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CYNO > SEC Filings for CYNO > Form 10-Q on 26-Oct-2012All Recent SEC Filings

Show all filings for CYNOSURE INC

Form 10-Q for CYNOSURE INC


26-Oct-2012

Quarterly Report


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 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 below under the heading "Risk Factors" in Part II, Item 1A, and in 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 this 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 will change in the future. 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 consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report and the 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 8, 2012. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of 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, remove multi-colored tattoos, rejuvenate the skin, liquefy and remove unwanted fat through laser lipolysis, reduce cellulite and treat onychomycosis. We are also developing in conjunction with Unilever Ltd. a laser treatment system for the treatment of wrinkles for the home-use market.

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 provides 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.

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

• our Elite product line for hair removal and treatment of facial and leg veins and pigmentations;

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

• our Cellulaze product line for the reduction of cellulite;

• our SmoothShapes XV product line for the temporary reduction in the appearance of cellulite;

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

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

• our Accolade, MedLite C6 and RevLite product lines for the removal of benign pigmented lesions, as well as multi-colored tattoos.

A key element of our business strategy is to launch innovative new products and technologies into high-growth aesthetic applications. Our research and development team builds on our existing broad range of laser and light-based technologies to develop new solutions and products to target unmet needs in significant aesthetic treatment markets. Innovation continues to be a strong contributor to our strength. For the nine months ended September 30, 2012, 38% of our product revenues were attributable to the sale of systems that we have introduced to the market since the beginning of 2010.


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In January 2012, we received FDA clearance in the United States to sell and market Cellulaze, the world's first FDA-cleared minimally-invasive aesthetic laser device for the reduction of cellulite, which we launched in February 2012. In July 2012, we received FDA clearance in the United States to market an at home device for the treatment of wrinkles that we are developing in partnership with Unilever. Unilever has advised us that it expects to launch the product commercially in 2013. We are also developing our picosecond laser technology platform, which we believe will be the first commercially available picosecond Alexandrite aesthetic laser platform. We expect that our PicoSure system, which we are developing for multiple applications, including tattoo removal and treatment of pigmented lesions, will be our first product based on this technology platform. Picosecond lasers deliver pulses that are measured in trillionths of a second, in contrast with nanosecond technology, such as our MedLite and RevLite products, which deliver pulses in billionths of a second. We have submitted a 510(k) application for PicoSure and, subject to FDA clearance, anticipate commercialization in the first half of 2013.

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, 2012, we derived approximately 83% of our revenues from sales of our products and 17% of our revenues from parts, accessories and service revenues. During the nine months ended September 30, 2011, we derived approximately 78% of our revenues from the sale of products and 22% 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 other than under service contracts and extended product warranties in the period in which the service occurs.

We sell our products through a direct sales force 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, 2012 and 2011, we derived 52% and 57% of our total revenues, respectively, from sales outside North America. As of September 30, 2012, we had 43 sales employees covering North America, 38 sales employees in France, Spain, the United Kingdom, Germany, Korea, China and Japan and 71 distributors covering 95 countries.

The following table provides total revenue data by geographical region for the nine months ended September 30, 2012 and 2011:

                                       Percentage of Revenues
                                          Nine Months Ended
                                            September 30,
                     Region            2012              2011
                     North America          48 %              43 %
                     Europe                 18                26
                     Asia/Pacific           28                25
                     Other                   6                 6

                     Total                 100 %             100 %


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See Note 8 to our consolidated financial statements included in this Quarterly Report for revenues and asset data by geographic region.

Results of Operations

THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

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, 2012 and 2011, respectively (in thousands, except for
percentages):



                                                     Three Months Ended
                                                        September 30,
                                             2012                          2011
                                                 As a % of                      As a % of
                                                   Total                          Total             $            %
                                    Amount       Revenues         Amount        Revenues         Change        Change
Product revenues                   $ 31,036              84 %    $ 22,635               80 %     $ 8,401            37 %
Parts, accessories and service
revenues                              6,047              16         5,642               20           405             7

Total revenues                       37,083             100        28,277              100         8,806            31
Cost of revenues                     15,496              42        12,303               44         3,193            26

Gross profit                         21,587              58        15,974               56         5,613            35
Operating expenses
Sales and marketing                  11,421              31         9,838               35         1,583            16
Research and development              3,081               8         2,571                9           510            20
Amortization of intangible
assets acquired                         342               1           415                1           (73 )         (18 )
General and administrative            3,400               9         3,537               13          (137 )          (4 )

Total operating expenses             18,244              49        16,361               58         1,883            12

Income (loss) from operations         3,343               9          (387 )             (1 )       3,730           964
Interest income, net                     16              -             17               -             (1 )          (6 )
Other income (expense), net             398               1          (260 )             (1 )         658           253

Income (loss) before provision
for income taxes                      3,757              10          (630 )             (2 )       4,387           696
Provision for income taxes              334               1           162                1           172           106

Net income (loss)                  $  3,423               9 %    $   (792 )             (3 )%    $ 4,215           532 %

Revenues



                                                     Three Months Ended
                                                        September 30,                $            %
                                                     2012             2011        Change       Change
                                                        (in thousands, except for percentages)
Product sales in North America                   $     15,425       $ 10,005      $ 5,420           54 %
Product sales outside North America                    15,611         12,630        2,981           24
Global parts, accessories and service sales             6,047          5,642          405            7

Total Revenues                                   $     37,083       $ 28,277      $ 8,806           31 %

Revenues in the three months ended September 30, 2012 increased from the three months ended September 30, 2011 by $8.8 million, or 31%. The increase was attributable to a number of factors:

• Revenues from the sale of products in North America increased by approximately $5.4 million, or 54%, from the 2011 period, primarily as a result of the increase in the number of Cellulaze units sold during the 2012 period, which was the second full quarter of that system's sales following its February 2012 launch.

• Revenues from the sale of products outside of North America increased by approximately $3.0 million, or 24%, from the 2011 period primarily due to an increase in the number of units sold.


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• Revenues from the sale of parts, accessories and services increased by approximately $0.4 million, or 7%, from the 2011 period primarily due to an increase in revenues generated from our extended service contracts and revenues generated from performing service on laser systems.

Cost of Revenues



                                                  Three Months Ended
                                                     September 30,                 $             %
                                                 2012             2011          Change        Change
Cost of revenues (in thousands)                $  15,496        $ 12,303        $ 3,193            26 %
Cost of revenues (as a percentage of total
revenues)                                             42 %            44 %

Total cost of revenues increased $3.2 million, or 26%, to $15.5 million for the three months ended September 30, 2012, as compared to $12.3 million for the three months ended September 30, 2011, primarily related to the 31% increase in total revenues. Total cost of revenues decreased slightly as a percentage of total revenues, to 42%, for the three months ended September 30, 2012, from 44% for the three months ended September 30, 2011, primarily due to a higher percentage of laser revenue from our North American distribution, where average selling prices tend to be higher.

Sales and Marketing



                                                  Three Months Ended
                                                     September 30,                 $             %
                                                  2012            2011          Change        Change
Sales and marketing (in thousands)             $   11,421        $ 9,838        $ 1,583            16 %
Sales and marketing (as a percentage of
total revenues)                                        31 %           35 %

Sales and marketing expenses increased $1.6 million, or 16%, for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011. The increase was primarily due to an increase in commission expense of $0.8 million due to the 37% increase in product revenues. In addition, sales and marketing costs increased $0.5 million, primarily due to an increased number of workshops, trade shows and other promotional efforts, including those related to the launch of Cellulaze. Lastly, personnel and travel expenses increased $0.3 million, primarily as a result of efforts related to the launch of Cellulaze and an increase in the number of our sales employees. Sales and marketing expenses for the three months ended September 30, 2012 decreased as a percentage of total revenues to 31%, primarily due to the 31% increase in total revenues.

Research and Development



                                                  Three Months Ended
                                                     September 30,                 $              %
                                                 2012             2011           Change        Change
Research and development (in thousands)        $   3,081         $ 2,571        $    510            20 %
Research and development (as a percentage
of total revenues)                                     8 %             9 %

Research and development expenses increased $0.5 million, or 20%, for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011. This increase was primarily due to a $0.3 million increase in personnel and administrative costs and a $0.2 million increase in product development.

Amortization of Intangible Assets Acquired



                                                  Three Months Ended
                                                    September 30,                $               %
                                                 2012             2011         Change          Change
Amortization of intangible assets acquired
(in thousands)                                 $    342             415       $    (73 )           (18 )%
Amortization of intangible assets acquired
(as a percentage of total revenues)                   1 %             1 %

For the three month period ending September 30, 2012, we recognized amortization expense of $0.3 million relating to certain intangible assets acquired through our acquisitions of Elemι Medical and ConBio's aesthetic business. We expect to recognize amortization expense associated with these intangible assets as follows: $0.3 million for the remainder of 2012, $0.9 million for 2013, $0.6 million for 2014, $0.4 million for 2015 and $1.8 million for 2016 and beyond.


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General and Administrative



                                                 Three Months Ended
                                                    September 30,                 $              %
                                                2012             2011          Change         Change
General and administrative (in thousands)     $   3,400         $ 3,537        $  (137 )           (4 )%
General and administrative (as a
percentage of total revenues)                         9 %            13 %

General and administrative expenses decreased $0.1 million, or 4%, for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011. The slight decrease primarily reflects accounting fees related to the ConBio acquisition incurred in 2011, partially offset by increased personnel and administrative costs in 2012.

Interest Income, net

Three Months Ended
September 30, $ %
2012 2011 Change Change
Interest income, net (in thousands) $ 16 $ 17 $ (1 ) (6 )%

The slight decrease in interest income, net was primarily due to lower interest rates on cash invested in the three months ended September 30, 2012, as compared to the three months ended September 30, 2011.

Other Income (Expense), net

Three Months Ended
September 30, $ %
2012 2011 Change Change
Other income (expense), net (in thousands) $ 398 $ (260 ) $ 658 253 %

The change in other income (expense), net was primarily a result of net foreign currency remeasurement gains in the three months ended September 30, 2012, as compared to net foreign currency remeasurement losses in the three months ended September 30, 2011, due to the strengthening of the euro against the U.S. dollar in the 2012 period. 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 dates. Therefore, we may be exposed to exchange rate fluctuations that occur while the payment is outstanding, which we recognize as unrealized gains and losses. Upon receipt of these payments, we may record realized foreign exchange gains and losses. We may incur negative foreign currency translation charges as a result of changes in currency exchange rates.

Provision for Income Taxes



                                                  Three Months Ended
                                                    September 30,                  $              %
                                                 2012             2011           Change         Change
Provision for income taxes (in thousands)      $    334          $  162         $    172            106 %
Provision as a percentage of income before
provision for income taxes                            9 %           (26 )%

The provision for income taxes results from a combination of the activities of our domestic and foreign subsidiaries. For the three months ended September 30, 2012 and 2011, we recorded an income tax provision of $0.3 million and $0.2 million, respectively. The income tax provision represents an effective tax rate of 9% and (26%) for these periods, respectively. The fluctuation in our effective tax rate is primarily attributable to increased domestic taxable earnings offset by forecasted utilization of a portion of our domestic deferred tax assets and associated valuation allowance. We continue to maintain a valuation allowance against the balance of net domestic deferred tax assets as well as the deferred tax assets of our German, Japanese and Mexican subsidiaries at September 30, 2012.


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NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

The following table contains selected income statement information, which serves
as the basis of the discussion of our results of operations for the nine months
ended September 30, 2012 and 2011, respectively (in thousands, except for
percentages):



                                                     Nine Months Ended
                                                       September 30,
                                            2012                           2011
                                                 As a % of                      As a % of
                                                   Total                          Total             $             %
                                   Amount        Revenues         Amount        Revenues          Change        Change
Product revenues                  $  92,054              83 %    $ 59,921               78 %     $ 32,133            54 %
Parts, accessories and service
revenues                             18,770              17        16,579               22          2,191            13

Total revenues                    $ 110,824             100      $ 76,500              100       $ 34,324            45
Cost of revenues                     46,689              42        33,379               44         13,310            40

Gross profit                         64,135              58        43,121               56         21,014            49
Operating expenses
Sales and marketing                  34,850              31        28,250               37          6,600            23
Research and development              9,780               9         7,242                9          2,538            35
Amortization of intangible
assets acquired                       1,026               1           439                1            587           134
General and administrative           10,585              10        10,639               14            (54 )          (1 )

Total operating expenses             56,241              51        46,570               61          9,671            21

Income (loss) from operations         7,894               7        (3,449 )             (5 )       11,343           329
Interest income, net                     39              -            117               -             (78 )         (67 )
Other income (expense), net             309              -            (47 )             -             356           757

Income (loss) before provision
for income taxes                      8,242               7        (3,379 )             (4 )       11,621           344
Provision for income taxes            1,320               1           608                1            712           117

Net income (loss)                 $   6,922               6 %    $ (3,987 )             (5 )%    $ 10,909           274 %

Revenues



                                                   Nine Months Ended
                                                     September 30,                $             %
                                                  2012             2011         Change       Change
                                                      (in thousands, except for percentages)
Product sales in North America                 $    45,418       $ 25,654      $ 19,764           77 %
Product sales outside North America                 46,636         34,267        12,369           36
Global parts, accessories and service sales         18,770         16,579         2,191           13

Total Revenues                                 $   110,824       $ 76,500      $ 34,324           45 %

Revenues in the nine months ended September 30, 2012 increased from the nine months ended September 30, 2011 by $34.3 million, or 45%. The increase was attributable to a number of factors:

• Revenues from the sale of products in North America increased by approximately $19.8 million, or 77%, from the 2011 period, primarily as a result of the increased number of units sold following our February 2012 launch of Cellulaze and sales of our PinPointe FootLaser and ConBio product lines, which we acquired during 2011.

. . .

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