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CYNO > SEC Filings for CYNO > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for CYNOSURE INC


9-Aug-2013

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 strategy of growing through acquisitions;

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 ability to resolve reliability issues in our products and meet warranty and service obligations to our customers;


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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 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, except as required by law.

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 Securities and Exchange Commission (the "SEC") on March 8, 2013, as amended on Form 10-K/A filed with the SEC on April 29, 2013. 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 benign pigmented lesions, treat 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 our development agreement with Unilever a laser treatment system 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 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.

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 treatment 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;

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

our PicoSure product line for the treatment of tattoos and benign pigmented lesions.

On June 24, 2013, we acquired Palomar. The acquisition complements and broadens our product lineup with the addition of Palomar's intense pulsed light, fractional laser and diode laser aesthetic systems, doubles the number of patents in our portfolio and enhances our global distribution network. As a result of the transaction, former Palomar stockholders, in the aggregate, received for their shares of Palomar common stock $145.8 million in cash and 6.0 million shares of our Class A common stock. The total consideration is valued at $287.2 million, based upon the closing price of our Class A common stock on June 24, 2013. We have stopped manufacturing and distributing the Pavlovia skin renewing laser previously offered by Palomar. The main aesthetic laser products which have been added to our portfolio as a result of the acquisition include:

the Icon Aesthetic System for fractional skin rejuvenation and wrinkle reduction;


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the StarLux laser and pulsed light system; and

the Vectus diode laser for high volume hair removal.

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 six months ended June 30, 2013, 46% of our product revenues were attributable to the sale of systems that we have introduced to the market since the beginning of 2010, excluding product revenue attributable to Palomar during the second quarter of 2013. As stated in our second-quarter 2013 financial results conference call on July 31, 2013, during the integration process we have identified reliability issues with Palomar's Vectus laser, primarily involving the large tip delivery system. We are currently reviewing shipments to new customers while we address these issues. Demand for the Vectus laser remains high and we are working to resolve these issues and support customers in the coming quarters.

In March 2013, we commenced commercialization of our PicoSure system, our picosecond laser technology platform for the treatment of tattoos and benign pigmented lesions. PicoSure is the first commercially available picosecond Alexandrite aesthetic laser 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. FDA clearance to market PicoSure was received in November 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 near the beginning of 2014.

We generate revenues primarily from sales of our products and parts and accessories and from services, including product warranty revenues. During the six months ended June 30, 2013, we derived approximately 85% of our revenues from sales of our products and 15% of our revenues from parts, accessories and service revenues. During the six months ended June 30, 2012, we derived approximately 83% of our revenues from sales of products and 17% 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 through a direct sales force in North America, France, Spain, the United Kingdom, Germany, Australia, 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 six months ended June 30, 2013 and 2012, we derived 53% and 52% of our revenues, respectively, from sales outside North America. As of June 30, 2013, including expansion from the acquisition of Palomar, we had 77 sales employees covering North America and 61 sales employees in France, Spain, the United Kingdom, Germany, Korea, China, Japan and Australia. We utilize a global distribution network covering approximately 120 countries.

The following table provides revenue data by geographical region for the six months ended June 30, 2013 and 2012:

                                       Percentage of Revenues
                                             Six Months
                                           Ended June 30,
                     Region            2013              2012
                     North America          47 %              48 %
                     Europe                 18                19
                     Asia/Pacific           26                28
                     Other                   9                 5

                     Total                 100 %             100 %

See Note 10 to our consolidated financial statements included in this Quarterly Report for revenues and asset data by geographic region.


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Results of Operations

The following table contains selected statement of operations information, which
serves as the basis of the discussion of our results of operations for the three
months ended June 30, 2013 and 2012, respectively (in thousands, except for
percentages):



                                                       Three Months Ended
                                                            June 30,
                                              2013                            2012
                                                   As a % of                       As a % of
                                                     Total                           Total             $             %
                                    Amount         Revenues          Amount        Revenues         Change        Change
Product revenues                   $  43,022               86 %     $ 32,923               83 %    $  10,099           31 %
Parts, accessories and service
revenues                               7,069               14          6,650               17            419            6

Total revenues                        50,091              100         39,573              100         10,518           27
Cost of revenues                      22,304               45         16,533               42          5,771           35

Gross profit                          27,787               55         23,040               58          4,747           21
Operating expenses
Sales and marketing                   14,231               28         11,878               30          2,353           20
Research and development               3,536                7          3,460                9             76            2
Amortization of intangible
assets acquired                          283               -             342                1            (59 )        (17 )
General and administrative            24,376               49          3,667                9         20,709          565

Total operating expenses              42,426               84         19,347               49         23,079          119

(Loss) income from operations        (14,639 )            (29 )        3,693                9        (18,332 )       (496 )
Interest income, net                      23               -              13               -              10           77
Other expense, net                       (46 )             -            (298 )             (1 )          252           85

(Loss) income before (benefit)
provision for income taxes           (14,662 )            (29 )        3,408                9        (18,070 )       (530 )
(Benefit) provision for income

taxes (5,708 ) (11 ) 728 2 (6,436 ) (884 )

Net (loss) income $ (8,954 ) (18 )% $ 2,680 7 % $ (11,634 ) (434 )%

Revenues



                                                     Three Months Ended
                                                          June 30,                   $            %
                                                     2013            2012          Change      Change
Product sales in North America (in thousands)     $   20,738       $ 16,432       $  4,306          26 %
Product sales outside North America (in
thousands)                                            22,284         16,491          5,793          35
Global parts, accessories and service sales
(in thousands)                                         7,069          6,650            419           6

Total Revenues                                    $   50,091       $ 39,573       $ 10,518          27 %

Revenues in the three months ended June 30, 2013 increased from the three months ended June 30, 2012 by $10.5 million, or 27%. The increase was attributable to a number of factors:

Revenues from the sale of products in North America increased by approximately $4.3 million, or 26%, from the 2012 period primarily due to an increase in average selling prices attributable to the introduction of new products, including PicoSure and Elite Plus. Our newly acquired Palomar business contributed $2.2 million in North America product revenues for the five business days following the June 24, 2013 acquisition date.

Revenues from the sale of products outside of North America increased by approximately $5.8 million, or 35%, from the 2012 period primarily due to an increase in the number of units sold by our European subsidiaries and distributors, including the introduction of Apogee Plus. Our newly acquired Palomar business contributed $2.7 million in product revenues outside of North America for the five business days following the June 24, 2013 acquisition date.

Revenues from the sale of parts, accessories and services increased by approximately $0.4 million, or 6%, from the 2012 period primarily due to an increase in revenues generated from performing service on laser systems.


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Cost of Revenues



                                                  Three Months Ended
                                                       June 30,                    $           %
                                                 2013             2012          Change      Change
Cost of revenues (in thousands)                $  22,304        $ 16,533        $ 5,771          35 %
Cost of revenues (as a percentage of total
revenues)                                             45 %            42 %

Total cost of revenues increased $5.8 million, or 35%, to $22.3 million for three months ended June 30, 2013, as compared to $16.5 million for the three months ended June 30, 2012. The increase was primarily associated with our 27% increase in total revenues. Total cost of revenues increased as a percentage of total revenues, to 45% for the three months ended June 30, 2013, from 42% for the three months ended June 30, 2012, primarily due to a purchase accounting charge of $1.4 million associated with the step up in fair value of finished goods inventory acquired through our acquisition of Palomar and sold during the period. We expect our gross margin percentage to return to approximately 58% by the fourth quarter of 2013 as the remaining finished goods inventory from the acquisition is sold.

Sales and Marketing



                                                  Three Months Ended
                                                       June 30,                    $           %
                                                 2013             2012          Change      Change
Sales and marketing (in thousands)             $  14,231        $ 11,878        $ 2,353          20 %
Sales and marketing (as a percentage of
total revenues)                                       28 %            30 %

Sales and marketing expenses increased $2.4 million, or 20%, for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012. The increase was primarily due to an increase in sales and marketing costs of $0.9 million from an increased number of workshops, trade shows and other promotional efforts, including those related to the launch of PicoSure. Personnel and travel expenses increased $0.6 million, primarily as a result of efforts related to the launch of PicoSure, and professional services expenses increased $0.1 million. Palomar's sales and marketing expenses were $0.8 million for the five business days following the June 24, 2013 acquisition date. Sales and marketing expenses for the three months ended June 30, 2013 decreased as a percentage of total revenues to 28%, due to favorable product mix and continued operating leverage.

Research and Development



                                                   Three Months Ended
                                                        June 30,                    $           %
                                                  2013             2012          Change      Change
Research and development (in thousands)         $   3,536         $ 3,460        $    76           2 %
Research and development (as a percentage
of total revenues)                                      7 %             9 %

Research and development expenses increased $0.1 million, or 2% for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012. This increase was due to Palomar's research and development expenses of $0.1 million for the five business days following the June 24, 2013 acquisition date. Research and development expenses for the three months ended June 30, 2013 decreased as a percentage of total revenues to 7%, primarily due to the 27% increase in total revenues and continued operating leverage.

Amortization of Intangible Assets Acquired



                                                  Three Months Ended
                                                       June 30,                   $              %
                                                 2013             2012          Change         Change
Amortization of intangible assets acquired
(in thousands)                                 $    283          $  342        $    (59 )          (17 )%
Amortization of intangible assets acquired
(as a percentage of total revenues)                  -  %             1 %

For the three month period ending June 30, 2013, we recognized amortization expense of $0.3 million in our operating expenses relating to the identifiable intangible assets acquired through our 2013 acquisition of Palomar and certain intangible assets acquired through our 2011 acquisitions of Eleme Medical and ConBio's aesthetic businesses.


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General and Administrative



                                                  Three Months Ended
                                                       June 30,                  $             %
                                                  2013           2012          Change        Change
General and administrative (in thousands)      $   24,376       $ 3,667       $ 20,709           565 %
General and administrative (as a percentage
of total revenues)                                     49 %           9 %

General and administrative expenses increased $20.7 million, or 565%, for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012. The increase is primarily due to $20.4 million in costs associated with the acquisition of Palomar during the three months ended June 30, 2013. In connection with our acquisition of Palomar, certain terminated Palomar employees were, and certain continuing Palomar employees are, entitled to severance benefits in specified circumstances associated with the change of control of Palomar. In connection with the acquisition and these change of control severance arrangements, we incurred $18.5 million of compensation expense during the three months ended June 30, 2013, and we expect to incur an additional $1.5 million of compensation expense during each of the next four quarters.

Interest Income, net

Three Months Ended
June 30, $ %
2013 2012 Change Change
Interest income, net (in thousands) $ 23 $ 13 $ 10 77 %

The increase in interest income, net was primarily due to higher interest rates on cash invested in interest-bearing securities, as well as lower capital lease interest payments during the three months ended June 30, 2013 as compared to the three months ended June 30, 2012.

Other Expense, net

Three Months Ended
June 30, $ %
2013 2012 Change Change
Other expense, net (in thousands) $ 46 $ 298 $ 252 85 %

The change in other expense, net is primarily a result of less net foreign currency remeasurement losses in the second quarter of 2013, as compared to the second quarter of 2012.

(Benefit) Provision for Income Taxes

                                                    Three Months Ended
                                                         June 30,                  $             %
                                                    2013            2012         Change       Change
(Benefit) provision for income taxes (in
thousands)                                       $    (5,708 )      $ 728       $ (6,436 )       (884 )%
(Benefit) provision as a percentage of income
before (benefit) provision for income taxes               39 %         21 %

The (benefit) provision for income taxes results from a combination of the activities of our domestic and foreign subsidiaries. During the three months ended June 30, 2013, we recorded an income tax benefit of $5.7 million, representing an effective tax rate of 39%. Included in this tax benefit is a non-recurring benefit of $5.8 million for the release of a portion of the domestic valuation allowance due to taxable temporary differences available as a source of income to realize the benefit of certain pre-existing Cynosure deferred tax assets as a result of the Palomar business combination. Excluding this item, the income tax provision for the three months ended June 30, 2013 would have been $0.1 million, which is primarily attributable to the current tax provision on the earnings of our foreign operations.


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SIX MONTHS ENDED JUNE 30, 2013 AND 2012

The following table contains selected statement of operations information, which
serves as the basis of the discussion of our results of operations for the six
months ended June 30, 2013 and 2012, respectively (in thousands, except for
percentages):



                                                        Six Months Ended
                                                            June 30,
                                              2013                            2012
                                                   As a % of                       As a % of
                                                     Total                           Total             $             %
                                    Amount         Revenues          Amount        Revenues         Change        Change
Product revenues                   $  77,139               85 %     $ 61,018               83 %    $  16,121           26 %
Parts, accessories and service
revenues                              13,642               15         12,723               17            919            7

Total revenues                        90,781              100         73,741              100         17,040           23
Cost of revenues                      39,307               43         31,193               42          8,114           26

Gross profit                          51,474               57         42,548               58          8,926           21
Operating expenses
Sales and marketing                   26,834               30         23,429               32          3,405           15
Research and development               7,317                8          6,699                9            618            9
Amortization of intangible
assets acquired                          497                1            684                1           (187 )        (27 )
General and administrative            29,477               32          7,185               10         22,292          310

Total operating expenses              64,125               71         37,997               52         26,128           69
. . .
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