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CYNO > SEC Filings for CYNO > Form 10-Q on 12-Nov-2013All Recent SEC Filings

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Form 10-Q for CYNOSURE INC


12-Nov-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;

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.


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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 LaserBodySculptingS 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 Medical Technologies, Inc., which we refer to as Palomar. The acquisition complemented and broadened our product lineup with the addition of Palomar's intense pulsed light, fractional laser and diode laser aesthetic systems, doubled the number of patents in our portfolio and enhanced 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;

the StarLux laser and pulsed light system for hair removal, skin resurfacing and skin rejuvenation; 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.

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 nine months ended September 30, 2013, we derived approximately 84% of our revenues from sales of our products and 16% of our revenues from parts, accessories and service revenues. During the nine months ended September 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.


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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 nine months ended September 30, 2013 and 2012, we derived 50% and 52% of our total revenues, respectively, from sales outside North America. As of September 30, 2013, including expansion from the acquisition of Palomar, we had 72 sales employees covering North America and 68 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 total revenue data by geographical region for the nine months ended September 30, 2013 and 2012:

                                       Percentage of Revenues
                                          Nine Months Ended
                                            September 30,
                     Region            2013              2012
                     North America          50 %              48 %
                     Europe                 18                18
                     Asia/Pacific           25                28
                     Other                   7                 6

                     Total                 100 %             100 %

See Note 11 to our consolidated financial statements included in this Quarterly Report for revenues and asset data by geographic region.

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 September 30, 2013 and 2012, respectively (in thousands, except for
percentages):



                                                         Three Months Ended
                                                           September 30,
                                                2013                            2012
                                                     As a % of                      As a % of
                                                       Total                          Total            $             %
                                       Amount        Revenues          Amount       Revenues         Change       Change
Product revenues                      $ 50,147               83 %     $ 31,036              84 %    $ 19,111           62 %
Parts, accessories, service and
royalties revenues                      10,545               17          6,047              16         4,498           74

Total revenues                          60,692              100         37,083             100        23,609           64
Cost of revenues                        26,558               44         15,496              42        11,062           71

Gross profit                            34,134               56         21,587              58        12,547           58
Operating expenses
Sales and marketing                     17,364               28         11,421              31         5,943           52
Research and development                 5,033                8          3,081               8         1,952           63
Amortization of intangible assets
acquired                                   451                1            342               1           109           32
General and administrative              12,712               21          3,400               9         9,312          274

Total operating expenses                35,560               58         18,244              49        17,316           95

(Loss) income from operations           (1,426 )             (2 )        3,343               9        (4,769 )       (143 )
Interest income, net                        25               -              16              -              9           56
Other income, net                          721                1            398               1           323           81

(Loss) income before provision for
income taxes                              (680 )             (1 )        3,757              10        (4,437 )       (118 )
Provision for income taxes                 601                1            334               1           267           80

Net (loss) income                     $ (1,281 )             (2 )%    $  3,423               9 %    $ (4,704 )       (137 )%


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Revenues



                                                   Three Months Ended
                                                     September 30,               $             %
                                                   2013           2012         Change       Change
Product sales in North America (in
thousands)                                      $   27,025      $ 15,425      $ 11,600           75 %
Product sales outside North America (in
thousands)                                          23,122        15,611         7,511           48
Global parts, accessories, service and
royalties (in thousands)                            10,545         6,047         4,498           74

Total Revenues                                  $   60,692      $ 37,083      $ 23,609           64 %

Revenues in the three months ended September 30, 2013 increased from the three months ended September 30, 2012 by $23.6 million, or 64%. The increase was attributable to a number of factors:

Revenues from the sale of products in North America increased by approximately $11.6 million, or 75%, from the 2012 period primarily due to an increase in average selling prices and number of units sold attributable to the introduction of additional products, including PicoSure, Vectus and Icon.

Revenues from the sale of products outside of North America increased by approximately $7.5 million, or 48%, from the 2012 period primarily due to an increase in average selling prices and number of units sold attributable to the introduction of additional products, including PicoSure, Vectus and Icon.

Revenues from the sale of parts, accessories, services and royalties increased by approximately $4.5 million, or 74%, from the 2012 period primarily due to an increase in revenues generated from performing service on laser systems, including our newly acquired Palomar product lines. Royalties revenues, attributable to the Palomar business, contributed $1.2 million for the three months ended September 30, 2013.

Cost of Revenues



                                                   Three Months Ended
                                                     September 30,                $             %
                                                  2013            2012          Change       Change
Cost of revenues (in thousands)                 $  26,558       $ 15,496       $ 11,062           71 %
Cost of revenues (as a percentage of total
revenues)                                              44 %           42 %

Total cost of revenues increased $11.1 million, or 71%, to $26.6 million for the three months ended September 30, 2013, as compared to $15.5 million for the three months ended September 30, 2012. The increase was primarily associated with our 64% increase in total revenues. Total cost of revenues increased as a percentage of total revenues, to 44% for the three months ended September 30, 2013, from 42% for the three months ended September 30, 2012, primarily due to a purchase accounting charge of $0.9 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% in the fourth quarter of 2013.

Sales and Marketing



                                                   Three Months Ended
                                                     September 30,                $            %
                                                  2013            2012         Change       Change
Sales and marketing (in thousands)              $  17,364       $ 11,421       $ 5,943           52 %
Sales and marketing (as a percentage of
total revenues)                                        28 %           31 %

Sales and marketing expenses increased $5.9 million, or 52%, for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012. The increase was primarily due to sales and marketing expenses, not including commission expenses, attributable to the Palomar business of $4.1 million for the three months ended September 30, 2013. The increase also included a commission expense increase of $1.3 million due to increased product revenues. Personnel costs increased $0.5 million due to an increase in the number of our sales employees as a result of the integration of our Palomar sales team. Sales and marketing expenses for the three months ended September 30, 2013 decreased as a percentage of total revenues to 28%, due to favorable product mix and continued operating leverage.


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Research and Development



                                                    Three Months Ended
                                                      September 30,                $            %
                                                   2013            2012         Change       Change
Research and development (in thousands)          $   5,033        $ 3,081       $ 1,952           63 %
Research and development (as a percentage of
total revenues)                                          8 %            8 %

Research and development expenses increased $2.0 million, or 63%, for the three months ended September 30, 2013, as compared to the three months ended September 30, 2012. This increase was primarily due to the integration of the Palomar research and development team for the three months ended September 30, 2013.

Amortization of Intangible Assets Acquired



                                                   Three Months Ended
                                                     September 30,                 $              %
                                                  2013             2012          Change        Change
Amortization of intangible assets acquired
(in thousands)                                  $    451             342        $    109            32 %
Amortization of intangible assets acquired
(as a percentage of total revenues)                    1 %             1 %

Amortization of intangible assets acquired increased $0.1 million, or 32%, for the three months ended September 30, 2013, as compared to the three months ended September 30, 2012. The increase was primarily due $0.2 million in amortization expense related to the identifiable intangible assets from the Palomar acquisition for the three months ended September 30, 2013, offset by reduced amortization expense on certain intangible assets acquired through previous acquisitions.

General and Administrative



                                                   Three Months Ended
                                                     September 30,                $            %
                                                   2013           2012         Change        Change
General and administrative (in thousands)       $   12,712       $ 3,400       $ 9,312           274 %
General and administrative (as a percentage
of total revenues)                                      21 %           9 %

General and administrative expenses increased $9.3 million, or 274%, for the three months ended September 30, 2013, as compared to the three months ended September 30, 2012. The increase is primarily due to $6.8 million in costs associated with the acquisition of Palomar during the three months ended September 30, 2013, including $3.1 million in compensation expense in connection with change of control severance arrangements, $2.4 million in employee termination payments, and $0.5 million in costs incurred in connection with our efforts to sell the former Palomar headquarters building. Excluding acquisition costs, general and administrative expenses increased due to increased headcount associated with our Palomar acquisition and increased legal costs associated with patent infringement prosecution.

Interest Income, net

Three Months Ended
September 30, $ %
2013 2012 Change Change
Interest income, net (in thousands) $ 25 $ 16 $ 9 56 %

The increase in interest income, net was primarily due to higher interest rates on cash invested in the three months ended September 30, 2013, as compared to the three months ended September 30, 2012, as well as decreased interest payments associated with capital leases.


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Other Income, net

Three Months Ended
September 30, $ %
2013 2012 Change Change
Other income, net (in thousands) $ 721 $ 398 $ 323 81 %

The change in other income, net was primarily a result of increased net foreign currency remeasurement gains in the third quarter of 2013, as compared to the third quarter of 2012, primarily due to weakening of the U.S. dollar against the euro and the pound.

Provision for Income Taxes



                                                   Three Months Ended
                                                     September 30,                 $              %
                                                  2013             2012          Change        Change
Provision for income taxes (in thousands)       $    601           $ 334        $    267            80 %
Provision as a percentage of (loss) income
before provision for income taxes                    (88 )%            9 %

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, 2013, we recorded an income tax provision of $0.6 million, representing an effective tax rate of (88%). The income tax provision for the three months ended September 30, 2013 is primarily attributable to the tax provision on the earnings of our foreign and domestic operations.

NINE MONTHS ENDED SEPTEMBER 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 nine
months ended September 30, 2013 and 2012, respectively (in thousands, except for
percentages):



                                                       Nine Months Ended
                                                         September 30,
                                              2013                            2012
                                                   As a % of                       As a % of
                                                     Total                           Total             $             %
                                    Amount         Revenues          Amount        Revenues         Change        Change
Product revenues                   $ 127,286               84 %     $  92,054              83 %    $  35,232           38 %
Parts, accessories, service and
royalties revenues                    24,187               16          18,770              17          5,417           29

Total revenues                       151,473              100         110,824             100         40,649           37
Cost of revenues                      65,865               43          46,689              42         19,176           41

Gross profit                          85,608               57          64,135              58         21,473           33
Operating expenses
Sales and marketing                   44,198               29          34,850              31          9,348           27
Research and development              12,350                8           9,780               9          2,570           26
Amortization of intangible
assets acquired                          948                1           1,026               1            (78 )         (8 )
General and administrative            42,189               28          10,585              10         31,604          299

Total operating expenses              99,685               66          56,241              51         43,444           77

(Loss) income from operations        (14,077 )             (9 )         7,894               7        (21,971 )       (278 )
Interest income, net                      80               -               39              -              41          105
Other income, net                        318               -              309              -               9            3

(Loss) income before (benefit)
provision for income taxes           (13,679 )             (9 )         8,242               7        (21,921 )       (266 )
(Benefit) provision for income
taxes                                 (4,683 )             (3 )         1,320               1         (6,003 )       (455 )

Net (loss) income                  $  (8,996 )             (6 )%    $   6,922               6 %    $ (15,918 )       (230 )%


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Revenues



                                                 Nine Months Ended
. . .
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