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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 March 31, 2010

OR

 

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

For the transition period from              to             

Commission File Number 000-51623

 

 

Cynosure, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		04-3125110
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
5 Carlisle Road Westford, MA		01886
(Address of principal executive offices)		(Zip code)

(978) 256-4200

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

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

The number of shares outstanding of each of the registrant’s classes of common stock, as of May 3, 2010:

 

Class		Number of Shares
Class A Common Stock, $0.001 par value		9,769,079
Class B Common Stock, $0.001 par value		2,939,161

 

 

 

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Table of Contents

Cynosure, Inc.

Table of Contents

 

				Page No.
PART I		Financial Information
Item 1.		Financial Statements (Unaudited)
		Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009		1
		Consolidated Statements of Operations for the Three Month Periods Ended March 31, 2010 and 2009		2
		Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2010 and 2009		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		18
Item 4.		Controls and Procedures		18
PART II		Other Information
Item 1.		Legal Proceedings		20
Item 1A.		Risk Factors		20
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		21
Item 6.		Exhibits		22
SIGNATURES				23
EXHIBIT INDEX				24
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

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Cynosure, Inc.

Consolidated Balance Sheets

(in thousands)

 

		(Unaudited) March 31, 2010				December 31, 2009
Assets
Current assets:
Cash and cash equivalents (Note 4)		$	35,742			$	44,797
Short-term marketable securities (Notes 4 and 5)			38,381				23,708
Short-term investments and related financial instruments (Notes 4 and 5)			14,599				18,454
Accounts receivable, net			11,236				11,773
Inventories			20,637				21,815
Prepaid expenses and other current assets			6,384				6,441
Deferred income taxes			368				160
Total current assets			127,347				127,148
Property and equipment, net			10,010				10,567
Long-term marketable securities (Notes 4 and 5)			3,013				5,008
Other assets			2,285				2,510
Total assets		$	142,655			$	145,233
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	4,411			$	4,822
Amounts due to related party (Note 11)			1,931				1,350
Accrued expenses			9,382				9,535
Deferred revenue			4,096				4,269
Capital lease obligation			233				264
Total current liabilities			20,053				20,240
Capital lease obligation, net of current portion			122				171
Deferred revenue, net of current portion			595				620
Other noncurrent liability			349				372
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.001 par value
Authorized — 5,000 shares
Issued — none			—				—
Class A and Class B common stock, $0.001 par value
Authorized — 70,000 shares
Issued — 9,780 Class A shares and 2,975 Class B shares at March 31, 2010; Issued— 9,775 Class A shares and 2,975 Class B shares at December 31, 2009, respectively			13				13
Additional paid-in capital			119,066				117,814
Retained earnings			4,961				7,773
Accumulated other comprehensive loss			(2,109	)			(1,451	)
Treasury stock, 11 Class A shares and 36 Class B shares at March 31, 2010, at cost; 3 Class A shares and 36 Class B shares at December 31, 2009, at cost			(395	)			(319	)
Total stockholders’ equity			121,536				123,830
Total liabilities and stockholders’ equity		$	142,655			$	145,233

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

 

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Cynosure, Inc.

Consolidated Statements of Operations

(Unaudited, in thousands, except per share data)

 

		Three Months Ended March 31,
		2010				2009
Product revenues		$	14,221			$	10,902
Parts, accessories and service revenues			4,672				3,914
Total revenues			18,893				14,816
Cost of revenues			8,093				5,800
Gross profit			10,800				9,016
Operating expenses:
Sales and marketing			8,402				10,530
Research and development			1,707				1,741
General and administrative			3,233				3,880
Total operating expenses			13,342				16,151
Loss from operations			(2,542	)			(7,135	)
Interest income, net			53				265
Other expense, net			(151	)			(56	)
Loss before provision (benefit) for income taxes			(2,640	)			(6,926	)
Provision (benefit) for income taxes			172				(2,905	)
Net loss		$	(2,812	)		$	(4,021	)
Basic net loss per share		$	(0.22	)		$	(0.32	)
Diluted net loss per share		$	(0.22	)		$	(0.32	)
Basic weighted average common shares outstanding			12,711				12,701
Diluted weighted average common shares outstanding			12,711				12,701

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

 

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Cynosure, Inc.

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

		Three Months Ended March 31,
		2010				2009
Operating activities:
Net loss		$	(2,812	)		$	(4,021	)
Reconciliation of net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			1,479				1,129
(Gain) loss on investments			(20	)			74
Stock-based compensation expense			1,220				1,825
Gain on disposal of fixed assets			(13	)			—
Accretion of discounts on marketable securities			216				47
Changes in operating assets and liabilities:
Accounts receivable			256				6,977
Inventories			(334	)			(1,404	)
Net book value of demonstration inventory sold			208				49
Prepaid expenses and other current assets			10				(2,763	)
Accounts payable			(374	)			(1	)
Due to related party			590				(2,924	)
Tax benefit from stock option exercises			—				(3	)
Accrued expenses			(33	)			(5,073	)
Deferred revenue			(161	)			214
Other noncurrent liability			(1	)			(5	)
Net cash provided by (used in) operating activities			231				(5,879	)
Investing activities:
Purchases of property and equipment			(99	)			(363	)
Proceeds from the sales and maturities of marketable securities			14,375				13,909
Purchases of marketable securities			(23,400	)			(11,276	)
Increase in other noncurrent assets			(35	)			(216	)
Net cash (used in) provided by investing activities			(9,159	)			2,054
Financing activities:
Excess tax benefit on options exercised			—				3
Repurchases of common stock			(76	)			—
Proceeds from stock option exercises			38				37
Payments on capital lease obligation			(65	)			(108	)
Net cash used in financing activities			(103	)			(68	)
Effect of exchange rate changes on cash and cash equivalents			(24	)			61
Net decrease in cash and cash equivalents			(9,055	)			(3,832	)
Cash and cash equivalents, beginning of the period			44,797				49,257
Cash and cash equivalents, end of the period		$	35,742			$	45,425
Supplemental cash flow information
Cash paid for interest		$	13			$	24
Cash paid for income taxes		$	73			$	49
Supplemental noncash investing and financing activities
Transfer of demonstration equipment from inventory to fixed assets		$	1,152			$	1,405
Net unrealized (loss) gain on marketable securities, net of $(1) and $5 deferred income tax (benefit) provision		$	(1	)		$	8

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

 

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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, 2009. 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 months ended March 31, 2010 may not be indicative of the results that may be expected for the year ending December 31, 2010, or any other period.

Note 2 — Stock-Based Compensation

Cynosure recorded stock-based compensation expense of $1.2 million and $1.8 million for the three months ended March 31, 2010 and 2009, respectively. Cynosure capitalized $47,000 and $71,000 of stock-based compensation expense as part of inventory during the three months ended March 31, 2010 and 2009, respectively.

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

 

		Three Months Ended March 31,
		2010			2009
		(In thousands)
Cost of revenues		$	86		$	121
Sales and marketing			579			787
Research and development			178			269
General and administrative			377			648
Total stock-based compensation expense		$	1,220		$	1,825

Cash received from option exercises was $38,000 and $37,000 during the three months ended March 31, 2010 and 2009, respectively. Cynosure had no actual tax benefits recognized during the three months ended March 31, 2010 and $11,000 in actual tax benefits recognized during the three months ended March 31, 2009. 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 354,500 and 376,000 stock options during the three months ended March 31, 2010 and 2009, respectively. Cynosure has elected to use the Black-Scholes model to determine the weighted average fair value of options, rather than a binomial model. The weighted average fair value of the options granted during the three months ended March 31, 2010 and 2009 was $5.63 and $4.44, respectively, using the following assumptions:

 

		Three Months Ended March 31,
		2010			2009
Risk-free interest rate		2.33	%		1.87	%
Expected dividend yield		—			—
Expected term		5.8 years			5.8 years
Expected volatility		59	%		63	%
Estimated forfeiture rate		5	%		5	%

Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Cynosure’s estimated expected stock price volatility is based on its own historical volatility. Cynosure’s expected term of options granted in the three months ended March 31, 2010 and 2009 was derived from the short-cut method. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield of zero is based on the fact that Cynosure has never paid cash dividends and has no present intention to pay cash dividends.

 

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Cynosure, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Note 3 — Inventories

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

 

		March 31, 2010			December 31, 2009
		(in thousands)
Raw materials		$	3,180		$	3,700
Work in process			1,213			1,302
Finished goods			16,244			16,813
		$	20,637		$	21,815

Note 4 — Fair Value

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

 

•

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

 

•

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

 

•

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

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. Auctions have failed for these securities since 2008, however, 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, 2009, certain investments in ARS were successfully called at full par value and Cynosure received cash proceeds of approximately $2.7 million. During the three months ended March 31, 2010, an additional $3.9 million in cash proceeds related to certain investments in ARS were successfully called at full par value. To date, during the second quarter of 2010, Cynosure received an additional $2.7 million in cash proceeds related to certain investments in ARS that were successfully called at full par value.

As of March 31, 2010 and December 31, 2009, Cynosure held $14.6 million and $18.5 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.

During the fourth quarter of 2008, 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 year ended December 31, 2009, Cynosure recorded a recovery in the fair value of the ARS of $2.9 million and an offsetting loss of $2.9 million for the value of the Rights. During the three months ended March 31, 2010, Cynosure recorded a recovery in the fair value of the ARS of $1.2 million and an offsetting loss of $1.2 million for the value of the Rights. These amounts have been recorded within other income (expense) in the statement of operations. 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 until settlement.

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 2% to 37% with a weighted average discount across the portfolio of 6%. 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 March 31, 2010. These assumptions are volatile and subject to change as the underlying sources of these assumptions and market conditions change.

 

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Cynosure, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

The following table represents Cynosure’s fair value hierarchy for its financial assets (cash equivalents, marketable securities, short-term investments and related financial instruments) measured at fair value as of March 31, 2010 (in thousands):

 

		Level 1			Level 2			Level 3			Total
Money market funds (1)		$	19,308		$	—		$	—		$	19,308
State and municipal bonds (2)			—			20,630			—			20,630
US government sponsored enterprises			—			22,371			—			22,371
Equity securities			14			—			—			14
Auction rate securities			—			—			13,723			13,723
Auction rate securities rights			—			—			876			876
Total		$	19,322		$	43,001		$	14,599		$	76,922

 

(1)	Included in cash and cash equivalents at March 31, 2010.

(2)	$1.6 million included in cash and cash equivalents at March 31, 2010.

During the three months ended March 31, 2010, there were no significant transfers in and out of Level 1 and Level 2.

The following table provides a summary of changes in fair value of Cynosure’s Level 3 financial assets for the three months ended March 31, 2010 (in thousands):

 

		Auction Rate Securities
Balance at December 31, 2009		$	18,454
Recovery on ARS included in gain on investments			1,211
Loss related to value of ARS Rights included in (loss) on investments			(1,191	)
Net settlements			(3,875	)
Balance at March 31, 2010		$	14,599

 

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Cynosure, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Note 5 — Short and Long-Term Marketable Securities, Short-Term Investments and Related Financial Instruments

Cynosure’s available-for-sale securities at March 31, 2010 consist of approximately $43.0 million of investments in debt securities consisting of state and municipal bonds, U.S. government agencies and treasuries and approximately $14,000 in equity securities. Cynosure’s trading securities at March 31, 2010 consist of approximately $13.7 million of investments in auction rate securities. All investments in available-for-sale securities are recorded at fair market value, with any unrealized gains and losses reported as a separate component of accumulated other comprehensive loss. All investments in trading securities are recorded at fair market value, with any adjustments recorded to earnings. As of March 31, 2010, Cynosure’s marketable securities consist of the following (in thousands):

 

		Market Value				Amortized Cost			Unrealized Gains			Unrealized Losses
Available-for-Sale Securities:
Cash equivalents:
State and municipal bonds		$	1,621			$	1,621		$	—		$	—
Total cash equivalents		$	1,621			$	1,621		$	—		$	—
Short-term marketable securities:
State and municipal bonds		$	19,009			$	19,013		$	—		$	(4	)
US government sponsored enterprises			19,358				19,362			8			(12	)
Equity securities			14				8			6			—
Total short-term marketable securities		$	38,381			$	38,383		$	14			(16	)
Long-term marketable securities:
US government sponsored enterprises			3,013				3,007			7			(1	)
Total long-term marketable securities		$	3,013			$	3,007		$	7			(1	)
Total available-for-sale securities		$	43,015			$	43,011		$	21		$	(17	)
Trading Securities:
Short-term investments:
Auction rate securities		$	13,723	*
Total marketable securities and short-term investments		$	56,738

 

*	Excludes $0.9 million for fair value of ARS Rights.

As of March 31, 2010, Cynosure’s available-for-sale debt securities mature as follows (in thousands):

 

		Total			Maturities
					Less Than One Year			One to Five Years			More than five years
State and municipal bonds		$	20,630		$	20,630		$	—		$	—
U.S. government sponsored enterprises			22,371			19,358			3,013			—
Total available-for-sale debt securities		$	43,001		$	39,988		$	3,013		$	—

Note 6 — 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 three months ended March 31, 2010, which is a component of accrued expenses in the consolidated balance sheets:

 

		March 31, 2010
		(in thousands)
Warranty accrual, beginning of period		$	2,440
Warranty provision related to new sales			714
Costs incurred			(846	)
Warranty accrual, end of period		$	2,308

Note 7 — Segment Information

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

 

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Cynosure, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

The following table represents total revenue by geographic destination:

 

		Three Months Ended March 31,
		2010			2009
		(in thousands)
United States		$	6,184		$	7,367
Europe			6,234			3,929
Asia / Pacific			3,667			1,964
Other			2,808			1,556
Total		$	18,893		$	14,816

Total assets by geographic area are as follows:

 

		March 31, 2010				December 31, 2009
		(in thousands)
United States		$	126,523			$	127,752
Europe			11,842				13,123
Asia / Pacific			6,140				6,346
Eliminations			(1,850	)			(1,988	)
Total		$	142,655			$	145,233

Long-lived assets by geographic area are as follows:

 

		March 31, 2010			December 31, 2009
		(in thousands)
United States		$	8,086		$	8,398
Europe			2,373			2,867
Asia / Pacific			1,836			1,812
Total		$	12,295		$	13,077

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 March 31, 2010. 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 14% of the Company’s total long-lived assets, as of March 31, 2010. These long-lived assets consist primarily of demonstration equipment.

 

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Cynosure, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Note 8 — Net Loss Per Common Share

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

A reconciliation of basic and diluted shares is as follows:

 

		Three Months Ended March 31,
		2010				2009
Net loss		$	(2,812	)			(4,021	)
Basic weighted average common shares outstanding			12,711				12,701
Weighted average common equivalent shares			—				—
Diluted weighted average common shares outstanding			12,711				12,701
Basic net loss per share		$	(0.22	)		$	(0.32	)
Diluted net loss per share		$	(0.22	)		$	(0.32	)

For the three months ended March 31, 2010 and 2009, the number of basic and diluted weighted average shares outstanding was the same because any increase in the number of shares of common stock equivalents for the three months ended March 31, 2010 and 2009 would be antidilutive based on the net loss for the period. Options outstanding to purchase 994,000 and 1,417,000 at March 31, 2010 and 2009, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have been antidilutive.

Note 9 — Comprehensive Loss

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

The components of accumulated other comprehensive loss as of March 31, 2010 and December 31, 2009 are as follows:

 

		March 31, 2010				December 31, 2009
		(in thousands)
Unrealized gain on marketable securities, net of taxes		$	4			$	6
Cumulative translation adjustment			(2,113	)			(1,457	)
Total accumulated other comprehensive loss		$	(2,109	)		$	(1,451	)

The components of total comprehensive loss for the three month periods ended March 31, 2010 and 2009 are as follows:

 

		Three Months Ended March 31,
		2010				2009
		(in thousands)
Cumulative translation adjustment		$	(656	)		$	(771	)
Unrealized loss on marketable securities			(2	)			(75	)
Total other comprehensive loss			(658	)			(846	)
Reported net loss			(2,812	)			(4,021	)
Total comprehensive loss		$	(3,470	)		$	(4,867	)

Note 10 — Litigation

In 2005, Dr. Ari Weitzner, individually and as putative representative of a purported class, filed a complaint against Cynosure under the federal Telephone Consumer Protection Act (TCPA) in Massachusetts Superior Court in Middlesex County seeking monetary damages, injunctive relief, costs and attorneys fees. The complaint alleges that Cynosure violated the TCPA by sending

 

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Cynosure, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

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 opposed on numerous factual and legal grounds, including that a nationwide class action may not be maintained in a Massachusetts state court by Dr. Weitzner, a New York resident; individual issues predominate over common issues; a class action is not superior to other methods of resolving TCPA claims; and Dr. Weitzner is an inadequate class representative. Cynosure also believes it has many merits defenses, including that the faxes in question do not constitute “advertising” within the meaning of the TCPA and many recipients had an established business relationship with Cynosure and are thereby deemed to have consented to the receipt of facsimile communications. The Court held a hearing on the plaintiff’s class certification motion on June 17, 2008, but 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. On January 7, 2010, the court entered an Order for Judgment consistent with its April 8, 2009 decision that the insurer is obligated to defend Cynosure against the putative class claims and to indemnify Cynosure for any single damages, attorneys’ fees or costs. Per agreement of the parties, Cynosure was awarded $0.4 million in fees and costs for the period through July 1, 2009. The insurer filed a Notice of Appeal of the judgment on January 27, 2010. The insurer’s appeal of Cynosure’s fee application is currently pending before the U.S. First Circuit Court of Appeals.

On January 9, 2008, Cynosure 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. Cynosure’s complaint alleged that CoolTouch’s “CoolLipo” infringes on the 873 patent and sought damages and injunctive relief. The lawsuit alleged that CoolTouch’s 130nm CoolLipo TM 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 Cynosure’s largest shareholder, El.En. S.p.A., and licensed by Cynosure. On January 31, 2008, CoolTouch answered Cynosure’s complaint, denying liability and alleging that the 873 patent is not infringed and is invalid and also asserted counterclaims against Cynosure in the same court alleging patent infringement by the Company. On February 18, 2009, CoolTouch dismissed, with prejudice, its counterclaims alleging that Cynosure infringed U.S. Patent Nos. 7,217,265 and 6,451,007.

On January 14, 2010, CoolTouch agreed to a Consent Judgment that it has infringed on the 873 patent and that the patent is valid and enforceable. CoolTouch also has granted to Cynosure and El.En. a royalty free license to any patents or patent applications owned or controlled by CoolTouch related to the treatment of fat and cellulite. Under the terms of the settlement, CoolTouch will make payments representing a 9% royalty on sales of CoolLipo made prior to the agreement and a portion of Cynosure’s legal expenses. CoolTouch also has agreed to pay a royalty rate of 10% of future net sales for any licensed product sold strictly for lipolysis, and 7.5% of future net sales for any licensed product sold for lipolysis and at least one other aesthetic procedure.

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 11 — Related Party Transactions

As of March 31, 2010, 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 March 31, 2010 and 2009 were approximately $1.4 million and $1.2 million, respectively. As of March 31, 2010 and December 31, 2009, amounts due to related party for these purchases were approximately $1.9 million and $1.4 million, respectively. There were no amounts due from El.En. as of March 31, 2010 or December 31, 2009.

 

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Cynosure, Inc.

Notes to Consolidated Financial Statements—(Continued)

 

Note 12 — Income Taxes

At March 31, 2010, 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 13 — Recent Accounting Pronouncements

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 will have a material impact on its financial position or statement of operations.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06 for Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements. This Update requires new disclosures for transfers in and out of Level 1 and 2 and activity in Level 3. This Update also clarifies existing disclosures for level of disaggregation and clarifies inputs and valuation techniques. The new disclosures are effective for interim and annual periods beginning after December 15, 2009, except for the Level 3 disclosures, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those years. The Company’s adoption of ASU 2010-06 for Level 1 and 2 assets did not have a material impact on its financial position or statement of operations. Cynosure does not expect the adoption of ASU 2010-06 on Level 3 assets will have a material impact on its financial position or statement of operations.

Note 14 – Subsequent Events

Management evaluated all other activity of Cynosure 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 March 31, 2010.

 

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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, 2009, 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 12, 2010. 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 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 focus our development and marketing efforts on offering leading, or flagship, products for the following high volume applications:

 

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

 

•

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

 

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•

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

 

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the Cynergy product line for the treatment of vascular lesions;

 

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

 

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the TriActive product line for the temporary reduction of the appearance of cellulite.

We sell our products through a direct sales force in North America, France, Spain, the United Kingdom, Germany, Korea, China and Japan and through international distributors in 71 other countries.

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 three months ended March 31, 2010, we derived approximately 75% of our revenues from sales of our products and 25% of our revenues from parts, accessories and service revenues. During the three months ended March 31, 2009, we derived approximately 74% of our revenues from sales of products and 26% of our revenues from parts, accessories and service revenues. Generally, we recognize revenues from the sales of our products upon delivery to our customers, revenues from service contracts and extended product warranties ratably over the coverage period and revenues from service in the period in which the service occurs.

We sell our products directly in North America, France, Spain, the United Kingdom, Germany, Korea, China and Japan and use distributors to sell our products in other countries where we do not have a direct presence. During the three months ended March 31, 2010, and 2009 we derived 60% and 47% of our revenues, respectively, from sales outside North America. As of March 31, 2010, we had 32 sales employees covering North America, 28 sales employees in France, Spain, the United Kingdom, Germany, Korea, China and Japan and 28 distributors covering 71 countries.

The following table provides revenue data by geographical region for the three months ended March 31, 2010 and 2009:

 

		Percentage of Revenues
		Three-Months Ended March 31,
Region		2010			2009
North America		40	%		53	%
Europe		33			27
Asia/Pacific		19			13
Other		8			7
Total		100	%		100	%

See Note 7 to our consolidated financial statements included in this Quarterly Report for revenues and asset data by geographic region.

 

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Results of Operations

The following table contains selected income statement information, which serves as the basis of the discussion of our results of operations for the three months ended March 31, 2010 and 2009, respectively (in thousands, except for percentages):

 

		Three Months Ended March 31,														$ Change				% Change
		2010							2009
		Amount				As a % of Total Revenues			Amount				As a % of Total Revenues
Product revenues		$	14,221			75	%		$	10,902			74	%		$	3,319			30	%
Parts, accessories and service revenues			4,672			25				3,914			26				758			19
Total revenues			18,893			100				14,816			100				4,077			28
Cost of revenues			8,093			43				5,800			39				2,293			40
Gross profit			10,800			57				9,016			61				1,784			20
Operating expenses
Sales and marketing			8,402			44				10,530			71				(2,128	)		(20	)
Research and development			1,707			9				1,741			12				(34	)		(2	)
General and administrative			3,233			17				3,880			26				(647	)		(17	)
Total operating expenses			13,342			70				16,151			109				(2,809	)		(17	)
Loss from operations			(2,542	)		(13	)			(7,135	)		(48	)			4,593			(64	)
Interest income, net			53			—				265			2				(212	)		(80	)
Other expense, net			(151	)		(1	)			(56	)		—				(95	)		170
Loss before provision (benefit) for income taxes			(2,640	)		(14	)			(6,926	)		(47	)			4,286			62
Provision (benefit) for income taxes			172			1				(2,905	)		(20	)			3,077			(106	)
Net loss		$	(2,812	)		(15	)%		$	(4,021	)		(27	)%		$	1,209			30	%

Revenues

Revenues in the three months ended March 31, 2010 increased from the three months ended March 31, 2009 by $4.1 million or 28%. The increase was attributable to a number of factors (in thousands, except for percentages):

 

		Three Months Ended March 31,						$ Change			% Change
		2010			2009
Product sales in North America		$	6,328		$	6,257		$	71		1	%
Product sales outside North America			7,893			4,645			3,248		70
Parts, accessories and service sales			4,672			3,914			758		19
Total Revenues		$	18,893		$	14,816		$	4,077		28	%

 

•

Revenues from the sale of products in North America increased 1% from the first quarter of 2009. 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. 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 first quarter of 2010, credit continued to be difficult to obtain and our potential customers were not as able to expand their practices or commit to purchasing equipment from us.

 

•

Revenues from sales of products outside of North America increased by approximately $3.2 million, or 70%, from the 2009 period, due to stronger revenues from our European and Asian subsidiaries as well as sales to our international distributors.

 

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•

Revenues from the sale of parts, accessories and services increased by approximately $0.8 million, or 19%, from the 2009 period, primarily due to an increase in revenues generated from the sale of our service contracts as well as an increase in sales of certain parts and accessories.

Cost of Revenues

 

		Three Months Ended March 31,								$ Change			% Change
		2010				2009
Cost of revenues (in thousands)		$	8,093			$	5,800			$	2,293		40	%
Cost of revenues (as a percentage of total revenues)			43	%			39	%

Total cost of revenues increased $2.3 million, or 40%, to $8.1 million for three months ended March 31, 2010, as compared to $5.8 million for the three months ended March 31, 2009, primarily related to our 28% increase of revenues. Our total cost of revenues increased as a percentage of total revenues to 43% for the three months ended March 31, 2010, from 39% for the three months ended March 31, 2009, primarily due to a higher percentage of laser revenue from our international distribution where our products tend to have lower average selling prices than North America.

Sales and Marketing

 

		Three Months Ended March 31,								$ Change				% Change
		2010				2009
Sales and marketing (in thousands)		$	8,402			$	10,530			$	(2,128	)		(20	)%
Sales and marketing (as a percentage of total revenues)			44	%			71	%

Sales and marketing expenses decreased $2.1 million, or 20%. The decrease is primarily attributed to a decrease of $1.2 million in personnel, administrative costs and travel expenses associated with the overall reduction of our worldwide direct sales organization and a decrease in promotional costs of $0.9 million, primarily due to a decreased number of clinical workshops, trade shows and other promotional efforts. Our sales and marketing expenses for the three months ended March 31, 2010 also decreased as a percentage of revenue to 44% partially due to the reduction of these expenses as well as a 28% increase to revenues for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009.

Research and Development

 

		Three Months Ended March 31,								$ Change				% Change
		2010				2009
Research and development (in thousands)		$	1,707			$	1,741			$	(34	)		(2	)%
Research and development (as a percentage of total revenues)			9	%			12	%

Research and development expenses remained relatively consistent for the three months ended March 31, 2010 when compared with the three months ended March 31, 2009.

General and Administrative

 

		Three Months Ended March 31,								$ Change				% Change
		2010				2009
General and administrative (in thousands)		$	3,233			$	3,880			$	(647	)		(17	)%
General and administrative (as a percentage of total revenues)			17	%			26	%

General and administrative expenses decreased $0.6 million, or 17%, primarily related to a decrease in legal and professional costs incurred in connection with our patent infringement case against CoolTouch, which was settled in January 2010.

 

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Interest Income, net

 

		Three Months Ended March 31,						$ Change				% Change
		2010			2009
Interest income, net (in thousands)		$	53		$	265		$	(212	)		(80	)%

The decrease in interest income, net was primarily due to our investing in securities that carry less risk as opposed to a maximum return from the three month period ending March 31, 2009.

Other Expense, net

 

		Three Months Ended March 31,						$ Change			% Change
		2010			2009
Other expense, net (in thousands)		$	151		$	56		$	95		170	%

The increase in other expense, net is primarily a result of net foreign currency remeasurement losses being greater in the first quarter of 2010 than in the first quarter of 2009 due to the weakening of the U.S. dollar, primarily against the euro.

Provision (Benefit) for Income Taxes

 

		Three Months Ended March 31,								$ Change			% Change
		2010				2009
Provision (benefit) for income taxes (in thousands)		$	172			$	(2,905	)		$	3,077		(106	)%
Provision (benefit) as a % of income before provision (benefit) for income taxes			7	%			(42	)%

The provision for income taxes results from a combination of the activities of our domestic and foreign subsidiaries. During the three months ended March 31, 2010, we recorded an income tax provision of $0.2 million, representing an effective tax rate of 7%. Given the uncertainty of future income in the U.S. we continued to maintain a valuation allowance against our net domestic deferred tax assets, and therefore we did not receive a benefit for our losses in the U.S. for the first quarter of 2010. During the three months ended March 31, 2009, we recorded an income tax benefit of $2.9 million, representing an effective tax rate of (42)%. The effective tax rate from the 2009 period to the 2010 period changed primarily due to the valuation allowance maintained against the net domestic deferred tax assets, including current year net operating losses at March 31, 2010.

Liquidity and Capital Resources

We require cash to pay our operating expenses, make capital expenditures and pay our long-term liabilities. Since our inception, we have funded our operations through private and public placements of equity securities, short-term borrowings and funds generated from our operations. At March 31, 2010, our cash, cash equivalents, short and long-term marketable securities, short-term investments and related financial instruments were $91.7 million. Our cash and cash equivalents of $35.7 million are highly liquid investments with maturity of 90 days or less at date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions. Our short-term marketable securities of $38.4 million consist of investments in various state and municipal governments, U.S. government treasuries and agencies all of which mature by March 31, 2011. Our long-term marketable securities of $3.0 million consist of investments in U.S. government agencies all of which mature by May 31, 2011. Our short-term investments and related financial instruments, which includes ARS with a fair market value of $13.7 million and a related Right with a fair market value of $0.9 million, consist primarily of tax exempt certificates with an auction reset feature (auction rate securities), with underlying assets consisting generally of student loans, which are substantially backed by the federal government.

Auctions have failed for these securities since 2008, however, to date we have collected all interest receivable on outstanding ARS when due and expect to do so in the future. During the year ended December 31, 2009, certain investments in ARS were successfully called at full par value and we received cash proceeds of approximately $2.7 million. During the three months ended March 31, 2010, we received an additional $3.9 million in cash proceeds related to certain investments in ARS that were successfully called at full par value. To date, during the second quarter of 2010, we received an additional $2.7 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, (the Rights), from UBS Financial Services Inc. (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.

 

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During the fourth quarter of 2008, we elected to transfer the ARS investments from available-for-sale 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 year ended December 31, 2009, we recorded a recovery in the fair value of the ARS of $2.9 million and an offsetting loss of $2.9 million for the value of the Rights. During the three months ended March 31, 2010, we recorded a recovery in the fair value of the ARS of $1.2 million in gain on investment and recorded an offsetting loss of $1.2 million for the value of the Rights 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 liquidity on these investments will affect our ability to execute our current business plan.

Our future capital requirements depend on a number of factors, including the rate of market acceptance of our current and future products, the resources we devote to developing and supporting our products and continued progress of our research and development of new products. We incurred minimal capital expenditures for the three months ended March 31, 2010 and expect capital expenditures for the remainder of the year to be relatively consistent with the year ended December 31, 2009. During the three months ended March 31, 2010 and 2009, respectively, we transferred $1.2 million and $1.4 million of demonstration equipment to fixed assets.

On July 28, 2009, our Board of Directors authorized the repurchase of up to $10 million of our Class A common stock, from time to time, on the open market or in privately negotiated transactions under a stock repurchase program. The program will terminate on August 1, 2010, unless our Board of Directors discontinues it sooner. During the three months ended March 31, 2010, we repurchased 7,700 shares of our common stock at an aggregate cost of approximately $76,000 and at a weighted average price of $9.74 per share under this program. As of March 31, 2010 we have repurchased an aggregate of 11,014 shares under the program.

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

Cash Flows

Net cash provided by operating activities was $0.2 million for the three months ended March 31, 2010. This resulted primarily from net loss for the period of $2.8 million, increased by approximately $2.7 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 increased cash from operating activities by approximately $0.2 million principally related to an increase in amounts due to related party of $0.6 million and a decrease in accounts receivable of $0.3 million due to increased collection efforts offset by a decrease in deferred revenue $0.2 million and a decrease in accounts payable of $0.4 million. Net cash used in investing activities was $9.2 million for the three months ended March 31, 2010, which consisted primarily of net purchases of marketable securities of $9.0 million and $0.1 million used for fixed asset purchases. Net cash used in financing activities during the three months ended March 31, 2010 was $0.1 million, principally relating to payments on capital lease obligations and common stock repurchases.

Net cash used in operating activities was $5.9 million for the three months ended March 31, 2009. This resulted primarily from net loss for the period of $4.0 million, decreased by approximately $3.0 million in depreciation and amortization and stock-based compensation expense and decreased by approximately $0.1 million in accretion of discounts on marketable securities. Net changes in working capital items decreased cash from operating activities by approximately $4.9 million principally related to an increase in income tax receivable and a decrease in amounts due to related party and accrued expenses offset by a decrease in accounts receivable due to increased collection efforts and reduced sales. Net cash provided by investing activities was $2.1 million for the three months ended March 31, 2009, which consisted primarily of the net proceeds from the sale of marketable securities of $2.6 million and offset by $0.4 million used for fixed asset purchases. Net cash used in financing activities during the three months ended March 31, 2009 was $0.1 million, principally relating to payments on capital lease obligations.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations set forth above are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those that relate to revenue recognition, allowances for doubtful accounts, inventories, warranty obligations, stock-based compensation and income taxes. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities, and the reported amounts of revenues and expenses, that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A discussion of our critical accounting policies and the related judgments and estimates affecting the preparation of our consolidated financial statements is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. There have been no material changes to our critical accounting policies as of March 31, 2010.

 

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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, commercial paper, federal agency notes 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 March 10, 2010. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase, which could result in a realized loss if we are forced to sell an investment before its scheduled maturity. We currently have the ability and intent to hold our fixed income investments until maturity. We do not utilize derivative financial instruments to manage our interest rate risks.

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

 

		As of March 31, 2010				Maturing  in 2010				Maturing  in 2011
Investments (at fair value)		$	43,001			$	23,056			$	19,945
Weighted average interest rate			0.38	%			0.31	%			0.47	%

We hold investments in auction-rate securities or ARS with underlying assets that generally consist of student loans, which are substantially backed by the federal government. Auctions have failed for these securities since 2008, however, to date we have collected all interest receivable on outstanding ARS when due and expect to do so in the future. During the three months ended March 31, 2010, certain investments in ARS were successfully called at full par value and we received cash proceeds of approximately $3.9 million.

During the three months ended March 31, 2010, we adjusted the carrying amount of our ARS to estimated fair market value. 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 its portfolio, we may incur further temporary impairments or other-than-temporary impairments, which could negatively affect our financial condition, cash flow and reported earnings.

As of March 31, 2010 and December 31, 2009, we held $14.6 million and $18.5 million, respectively, at par value, of auction rate security investments. As discussed further in “Liquidity and Capital Resources” above, we expect to exercise our Rights and put the ARS back to UBS at par value on June 30, 2010, the earliest date allowable under the Rights. We measured the value of the ARS at $14.6 million and we recognized a recovery of $1.2 million in gain on investment and recorded an offsetting loss of $1.2 million for the value of the Rights 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. While the auction failures will limit our ability to liquidate these investments, until we exercise our Rights on June 30, 2010, we believe that the ARS failures will not have an impact on our ability to fund ongoing operations and growth initiatives.

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 38% of our total international revenues during the three months ended March 31, 2010. Substantially all of the remaining 62% 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 March 31, 2010. 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

 

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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 March 31, 2010, 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 March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — Other Information

 

Item 1.

Legal Proceedings

In 2005, Dr. Ari Weitzner, individually and as putative representative of a purported class, filed a complaint against us under the federal Telephone Consumer Protection Act, or the TCPA in Massachusetts Superior Court in Middlesex County seeking monetary damages, injunctive relief, costs and attorneys fees. The complaint alleges that we violated the TCPA by sending unsolicited advertisements by facsimile to the plaintiff and other recipients without the prior express invitation or permission of the recipients. Under the TCPA, recipients of unsolicited facsimile advertisements are entitled to damages of up to $500 per facsimile for inadvertent violations and up to $1,500 per facsimile for knowing or willful violations. Based on discovery in this matter, the plaintiff alleges that approximately three million facsimiles were sent on our behalf by a third party to approximately 100,000 individuals. On February 6, 2008, several months after the close of discovery, the plaintiff served a motion for class certification, which we opposed on numerous factual and legal grounds, including that a nationwide class action may not be maintained in a Massachusetts state court by Dr. Weitzner, a New York resident; individual issues predominate over common issues; a class action is not superior to other methods of resolving TCPA claims; and Dr. Weitzner is an inadequate class representative. We also believe we have many merits defenses, including that the faxes in question do not constitute “advertising” within the meaning of the TCPA and many recipients had an established business relationship with us and are thereby deemed to have consented to the receipt of facsimile communications. The Court held a hearing on the plaintiff’s class certification motion on June 17, 2008, but 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. On January 7, 2010, the court entered an Order for Judgment consistent with its April 8, 2009 decision that the insurer is obligated to defend us against the putative class claims and to indemnify us for any single damages, attorneys’ fees or costs. Per agreement of the parties, we were awarded $0.4 million in fees and costs for the period through July 1, 2009. The insurer filed a Notice of Appeal of the judgment on January 27, 2010. The insurer’s appeal is currently pending before the U.S. First Circuit Court of Appeals.

On January 9, 2008, we 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). Our complaint alleged that CoolTouch’s “CoolLipo” infringes on the 873 patent and sought damages and injunctive relief. The lawsuit alleged that CoolTouch’s 130nm CoolLipo TM 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 our largest shareholder, El.En. S.p.A., and licensed by us. On January 31, 2008, CoolTouch answered our complaint, denying liability and alleging that the 873 patent is not infringed and is invalid and also asserted counterclaims against us in the same court alleging patent infringement by us. On February 18, 2009, CoolTouch dismissed, with prejudice, its counterclaims alleging that we infringed U.S. Patent Nos. 7,217,265 and 6,451,007.

On January 14, 2010, CoolTouch agreed to a Consent Judgment that it has infringed on the 873 patent and that the patent is valid and enforceable. CoolTouch also has granted to us and El.En. a royalty free license to any patents or patent applications owned or controlled by CoolTouch related to the treatment of fat and cellulite. Under the terms of the settlement, CoolTouch will make payments representing a 9% royalty on sales of CoolLipo made prior to the agreement and a portion of our legal expenses. CoolTouch also has agreed to pay a royalty rate of 10% of future net sales for any licensed product sold strictly for lipolysis, and 7.5% of future net sales for any licensed product sold for lipolysis and at least one other aesthetic procedure.

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, 2009 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.

 

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As of March 31, 2010, 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, 2009, 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

On July 28, 2009, our Board of Directors authorized the repurchase of up to $10 million of our Class A common stock from time to time on the open market or in privately negotiated transactions under a stock repurchase program. The program will terminate on August 1, 2010, unless our Board of Directors discontinues it sooner. During the three months ended March 31, 2010, we repurchased 7,700 shares of our Class A common stock at an aggregate cost of approximately $76,000 and at a weighted average price of $9.74 per share under this program. As of March 31, 2010, we have repurchased an aggregate of 11,014 shares under the program.

The following table provides information about purchases by the Company of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act during the quarter ended March 31, 2010:

 

Period		Total number of shares (or units) purchased		Average price paid per share (or unit)			Total number of shares (or units) purchased as part of publicly announced plans or programs		Maximum number (or appropriate dollar value) of shares (or units) that may yet be purchased under the plans or programs
January 1, 2010—January 31, 2010		—		$	—		—		$	9,967,566
February 1, 2010—February 28, 2010		600			9.75		600			9,961,692
March 1, 2010—March 31, 2010		7,100			9.74		7,100			9,892,234
Total		7,700		$	9.74		7,700		$	9,892,234

 

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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

 

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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: May 7, 2010		By:		/S/    MICHAEL R. DAVIN
				Michael R. Davin
				Chairman, President, Chief Executive Officer
Date: May 7, 2010		By:		/S/    TIMOTHY W. BAKER
				Timothy W. Baker
				Executive Vice President, Chief Financial Officer and Treasurer

 

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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

 

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