 31,
Consolidated Balance Sheet Data (in thousands):		2011				2010				2009				2008				2007
Cash and cash equivalents		$	14,020			$	12,519			$	22,829			$	36,540			$	11,054
Marketable investments			74,666				77,484				76,780				60,653				88,510
Long-term investments			3,027				6,784				7,275				9,627				7,429
Working capital (current assets less current liabilities)			89,075				90,339				96,015				101,644				106,894
Total assets			111,353				111,805				121,352				137,476				138,653
Retained earnings (accumulated deficit)			(3,325	)			6,736				17,254				31,410				34,279
Total stockholders’ equity			91,567				95,417				100,853				112,108				109,353

ITEM 7.

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

●

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

●

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

●

Recent Accounting Guidance. This section describes the issuance and effect of new accounting pronouncements that are and may be applicable to us.

●

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

●

Liquidity and Capital Resources. This section provides an analysis of our liquidity and cash flows, as well as a discussion of our commitments that existed as of December 31, 2011.

 

 

 

 

 

 

 

 

●

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

●

FDA clearance of our GenesisPlus system for onychomycosis, or toenail fungus, in April 2011.

●

Commencement of Excel V shipments in the second quarter of 2011

●

Effective U.S. sales management changes implemented in early 2011.

●

An improvement of our 2011 margins for Titan refill revenue, given 2011 did not have costs associated with the recall of certain Titan XL hand pieces in 2010;

·

An increase of $823,000 of Titan refill revenue, for which we traditionally earn a higher gross margin than our blended total gross margin percentage;

 

 

●

Improved gross margin on our Dermal fillers and cosmeceutical products sold in Japan, due to higher average selling prices resulting from favorable foreign exchange rates; which was offset by

●

Lower gross margins for our Product revenue, resulting from an unfavorable product mix towards lower margin products.

●

The 2010 voluntary recall of certain Titan XL hand pieces whereby eligible customers were provided with fully refilled hand pieces;

●

A $1.7 million, or 31%, temporary decrease in our Titan refill revenue in 2010, compared to 2009, for which we traditionally earn a higher gross margin than our blended total gross margin percentage;

●

Our ASPs declined in 2010 due primarily to customers purchasing fewer applications on their platforms and due to competitive discounting pressures; and

●

A higher proportion of distributor revenue, that carries a lower gross margin; partially offset by

●

Lower manufacturing expenses resulting from headcount reductions; and

●

Reduced warranty and service expenses as a result of improved product reliability (for products other than Titan XL hand pieces).