Annual Reports

 
Quarterly Reports

  • 10-Q (May 9, 2014)
  • 10-Q (Nov 12, 2013)
  • 10-Q (Aug 9, 2013)
  • 10-Q (May 8, 2013)
  • 10-Q (Oct 26, 2012)
  • 10-Q (Aug 3, 2012)

 
8-K

 
Other

Cynosure 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

 

Form 10-Q

 

 

(Mark one)

 

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

For the quarterly period ended September 30, 2011

OR

 

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

For the transition period from            to            

Commission File Number 000-51623

 

 

Cynosure, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   04-3125110

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

5 Carlisle Road

Westford, MA

  01886
(Address of principal executive offices)   (Zip code)

(978) 256-4200

(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.    x  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).    x  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 the 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   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

The number of shares outstanding of each of the registrant’s classes of common stock, as of October 31, 2011:

 

Class

 

Number of Shares

Class A Common Stock, $0.001 par value   9,625,851
Class B Common Stock, $0.001 par value   2,939,161

 

 

 


Table of Contents

Cynosure, Inc.

Table of Contents

 

          Page No.  

PART I

  

Financial Information

  

Item 1.

  

Financial Statements (Unaudited)

  
  

Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010

     1   
  

Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2011 and 2010

     2   
  

Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2011 and 2010

     3   
  

Notes to Consolidated Financial Statements

     4   

Item 2.

  

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

     14   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     23   

Item 4.

  

Controls and Procedures

     24   

PART II

  

Other Information

  

Item 1.

  

Legal Proceedings

     24   

Item 1A.

  

Risk Factors

     24   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     25   

Item 6.

  

Exhibits

     26   

SIGNATURES

     27   

EXHIBIT INDEX

     28   

EX-31.1 Certification of the Principal Executive Officer

  

EX-31.2 Certification of the Principal Financial Officer

  

EX-32.1 Certification of the Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  

EX-32.2 Certification of the Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  


Table of Contents

Cynosure, Inc.

Consolidated Balance Sheets

(in thousands)

 

     (Unaudited)
September 30,
2011
    December 31,
2010
 
Assets     

Current assets:

    

Cash and cash equivalents

   $ 31,388      $ 27,434   

Short-term marketable securities

     31,808        59,402   

Accounts receivable, net

     14,980        10,621   

Inventories

     29,669        18,684   

Prepaid expenses and other current assets

     3,853        3,902   

Deferred income taxes

     485        489   
  

 

 

   

 

 

 

Total current assets

     112,183        120,532   
  

 

 

   

 

 

 

Property and equipment, net

     7,828        8,892   

Long-term marketable securities

     2,598        9,990   

Goodwill and intangibles, net

     24,159        1,666   

Other noncurrent assets

     647        732   
  

 

 

   

 

 

 

Total assets

   $ 147,415      $ 141,812   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 8,433      $ 4,840   

Amounts due to related party

     1,873        1,785   

Accrued expenses

     12,730        10,427   

Deferred revenue

     5,280        3,660   

Capital lease obligation

     136        133   
  

 

 

   

 

 

 

Total current liabilities

     28,452        20,845   
  

 

 

   

 

 

 

Capital lease obligation, net of current portion

     279        40   

Deferred revenue, net of current portion

     405        348   

Other noncurrent liability

     99        279   

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock, $0.001 par value

    

Authorized — 5,000 shares

    

Issued — none

     —          —     

Class A and Class B common stock, $0.001 par value

    

Authorized — 70,000 shares

    

Issued — 9,823 Class A shares and 2,975 Class B shares at September 30, 2011;

Issued — 9,786 Class A shares and 2,975 Class B shares at December 31, 2010, respectively

     13        13   

Additional paid-in capital

     123,850        121,706   

(Accumulated deficit) retained earnings

     (1,760     2,227   

Accumulated other comprehensive loss

     (1,753     (1,938

Treasury stock, 197 Class A shares and 36 Class B shares at September 30, 2011 (at cost), and 149 Class A shares and 36 Class B shares at December 31, 2010 (at cost)

     (2,170     (1,708
  

 

 

   

 

 

 

Total stockholders’ equity

     118,180        120,300   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 147,415      $ 141,812   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1


Table of Contents

Cynosure, Inc.

Consolidated Statements of Operations

(Unaudited, in thousands, except per share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Product revenues

   $ 22,635      $ 14,357      $ 59,921      $ 44,963   

Parts, accessories and service revenues

     5,642        4,694        16,579        14,470   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     28,277        19,051        76,500        59,433   

Cost of revenues

     12,303        8,367        33,379        25,529   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     15,974        10,684        43,121        33,904   

Operating expenses:

        

Sales and marketing

     9,838        7,069        28,250        24,116   

Research and development

     2,571        1,899        7,242        5,454   

Amortization of intangible assets acquired

     415        —          439        —     

General and administrative

     3,537        2,688        10,639        8,751   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     16,361        11,656        46,570        38,321   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (387     (972     (3,449     (4,417
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest income, net

     17        41        117        139   

Other (expense) income, net

     (260     504        (47     (197
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (630     (427     (3,379     (4,475
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for income taxes

     162        33        608        274   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (792   $ (460   $ (3,987   $ (4,749
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net loss per share

   $ (0.06   $ (0.04   $ (0.32   $ (0.37
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net loss per share

   $ (0.06   $ (0.04   $ (0.32   $ (0.37
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted-average common shares outstanding

     12,596        12,653        12,591        12,691   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted-average common shares outstanding

     12,596        12,653        12,591        12,691   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2


Table of Contents

Cynosure, Inc.

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

     Nine Months Ended
September 30,
 
     2011     2010  

Operating activities:

    

Net loss

   $ (3,987   $ (4,749

Reconciliation of net loss to net cash (used in) provided by operating activities:

    

Depreciation and amortization

     4,965        4,254   

Stock-based compensation expense

     1,942        3,289   

Gain on investments

     —          (21

Loss on disposal of fixed assets

     6        1   

Deferred income taxes

     —          1   

Accretion of discounts on marketable securities

     870        633   

Changes in operating assets and liabilities:

    

Accounts receivable

     (2,405     728   

Inventories

     (9,402     (1,829

Net book value of demonstration inventory sold

     824        909   

Prepaid expenses and other current assets

     16        2,580   

Accounts payable

     2,123        68   

Due to related party

     85        768   

Tax benefit from stock option exercises

     (32     (2

Accrued expenses

     1,568        550   

Deferred revenue

     1,304        (1,641

Other noncurrent liability

     3        (1
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (2,120     5,538   

Investing activities:

    

Purchases of property and equipment

     (689     (391

Proceeds from the sales and maturities of marketable securities

     70,601        58,366   

Purchases of marketable securities

     (36,489     (75,248

Acquisitions

     (26,970     —     

Increase in other noncurrent assets

     (3     (23
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     6,450        (17,296

Financing activities:

    

Excess tax benefit on options exercised

     32        2   

Repurchases of common stock

     (462     (1,146

Proceeds from stock option exercises

     202        84   

Payments on capital lease obligation

     (75     (185
  

 

 

   

 

 

 

Net cash used in financing activities

     (303     (1,245

Effect of exchange rate changes on cash and cash equivalents

     (73     89   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     3,954        (12,914

Cash and cash equivalents, beginning of the period

     27,434        44,797   
  

 

 

   

 

 

 

Cash and cash equivalents, end of the period

   $ 31,388      $ 31,883   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Cash paid for interest

   $ 18      $ 40   
  

 

 

   

 

 

 

Cash paid for income taxes

   $ 746      $ 549   
  

 

 

   

 

 

 

Supplemental noncash investing and financing activities

    

Transfer of demonstration equipment from inventory to fixed assets

   $ 2,343      $ 3,181   

Assets acquired under capital lease

   $ 317        —     
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements

Note 1 — Interim Consolidated Financial Statements

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. It is recommended that these financial statements be read in conjunction with the consolidated financial statements and related notes that appear in the Annual Report on Form 10-K of Cynosure, Inc. (Cynosure) for the year ended December 31, 2010. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations, and cash flows as of the dates and for the periods presented have been included. The results of operations for the nine months ended September 30, 2011 may not be indicative of the results that may be expected for the year ending December 31, 2011, or any other period.

Note 2 — Stock-Based Compensation

Cynosure recorded stock-based compensation expense of $0.6 million and $0.9 million for the three months ended September 30, 2011 and 2010, respectively. Cynosure recorded stock-based compensation expense of $1.9 million and $3.3 million for the nine months ended September 30, 2011 and 2010, respectively. Cynosure capitalized $14,000 and $32,000 of stock-based compensation expense as part of inventory during the nine months ended September 30, 2011 and 2010, respectively.

Total stock-based compensation expense was recorded to cost of revenues and operating expenses based upon the functional responsibilities of the individual holding the respective options, as follows:

 

     Three Months
Ended
September 30,
     Nine Months
Ended
September 30,
 
     2011      2010      2011      2010  
     (In thousands)  

Cost of revenues

   $ 32       $ 66       $ 105       $ 255   

Sales and marketing

     192         339         636         1,509   

Research and development

     104         121         340         459   

General and administrative

     289         326         861         1,066   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 617       $ 852       $ 1,942       $ 3,289   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash received from option exercises was $0.2 million and $0.1 million during the nine months ended September 30, 2011 and 2010, respectively.

Cynosure granted 408,854 and 438,211 stock options during the nine months ended September 30, 2011 and 2010, respectively. Cynosure has elected to use the Black-Scholes model to determine the weighted average fair value of options. The weighted average fair value of the options granted during the nine months ended September 30, 2011 and 2010 was $7.27 and $5.79, respectively, using the following assumptions:

 

     Nine Months
Ended
September 30,
     2011   2010

Risk-free interest rate

   0.93% - 2.37%   1.73% - 2.50%

Expected dividend yield

    

Expected term

   5.8 years   5.8 years

Expected volatility

   55% - 56%   58% - 59%

Estimated forfeiture rate

   5%   5%

Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Cynosure’s estimated expected stock price volatility is based on its own historical volatility. Cynosure’s expected term of options granted in the nine months ended September 30, 2011 and 2010 was derived from the short-cut method. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield of zero is based on the fact that Cynosure has never paid cash dividends and has no present intention to pay cash dividends.

 

4


Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Note 3 — Inventories

Cynosure states all inventories at the lower of cost or market, determined on a first-in, first-out method. Inventory includes material, labor and overhead and consists of the following:

 

     September 30,
2011
     December 31,
2010
 
     (in thousands)  

Raw materials

   $ 6,763       $ 3,980   

Work in process

     1,995         711   

Finished goods

     20,911         13,993   
  

 

 

    

 

 

 
   $ 29,669       $ 18,684   
  

 

 

    

 

 

 

Note 4 — Fair Value

U.S. GAAP establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

 

   

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable markets data for substantially the full term of the assets or liabilities.

 

   

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table represents Cynosure’s fair value hierarchy for its financial assets (cash equivalents and marketable securities) measured at fair value as of September 30, 2011 (in thousands):

 

     Level 1      Level 2      Level 3      Total  

Money market funds (1)

   $ 14,304       $ —         $ —         $ 14,304   

State and municipal bonds

     —           16,886         —           16,886   

Treasuries and government agencies

     —           17,515         —           17,515   

Equity securities

     5         —           —           5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,309       $ 34,401       $ —         $ 48,710   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Included in cash and cash equivalents at September 30, 2011.

During the nine months ended September 30, 2011, there were no significant transfers in and out of Level 1 and Level 2. Cynosure did not have any Level 3 financial assets at September 30, 2011 or December 31, 2010.

 

5


Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Note 5 — Short and Long-Term Marketable Securities

Cynosure’s available-for-sale securities at September 30, 2011 consist of approximately $34.4 million of investments in debt securities consisting of state and municipal bonds, treasuries and government agencies and approximately $5,000 in equity securities. All investments in available-for-sale securities are recorded at fair market value, with any unrealized gains and losses reported as a separate component of accumulated other comprehensive loss. As of September 30, 2011, Cynosure’s available-for-sale securities consist of the following (in thousands):

 

     Market
Value
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
 

Available-for-Sale Securities:

           

Short-term marketable securities:

           

State and municipal bonds

   $ 16,290       $ 16,278       $ 14       $ (2

Treasuries and government agencies

     15,513         15,507         7         (1

Equity securities

     5         8         —           (3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term marketable securities

   $ 31,808       $ 31,793       $ 21         (6
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-term marketable securities:

           

State and municipal bonds

   $ 596       $ 594       $ 2         —     

Treasuries and government agencies

   $ 2,002       $ 1,998         4         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term marketable securities

     2,598         2,592       $ 6         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 34,406       $ 34,385       $ 27       $ (6
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable securities

   $ 34,406            
  

 

 

          

As of December 31, 2010, Cynosure’s marketable securities consist of the following (in thousands):

 

     Market
Value
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
 

Available-for-sale Securities:

           

Cash equivalents:

           

State and municipal bonds

   $ 1,109       $ 1,109       $ —         $ —     

Treasuries and government agencies

     5,008         5,011         —           (3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash equivalents

   $ 6,117       $ 6,120       $ —         $ (3
  

 

 

    

 

 

    

 

 

    

 

 

 

Short-term marketable securities:

           

State and municipal bonds

   $ 13,416       $ 13,420       $ —         $ (4

Treasuries and government agencies

     45,974         45,953         31         (10

Equity securities

     12         15         —           (3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term marketable securities

   $ 59,402       $ 59,388       $ 31       $ (17
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-term marketable securities:

           

State and municipal bonds

   $ 5,191       $ 5,200       $ —         $ (9

Treasuries and government agencies

     4,799         4,798         1         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term marketable securities

   $ 9,990       $ 9,998       $ 1       $ (9
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 75,509       $ 75,506       $ 32       $ (29
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable securities

   $ 69,392            
  

 

 

          

 

 

6


Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

As of September 30, 2011, Cynosure’s available-for-sale debt securities mature as follows (in thousands):

 

 

     Total      Maturities  
      Less
Than
One
Year
     One to
Five
Years
     More
than
five
years
 

State and municipal bonds

   $ 16,886       $ 16,290       $ 596       $ —     

Treasuries and government agencies

     17,515         15,513         2,002         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale debt securities

   $ 34,401       $ 31,803       $ 2,598       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 6 — Acquisitions

ConBio

On June 27, 2011, Cynosure acquired the net assets of HOYA ConBio’s aesthetic laser business (ConBio) for $24.5 million in cash. The business purpose of this transaction was to acquire and incorporate ConBio’s aesthetic laser product line which utilizes proprietary PhotoAcoustic energy technology including high-speed energy waves to penetrate the skin in nanoseconds, minimizing the amount of heat in each procedure, into Cynosure’s product portfolio. ConBio’s Q-Switched Nd:YAG technology is designed to treat a broad range of high-volume applications, including skin rejuvenation, skin toning, multi-color tattoo removal, wrinkle and acne scar reduction, pigmented lesions and vascular lesions. This acquisition was considered a business acquisition for accounting purposes. The goodwill recognized is attributable to synergies associated with the ConBio technology which has been integrated with Cynosure’s product portfolio and distributed throughout the U.S. and international distribution channels.

The total purchase price was allocated to the net tangible and intangible assets based upon the fair values as of June 27, 2011. The excess of the purchase price over the net tangible and intangible assets was recorded as goodwill. Cynosure acquired $24.5 million of net assets, including $7.6 million of identifiable intangible assets, and goodwill of $14.2 million. The identifiable intangible assets include: $2.6 million of trade names, $2.0 million of developed technology and patents and $3.0 million of customer relationships. All intangible assets, including goodwill, are deductible for income tax purposes over 15 years.

The allocation of the acquisition purchase price is subject to adjustment upon finalization of the valuations, and therefore the current measurements of inventory, intangible assets acquired, goodwill and assumed liabilities are subject to change. The following table summarizes the estimated fair value as of June 27, 2011 of the net assets acquired (in thousands):

 

Purchase price:

  

Cash paid per Agreement

   $ 24,500   
  

 

 

 

Total

   $ 24,500   
  

 

 

 

Assets (liabilities) acquired:

  

Accounts receivable

   $ 1,525   

Inventory

     2,756   

Prepaids and other assets

     115   

Property and equipment

     525   

Intangible assets

     7,580   

Goodwill

     14,204   

Accounts payable

     (1,463

Accrued expenses

     (402

Deferred revenue

     (340
  

 

 

 

Total

   $ 24,500   
  

 

 

 

Eleme Medical

On February 2, 2011, Cynosure acquired assets and certain liabilities of Eleme Medical for $2.5 million in cash. The business purpose of this transaction was to acquire and incorporate Eleme Medical’s non-invasive SmoothShapes® XV system for the temporary reduction in the appearance of cellulite into Cynosure’s product portfolio and also included licensing rights to intellectual property related to the SmoothShapes technology. This acquisition was considered a business acquisition for accounting purposes. The goodwill recognized is attributable to expected synergies as the SmoothShapes XV technology will be integrated into Cynosure’s U.S. and international distribution channel and complement the Cellulite product family.

 

7


Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

The total purchase price was allocated to the net tangible and intangible assets based upon their fair values as of February 2, 2011. The excess of the purchase price over the net tangible and intangible assets was recorded as goodwill. Cynosure acquired $2.5 million of net assets, including $1.0 million of identifiable intangible assets, and goodwill of $0.5 million. The identifiable intangible assets are being amortized over five years on a straight-line basis. All intangible assets, including goodwill, are deductible for income tax purposes over 15 years.

The following table summarizes the fair value as of February 2, 2011 of the net assets acquired (in thousands):

 

Purchase price:

  

Cash paid per Agreement

   $ 2,470   
  

 

 

 

Total

   $ 2,470   
  

 

 

 

Assets (liabilities) acquired:

  

Accounts receivable

   $ 161   

Inventory

     736   

Property and equipment

     363   

Identifiable intangible assets

     988   

Goodwill

     460   

Accrued warranty and royalty

     (238
  

 

 

 

Total

   $ 2,470   
  

 

 

 

The following unaudited pro forma condensed consolidated operating results for the three and nine months ended September 30, 2011 and 2010 summarizes the combined results of operations for Cynosure and the other two companies that were acquired during fiscal year 2011, ConBio and Eleme Medical. The unaudited pro forma condensed consolidated operating results includes the business combination accounting effects as if the acquisitions had been completed as of January 1, 2011 (for the 2011 period results) and January 1, 2010 (for the 2010 period results). These pro forma amounts are not necessarily indicative of the operating results that would have occurred if these transactions had occurred on such date.

 

     Three Months
Ended
Sept 30,
    Nine Months
Ended
Sept 30,
 
     2011     2010     2011     2010  
     (In thousands)  

Revenue

   $ 28,277      $ 26,323      $ 88,081      $ 81,319   

Pre-tax loss

     (565     (1,323     (1,813     (7,921

The amounts included in revenue within the consolidated statement of operations, relating to the acquisitions of ConBio and Eleme Medical, for the three and nine month periods ending September 30, 2011 were $7.1 million and $9.3 million, respectively. As a result of the integration of the operations of ConBio and Eleme Medical into Cynosure’s operations, disclosures of earnings included in the accompanying consolidated statement of operations since the acquisition date is not practicable.

Cynosure recorded $0.4 million and $1.7 million of acquisition related costs for the three and nine month periods ending September 30, 2011, respectively. This amount is primarily recorded in the general and administrative line on the consolidated statement of operations.

Note 7 — Goodwill and Other Intangible Assets

Changes to goodwill during the nine months ended September 30, 2011 were as follows (in thousands):

 

     United
States
     Asia
Pacific
    Europe     Total  

Balance — December 31, 2010

   $ —         $ 1,225      $ —        $ 1,225   

Acquisition

     14,512         —          152        14,664   

Translation adjustment

     —           (41     (6     (47
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance — September 30, 2011

   $ 14,512       $ 1,184      $ 146      $ 15,842   
  

 

 

    

 

 

   

 

 

   

 

 

 

Intangible assets are recorded at fair value and stated net of accumulated amortization and impairments. Cynosure amortizes its intangible assets that have finite lives using either the straight-line or accelerated method, based on the useful life

 

8


Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

of the asset in which it is expected to be consumed utilizing expected undiscounted future cash flows. Amortization is recorded over the estimated useful lives ranging from 5 to 20 years. The Company evaluates the realizability of its definite lived intangible assets whenever events or changes in circumstances or business conditions indicate that the carrying value of these assets may not be recoverable based on expectations of future undiscounted cash flows for each asset group. If the carrying value of an asset or asset group exceeds its undiscounted cash flows, Cynosure estimates the fair value of the assets, generally utilizing a discounted cash flow analysis based on the present value of estimated future cash flows to be generated by the assets using a risk-adjusted discount rate. To estimate the fair value of the assets, Cynosure uses market participant assumptions pursuant to ASC 820, Fair Value Measurements. If the estimate of an intangible asset’s remaining useful life is changed, Cynosure will amortize the remaining carrying value of the intangible asset prospectively over the revised useful life.

Other intangible assets consist of the following at September 30, 2011 and December 31, 2010 (in thousands):

 

     Developed
Technology
& Patents
    Business
Licenses
    Customer
Relationships
    Trade
Names
    Other     Total  

September 30, 2011

            

Cost

   $ 3,250      $ 384      $ 3,323      $ 2,650      $ 48      $ 9,655   

Translation adjustment

     —          30        16        —          2        48   

Accumulated amortization

     (759     (136     (440     (47     (4     (1,386
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2011

   $ 2,491      $ 278      $ 2,899      $ 2,603      $ 46      $ 8,317   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2010

            

Cost

   $ 591      $ 384      $ 64      $ —        $ 48      $ 1,087   

Translation adjustment

     —          30        19        —          1        50   

Accumulated amortization

     (554     (109     (30     —          (2     (695
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2010

   $ 37      $ 305      $ 53      $ —        $ 47      $ 442   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cynosure purchased $1.0 million of identifiable intangible assets from its Eleme Medical acquisition, of which $0.7 million was attributable to developed technology and patents, $0.3 million was attributable to customer relationships and $20,000 was attributable to trademarks in the nine months ended September 30, 2011. These identifiable intangible assets are being amortized on a straight-line basis over a five year period.

Cynosure purchased $7.6 million of identifiable intangible assets from its ConBio acquisition, of which $2.0 million was assigned to developed technology and patents, $3.0 million was assigned to customer relationships and $2.6 million was assigned to trademarks. The developed technology and patents and customer relationships are being amortized on an accelerated basis; developed technology and patents over a 12 year period and customer relationships over a 5 year period. The trade names are being amortized on a straight-line basis over a 15 year period.

Amortization expense related to developed technology and patents is classified as a component of cost of revenues in the Consolidated Statements of Operations. Amortization expense related to business licenses, customer relationships, trade names and other is classified as a component of amortization of intangible assets acquired in the Consolidated Statements of Operations.

Amortization expense for the three months ended September 30, 2011 and 2010, was $0.6 million and $16,000, respectively, of which, $0.4 million is classified within operating expenses as amortization of intangible assets acquired through the Eleme Medical and ConBio acquisitions in the 2011 period. Amortization expense for the nine months ended September 30, 2011 and 2010, was $0.7 million and $47,000, respectively, of which, $0.4 million is classified within operating expenses as amortization of intangible assets acquired through the Eleme Medical and ConBio acquisitions in the 2011 period. Cynosure has approximately $41,000 of indefinite-life intangible assets that are included in other intangible assets in the table above. As of September 30, 2011, amortization expense on existing intangible assets for the next five years and beyond is as follows (table in thousands):

 

Remainder of 2011

   $ 542   

2012

     1,842   

2013

     1,298   

2014

     950   

2015 and thereafter

     3,644   
  

 

 

 

Total

   $
8,276
  
  

 

 

 

 

9


Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

The table above includes $0.4 million for the remainder of 2011, $1.4 million for 2012, $0.9 million for 2013, $0.6 million for 2014 and $2.3 million for 2015 and thereafter, to be recognized within operating expenses related to the amortization expense on intangible assets acquired through the Eleme Medical and ConBio acquisitions.

Note 8 — Warranty Costs

Cynosure typically provides a one-year parts and labor warranty on end-user sales of laser systems. Distributor sales generally include a warranty on parts only. Estimated future costs for initial product warranties are provided at the time of revenue recognition.

The following table provides the detail of the change in Cynosure’s product warranty accrual during the nine months ended September 30, 2011, which is a component of accrued expenses in the consolidated balance sheets:

 

     September 30,
2011
 
     (in thousands)  

Warranty accrual, beginning of period

   $ 2,112   

Warranty provision related to new sales

     3,331   

Warranty provision assumed from acquisitions

     461   

Costs incurred

     (2,961
  

 

 

 

Warranty accrual, end of period

   $ 2,943   
  

 

 

 

Note 9 — Segment Information

Cynosure identifies operating segments as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. Cynosure’s chief decision-maker is a combination of the Chief Executive Officer and the Chief Financial Officer. Cynosure views its operations and manages its business as one segment, aesthetic treatment products and services.

The following table represents total revenue by geographic destination:

 

     Three Months
Ended
September 30,
     Nine Months
Ended
September 30,
 
     2011      2010      2011      2010  
     (in thousands)  

United States

   $ 10,644       $ 6,889       $ 29,058       $ 21,564   

Europe

     5,520         4,939         20,241         17,180   

Asia / Pacific

     9,309         5,112         18,880         14,226   

Other

     2,804         2,111         8,321         6,463   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,277       $ 19,051       $ 76,500       $ 59,433   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Total assets by geographic area are as follows:

 

     September 30,
2011
    December 31,
2010
 
     (in thousands)  

United States

   $ 128,109      $ 123,211   

Europe

     13,032        12,119   

Asia / Pacific

     8,335        8,279   

Eliminations

     (2,061     (1,797
  

 

 

   

 

 

 

Total

   $ 147,415      $ 141,812   
  

 

 

   

 

 

 

Long-lived assets by geographic area are as follows:

 

     September 30,
2011
     December 31,
2010
 
     (in thousands)  

United States

   $ 29,295       $ 7,571   

Europe

     1,529         1,833   

Asia / Pacific

     1,810         1,886   
  

 

 

    

 

 

 

Total

   $ 32,634       $ 11,290   
  

 

 

    

 

 

 

No individual country within Europe or Asia/Pacific represented greater than 10% of total revenue, total assets or total long lived assets for any period presented.

The increase in the amount of long-lived assets in the United States is due to the intangible assets realized from the Eleme and ConBio acquisitions.

Note 10 — Net Loss Per Common Share

Basic net loss per share was determined by dividing net loss by the weighted average common shares outstanding during the period. Diluted net loss per share was determined by dividing net loss by diluted weighted average shares outstanding. Diluted weighted average shares reflect the dilutive effect, if any, of common stock options based on the treasury stock method. Common shares outstanding includes both Class A and Class B common stock as each participates equally in earnings. Class B shares are convertible at any time into shares of Class A on a one-for-one basis at the option of the holder.

A reconciliation of basic and diluted shares is as follows:

 

     Three Months
Ended
September 30,
    Nine Months
Ended
September 30,
 
     2011     2010     2011     2010  

Net loss

   $ (792   $ (460   $ (3,987   $ (4,749
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average common shares outstanding

     12,596        12,653        12,591        12,691   

Weighted average common equivalent shares

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average common shares outstanding

     12,596        12,653        12,591        12,691   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net loss per share

   $ (0.06   $ (0.04   $ (0.32   $ (0.37
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net loss per share

   $ (0.06   $ (0.04   $ (0.32   $ (0.37
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three and nine months ended September 30, 2011 and 2010, the number of basic and diluted weighted average shares outstanding was the same because any increase in the number of shares of common stock equivalents for those periods would be antidilutive based on the net loss for the period. During the three months ended September 30, 2011 and 2010, outstanding options to purchase 1,990,000 and 1,552,000, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have been antidilutive. During the nine months ended September 30, 2011 and 2010, outstanding options to purchase 2,014,000 and 1,181,000, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have been antidilutive.

 

11


Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Note 11 — Comprehensive (Loss) Gain

Comprehensive loss is the change in equity of a company during a period from transactions and other events and circumstances, excluding transactions resulting from investments by owners and distributions to owners.

The components of accumulated other comprehensive loss as of September 30, 2011 and December 31, 2010 are as follows:

 

     September 30,
2011
    December 31,
2010
 
     (in thousands)  

Unrealized gain on marketable securities, net of taxes

   $ 21      $ 29   

Cumulative translation adjustment

     (1,774     (1,967
  

 

 

   

 

 

 

Total accumulated other comprehensive loss

   $ (1,753   $ (1,938
  

 

 

   

 

 

 

The components of total comprehensive loss for the three and nine month periods ended September 30, 2011 and 2010 are as follows:

 

     Three Months
Ended
September 30,
    Nine Months
Ended
September 30,
 
     2011     2010     2011     2010  
     (in thousands)  

Cumulative translation adjustment

   $ (604   $ 966      $ 193      $ (254

Unrealized (loss) gain on marketable securities

     (15     15        (8     33   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) gain

     (619     981        185        (221

Reported net loss

     (792     (460     (3,987     (4,749
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive (loss) gain

   $ (1,411   $ 521      $ (3,802   $ (4,970
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 12 — Litigation

In 2005, Dr. Ari Weitzner, individually and as putative representative of a purported class, filed a complaint against Cynosure under the federal Telephone Consumer Protection Act (TCPA) in Massachusetts Superior Court in Middlesex County seeking monetary damages, injunctive relief, costs and attorneys fees. The complaint alleges that Cynosure violated the TCPA by sending unsolicited advertisements by facsimile to the plaintiff and other recipients without the prior express invitation or permission of the recipients. Under the TCPA, recipients of unsolicited facsimile advertisements are entitled to damages of up to $500 per facsimile for inadvertent violations and up to $1,500 per facsimile for knowing or willful violations. Based on discovery in this matter, the plaintiff alleges that approximately three million facsimiles were sent on Cynosure’s behalf by a third party to approximately 100,000 individuals. In February 2008, several months after the close of discovery, the plaintiff served a motion for class certification, which Cynosure opposed on numerous factual and legal grounds, including that a nationwide class action may not be maintained in a Massachusetts state court by Dr. Weitzner, a New York resident; individual issues predominate over common issues; a class action is not superior to other methods of resolving TCPA claims; and Dr. Weitzner is an inadequate class representative. Cynosure also believes it has many merits defenses, including that the faxes in question do not constitute “advertising” within the meaning of the TCPA and many recipients had an established business relationship with Cynosure and are thereby deemed to have consented to the receipt of facsimile communications. The Court held a hearing on the plaintiff’s class certification motion in June 2008, but no decision on the motion was rendered. In July 2010, the Court issued an order dismissing this matter without prejudice for Dr. Weitzner’s failure to prosecute the case. In August 2010, Dr. Weitzner filed a motion for relief from the dismissal order, which the Court allowed. At a status conference held in November 2010, the Court confirmed that the class certification motion was still under advisement. In October 2011, Dr. Weitzner’s counsel sent a letter to the Court seeking reassignment of the case and reargument of the class certification motion. Cynosure has opposed this request. Cynosure is not currently able to estimate the amount or range of loss that could result from an unfavorable outcome of this lawsuit.

In addition to the matter discussed above, from time to time, Cynosure is subject to various claims, lawsuits, disputes with third parties, investigations and pending actions involving various allegations against Cynosure incident to the operation of its business, principally product liability. Each of these other matters is subject to various uncertainties, and it is possible that some of these other matters may be resolved unfavorably to Cynosure. Cynosure establishes accruals for losses that management deems to be probable and subject to reasonable estimate. Cynosure believes that the ultimate outcome of these matters will not have a material adverse impact on its consolidated financial position, results of operations or cash flows.

 

12


Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Note 13 — Related Party Transactions

As of September 30, 2011, El. En. S.p.A. (El.En.) owned 23% of Cynosure’s outstanding common stock. Purchases of inventory from El.En. during the three months ended September 30, 2011 and 2010, were approximately $2.0 million and $1.0 million. Purchases of inventory from El.En. during the nine months ended September 30, 2011 and 2010, were approximately $6.3 million and $4.0 million, respectively. As of September 30, 2011 and December 31, 2010, amounts due to related party for these purchases were approximately $1.9 million and $1.8 million, respectively. There were no amounts due from El.En. as of September 30, 2011 or December 31, 2010.

Note 14 — Income Taxes

At September 30, 2011, there are no material gross unrecognized tax benefits. Cynosure files income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. Cynosure is no longer subject to U.S. federal tax examinations by tax authorities for years before 2008. The Internal Revenue Service commenced an examination of Cynosure’s 2008 and 2009 federal income tax returns during the nine months ended September 30, 2011. With few exceptions, Cynosure is no longer subject to state and local income tax examinations by tax authorities for years before 2007. Additionally non-U.S. jurisdictions are generally no longer subject to income tax examinations by tax authorities for years before 2006.

Note 15 — Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) amended its accounting guidance on the presentation of other comprehensive income (OCI) in an entity’s financial statements. The amended guidance eliminates the option to present the components of OCI as part of the statement of changes in shareholders equity and provides two options for presenting OCI: in a statement included in the income statement or in a separate statement immediately following the income statement. The amendments do not change the guidance for the items that have to be reported in OCI or when an item of OCI has to be moved into net income. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Cynosure does not expect that adoption of this guidance will have an impact on its consolidated financial statements.

In September 2011, the FASB issued guidance on testing goodwill for impairment. The guidance provides entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt, provided that the entity has not yet performed its 2011 annual impairment test or issued its financial statements. Cynosure has elected to early adopt the guidance and will perform a “qualitative” assessment when it performs its goodwill impairment test in the fourth quarter of 2011.

 

13


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Quarterly Report regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

 

   

our ability to identify and penetrate new markets for our products and technology;

 

   

our ability to successfully integrate acquired businesses and technologies;

 

   

our ability to innovate, develop and commercialize new products;

 

   

our ability to obtain and maintain regulatory clearances;

 

   

our sales and marketing capabilities and strategy in the United States and internationally;

 

   

our intellectual property portfolio; and

 

   

our estimates regarding expenses, future revenues, capital requirements and needs for additional financing.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in our Annual Report on Form 10-K for the year ended December 31, 2010, particularly in Part I — Item 1A and in this and our other public filings with the Securities and Exchange Commission that could cause actual results or events to differ materially from the forward-looking statements that we make.

You should read this Quarterly Report and the documents that we have filed as exhibits to the Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. It is routine for internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations are made as of the date of this Quarterly Report on Form 10-Q and may change prior to the end of each quarter or the year. While we may elect to update forward-looking statements at some point in the future, we do not undertake any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

The following discussion should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report and the condensed consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K filed with the SEC on March 10, 2011. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.

Company Overview

We develop and market aesthetic treatment systems that are used by physicians and other practitioners to perform non-invasive and minimally invasive procedures to remove hair, treat vascular and pigmented lesions, rejuvenate the skin, liquefy and remove unwanted fat through laser lipolysis, reduce the appearance of cellulite and treat toenail fungus. We are also developing in conjunction with our development agreement with Unilever Ltd. (Unilever) a laser treatment system for the home use market. This product is targeted for commercialization in 2012.

Our systems incorporate a broad range of laser and other light-based energy sources, including Alexandrite, pulse dye, Nd:Yag and diode lasers, as well as intense pulsed light. We believe that we are one of only a few companies that currently offer aesthetic treatment systems utilizing Alexandrite and pulse dye lasers, which are particularly well suited for some applications and skin types. We offer single energy source systems as well as workstations that incorporate two or more different types of lasers or pulsed light technologies. We offer multiple technologies and system alternatives at a variety of price points depending primarily on the number and type of energy sources included in the system. Our newer products are designed to be easily upgradeable to add additional energy sources and handpieces, which provide our customers with technological flexibility as they expand their practices. As the aesthetic treatment market evolves to include new customers, such as aesthetic spas and additional physician specialties, we believe that our broad technology base and tailored solutions will provide us with a competitive advantage.

 

14


Table of Contents

We focus our development and marketing efforts on offering leading, or flagship, products for the following high volume applications:

 

   

the Elite product line for hair removal, treatment of facial and leg veins and pigmentations;

 

   

the Smartlipo product line for LaserBodySculptingSM for the removal of unwanted fat;

 

   

the Cellulaze, SmoothShapes XV and TriActive product line for the temporary and long-term reduction in the appearance of cellulite;

 

   

the Affirm/SmartSkin product line for anti-aging applications, including treatments for wrinkles, skin texture, skin discoloration and skin tightening;

 

   

the Cynergy product line for the treatment of vascular lesions; and

 

   

the Accolade product line for the removal of benign pigmented lesions, as well as multi-colored tattoos.

In June 2011, we acquired the assets and certain liabilities of HOYA ConBio’s aesthetic laser business (ConBio). The acquisition expands our broad product portfolio with the addition of HOYA ConBio’s proprietary PhotoAcoustic energy technology, which uses high-speed energy waves to penetrate the skin in nanoseconds, minimizing the amount of heat in each procedure. The acquired aesthetic laser products which have been added to our portfolio include:

 

   

The MedLiteR C6 and RevLiteR which is a Q-Switched Nd:YAG nanosecond technology dual-wavelength system which treats facial wrinkles, acne scars, overall skin rejuvenation, multi-color tattoos, sun spots, brown spots and uneven skin tone.

In October 2011, we acquired worldwide exclusive rights from NuvoLase, Inc. to distribute the PinPointeTM FootLaserTM. The PinPointe FootLaser is a light-based device for the treatment of toenail fungus. The system uses laser light to kill the fungus that lies in and under the nail without causing damage to the nail or the surrounding skin.

We generate revenues primarily from sales of our products and parts and accessories and from services, including product warranty revenues. During the nine months ended September 30, 2011, we derived approximately 78% of our revenues from sales of our products and 22% of our revenues from parts, accessories and service revenues. During the nine months ended September 30, 2010, we derived approximately 76% of our revenues from sales of products and 24% of our revenues from parts, accessories and service revenues. Generally, we recognize revenues from the sales of our products upon delivery to our customers, revenues from service contracts and extended product warranties ratably over the coverage period and revenues from service in the period in which the service occurs.

We sell our products directly in North America, France, Spain, the United Kingdom, Germany, Korea, China, Japan and Mexico and use distributors to sell our products in other countries where we do not have a direct presence. During the nine months ended September 30, 2011, and 2010 we derived 57% and 59% of our revenues, respectively, from sales outside North America. As of September 30, 2011, we had 31 sales employees covering North America, 39 sales employees in France, Spain, the United Kingdom, Germany, Korea, China and Japan and 72 distributors covering 99 countries.

The following table provides revenue data by geographical region for the nine months ended September 30, 2011 and 2010:

 

     Percentage of
Revenues
 
     Nine-Months
Ended
September 30,
 

Region

   2011     2010  

North America

     43     41

Europe

     26        29   

Asia/Pacific

     25        24   

Other

     6        6   
  

 

 

   

 

 

 

Total

     100     100
  

 

 

   

 

 

 

See Note 9 to our consolidated financial statements included in this Quarterly Report for revenues and asset data by geographic region.

 

15


Table of Contents

Results of Operations

The following table contains selected income statement information, which serves as the basis of the discussion of our results of operations for the three months ended September 30, 2011 and 2010, respectively (in thousands, except for percentages):

 

     Three Months
Ended
September 30,
    $
Change
    %
Change
 
   2011     2010      
   Amount     As a % of
Total
Revenues
    Amount     As a % of
Total
Revenues
     

Product revenues

   $ 22,635        80   $ 14,357        75   $ 8,278        58

Parts, accessories and service revenues

     5,642        20        4,694        25        948        20   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     28,277        100        19,051        100        9,226        48   

Cost of revenues

     12,303        44        8,367        44        3,936        47   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     15,974        56        10,684        56        5,290        50   

Operating expenses

            

Sales and marketing

     9,838        35        7,069        37        2,769        39   

Research and development

     2,571        9        1,899        10        672        35   

Amortization of intangible assets acquired

     415        1        —          —          415        —     

General and administrative

     3,537        13        2,688        14        849        32   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     16,361        58        11,656        61        4,705        40   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (387     (1     (972     (5     585        60   

Interest income, net

     17        —          41        —          (24     (59

Other (expense) income, net

     (260     (1     504        3        (764     (152
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (630     (2     (427     (2     203        48   

Provision for income taxes

     162        1        33        —          129        391   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (792     (3 )%    $ (460     (2 )%    $ 332        72
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

Revenues in the three months ended September 30, 2011 increased from the three months ended September 30, 2010 by $9.2 million or 48%. The increase was attributable to a number of factors (in thousands, except for percentages):

 

     Three Months
Ended
September 30,
     $
Change
     %
Change
 
     2011      2010        

Product sales in North America

   $ 10,005       $ 6,485       $ 3,520         54

Product sales outside North America

     12,630         7,872         4,758         60   

Parts, accessories and service sales

     5,642         4,694         948         20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Revenues

   $ 28,277       $ 19,051       $ 9,226         48
  

 

 

    

 

 

    

 

 

    

 

 

 

 

   

Revenues from the sale of products in North America increased 54% from the third quarter of 2010, primarily attributable to our newly acquired ConBio and Smoothshapes XV product lines which contributed $2.5 million. On an organic basis, within North America, our core product sales grew $1.0 million, or 16%, due to an increased number of units sold. We develop and market aesthetic treatment systems (capital equipment) that are used by physicians and other practitioners to perform non-invasive and minimally invasive procedures in the aesthetic marketplace. These procedures are discretionary and not reimbursed by third-party insurers. The significant majority of our business each quarter is derived from new customers. A portion of our customers finance the purchase of these lasers through third party finance companies or banks. We believe that the availability of credit remains limited and demand for discretionary aesthetic laser treatments remains uncertain and as a result, we may continue to face revenue challenges.

 

   

Revenues from the sales of products outside of North America increased by approximately $4.8 million, or 60%, from the 2010 period primarily attributable to our newly acquired ConBio and Smoothshapes XV product lines, which contributed $4.6 million. On an organic basis, outside of North America, our core product sales grew $0.1 million, or 2%.

 

16


Table of Contents
   

Revenues from the sale of parts, accessories and services increased by approximately $0.9 million, or 20%, from the 2010 period, primarily due to an increase in revenues generated from the sale of our service contracts as well as sales of certains parts and accessories and includes $0.5 million of service revenue through our newly acquired ConBio product line.

Cost of Revenues

 

     Three Months
Ended
September 30,
    $
Change
     %
Change
 
     2011     2010       

Cost of revenues (in thousands)

   $ 12,303      $ 8,367      $ 3,936         47

Cost of revenues (as a percentage of total revenues)

     44     44     

Total cost of revenues increased $3.9 million, or 47%, to $12.3 million for three months ended September 30, 2011, as compared to $8.4 million for the three months ended September 30, 2010, primarily related to our 48% increase in revenues. Our total cost of revenues remained consistent as a percentage of total revenues at 44% for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010.

Sales and Marketing

 

     Three Months
Ended
September 30,
    $
Change
     %
Change
 
     2011     2010       

Sales and marketing (in thousands)

   $ 9,838      $ 7,069      $ 2,769         39

Sales and marketing (as a percentage of total revenues)

     35     37     

Sales and marketing expenses increased $2.8 million, or 39%. The increase is attributed to an increase in promotional costs of $0.6 million, primarily due to an increased number of workshops, trade shows and other promotional efforts. Our commission expense increased $1.0 million due to the 58% increase in product revenues as well as our personnel, administrative costs and travel expenses which increased $1.2 million. Our sales and marketing expenses for the three months ended September 30, 2011 decreased as a percentage of revenue to 35% primarily due to the 48% increase in revenues as compared to the three months ended September 30, 2010.

Research and Development

 

     Three Months
Ended
September 30,
    $
Change
     %
Change
 
     2011     2010       

Research and development (in thousands)

   $ 2,571      $ 1,899      $ 672         35

Research and development (as a percentage of total revenues)

     9     10     

Research and development expenses increased $0.7 million, or 35% for the three months ended September 30, 2011 when compared with the three months ended September 30, 2010. This is primarily due to a $0.7 million increase in expenses associated with consulting and other professional fees related to clinical studies and other research and development efforts including the integration of our ConBio research and development team.

Amortization on Intangible Assets Acquired

 

     Three Months
Ended
September 30,
     $
Change
     %
Change
 
     2011     2010        

Amortization of intangible assets acquired (in thousands)

   $ 415        —         $ 415         —     

Amortization of intangible assets acquired (as a percentage of total revenues)

     1     —           

For the three month period ending September 30, 2011, we recognized amortization expense of $0.4 million in our operating expenses relating to intangible assets acquired through our recent acquisitions of Eleme Medical and ConBio’s aesthetic business. We expect our amortization expense associated with these intangible assets that will be recognized in our operating expenses over the next five years and beyond to be $0.4 million for the remainder of 2011, $1.4 million for 2012, $0.9 million for 2013, $0.6 million for 2014, and $2.3 million for 2015 and beyond.

 

17


Table of Contents

General and Administrative

 

     Three Months
Ended
September 30,
    $
Change
     %
Change
 
     2011     2010       

General and administrative (in thousands)

   $ 3,537      $ 2,688      $ 849         32

General and administrative (as a percentage of total revenues)

     13     14     

General and administrative expenses increased $0.8 million, or 32%, for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010. The increase is primarily due to acquisition costs of $0.4 million in accounting and legal expenses, an increase in personnel and administrative expenses of $0.4 million associated with increased headcount through our ConBio acquisition and other general legal expenses primarily associated with patent maintenance.

Interest Income, net

 

     Three Months
Ended
September 30,
     $
Change
    %
Change
 
     2011      2010       

Interest income, net (in thousands)

   $ 17       $ 41       $ (24     (59 )% 

The decrease in interest income, net is primarily due to less cash invested in the 2011 period when compared to the 2010 period after using approximately $27.0 million for our Eleme Medical and ConBio acquisitions, as well as increased interest payments associated with our increase in capital leases.

Other (Expense) Income, net

 

     Three Months
Ended
September 30,
     $
Change
    %
Change
 
     2011     2010       

Other (expense) income, net (in thousands)

   $ (260   $ 504       $ (764     (152 )% 

The decrease in other (expense) income, net is primarily a result of net foreign currency remeasurement losses in the third quarter of 2011, primarily associated with the weakening of the euro and British pound, compared to remeasurement gains in the third quarter of 2010.

Provision for Income Taxes

 

     Three Months
Ended
September 30,
    $
Change
     %
Change
 
     2011     2010       

Provision for income taxes (in thousands)

   $ 162      $ 33      $ 129         391

Provision as a % of loss before provision for income taxes

     26     8     

The provision for income taxes results from a combination of the activities of our domestic and foreign subsidiaries. During the three months ended September 30, 2011, we recorded an income tax provision of $0.2 million, representing an effective tax rate of 26%. We continue to maintain a valuation allowance against our net domestic deferred tax assets, with the exception of net operating loss carryforwards that can be utilized to offset current year U.S. taxable income. During the three months ended September 30, 2010, we recorded an income tax provision of $33,000, representing an effective tax rate of 8%. The effective tax rate from the 2010 period to the 2011 period changed primarily due to changes in the jurisdictional mix of earnings.

 

18


Table of Contents

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

The following table contains selected statement of operations information, which serves as the basis of the discussion of our results of operations for the nine months ended September 30, 2011 and 2010, respectively (in thousands, except for percentages):

 

     Nine Months
Ended
September 30,
             
     2011     2010              
     Amount     As a % of
Total
Revenues
    Amount     As a % of
Total
Revenues
    $
Change
    %
Change
 

Product revenues

   $ 59,921        78   $ 44,963        76   $ 14,958        33

Parts, accessories and service revenues

     16,579        22        14,470        24        2,109        15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 76,500        100   $ 59,433        100   $ 17,067        29

Cost of revenues

     33,379        44        25,529        43        7,850        31   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     43,121        56        33,904        57        9,217        27   

Operating expenses

            

Sales and marketing

     28,250        37        24,116        41        4,134        17   

Research and development

     7,242        9        5,454        9        1,788        33   

Amortization of intangible assets acquired

     439        1        —          —          439        —     

General and administrative

     10,639        14        8,751        15        1,888        22   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     46,570        61        38,321        64        8,249        22   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (3,449     (5     (4,417     (7     968        22   

Interest income, net

     117        —          139        —          (22     (16

Other expense, net

     (47     —          (197     —          (150     (76
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (3,379     (4     (4,475     (8     (1,096     (24

Provision for income taxes

     608        1        274        —          334        122   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (3,987     (5 )%    $ (4,749     (8 )%    $ 762        16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

Revenues in the nine months ended September 30, 2011 increased from revenues in the nine months ended September 30, 2010 by $17.1 million, or 29%. The increase in revenues was attributable to a number of factors (in thousands, except for percentages):

 

     Nine Months
Ended
September 30,
     $
Change
     %
Change
 
     2011      2010        

Product sales in North America

   $ 25,654       $ 20,680       $ 4,974         24

Product sales outside North America

     34,267         24,283         9,984         41   

Parts, accessories and service sales

     16,579         14,470         2,109         15   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Revenues

   $ 76,500       $ 59,433       $ 17,067         29
  

 

 

    

 

 

    

 

 

    

 

 

 

 

   

Revenues from the sale of products in North America for the nine months ended September 30, 2011 increased $5.0 million, or 24%, from the nine months ended September 30, 2010. The increase is primarily due to $4.0 million of ConBio and Smoothshapes XV products sold during the nine months ended September 30, 2011. On an organic basis, within North America, our core product sales grew $1.0 million, or 5%, due to an increase in the number of units sold. We develop and market aesthetic treatment systems (capital equipment) that are used by physicians and other practitioners to perform non-invasive and minimally invasive procedures in the aesthetic marketplace. These procedures are discretionary and not reimbursed by third-party insurers. The significant majority of our business each quarter is derived from new customers. A portion of our customers finance the purchase of these lasers through third party finance companies or banks. We believe that the availability of credit remains limited and demand for discretionary aesthetic laser treatments remains uncertain and as a result, we may continue to face revenue challenges.

 

   

Revenues from sales of products outside of North America increased by approximately $10.0 million, or 41%, over the 2010 period. The ConBio and SmoothShapes XV acquisitions contributed $5.3 million of our $10.0 million increase. On an organic basis, revenue from our European subsidiaries increased $2.4 million, or 31%, and revenues from international distributors increased $2.1 million, or 27%, from the 2010 period.

 

19


Table of Contents
   

Revenues from the sale of parts, accessories and services increased by approximately $2.1 million, or 15%, over the 2010 period, primarily due to an increase in revenues generated from the sale of our service contracts as well as an increase in sales of certain parts and accessories and includes $0.5 million of service revenue through our newly acquired ConBio product line.

Cost of Revenues

 

     Nine Months
Ended
September 30,
    $
Change
     %
Change
 
     2011     2010       

Cost of revenues (in thousands)

   $ 33,379      $ 25,529      $ 7,850         31

Cost of revenues (as a percentage of total revenues)

     44     43     

Total cost of revenues increased $7.9 million, or 31%, to $33.4 million for the nine months ended September 30, 2011 as compared to $25.6 million for the nine months ended September 30, 2010, primarily related to our 29% increase in revenues, and approximately $0.4 million in one-time costs for purchase accounting adjustments which related to the write-up of inventory sold in the period which was acquired through our acquisitions of Eleme Medical and ConBio. Our cost of revenues increased as a percentage of total revenues to 44% for the nine months ended September 30, 2011, from 43% for the nine months ended September 30, 2010, primarily due to a higher percentage of laser revenue from international distribution where our products tend to have lower average selling prices than in North America, and purchase accounting adjustments.

Sales and Marketing

 

     Nine Months
Ended
September 30,
    $
Change
     %
Change
 
     2011     2010       

Sales and marketing (in thousands)

   $ 28,250      $ 24,116      $ 4,134         17

Sales and marketing (as a percentage of total revenues)

     37     41     

Sales and marketing expenses increased by $4.1 million, or 17%. The increase is attributed to an increase in promotional costs of $1.1 million, primarily due to an increased number of workshops, tradeshows and other promotional efforts. Our commission expense increased $1.6 million due to the 33% increase in product revenues as well as our personnel, administrative costs and travel expenses which increased $1.4 million. Our sales and marketing expenses for the nine months ended September 30, 2011 decreased as a percentage of revenue to 37% due to a 29% increase in revenues for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010.

Research and Development

 

     Nine Months
Ended
September 30,
    $
Change
     %
Change
 
     2011     2010       

Research and development (in thousands)

   $ 7,242      $ 5,454      $ 1,788         33

Research and development (as a percentage of total revenues)

     9     9     

Research and development expenses increased by $1.8 million for the nine months ended September 30, 2011, when compared with the nine months ended September 30, 2010. This increase is due to a $0.7 million increase in expenses associated with consulting and other professional fees related to clinical studies and other research and development efforts and personnel related expenses increased $1.1 million which included the integration of our ConBio research and development team.

 

20


Table of Contents

Amortization on Intangible Assets Acquired

 

     Nine Months
Ended
September 30,
     $
Change
     %
Change
 
     2011     2010        

Amortization of intangible assets acquired (in thousands)

   $ 439        —         $ 439         —     

Amortization of intangible assets acquired (as a percentage of total revenues)

     1     —           

For the nine month period ending September 30, 2011, we recognized amortization expense of $0.4 million in our operating expenses relating to intangible assets acquired through the recent acquisitions of Eleme Medical and ConBio’s aesthetic business. We expect our amortization expense associated with these intangible assets that will be recognized in our operating expenses over the next five years and beyond to be $0.4 million for the remainder of 2011, $1.4 million for 2012, $0.9 million for 2013, $0.6 million for 2014, and $2.3 million for 2015 and beyond.

General and Administrative

 

     Nine Months
Ended
September 30,
    $
Change
     %
Change
 
     2011     2010       

General and administrative (in thousands)

   $ 10,639      $ 8,751      $ 1,888         22

General and administrative (as a percentage of total revenues)

     14     15     

General and administrative expenses increased $1.9 million, or 22%, for the nine months ended September 30, 2011 when compared with the nine months ended September 30, 2010. This increase is primarily due to acquisition costs of $1.7 million in legal, accounting and investment banking fees associated with the acquisition of ConBio and Eleme Medical. Personnel costs increased $0.4 million associated with increased headcount through our ConBio acquisition. These increases were partially offset with a decrease of $0.2 million in stock compensation expense.

Interest Income, net

 

     Nine Months
Ended
September 30,
     $
Change
    %
Change
 
     2011      2010       

Interest income, net (in thousands)

   $ 117       $ 139       $ (22     (16 )% 

The decrease in interest income, net is primarily due to less cash invested in the 2011 period when compared to the 2010 period after using approximately $27.0 million for our Eleme Medical and ConBio acquisitions, as well as increased interest payments associated with our increase in capital leases.

Other Expense, net

 

     Nine Months
Ended
September 30,
    $
Change
    %
Change
 
     2011     2010      

Other expense, net (in thousands)

   $ (47   $ (197   $ (150     (76 )% 

The decrease in other expense is primarily a result of less net foreign currency remeasurement losses in the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 due to the weakening of the U.S. dollar, primarily against the euro.

 

21


Table of Contents

Provision for Income Taxes

 

     Nine Months
Ended
September 30,
    $
Change
     %
Change
 
     2011     2010       

Provision for income taxes (in thousands)

   $ 608      $ 274      $ 334         122

Provision as a % of loss before provision for income taxes

     18     6     

The provision for income taxes results from a combination of the activities of our domestic and foreign subsidiaries. During the nine months ended September 30, 2011, we recorded an income tax provision of $0.6 million, representing an effective tax rate of 18%. We continue to maintain a valuation allowance against our net domestic deferred tax assets, with the exception of net operating loss carryforwards that can be utilized to offset current year U.S. taxable income. During the nine months ended September 30, 2010, we recorded an income tax provision of $0.3 million, representing an effective tax rate of 6%. The effective tax rate from the 2010 period to the 2011 period changed primarily due to changes in jurisdictional mix of earnings.

Liquidity and Capital Resources

We require cash to pay our operating expenses, make capital expenditures and pay our long-term liabilities. Since our inception, we have funded our operations through our 2005 initial public offering, private placements of equity securities, short-term borrowings and funds generated from our operations.

Our cash and marketable securities balance decreased by $31.0 million from December 31, 2010 to September 30, 2011 primarily due to acquisitions in the first nine months of 2011. During the first nine months of 2011, we purchased the aesthetic laser business of ConBio for $24.5 million and the assets of Eleme Medical for $2.5 million. At September 30, 2011, our cash, cash equivalents and short and long-term marketable securities were $65.8 million. Our cash and cash equivalents of $31.4 million are highly liquid investments with maturities of 90 days or less at date of purchase and consist of cash in operating accounts and investments in money market funds. Our short-term marketable securities of $31.8 million consist of investments in various state and municipal governments, U.S. government agencies and treasuries, all of which mature by August 15, 2012. Our long-term marketable securities of $2.6 million consist of investments in various state and municipal governments, U.S. government agencies and treasuries all of which mature by March 14, 2013.

Our future capital requirements depend on a number of factors, including the rate of market acceptance of our current and future products, the resources we devote to developing and supporting our products and continued progress of our research and development of new products. We incurred minimal capital expenditures for the nine months ended September 30, 2011 and expect capital expenditures for the remainder of the year to be relatively consistent with the year ended December 31, 2010. Our inventory balance increased $11.0 million due to recent acquisitions which included inventory and increased purchases to meet increased revenue requirements. During the nine months ended September 30, 2011 and 2010, respectively, we transferred $1.8 million and $2.1 million of demonstration equipment to fixed assets.

On July 28, 2009, our Board of Directors authorized the repurchase of up to $10 million of our Class A common stock, from time to time, on the open market or in privately negotiated transactions under a stock repurchase program. The program will terminate upon the purchase of $10 million in common stock, unless our Board of Directors discontinues it sooner. During the nine months ended September 30, 2011, we repurchased 47,725 shares of our common stock at an aggregate cost of approximately $0.5 million and at a weighted average price of $9.68 per share under this program. As of September 30, 2011 we have repurchased an aggregate of 196,660 shares under this program at an aggregate cost of $1.9 million.

We believe that our current cash, cash equivalents and marketable securities, as well as cash generated from operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable future.

Cash Flows

Net cash used in operating activities was $2.1 million for the nine months ended September 30, 2011, and resulted primarily from the net loss for the period of $4.0 million, increased by approximately $6.9 million in depreciation and amortization and stock-based compensation expense and by approximately $0.9 million in accretion of discounts on marketable securities. Net changes in working capital items decreased cash from operating activities by approximately $5.9 million primarily related to an increase in inventory of $9.4 million associated with increased purchases to meet the increased revenue requirements. Accounts receivable increased $2.4 million due to increased revenues. These increases were offset by increases in accounts payable of $2.1 million, accrued expenses of $1.6 million, deferred revenue of $1.3 million and the sale of demonstration equipment of $0.8 million. Net cash provided by investing activities was $6.5 million for the nine months ended September 30, 2011, which consisted primarily of $27.0 million used to acquire Eleme Medical and ConBio, $0.7 million used for fixed asset purchases offset by net proceeds of marketable securities of $34.1 million. Net cash used in financing activities during the nine months ended September 30, 2011 was $0.3 million, principally relating to $0.5 million in the repurchase of our common stock and $0.1 million for payments on capital lease obligations partially offset by $0.2 million of proceeds from stock option exercises during the nine months ended September 30, 2011.

 

22


Table of Contents

Net cash provided by operating activities was $5.5 million for the nine months ended September 30, 2010, and resulted primarily from the net loss for the period of $4.7 million, increased by approximately $7.5 million in depreciation and amortization and stock-based compensation expense and by approximately $0.6 million in accretion of discounts on marketable securities. Net changes in working capital items increased cash from operating activities by approximately $2.1 million primarily related to a decrease in prepaid expenses and other assets of $2.6 million associated with our income tax refund, a decrease in accounts receivable of $0.7 million due to increased collection efforts and an increase in amounts due to related parties and accrued expenses of $1.3 million. These changes were partially offset by a decrease in deferred revenue of $1.6 million. Net cash used in investing activities was $17.3 million for the nine months ended September 30, 2010, which consisted primarily of net purchases of marketable securities of $16.9 million and $0.4 million used for fixed asset purchases. Net cash used in financing activities during the nine months ended September 30, 2010 was $1.2 million, principally relating to $1.1 million in the repurchase of our common stock and $0.2 million for payments on capital lease obligations partially offset by $0.1 million of proceeds from stock option exercises during the nine months ended September 31, 2010.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations set forth above are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those that relate to revenue recognition, allowances for doubtful accounts, inventories, warranty obligations, stock-based compensation and income taxes. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities, and the reported amounts of revenues and expenses, that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A discussion of our critical accounting policies and the related judgments and estimates affecting the preparation of our consolidated financial statements is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. There have been no material changes to our critical accounting policies as of September 30, 2011.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments.

Interest Rate Sensitivity. We maintain an investment portfolio consisting mainly of money market funds, state and municipal bonds, and U.S. government agencies and treasuries. The securities, other than money market funds, are classified as available-for-sale and consequently are recorded on the balance sheet at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive (loss) income. All investments mature by March 14, 2013. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase, which could result in a realized loss if we are forced to sell an investment before its scheduled maturity. We currently have the ability and intent to hold our fixed income investments until maturity. We do not utilize derivative financial instruments to manage our interest rate risks.

The following table provides information about our investment portfolio in available-for-sale debt securities. For investment securities, the table presents principal cash flows (in thousands) and weighted average interest rates by expected maturity dates.

 

     As of
September 30,
2011
    Maturing
in 2011
    Maturing
in 2012
    Maturing
in 2013
 

Investments (at fair value)

   $ 34,401      $ 16,122      $ 17,279      $ 1,000   

Weighted average interest rate

     0.35     0.30     0.39     0.45

Foreign Currency Exchange. A significant portion of our operations is conducted through operations in countries other than the United States. Revenues from our international operations that were recorded in U.S. dollars represented approximately 40% of our total international revenues during the nine months ended September 30, 2011. Substantially all of the remaining 60% were sales in euros, British pounds, Japanese yen, Chinese yuan and South Korean won. Since we conduct our business in U.S. dollars, our main exposure, if any, results from changes in the exchange rate between these currencies and the U.S. dollar. Our functional currency is the U.S. dollar. Our policy is to reduce exposure to exchange rate fluctuations by having most of our assets and liabilities, as well as most of our revenues and expenditures, in U.S. dollars, or U.S. dollar linked. We have not historically engaged in hedging activities relating to our non-U.S. dollar operations. We sell inventory to our subsidiaries in U.S. dollars. These amounts are recorded at our local subsidiaries in local currency rates in effect on the transaction date. Therefore, we may be exposed to exchange rate fluctuations that occur while the debt is outstanding which we recognize as unrealized gains and losses in our statements of operations. Upon settlement of these debts, we may record realized foreign exchange gains and losses in our statements of operations. We may incur negative foreign currency translation charges as a result of changes in currency exchange rates.

 

23


Table of Contents
Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2011, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — Other Information

 

Item 1. Legal Proceedings

In 2005, Dr. Ari Weitzner, individually and as putative representative of a purported class, filed a complaint against us under the federal Telephone Consumer Protection Act, or the TCPA in Massachusetts Superior Court in Middlesex County seeking monetary damages, injunctive relief, costs and attorneys fees. The complaint alleges that we violated the TCPA by sending unsolicited advertisements by facsimile to the plaintiff and other recipients without the prior express invitation or permission of the recipients. Under the TCPA, recipients of unsolicited facsimile advertisements are entitled to damages of up to $500 per facsimile for inadvertent violations and up to $1,500 per facsimile for knowing or willful violations. Based on discovery in this matter, the plaintiff alleges that approximately three million facsimiles were sent on our behalf by a third party to approximately 100,000 individuals. On February 6, 2008, several months after the close of discovery, the plaintiff served a motion for class certification, which we opposed on numerous factual and legal grounds, including that a nationwide class action may not be maintained in a Massachusetts state court by Dr. Weitzner, a New York resident; individual issues predominate over common issues; a class action is not superior to other methods of resolving TCPA claims; and Dr. Weitzner is an inadequate class representative. We also believe we have many merits defenses, including that the faxes in question do not constitute “advertising” within the meaning of the TCPA and many recipients had an established business relationship with us and are thereby deemed to have consented to the receipt of facsimile communications. The Court held a hearing on the plaintiff’s class certification motion in June 2008, but no decision on the motion has been rendered. In July 2010, the Court issued an order dismissing this matter without prejudice for Dr. Weitzner’s failure to prosecute the case in August 2010, Dr. Weitzner filed a motion for relief from the dismissal order, which the Court allowed. At a status conference held in November 2010, the Court confirmed that the class certification motion was still under advisement. In October 2011, Dr. Weitzner’s counsel sent a letter to the court seeking reassignment of the case and reargument of the class certification motion. We have opposed this request. We are not currently able to estimate the amount or range of loss that could result from an unfavorable outcome of this lawsuit.

In addition to the matter discussed above, from time to time, we are subject to various claims, lawsuits, disputes with third parties, investigations and pending actions involving various allegations against us incident to the operation of its business, principally product liability. Each of these other matters is subject to various uncertainties, and it is possible that some of these other matters may be resolved unfavorably to us. We establish accruals for losses that management deems to be probable and subject to reasonable estimate. We believe that the ultimate outcome of these matters will not have a material adverse impact on our consolidated financial position, results of operations or cash flows.

 

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2010 in addition to the other information included in this quarterly report. If any of the risks actually occurs, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall.

 

24


Table of Contents

Our recent acquisition of two businesses, or any acquisitions that we may make in the future, could disrupt our ongoing business, divert the attention of our management and employees and adversely affect our results of operations.

From time to time, we evaluate potential strategic acquisitions of complementary businesses, products or technologies, as well as consider joint ventures and other collaborative projects. In June 2011, we acquired ConBio, in order to acquire and incorporate its aesthetic laser product line into our product portfolio. In February 2011, we acquired assets and certain liabilities of Eleme Medical in order to acquire and incorporate its non-invasive SmoothShapes® XV system and certain related licensing rights into our product and intellectual property portfolios.

We cannot assure you that the acquisitions we have completed, or any future acquisitions that we may make, will enhance our products or strengthen our competitive position. In particular, we may encounter difficulties assimilating or integrating the acquired businesses, technologies, products, personnel or operations of the acquired companies, and in retaining and motivating key personnel from these businesses. We also cannot assure you that we have identified, or will be able to identify, all material adverse issues related to the integration of our acquisitions, such as significant defects in the internal control policies of companies that we have acquired. Any failure to properly integrate acquired businesses and their key personnel or to recognize material adverse issues related to integration of acquired companies may require a significant amount of time and resources to address. Acquisitions may disrupt our ongoing operations, divert management from day-to-day responsibilities, increase our expenses and harm our results of operations or financial condition.

As of September 30, 2011, there have been no other material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, although we may disclose other changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On July 28, 2009, our Board of Directors authorized the repurchase of up to $10 million of our Class A common stock from time to time on the open market or in privately negotiated transactions under a stock repurchase program. The program will terminate upon the purchase of $10 million in common stock unless our Board of Directors discontinues it sooner. During the three months ended September 30, 2011, we repurchased 47,725 shares of our Class A common stock under this program at an aggregate cost of approximately $0.5 million and at a weighted average price of $9.68 per share. As of September 30, 2011, we had repurchased an aggregate of 196,660 shares under the program at an aggregate cost of $1.9 million.

 

25


Table of Contents

The following table provides information about purchases by us of equity securities that are registered by us pursuant to Section 12 of the Exchange Act during the quarter ended September 30, 2011:

 

Period

   Total
number
of shares
(or units)
purchased
     Average
price
paid
per
share
(or
unit)
     Total
number of
shares (or
units)
purchased
as part of
publicly
announced
plans or
programs
     Maximum
number (or
appropriate
dollar value)
of shares (or
units) that
may yet be
purchased
under the
plans or
programs
 

July 1, 2011 — July 31, 2011

     —         $ —           —         $ 8,578,749   

August 1, 2011 — August 31, 2011

     25,100         9.74         25,100         8,334,262   

September 1, 2011 — September 30, 2011

     22,625         9.61         22,625         8,116,925   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     47,725       $ 9.68         47,725       $ 8,116,925   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Item 6. Exhibits

(a) Exhibits

 

Exhibit

No.

  

Description

31.1    Certification of the Principal Executive Officer
31.2    Certification of the Principal Financial Officer
32.1    Certification of the Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of the Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*    The following materials from the Cynosure, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language); (i) Condensed Statement of Earnings for the three months and nine months ended September 30, 2011 and 2010, (ii) Condensed Statement of Financial Position at September 30, 2011 and December 31, 2010, (iii) Condensed Statement of Cash Flows for the nine months ended September 30, 2011 and 2010, and (iv) Notes to Condensed Consolidated Financial Statements.
101*    The following materials from the Cynosure, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language); (i) Condensed Statement of Earnings for the three months and six months ended June 30, 2011 and 2010, (ii) Condensed Statement of Financial Position at June 30, 2011 and December 31, 2010, (iii) Condensed Statement of Cash Flows for the six months ended June 30, 2011 and 2010, and (iv) Notes to Condensed Consolidated Financial Statements.

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

26


Table of Contents

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant certifies that it has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Cynosure, Inc.

(Registrant)

Date: November 4, 2011   By:  

/S/    MICHAEL R. DAVIN        

    Michael R. Davin
    Chairman, President, Chief Executive Officer
Date: November 4, 2011   By:  

/S/    TIMOTHY W. BAKER      

    Timothy W. Baker
   

Executive Vice President, Chief Financial Officer and Treasurer

(Principal Financial and Accounting Officer)

 

27


Table of Contents

EXHIBIT INDEX

 

Exhibit

No.

  

Description

31.1    Certification of the Principal Executive Officer
31.2    Certification of the Principal Financial Officer
32.1    Certification of the Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of the Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*    The following materials from the Cynosure, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language); (i) Condensed Statement of Earnings for the three months and nine months ended September 30, 2011 and 2010, (ii) Condensed Statement of Financial Position at September 30, 2011 and December 31, 2010, (iii) Condensed Statement of Cash Flows for the nine months ended September 30, 2011 and 2010, and (iv) Notes to Condensed Consolidated Financial Statements.

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

28

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki