CYNOSURE INC - FORM 10-Q - November 5, 2009

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EX-32.1 - SECTION 906 PEO CERTIFICATION - CYNOSURE INC	dex321.htm
EX-31.2 - SECTION 302 PFO CERTIFICATION - CYNOSURE INC	dex312.htm
EX-32.2 - SECTION 906 PFO CERTIFICATION - CYNOSURE INC	dex322.htm
EX-31.1 - SECTION 302 PEO CERTIFICATION - CYNOSURE INC	dex311.htm

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, 2009

¨	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). ¨ 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):

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 November 2, 2009:


Class		Number of Shares
Class A Common Stock, $0.001 par value		9,773,445
Class B Common Stock, $0.001 par value		2,975,297

Cynosure, Inc.

Table of Contents


		Page No.
PART I Financial Information

Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008	1
	Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2009 and 2008	2
	Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2009 and 2008	3
	Notes to Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	22

PART II Other Information

Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6.	Exhibits	24
SIGNATURES		25
EXHIBIT INDEX		26

EX-31.1 Section 302 Certification of Principal Executive Officer

EX-31.2 Section 302 Certification of Principal Financial Officer

EX-32.1 Section 906 Certification of Principal Executive Officer

EX-32.2 Section 906 Certification of Principal Financial Officer

Cynosure, Inc.

Consolidated Balance Sheets

(in thousands)


	(unaudited) September 30, 2009			December 31, 2008
Assets
Current assets:
Cash and cash equivalents (Note 5)	$	47,492		$	49,257
Short-term marketable securities (Notes 5 and 6)		22,461			25,112
Short-term investments and related financial instruments (Notes 5 and 6)		18,587			—
Accounts receivable, net		14,975			25,156
Amounts due from related party (Note 12)		49			40
Inventories		25,724			30,248
Prepaid expenses and other current assets		7,857			4,331
Deferred income taxes		6,871			6,825

Total current assets		144,016			140,969

Property and equipment, net		10,080			8,422
Long-term marketable securities (Notes 5 and 6)		2,005			—
Long-term investments and related financial instruments (Notes 5 and 6)		—			21,082
Other assets		2,906			2,649

Total assets	$	159,007		$	173,122

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4,092		$	5,095
Amounts due to related party (Note 12)		1,944			6,083
Accrued expenses		9,979			15,602
Deferred revenue		3,990			4,296
Capital lease obligation		299			398

Total current liabilities		20,304			31,474

Capital lease obligation, net of current portion		231			436
Deferred revenue, net of current portion		504			407
Other noncurrent liability		429			451

Commitments and contingencies (Note 11)

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 — 12,749 and 12,734 shares as of September 30, 2009 and December 31, 2008, respectively		13			13
Additional paid-in capital		116,776			111,892
Retained earnings		22,271			30,531
Accumulated other comprehensive loss		(1,234	)		(1,795	)
Treasury stock, 36 shares, at cost		(287	)		(287	)

Total stockholders’ equity		137,539			140,354

Total liabilities and stockholders’ equity	$	159,007		$	173,122

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

Cynosure, Inc.

Consolidated Statements of Operations

(Unaudited, in thousands, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Revenues	$	17,937		$	38,209		$	53,566		$	114,167
Cost of revenues		7,460			13,396			21,997			38,645

Gross profit		10,477			24,813			31,569			75,522

Operating expenses:
Sales and marketing		8,743			13,911			29,696			41,190
Research and development		1,564			1,992			5,001			5,606
General and administrative		3,511			3,983			11,440			11,108

Total operating expenses		13,818			19,886			46,137			57,904

(Loss) income from operations		(3,341	)		4,927			(14,568	)		17,618

Interest income, net		83			549			454			1,977
Other income (expense), net		371			(425	)		705			9

(Loss) income before income taxes		(2,887	)		5,051			(13,409	)		19,604

Income tax (benefit) provision		(972	)		1,888			(5,149	)		6,912

Net (loss) income	$	(1,915	)	$	3,163		$	(8,260	)	$	12,692

Basic net (loss) income per share	$	(.15	)	$	.25		$	(.65	)	$	1.01

Diluted net (loss) income per share	$	(.15	)	$	.25		$	(.65	)	$	.99

Basic weighted-average common shares outstanding		12,712			12,642			12,708			12,542

Diluted weighted-average common shares outstanding		12,712			12,854			12,708			12,806

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

Cynosure, Inc.

Consolidated Statements of Cash Flows

(Unaudited, in thousands)


	Nine Months Ended September 30,
	2009			2008
Operating activities:
Net (loss) income	$	(8,260	)	$	12,692
Reconciliation of net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		3,948			2,901
Stock-based compensation expense		5,110			5,875
Accretion of discounts on marketable securities		244			241
Deferred income taxes		—			(26	)
Gain on marketable investments		(6	)		—
Loss on disposal of fixed assets		25			—
Changes in operating assets and liabilities:
Accounts receivable		10,484			(15,625	)
Due from related party		(8	)		(31	)
Inventories		(529	)		(6,988	)
Net book value of demonstration inventory sold		520			626
Prepaid expenses and other current assets		(3,769	)		679
Tax benefit from exercise of stock options		(3	)		(1,555	)
Accounts payable		(1,018	)		3,774
Due to related party		(4.133	)		2,213
Accrued expenses		(5,676	)		1,815
Deferred revenue		(238	)		635
Other noncurrent liability		(5	)		264

Net cash (used in) provided by operating activities		(3,314	)		7,490
Investing activities:
Purchases of property and equipment		(604	)		(1,780	)
Proceeds from the sales and maturities of marketable securities		29,985			43,115
Purchases of marketable securities		(27,176	)		(39,674	)
Increase in other noncurrent assets		(193	)		—

Net cash provided by investing activities		2,012			1,661
Financing activities:
Proceeds from exercise of stock options		47			1,602
Excess tax benefits related to stock options		3			1,555
Payments on capital lease obligation		(303	)		(356	)

Net cash (used in) provided by financing activities		(253	)		2,801
Effect of exchange rate changes on cash and cash equivalents		(210	)		(230	)

Net (decrease) increase in cash and cash equivalents		(1,765	)		11,722
Cash and cash equivalents, beginning of the period		49,257			39,011

Cash and cash equivalents, end of the period	$	47,492		$	50,733

Supplemental cash flow information
Cash paid for interest	$	64		$	95

Cash (received) paid for taxes, net	$	(1,625	)	$	5,369

Supplemental noncash investing and financing activities
Transfer of demonstration equipment to fixed assets for the nine months ended September 30, 2009 and 2008, respectively	$	5,355		$	3,089
Net unrealized gain (loss) on marketable securities, net of $13 and $(503) deferred income tax provision (benefit), for the nine months ended September 30, 2009 and 2008, respectively	$	23		$	(944	)

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

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, 2008. 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 three and nine months ended September 30, 2009 may not be indicative of the results that may be expected for the year ending December 31, 2009, or any other period.

Note 2 — Accounting Pronouncements

Newly Adopted Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. This statement modifies the Generally Accepted Accounting Principles (“GAAP”) hierarchy by establishing only two levels of GAAP: authoritative and nonauthoritative accounting literature. Effective September 2009, the FASB Accounting Standards Codification (“ASC”), also known collectively as the “Codification,” is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the SEC. Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. This statement applies beginning in the third quarter of 2009. All accounting references have been updated, and therefore SFAS references have been replaced with ASC references.

Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140 (“SFAS No. 166”). SFAS No. 166 is intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets, the effects of a transfer on its financial position, financial performance, and cash flows and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS No. 166 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Cynosure does not expect the adoption of SFAS No. 166 to have a material impact on its financial position or results of operations.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”). SFAS No. 167 is intended to improve financial reporting by enterprises involved with variable interest entities and to address (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept in SFAS 166, and (2) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. SFAS No. 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Cynosure does not expect the adoption of SFAS No. 167 to have a material impact on its financial position or results of operations.

In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements.” ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. A company may elect, but will not be required, to adopt the amendments in ASU No. 2009-13 retrospectively for all prior periods. Cynosure does not expect the adoption of ASU 2009-13 to have a material impact on its financial position or results of operations.

Note 3 — Stock-Based Compensation

Cynosure recorded stock-based compensation expense of $1.5 million and $2.3 million for the three months ended September 30, 2009 and 2008, respectively; as well as related tax benefits of $0.5 million and $0.6 million for the three months ended September 30, 2009 and 2008, respectively. Cynosure recorded stock-based compensation expense $5.1 million and $5.9 million for the nine months ended September 30, 2009 and 2008 and related tax benefits of $1.7 million and $1.2 million for the nine months ended September 30, 2009 and 2008, respectively. Cynosure capitalized $53,000 and $76,000 of stock-based compensation expense as part of inventory during the nine months ended September 30, 2009 and 2008, 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:


	Nine Months Ended September 30,
	2009		2008
	(In thousands)
Cost of revenues	$	383	$	411
Sales and marketing		2,250		2,365
Research and development		738		823
General and administrative		1,739		2,276

Total stock-based compensation expense	$	5,110	$	5,875

Cash received from option exercises was $47,000 and $1.6 million during the nine months ended September 30, 2009 and 2008, respectively. Cynosure recognized $15,000 and $1.6 million in actual tax benefits during the nine months ended September 30, 2009 and 2008, respectively. Actual tax benefits are primarily the result of disqualifying dispositions of incentive stock options exercised which result in a reduction of income taxes payable.

Cynosure granted 506,225 and 350,090 stock options during the nine months ended September 30, 2009 and 2008, respectively. Cynosure uses 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, 2009 and 2008 was $4.38 and $13.53, respectively, using the following assumptions:


	Nine Months Ended September 30,
	2009		2008
Risk-free interest rate	1.87% - 2.66	%	2.19% - 3.30	%
Expected dividend yield	—		—
Expected lives	5.8 years		5.8 years
Expected volatility	63% - 64	%	64% - 66	%
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. Due to Cynosure’s initial public offering in December 2005, Cynosure believes there is limited information on the volatility of its own shares. As such, Cynosure’s estimated expected stock price volatility is based on a weighted average of its own historical volatility and of the average volatilities of other guideline companies in the same industry. Cynosure believes this is more reflective and a better indicator of the expected future volatility, than using an average of a comparable market index or of a single comparable company in the same industry. Cynosure’s expected term of options granted in the nine months ended September 30, 2009 and 2008 was derived from the short-cut method described in ASC 718-10-S99. 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.

Note 4 — 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:


	(unaudited) September 30, 2009		December 31, 2008
	(in thousands)
Raw materials	$	3,076	$	3,680
Work in process		1,297		999
Finished goods		21,351		25,569

	$	25,724	$	30,248

Note 5 — Fair Value

Effective January 1, 2008, Cynosure adopted the Fair Value Measurements Topic ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value under U.S. GAAP 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.

Cynosure’s short-term investments and related financial instruments consist of tax exempt certificates with an auction reset feature (auction rate securities or ARS) whose underlying assets are generally student loans, which are substantially backed by the federal government. In February 2008, auctions began to fail for these securities and each auction since then has failed, with one exception. To date Cynosure has collected all interest receivable on outstanding ARS when due and expects to continue to do so in the future. During the year ended December 31, 2008, certain investments in ARS were successfully called at full par value and Cynosure received cash proceeds of approximately $8.2 million. During the nine months ended September 30, 2009, an additional $2.5 million in cash proceeds was received by Cynosure related to certain investments in ARS that were successfully called at full par value.

As of September 30, 2009 and December 31, 2008, Cynosure held $18.6 million and $21.1 million, respectively, at par value, of auction rate securities investments. The auction rate securities are managed by UBS Financial Services, Inc. (UBS). On November 3, 2008, Cynosure agreed to accept Auction Rate Securities Rights (the Rights) from UBS. The Rights permit Cynosure to sell, or put, its ARS at par value to UBS at any time during the period from June 30, 2010 through July 2, 2012. Cynosure expects to exercise its ARS Rights and put its auction rate securities to UBS on June 30, 2010, the earliest date allowable under the Rights, therefore, Cynosure has reclassified its ARS and associated Rights to short-term investments and related financial instruments as of September 30, 2009. While the auction failures will limit Cynosure’s ability to liquidate these investments, until Cynosure exercises its Right on June 30, 2010, Cynosure believes that the ARS failures will not have an impact on its ability to fund ongoing operations and growth initiatives.

Prior to accepting the UBS offer, Cynosure classified its ARS as available-for-sale investments, as management’s intent was to hold the ARS until the earlier of anticipated recovery in market value or maturity, and recorded resulting unrealized losses, net of tax, in accumulated other comprehensive income in stockholders’ equity. By accepting the Rights, Cynosure can no longer assert that it has the intent to hold the ARS until anticipated recovery, as it expects to put the ARS to UBS on June 30, 2010, the earliest date possible. As a result, Cynosure recognized an other-than-temporary impairment charge of approximately $4.3 million, which is based on the $16.8 million fair value of the ARS using a discounted cash flow methodology. Cynosure recorded the $4.3 million charge in other income (expense) in the consolidated statement of operations for the year ended December 31, 2008, for the amount of unrealized loss not previously recognized in earnings. Additionally, during the fourth quarter of 2008, in accordance with the Debt and Equity Securities Topic ASC 320, Cynosure elected to transfer the ARS investments from the available-for-sale category to the trading category and account for the ARS at fair value with changes in fair value reported in earnings as they occur. During the three months ended September 30, 2009, Cynosure recognized a recovery of ARS of approximately $0.5 million which is based on the $16.9 million fair value of the ARS using a discounted cash flow methodology as discussed below. During the nine months ended September 30, 2009, Cynosure recorded $2.6 million as a recovery in ARS. Recoveries for both the three and nine month periods are recorded in other income (expense) in the consolidated statements of operations.

As discussed above, the enforceability of the Rights results in Cynosure having a put option. Since the terms of the Rights do not provide for net settlement, the Rights do not meet the definition of a derivative instrument under the Derivatives and Hedging Topic ASC 815. The Right is recognized as a separate freestanding asset, and is accounted for separately from the ARS investment. The Fair Value Option Topic ASC 825 permits an entity to elect the fair value option for recognized financial assets. Cynosure elected to measure the Rights under ASC 825 upon the initial acceptance of the Rights on November 3, 2008 and to recognize future changes in the fair value of the Rights as they occur in operations in order to offset the fair value movements of the ARS, which would create accounting symmetry with changes in the fair value of the ARS. As of December 31, 2008, Cynosure recorded approximately $4.3 million as the fair value of the Rights, using a discounted cash flow methodology, and classified the Rights as long-term investments and related financial instruments on the consolidated balance sheet, with a corresponding credit to other income (expense) in the consolidated statement of operations for the year ended December 31, 2008. During the three and nine months ended September 30, 2009, Cynosure recorded approximately $0.4 million, and $2.6 million respectively, for the loss on the value of the Rights, using a discounted cash flow methodology, with a corresponding charge to other income (expense) in the consolidated statements of

operations. Since management expects to put the ARS to UBS on June 30, 2010, Cynosure classified the Rights to short-term investments and related financial instruments on the consolidated balance sheet as of September 30, 2009.

As a result of the illiquidity in the market for ARS investments and given the current failures in the auction markets to provide quoted market prices of the securities, as well as the lack of any correlation of these instruments to other observable market data, Cynosure valued its investments in ARS and the Rights using a discounted cash flow methodology with the most significant inputs categorized as Level 3. Significant inputs that went into the model were the credit quality of the issuer, the percentage and types of guarantees (such as Federal Family Education Loan Program – FFELP), the probability of the auction succeeding or the security being called, the estimated period to liquidation, and an illiquidity discount factor. Based on these inputs, discounts from par ranged from 4% to 40% with a weighted average discount across the portfolio of 10%. In order to assess the fair value of the Rights, Cynosure adjusted the fair value of the Rights for any bearer risk associated with the financial ability of UBS to repurchase the ARS beginning June 30, 2010, based on Level 3 data available at September 30, 2009. These assumptions are volatile and subject to change as the underlying sources of these assumptions and market conditions change.

Cynosure anticipates that any future changes in the fair value of the ARS will be mostly offset by the changes in the fair value of the related Rights, both of which will be adjusted to their estimated fair value on an ongoing basis.

In accordance with ASC 820-10-35, the following table represents Cynosure’s fair value hierarchy for its financial assets (cash equivalents, short and long-term marketable securities, short-term investments and related financial instruments) measured at fair value as of September 30, 2009 (in thousands):


	Level 1		Level 2		Level 3		Total
Money market funds (1)	$	33,850	$	—	$	—	$	33,850
State and municipal bonds		—		4,346		—		4,346
Corporate obligations & commercial paper		—		1,523		—		1,523
US government agencies and treasuries		—		18,590		—		18,590
Equity securities		7		—		—		7
Auction rate securities		—		—		16,852		16,852
Auction rate securities rights		—		—		1,735		1,735

Total	$	33,857	$	24,459	$	18,587	$	76,903

(1)	Included in cash and cash equivalents

The following table provides a summary of changes in fair value of Cynosure’s Level 3 financial assets for the nine months ended September 30, 2009 (in thousands):


	Auction Rate Securities
Balance at December 31, 2008	$	21,082
Recovery on ARS included in gain on investments		2,562
Loss related to value of ARS Rights included in (loss) on investments		(2,557	)
Net settlements		(2,500	)

Balance at September 30, 2009	$	18,587

Note 6 — Short and Long-Term Marketable Securities, Short-Term Investments and Related Financial Instruments

Cynosure accounts for investments in short and long-term marketable securities and short-term investments as available-for-sale and trading securities in accordance with ASC 320. Under ASC 320, securities purchased to be held for indefinite periods of time and not intended at the time of purchase to be held until maturity are classified as available-for-sale securities. Securities that are purchased and held principally for the purpose of selling them in the near term are classified as trading securities. ASC 320-10-35 requires Cynosure to recognize all marketable securities on the consolidated balance sheets at fair value. Cynosure’s marketable securities are stated at fair value based on quoted market prices. Adjustments to the fair value of marketable securities that are classified as available-for-sale are recorded as increases or decreases, net of income taxes, within accumulated other comprehensive gain (loss) in stockholder’s equity and adjustments to the fair value of marketable securities and short-term investments that are classified as trading are recorded in earnings.

The Company adjusts the cost of available-for-sale debt securities for amortization of premiums and accretion of discounts to maturity. Cynosure includes such amortization and accretion in interest and investment income. Realized gains and losses and declines in value, if any, that are judged to be other-than-temporary on available-for-sale securities are reported in interest and investment

income. Cynosure continually evaluates whether any marketable investments have been impaired in accordance with ASC 320-10-65. To determine whether an other-than-temporary impairment exists, Cynosure considers whether the intention is to sell the debt security and, if the Company does not intend to sell the debt security, Cynosure considers available evidence to assess whether it is more likely than not that the Company will be required to sell the security before the recovery of its amortized cost basis and if Cynosure expects to recover the entire cost basis of the security. During the three and nine months ended September 30, 2009 and 2008, Cynosure determined that no securities were other-than-temporarily impaired.

As of September 30, 2009, Cynosure’s marketable 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	$	4,346		$	4,346	$	1	$	(1	)
Corporate obligations		1,523			1,514		9		—
US government agencies and treasuries		16,585			16,561		24		—
Equity securities		7			8		—		(1	)

Total short-term marketable securities	$	22,461		$	22,429	$	34		(2	)


Long-term marketable securities:
US government agencies and treasuries		2,005			2,003		2		—

Total long-term marketable securities	$	2,005		$	2,003	$	2		—

Total available-for-sale securities	$	24,466		$	24,432	$	36		(2	)


*Trading Securities:*
Auction rate securities	$	16,853	*

Total marketable securities and short-term investments	$	41,319

*	Excludes $1.7 million for fair value of ARS Rights.

As of September 30, 2009, Cynosure’s debt securities, included in short and long-term investments were as follows (in thousands):


			Original Maturities
	Total		Less Than One Year		One to Five Years		More than five years
State and municipal bonds	$	4,346	$	4,346	$	—	$	—
Corporate obligations		1,523		1,523		—		—
US government agencies and treasuries		18,590		16,585		2,005		—
Auction rate securities		16,853		—		—		16,853

Total debt securities	$	41,312	$	22,454	$	2,005	$	16,853

Note 7 — 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, 2009, which is a component of accrued expenses in the consolidated balance sheets:


	September 30, 2009
	(in thousands)
Warranty accrual, beginning of period	$	3,052
Warranty provision relating to new sales		3,594
Costs incurred		(4,222	)

Warranty accrual, end of period	$	2,424

Note 8 — Segment Information

In accordance with the Segment Reporting Topic ASC 280, operating segments are identified 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, as defined under ASC 280, 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,
	2009		2008		2009		2008
	(in thousands)
United States	$	8,269	$	24,146	$	23,599	$	71,978
Europe		3,380		6,184		12,980		20,971
Asia / Pacific		4,225		5,216		11,418		12,723
Other		2,063		2,663		5,569		8,495

Total	$	17,937	$	38,209	$	53,566	$	114,167

Total assets by geographic area are as follows:


	September 30, 2009			December 31, 2008
	(in thousands)
United States	$	141,211		$	155,590
Europe		12,376			14,690
Asia / Pacific		7,406			4,539
Eliminations		(1,986	)		(1,697	)

Total	$	159,007		$	173,122

Long-lived assets by geographic area are as follows:


	September 30, 2009		December 31, 2008
	(in thousands)
United States	$	8,992	$	9,035
Europe		2,317		652
Asia / Pacific		1,677		1,384

Total	$	12,986	$	11,071

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

Cynosure Korea has long-lived assets of $1.4 million, or 11% of the Company’s total long-lived assets, as of September 30, 2009. These long-lived assets consist primarily of goodwill and intangibles associated with Cynosure’s acquisition of the aesthetic division of Orient MG in December 2008. Cynosure Spain has long-lived assets of $1.7 million, or 13% of the Company’s total long-lived assets, as of September 30, 2009. These long-lived assets consist primarily of demonstration equipment.

Note 9 — Net (Loss) Income Per Common Share

Basic net (loss) income per share was determined by dividing net (loss) income by the weighted average common shares outstanding during the period. Diluted net (loss) income per share was determined by dividing net (loss) income 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.

A reconciliation of basic and diluted shares is as follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2009	2008	2009	2008
	(in thousands)
Basic weighted average common shares outstanding	12,712	12,642	12,708	12,542
Potential common shares pursuant to stock options	—	212	—	264

Diluted weighted average common shares outstanding	12,712	12,854	12,708	12,806

During the nine months ended September 30, 2009 and 2008 approximately 1,043,000 and 742,000 shares, respectively, were excluded from the calculation of diluted weighted average common shares outstanding as the effect would have been anti-dilutive.

Note 10 — Comprehensive (Loss) Income

Comprehensive (loss) income 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, 2009 and December 31, 2008 are as follows:


	September 30, 2009			December 31, 2008
	(in thousands)
Unrealized gain on marketable securities, net of taxes	$	21		$	84
Cumulative translation adjustment		(1,255	)		(1,879	)

Total accumulated other comprehensive loss	$	(1,234	)	$	(1,795	)

The components of total comprehensive (loss) income for the three and nine month periods ended September 30, 2009 and 2008 are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
	(in thousands)
Cumulative translation adjustment	$	332		$	(919	)	$	624		$	(644	)
Unrealized (loss) on marketable securities		(12	)		(90	)		(63	)		(944	)

Total other comprehensive gain (loss)		320			(1,009	)		561			(1,588	)
Reported net (loss) income		(1,915	)		3,163			(8,260	)		12,692

Total comprehensive (loss) income	$	(1,595	)	$	2,154		$	(7,699	)	$	11,104

Note 11 — Litigation

In May 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. On February 6, 2008, several months after the close of discovery, the plaintiff served a motion for class certification, which Cynosure vigorously 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. The Company 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 the Company 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 on June 17, 2008. No decision on the motion has been rendered. Cynosure is not currently able to estimate the amount or range of loss that could result from an unfavorable outcome of this lawsuit.

On July 16, 2008, Cynosure commenced a declaratory judgment action in the U.S. District Court for the District of Massachusetts requesting a declaration that Dr. Weitzner’s and the putative class claims are covered under the Company’s general liability insurance policies. On August 11, 2008, Cynosure’s insurance company filed an Answer and Counterclaim against Cynosure seeking a declaration that the Company’s policy does not provide coverage for Dr. Weitzner’s claims. On August 19, 2008, Cynosure filed a reply to the Counterclaim. The insurance company filed a Motion for Summary Judgment on December 15, 2008, and Cynosure cross moved for Summary Judgment on January 15, 2009. The Court held a hearing on the motions on February 26, 2009, and on April 8, 2009 rendered a decision that Cynosure’s liability insurer is obligated to provide Cynosure with a defense to the Weitzner action and, if necessary, indemnify Cynosure for the putative class claims. Thereafter, Cynosure’s liability insurer filed a motion for reconsideration, which Cynosure opposed. The Court denied the insurer’s motion on May 13, 2009. Cynosure’s fee application is currently before the Court.

On January 9, 2008, Cynosure commenced a lawsuit in the U.S. District Court for the District of Massachusetts against CoolTouch Inc. (CoolTouch) for infringement of U.S. Patent No. 6,206,873, (the 873 patent). Cynosure’s complaint alleges that CoolTouch’s “CoolLipo” infringes on the 873 patent and seeks damages and injunctive relief. On January 31, 2008, CoolTouch answered Cynosure’s complaint, denying liability and alleging that the 873 patent is not infringed and is invalid. On March 3, 2009, Cynosure announced that the U.S. District Court for the District of Massachusetts had issued a favorable set of rulings in a Markman hearing in Cynosure’s patent infringement lawsuit against CoolTouch The lawsuit alleges that CoolTouch’s 1320 nm CoolLipo™ laser system infringes on the 873 patent, which relates to methods for liquefying and removing subcutaneous fat cells through the use of laser energy. The 873 patent is owned by the company’s largest shareholder, El.En. S.p.A. Cynosure is vigorously prosecuting its claims against CoolTouch.

The purpose of a Markman hearing is for the court to determine the meaning and scope of the patent claims that the plaintiff asserts are being infringed. In Cynosure’s lawsuit, the meaning of four terms used in the 873 patent was contested by CoolTouch. In each instance, the U.S. District Court ruled in favor of Cynosure regarding how those terms should be properly construed at trial.

In addition to the matters 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.

Note 12 — Related Party Transactions

As of September 30, 2009, 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, 2009 and 2008 were approximately $1.1 million and $3.9 million, respectively. Purchases of inventory from El.En. during the nine months ended September 30, 2009 and 2008 were approximately $3.4 million and $10.4 million, respectively. As of September 30, 2009 and December 31, 2008, amounts due to related party for these purchases were approximately $1.9 million and $6.1 million, respectively. Amounts due from El.En. as of September 30, 2009 and December 31, 2008 were $49,000 and $40,000, respectively, which represent services performed by Cynosure.

Note 13 — Income Taxes

Effective January 1, 2007, Cynosure adopted the provisions of the Income Tax Topic ASC 740. At September 30, 2009, 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. With few exceptions, Cynosure is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2006.

Note 14 — Stockholders’ Equity

Common Stock Authorized

Cynosure has a dual class capital structure consisting of $0.001 par value class A and class B common stock,. Cynosure has authorized 61,500,000 shares of $0.001 par value class A common stock and 8,500,000 shares of $0.001 par value class B common stock. As of September 30, 2009, there were 9,773,445 shares of class A common stock issued and 2,975,297 shares of class B common stock issued.

Note 15 — Subsequent Events

Management evaluated all other activity of Cynosure through November 5, 2009 (the issue date of the Financial Statements) and concluded that no other subsequent events have occurred that would require recognition in the Financial Statements or disclosure in the Notes to the Financial Statements for the period ended September 30, 2009.

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 in the cautionary statements included in our Annual Report on Form 10-K for the year ended December 31, 2008, particularly in Part I — 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.

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 13, 2009. 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 procedures to remove hair, treat vascular lesions, rejuvenate skin through the treatment of shallow vascular lesions and pigmented lesions, as well as multi-colored tattoos, temporarily reduce the appearance of cellulite, treat wrinkles, skin texture, skin discoloration and skin tightening, and to perform minimally invasive procedures for LaserBodySculpting^SM for the removal of unwanted fat. 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.

We sell 20 different aesthetic treatment systems and have focused our development and marketing efforts on offering leading, or flagship, products for each of the major aesthetic procedure categories that we address. Our flagship products are:

•

the Apogee Elite system for hair removal;

•

the Cynergy system for the treatment of vascular lesions;

•

the TriActive LaserDermology system for the temporary reduction of the appearance of cellulite;

•

the Affirm and SmartXide systems for anti-aging, including treatments for wrinkles, skin texture, skin discoloration and skin tightening

•

the Accolade system for the removal of benign pigmented lesions, including pigmented lesions known as Nevus of Ota and Nevus of Ito, as well as multi-colored tattoos; and

•

the Smartlipo, Smartlipo MPX and Smartlipo Triplex systems for LaserBodySculpting^SM for the removal of unwanted fat.

In addition to their primary applications, the Apogee Elite and Cynergy systems can each be used by practitioners for a variety of applications.

We have also launched several new products in 2009. In March 2009, we launched the Elite MPX system, a multi-wavelength workstation that combines vascular treatment, hair removal and skin rejuvenation in a single system. The workstation also features a built-in Zimmer SmartCool^® skin cooling system which is integrated into a single compact model saving office space and reducing treatment time.

Also in March 2009, we launched proprietary new energy delivery innovations for our Smartlipo MPX laser lipolysis workstations: SmartSense with ThermaGuide and ThermaView. SmartSense with ThermaGuide is equipped with a thermal sensing cannula for measuring temperatures in the subcutaneous areas of the body. This technology allows the thresholds to achieve targeted and controlled energy. The ThermaView thermal camera system measures skin temperatures within the treatment area in order to provide a homogeneous delivery of thermal energy.

In May 2009, we introduced the enhancement to the industry-leading Smartlipo Laser Lipolysis Workstation with increased energy and intelligent temperature sensing. This multi-wavelength Smartlipo MPX 46-watt workstation enables a physician to liquefy and remove larger areas of unwanted fat faster than the original 32-watt Smartlipo MPX system.

In September 2009, we introduced the Performa CO2 in our international markets. This LaserSkinRenewal™ workstation, with customizable scanning delivery, offers micro ablative CO2 skin resurfacing and collagen rejuvenation in a single laser device.

In October 2009, we introduced Smartlipo Triplex, a laser lipolysis workstation featuring three wavelengths that combine to deliver high-powered fat absorption and tissue tightening through tissue coagulation. Smarlipo Triplex adds a 1440 nm wavelength to the MPX generation of the product, and employs our patented Multiplex technology to combine the benefits of multiple wavelengths in a single laser output.

We generate revenues primarily from sales of our products and parts and accessories and, to a lesser extent, from services, including product warranty revenues. During the nine months ended September 30, 2009, we derived approximately 90% of our revenues from sales of our products and 10% of our revenues from service. During the nine months ended September 30, 2008, we derived approximately 96% of our revenues from sales of our products and 4% of our revenues from service. 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, four European countries, Japan, China and Korea 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, 2009, and 2008 we derived 52% and 32% of our revenues, respectively, from sales outside North America. As of September 30, 2009, we had 39 sales employees covering North America, 41 sales employees in four European countries, Japan, China and Korea and 28 distributors covering 71 countries.

The following table provides revenue data by geographical region for the nine months ended September 30, 2009 and 2008:


	Percentage of Revenues
	Nine-Months Ended September 30,
Region	2009		2008
North America	48	%	68	%
Europe	24		18
Asia/Pacific	21		11
Other	7		3

Total	100	%	100	%

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, 2009 AND 2008

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, 2009 and 2008, respectively (in thousands, except for percentages):


	Three Months Ended September 30,
	2009					2008
	Amount			As a % of Total Revenues		Amount			As a % of Total Revenues		$ Change			% Change
Revenues	$	17,937		100	%	$	38,209		100	%	$	(20,272	)	(53	)%
Cost of revenues		7,460		42			13,396		35			(5,936	)	(44	)

Gross profit		10,477		58			24,813		65			(14,336	)	(58	)
Operating expenses
Sales and marketing		8,743		49			13,911		36			(5,168	)	(37	)
Research and development		1,564		9			1,992		5			(428	)	(21	)
General and administrative		3,511		20			3,983		10			(472	)	(12	)

Total operating expenses		13,818		77			19,886		52			(6,068	)	(31	)

(Loss) income from operations		(3,341	)	(19	)		4,927		13			(8,268	)	(168	)
Interest income, net		83		1			549		1			(466	)	(85	)
Other income (expense), net		371		2			(425	)	(1	)		796		(187	)

(Loss) income before (benefit) provision for income taxes		(2,887	)	(16	)		5,051		13			(7,938	)	(157	)
(Benefit) provision for income taxes		(972	)	(5	)		1,888		5			(2,860	)	(151	)

Net (loss) income	$	(1,915	)	(11	)	$	3,163		8	%	$	(5,078	)	(161	)%

Revenues

Revenues in the three months ended September 30, 2009 decreased from the three months ended September 30, 2008 by $20.3 million, or 53%. The decrease was attributable to a number of factors (in thousands, except for percentages):


	Three Months Ended September 30,				$			%
	2009		2008		Change			Change
Product sales in North America	$	7,470	$	24,152	$	(16,682	)	(69	)%
Product sales outside North America		6,209		10,015		(3,806	)	(38	)
Global Parts, accessories and service sales		4,258		4,042		216		5

Total Revenues	$	17,937	$	38,209	$	(20,272	)	(53	)%

•

Revenues from the sale of products in North America decreased by approximately $16.7 million, or 69%, from the 2008 period, primarily due to a decrease in the number of product units sold which we attribute to adverse general business conditions. 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. During the third quarter of 2009, credit was more difficult to obtain and our potential customers were not as able to expand their practices or commit to purchasing equipment from us as compared to the third quarter of 2008. Additionally, we believe that due to the uncertain and adverse business conditions, some of our customers and potential customers anticipated a decline in the number of patients seeking discretionary aesthetic laser treatments and therefore, decided not to purchase during the quarter. We believe that the availability of credit remains limited and demand for discretionary aesthetic laser treatments remains uncertain and as a result, our revenues may continue to be adversely affected.

•

Revenues from sales of products outside of North America decreased by approximately $3.8 million, or 38%, from the 2008 period, due to a decrease in the number of units sold by our Asia distributors and our European subsidiaries which we attribute to the adverse global business conditions. This decrease was partially offset by an increase in product units sold at our subsidiaries in Asia, including our recently established subsidiary in Korea.

•

Revenues from the global sale of parts, accessories and services increased $0.2 million, or 5%, from the 2008 period, which includes an increase in revenues generated from the sale of our service contracts.

Cost of Revenues


	Three Months Ended September 30,						$			%
	2009			2008			Change			Change
Cost of revenues (in thousands)	$	7,460		$	13,396		$	(5,936	)	(44	)%
Cost of revenues (as a percentage of total revenues)		42	%		35	%

The decrease in the cost of revenues was primarily attributable to a 53% decrease in revenues for the three months ended September 30, 2009 as compared with the three months ended September 30, 2008. Our cost of revenues increased as a percentage of revenues to 42% for the three months ended September 30, 2009, from 35% for the three months ended September 30, 2008, resulting in a decrease in our gross margin of 11%, quarter over quarter. The decline in gross margin in the third quarter of 2009 as compared to the third quarter of 2008 was primarily a result of the higher percentage of laser revenue from international distribution where our products tend to have lower sales prices than in North America.

Sales and Marketing


	Three Months Ended September 30,						$			%
	2009			2008			Change			Change
Sales and marketing (in thousands)	$	8,743		$	13,911		$	(5,168	)	(37	)%
Sales and marketing (as a percentage of total revenues)		49	%		36	%

Sales and marketing expenses decreased by $5.2 million, or 37%. The decrease is primarily attributed to a $1.7 million reduction in commission expense associated with the 60% decrease in laser revenue, as well as a decrease of $2.8 million in personnel costs, travel expenses and other administrative costs associated with the overall reduction of our worldwide direct sales organization and a decrease in promotional costs of $0.7 million, primarily due to a decreased number of clinical workshops, trade shows and other promotional efforts. Although we reduced sales and marketing expenses in the three months ended September 30, 2009, as compared to the three months ended September 30, 2008, our sales and marketing expenses for the three months ended September 30, 2009 increased as a percentage of total revenues to 49% as a result of the 53% decrease in total revenues.

Research and Development


	Three Months Ended September 30,						$			%
	2009			2008			Change			Change
Research and development (in thousands)	$	1,564		$	1,992		$	(428	)	(22	)%
Research and development (as a percentage of total revenues)		9	%		5	%

Research and development expenses decreased by $0.4 million for the three months ended September 30, 2009, when compared with the three months ended September 30, 2008 due to a reduction in professional services of $0.4 million.

General and Administrative


	Three Months Ended September 30,						$			%
	2009			2008			Change			Change
General and administrative (in thousands)	$	3,511		$	3,983		$	(472	)	(12	)%
General and administrative (as a percentage of total revenues)		20	%		10	%

General and administrative expenses decreased by $0.5 million primarily due to a decrease in legal and professional services costs of $0.3 million, a decrease in stock compensation expense of $0.3 million and a $0.5 million decrease in personnel costs, travel

expenses and other administrative costs related to the reduction in workforce. The overall decrease was partially offset by an increase to bad debt expense of $0.6 million.

Interest Income, net and Other Income (Expense), net


	Three Months Ended September 30,					$			%
	2009		2008			Change			Change
Interest income, net (in thousands)	$	83	$	549		$	(466	)	(85	)%
Other income (expense), net (in thousands)	$	371	$	(425	)	$	796		(187	)%

The decrease in interest income is primarily due to investing in securities that carry less risk as opposed to a maximum return from the three month period ending September 30, 2009; as compared to the three month period ended September 30, 2008. The increase in other income and (expense), net is primarily a result of net foreign currency remeasurement gains in the third quarter of 2009 compared to net foreign currency remeasurement losses in the third quarter of 2008, as well as a $51,000 net recovery on auction rate securities, or ARS.

(Benefit) Provision for Income Taxes


	Three Months Ended September 30,						$			%
	2009			2008			Change			Change
(Benefit) provision for income taxes (in thousands)	$	(972	)	$	1,888		$	(2,860	)	(151	)%
(Benefit) provision as a % of income before (benefit) provision for income taxes		(34	)%		37	%

For the three months ended September 30, 2009, we recorded a pre-tax book loss and a benefit for income taxes as compared to pre-tax book income and a provision for income taxes for the three months ended September 30, 2008. The effective tax rates for the three months ended September 30, 2009 and 2008 were 34% and 37%, respectively. The decrease in the benefit as a percentage of income before benefit for income taxes is primarily due to changes in the jurisdictional mix of earnings and the impact of the R&D credit included in the three months ended September 30, 2009.

NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

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, 2009 and 2008, respectively (in thousands, except for percentages):


	Nine Months Ended September 30,
	2009					2008
	Amount			As a % of Total Revenues		Amount		As a % of Total Revenues		$ Change			% Change
Revenues	$	53,566		100	%	$	114,167	100	%	$	(60,601	)	(53	)%
Cost of revenues		21,997		41			38,645	34			(16,648	)	(43	)

Gross profit		31,569		59			75,522	66			(43,953	)	(58	)
Operating expenses
Sales and marketing		29,696		55			41,190	36			(11,494	)	(28	)
Research and development		5,001		9			5,606	5			(605	)	(11	)
General and administrative		11,440		21			11,108	10			332		3

Total operating expenses		46,137		86			57,904	51			(11,767	)	(20	)

(Loss) income from operations		(14,568	)	(27	)		17,618	15			(32,187	)	(183	)
Interest income, net		454		1			1,977	2			(1,523	)	(77	)
Other income, net		705		1			9	—			696		7,733

(Loss) income before (benefit) provision for income taxes		(13,409	)	(25	)		19,604	17			(33,013	)	(168	)
(Benefit) provision for income taxes		(5,149	)	(10	)		6,912	6			(12,061	)	(174	)

Net (loss) income	$	(8,260	)	(15	)%	$	12,692	11	%	$	(20,952	)	(165	)%

Revenues

Revenues in the nine months ended September 30, 2009 decreased from revenues in the nine months ended September 30, 2008 by $60.6 million, or 53%. The decrease in revenues was attributable to a number of factors (in thousands, except for percentages):


	Nine Months Ended September 30,				$ Change			% Change
	2009		2008		$ Change			% Change
Product sales in North America	$	21,814	$	72,220	$	(50,406	)	(70	)%
Product sales outside North America		19,259		29,886		(10,627	)	(36	)
Global Parts, accessories and service sales		12,493		12,061		432		4

Total Revenues	$	53,566	$	114,167	$	(60,601	)	(53	)%

•

Revenues from the sale of products in North America decreased by approximately $50.4 million, or 70%, from the 2008 period, primarily due to a decrease in the number of product 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. During the nine months ended September 30, 2009, credit was more difficult to obtain and our potential customers were not as able to expand their practices or commit to purchasing equipment from us as compared to the nine months ended September 30, 2008. Additionally, we believe that due to the uncertain and adverse business conditions, some of our customers and potential customers anticipated a decline in the number of patients seeking discretionary aesthetic laser treatments and therefore, decided not to purchase during the quarter. We believe that the availability of credit remains limited and demand for discretionary aesthetic laser treatments remains uncertain and as a result, our revenues may continue to be adversely affected.

•

Revenues from sales of products outside of North America decreased by approximately $10.6 million, or 36%, over the 2008 period, due to a decrease in the number of units sold.

•

Revenues from the global sale of parts, accessories and services increased by approximately $0.4 million, or 4%, over the 2008 period, primarily due to an increase in revenues generated from the sale of our service contracts, offset by a decrease in revenue sharing generated by our European subsidiaries.

Cost of Revenues


	Nine Months Ended September 30,						$ Change			% Change
	2009			2008			$ Change			% Change
Cost of revenues (in thousands)	$	21,997		$	38,645		$	(16,648	)	(43	)%
Cost of revenues (as a percentage of total revenues)		41	%		34	%

The decrease in the cost of revenues was primarily attributable to a 53% decrease in revenues for the nine months ended September 30, 2009 as compared with the nine months ended September 30, 2008. Our cost of revenues increased as a percentage of revenues to 41% for the nine months ended September 30, 2009, from 34% for the nine months ended September 30, 2008, resulting in a decrease in our gross margin of 11%, period over period. The decline in gross margin in the 2009 period as compared to the 2008 period was primarily a result of the higher percentage of laser revenue from international distribution where the company’s products tend to have lower sales prices than North America.

Sales and Marketing


	Nine Months Ended September 30,						$ Change			% Change
	2009			2008			$ Change			% Change
Sales and marketing (in thousands)	$	29,696		$	41,190		$	(11,494	)	(28	)%
Sales and marketing (as a percentage of total revenues)		55	%		36	%

Sales and marketing expenses decreased by $11.5 million, or 28%. The decrease is primarily attributed to a $4.8 million reduction in commission expense associated with the 60% decrease in laser revenue, as well as a decrease of $5.2 million in personnel costs, travel expenses and other administrative costs associated with the overall reduction of our worldwide direct sales organization and a decrease in promotional costs of $1.5 million, primarily due to a decreased number of clinical workshops, trade shows and other promotional efforts. Although we reduced sales and marketing expenses in the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008, our sales and marketing expenses for the nine months ended September 30, 2009 increased as a percentage of total revenues to 55% as a result of the 53% decrease in total revenues.

Research and Development


	Nine Months Ended September 30,						$ Change			% Change
	2009			2008			$ Change			% Change
Research and development (in thousands)	$	5,001		$	5,606		$	(605	)	(11	)%
Research and development (as a percentage of total revenues)		9	%		5	%

Research and development expenses decreased by $0.6 million for the nine months ended September 30, 2009, when compared with the nine months ended September 30, 2008 due to a reduction in professional services of $0.4 million and a reduction in personnel and other travel related expenses of $0.2 million associated with the overall reduction of our workforce.

General and Administrative


	Nine Months Ended September 30,						$ Change		% Change
	2009			2008			$ Change		% Change
General and administrative (in thousands)	$	11,440		$	11,108		$	332	3	%
General and administrative (as a percentage of total revenues)		21	%		10	%

General and administrative expenses increased by $0.3 million primarily due to an increase in bad debt expense of $1.5 million and an increase in legal and professional services costs of $0.3 million. The overall increase was partially offset by a $1.2 million reduction in personnel costs, travel related expenses and other administrative costs associated with the overall reduction of our workforce as well as reduced stock compensation expense of $0.3 million.

Interest Income, net and Other Income, net


	Nine Months Ended September 30,				$ Change			% Change
	2009		2008		$ Change			% Change
Interest income, net (in thousands)	$	454	$	1,977	$	(1,523	)	(77	)%
Other income, net (in thousands)	$	705	$	9	$	696		7733	%

The decrease in interest income is primarily due to investing in securities that carry less risk as opposed to a maximum return from the nine month period ending September 30, 2009; as compared to the nine month period ended September 30, 2008. The increase in other income is primarily a result of more net foreign currency remeasurement gains in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.

Provision for Income Taxes


	Nine Months Ended September 30,						$ Change		% Change
	2009			2008			$ Change		% Change
(Benefit) provision for income taxes (in thousands)	$	(5,149	)	$	6,912		$	12,061	175	%
(Benefit) provision as a % of income before (benefit) provision for income taxes		(38	)%		35	%

For the nine months ended September 30, 2009, we recorded a pre-tax book loss and a benefit for income taxes as compared to pre-tax book income and a provision for income taxes for the nine months ended September 30, 2008. The effective tax rates for the nine months ended September 30, 2009 and 2008 were 38% and 35%, respectively. The increase in the benefit as a percentage of income before benefit for income taxes is primarily due to changes in the jurisdictional mix of earnings and the impact of the R&D credit included in the nine months ended September 30, 2009.

Liquidity and Capital Resources

We require cash to pay our operating expenses, make capital expenditures and pay our short and long-term liabilities. Since our inception, we have funded our operations through private and public placements of equity securities, short-term borrowings and funds generated from our operations. At September 30, 2009, our cash, cash equivalents, short and long-term marketable securities, short-term investments and related financial instruments were $90.5 million. Our cash and cash equivalents of $47.5 million are highly liquid investments with maturity of 90 days or less at date of purchase and consist of investments in money market funds with commercial banks and financial institutions backed by U.S. treasuries or government obligations. Our short and long-term marketable securities of $24.5 million consist of investments in various state and municipal government obligations, bonds and corporate and U.S. government agencies and treasuries, all of which mature by May 31, 2011. Our short-term investments and related financial instruments, which include ARS with a fair market value of $16.9 and a related Right with a fair market value of $1.7 million, consist primarily of tax exempt certificates with an auction reset feature, with underlying assets consisting generally of student loans, substantially backed by the federal government.

In February 2008, auctions began to fail for auction rate securities and each auction since then has failed, with one exception. During the year ended December 31, 2008, certain investments in ARS were successfully called at full par value and we received cash proceeds of approximately $8.2 million. During the nine months ended September 30, 2009, we received an additional $2.5 million in cash proceeds related to certain investments in ARS that were successfully called at full par value.

On November 3, 2008, we agreed to accept Auction Rate Security Rights, or Rights, from UBS Financial Services Inc., or UBS. The Rights permit us to sell, or put, our auction rate securities back to UBS at par value at any time during the period from June 30, 2010 through July 2, 2012. We expect to exercise these Rights and put our auction rate securities back to UBS on June 30, 2010, the earliest date allowable under the Rights; therefore, we have reclassified our ARS and associated Rights to short-term investments and other related financial instruments as of September 30, 2009. These Rights are nontransferable securities registered with the Securities and Exchange Commission, or the SEC. As a result of accepting the Rights, we have released UBS and its employees/agents from all claims except claims for consequential damages directly or indirectly relating to UBS’s marketing and sale of ARS and agreed not to serve as a class representative or receive benefits under any class action settlement or investor fund.

During the fourth quarter of 2008, we transferred the ARS investments, at their fair value of $16.8 million, from available-for-sale to trading marketable securities, as elected under the Debt and Equity Securities Topic ASC 320. We recognized an other-than-temporary impairment charge of approximately $4.3 million, which is based on the $16.8 million fair value of the ARS using a discounted cash flow methodology. We recorded the $4.3 million charge in other income (expense) in the consolidated statement of operations for the year ended December 31, 2008, for the amount of unrealized loss not previously recognized in earnings. Upon

acceptance of the Rights, on November 3, 2008, we elected to measure the Rights under the provisions of the Fair Value Option Topic ASC 825 and to recognize future changes in the fair value of the Rights as they occur in operations in order to offset the fair value movements of the ARS, which would create accounting symmetry with changes in the fair value of the ARS. As of December 31, 2008, we recorded approximately $4.3 million as the fair value of the Rights, using a discounted cash flow methodology and classified the Rights as long-term investments and related financial instruments on the consolidated balance sheet, with a corresponding credit to other income (expense) in the consolidated statement of operations for the year ended December 31, 2008. As a result of the illiquidity in the market for ARS investments, we have estimated the fair value of our ARS and the Rights using a Level 3 valuation methodology. During the nine months ended September 30, 2009, we recorded a loss in the fair value of the Rights of $2.6 million in loss on investment and recorded an offsetting gain of $2.6 million for the value of the ARS within other income (expense) in the statement of operations. We anticipate that any future changes in the fair value of the ARS will be mostly offset by the changes in the fair value of the related Rights, both of which will be adjusted to their estimated fair value on an ongoing basis.

Based on our expectations for future operating cash flows and our other sources of cash, we do not anticipate the current lack of short-term liquidity on these investments will affect our ability to execute our current business plan.

The disruptions in the financial and credit markets over the past 12 months have also reduced access to cash by our customers and potential customers. If the capital spending of our customers or potential customers continues to decrease, demand for our products would likely be adversely affected and our revenue will continue to decline. Challenging economic and credit conditions also may impair the ability of our customers to pay for our products and services for which they have contracted. While we continue to complete appropriate credit reviews of our customers prior to shipment of product and revenue recognition, we may be required to write off accounts receivable that become uncollectible.

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. Due to certain capital expenditures incurred during the year ended December 31, 2008, including the expansion of our corporate headquarters facility and the implementation of a new financial software system, we expect that capital expenditures during the 12 months ending December 31, 2009 will be less than our capital expenditures during the 12 months ended December 31, 2008. During the nine months ended September 30, 2009 and 2008, respectively, we transferred $5.4 million and $3.1 million of demonstration equipment to fixed assets.

On July 28, 2009, we announced that 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. During the three months ended September 30, 2009, we did not repurchase any common stock under this program.

We believe that our current cash, cash equivalents and short and long-term 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 $3.3 million for the nine months ended September 30, 2009. This resulted primarily from net loss for the period of $8.3 million, decreased by approximately $9.1 million in depreciation and amortization and stock-based compensation expense and decreased by approximately $0.2 million in accretion of discounts on marketable securities. Net changes in working capital items decreased cash from operating activities by approximately $4.4 million principally related to a decrease in accounts receivable of $10.5 million due to increased collection efforts and reduced sales. This was offset by an increase in prepaid expenses and other assets related to our tax benefit position, and a decrease in amounts due to related party, accrued expenses and accounts payable. Net cash provided by investing activities was $2.0 million for the nine months ended September 30, 2009, which consisted primarily of the net proceeds of $2.8 million from the sale and maturities of marketable securities, offset by purchases of marketable securities, and partially offset by $0.6 million used for fixed asset purchases. Net cash used in financing activities during the nine months ended September 30, 2009 was $0.3 million, principally relating to payments on capital lease obligations.

Net cash provided by operating activities was $7.5 million for the nine months ended September 30, 2008. This resulted primarily from net income for the period of $12.7 million, increased by approximately $8.8 million in depreciation and amortization and stock-based compensation expense and increased by approximately $0.2 million in accretion of discounts on marketable securities. Net changes in working capital items decreased cash from operating activities by approximately $14.2 million principally related to an increase in accounts receivable due to an increase in sales, particularly in the last month of the quarter as the result of our introduction of the Smartlipo MPX systems, and an increase in inventory for anticipated future sales, offset by an increase in accounts payable and deferred revenue. Net cash provided by investing activities was $1.7 million for the nine months ended September 30, 2008, which consisted primarily of the net proceeds of $3.4 million from the sales and maturities of marketable securities, offset by purchases of marketable securities, and partially offset by $1.8 million used for fixed asset purchases. Net cash provided by financing

activities during the nine months ended September 30, 2008 was $2.8 million, principally relating to proceeds from stock option exercises and related tax benefits.

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 further 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, 2008. There have been no other material changes to our critical accounting policies as of September 30, 2009.

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 government obligations, some of which are auction rate securities, US government sponsored agency notes and treasuries, and corporate bonds. The securities, other than money market funds and auction rate securities 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, other than auction rate securities, mature by May 31, 2011. 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.


	September 30, 2009			2009			2010			2011
Investments (at fair value)	$	24,459		$	5,032		$	17,422		$	2,005

Weighted average interest rate		0.86	%		1.08	%		0.80	%		0.79	%

We hold investments in auction rate securities with underlying assets that generally consist of student loans, which are substantially backed by the federal government. In February 2008, auctions began to fail for these securities and each auction since then has failed, with one exception. To date we have collected all interest receivable on outstanding ARS when due and expect to continue to do so in the future. During the nine months ended September 30, 2009, certain investments in ARS were successfully called at full par value and we received cash proceeds of approximately $2.5 million.

During the nine months ended September 30, 2009, we adjusted the carrying amount of our ARS to estimated fair market value in accordance with the Fair Value Measurements Topic ASC 820. If uncertainties in the credit and capital markets continue and these markets deteriorate further or we experience any additional rating downgrades on any investments in the portfolio, we may incur further other-than-temporary impairments, which could negatively affect our financial condition, cash flow and reported earnings.

As discussed further in “Liquidity and Capital Resources” above, in November 2008 we agreed to accept Auction Rate Security Rights, or Rights, from UBS Financial Services Inc., or UBS, which permit us to sell, or put, our auction rate securities back to UBS at par value at any time during the period from June 30, 2010 and July 2, 2012. Associated with the Rights, we classified $16.8 million of our ARS from available-for-sale securities to trading securities as of December 31, 2008. For the nine month period ended September 30, 2009, we measured the value of the ARS under ASC 820 at $16.9 million and we recognized a recovery of $2.6 million in gain on investment. We measured the value of the Rights under ASC 825 and recorded an offsetting loss of $2.6 million within other income (expense) in the statement of operations for the nine month period ended September 30, 2009. We expect that the future changes in the fair value of the ARS will be mostly offset by the fair value movements in the related Rights.

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 36% of our total international revenues during the nine months ended September 30, 2009. Substantially all of the remaining 64% 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. Therefore, we believe that the potential loss that would result from an increase or decrease in the exchange rate is immaterial to our business and net assets.

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, 2009. 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, 2009, 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, 2009 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 May 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 vigorously 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 on June 17, 2008. No decision on the motion has been rendered. We are not currently able to estimate the amount or range of loss that could result from an unfavorable outcome of this lawsuit.

On July 16, 2008, we commenced a declaratory judgment action in the U.S. District Court for the District of Massachusetts requesting a declaration that Dr. Weitzner’s and the putative class claims are covered under our general liability insurance policies. On August 11, 2008, our insurance company filed an Answer and Counterclaim against us seeking a declaration that our policy does not provide coverage for Dr. Weitzner’s claims. On August 19, 2008, we filed a reply to the Counterclaim. The insurance company filed a Motion for Summary Judgment on December 15, 2008, and we cross moved for Summary Judgment on January 15, 2009. The Court held a hearing on the motions on February 26, 2009, and on April 8, 2009 rendered a decision that our liability insurer is obligated to provide us with a defense to the Weitzner action and, if necessary, indemnify us for the putative class claims. Thereafter, our liability insurer filed a motion for reconsideration, which we opposed. The Court denied the insurer’s motion on May 13, 2009. Our fee application is currently before the Court.

On January 9, 2008, we commenced a lawsuit in the U.S. District Court for the District of Massachusetts against CoolTouch Inc., or CoolTouch, for infringement of U.S. Patent No. 6,206,873, or the 873 patent. Our complaint alleges that CoolTouch’s “CoolLipo” infringes on the 873 patent and seeks damages and injunctive relief. On January 31, 2008, CoolTouch answered our complaint, denying liability and alleging that the 873 patent is not infringed and is invalid On March 3, 2009, we announced that the U.S. District Court for the District of Massachusetts had issued a favorable set of rulings in a Markman hearing in our patent infringement lawsuit against CoolTouch. The lawsuit alleges that CoolTouch’s 1320 nm CoolLipo™ laser system infringes on the 873 patent, which relates to methods for liquefying and removing subcutaneous fat cells through the use of laser energy. The 873 patent is owned by the company’s largest shareholder, El.En. S.p.A. We are vigorously prosecuting our claims against CoolTouch.

In addition to the matters 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, 2008 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.

As of September 30, 2009, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, although we may disclose 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

None.

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

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 5, 2009	By:	/S/ MICHAEL R. DAVIN
		Michael R. Davin
		Chairman, President, Chief Executive Officer

Date: November 5, 2009	By:	/S/ TIMOTHY W. BAKER
		Timothy W. Baker
		Executive Vice President, Chief Financial Officer and Treasurer

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company