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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 June 30, 2012

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).    x  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: August 2, 2012:

 

Class		Number of Shares
Class A Common Stock, $0.001 par value			10,016,430
Class B Common Stock, $0.001 par value			2,939,161

 

 

 

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Cynosure, Inc.

Table of Contents

 

				Page No.
PART I		Financial Information
Item 1.		Financial Statements (Unaudited)
		Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011			1
		Consolidated Statements of Operations for the Three and Six Month Periods Ended June 30, 2012 and 2011			2
		Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Month Periods Ended June 30, 2012 and 2011			3
		Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2012 and 2011			4
		Notes to Consolidated Financial Statements			5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			22
Item 4.		Controls and Procedures			22
PART II		Other Information
Item 1.		Legal Proceedings			24
Item 1A.		Risk Factors			24
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			24
Item 6.		Exhibits			25
SIGNATURES					26
EXHIBIT INDEX					27
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
EX-101 The following materials from the Cynosure, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language); (i) Condensed Statement of Earnings for the three and six months ended June 30, 2012 and 2011, (ii) Condensed Statement of Financial Position at June 30, 2012 and December 31, 2011, (iii) Condensed Statement of Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2011, (iv) Condensed Statement of Cash Flows for the six months ended June 30, 2012 and 2011, and (v) Notes to Condensed Consolidated Financial Statements.

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Cynosure, Inc.

Consolidated Balance Sheets

(in thousands)

 

		(Unaudited) June 30, 2012				December 31, 2011
Assets
Current assets:
Cash and cash equivalents		$	37,114			$	35,694
Short-term marketable securities			34,771				31,379
Accounts receivable, net			14,248				12,853
Inventories			30,786				29,568
Prepaid expenses and other current assets			3,474				3,038
Deferred income taxes			701				701
Total current assets			121,094				113,233
Property and equipment, net			8,190				7,705
Long-term marketable securities			8,090				6,595
Goodwill and intangibles, net			22,564				23,486
Other assets			415				561
Total assets		$	160,353			$	151,580
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	9,472			$	8,474
Amounts due to related party			1,064				1,550
Accrued expenses			13,689				13,944
Deferred revenue			9,333				6,388
Capital lease obligation			295				239
Total current liabilities			33,853				30,595
Capital lease obligation, net of current portion			543				494
Deferred revenue, net of current portion			278				367
Other noncurrent liability			762				497
Commitments and contingencies
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 — 9,874 Class A shares and 2,975 Class B shares at June 30, 2012;
Issued — 9,828 Class A shares and 2,975 Class B shares at December 31, 2011, respectively			13				13
Additional paid-in capital			126,425				124,506
Retained earnings (accumulated deficit)			2,822				(678	)
Accumulated other comprehensive loss			(2,170	)			(2,041	)
Treasury stock, 197 Class A shares and 36 Class B shares, at cost			(2,173	)			(2,173	)
Total stockholders’ equity			124,917				119,627
Total liabilities and stockholders’ equity		$	160,353			$	151,580

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 June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Product revenues		$	32,923			$	20,675			$	61,018			$	37,286
Parts, accessories and service revenues			6,650				5,664				12,723				10,937
Total revenues			39,573				26,339				73,741				48,223
Cost of revenues			16,533				11,273				31,193				21,076
Gross profit			23,040				15,066				42,548				27,147
Operating expenses:
Sales and marketing			11,878				9,656				23,429				18,412
Research and development			3,460				2,431				6,699				4,671
Amortization of intangible assets acquired			342				14				684				24
General and administrative			3,667				4,161				7,185				7,102
Total operating expenses			19,347				16,262				37,997				30,209
Income (loss) from operations			3,693				(1,196	)			4,551				(3,062	)
Interest income, net			13				46				23				100
Other (expense) income, net			(298	)			(1	)			(89	)			213
Income (loss) before provision for income taxes			3,408				(1,151	)			4,485				(2,749	)
Provision for income taxes			728				149				986				445
Net income (loss)		$	2,680			$	(1,300	)		$	3,499			$	(3,194	)
Basic net income (loss) per share		$	0.21			$	(0.10	)		$	0.28			$	(0.25	)
Diluted net income (loss) per share		$	0.20			$	(0.10	)		$	0.27			$	(0.25	)
Basic weighted-average common shares outstanding			12,605				12,599				12,591				12,588
Diluted weighted-average common shares outstanding			13,278				12,599				13,141				12,588

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

 

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Cynosure, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited, in thousands)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Net income (loss)		$	2,680			$	(1,300	)		$	3,499			$	(3,194	)
Other comprehensive income (loss) components:
Cumulative translation adjustment			(463	)			228				(141	)			797
Unrealized gain on marketable securities			3				21				12				7
Total other comprehensive (loss) income			(460	)			249				(129	)			804
Comprehensive income (loss)		$	2,220			$	(1,051	)		$	3,370			$	(2,390	)

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)

 

		Six Months Ended June 30,
		2012				2011
Operating activities:
Net income (loss)		$	3,499			$	(3,194	)
Reconciliation of net income (loss) to net cash provided by operating activities:
Depreciation and amortization			3,493				2,971
Stock-based compensation expense			1,397				1,325
(Gain) loss on disposal of fixed assets			(37	)			4
Net accretion of marketable securities			589				638
Changes in operating assets and liabilities:
Accounts receivable			(1,525	)			(2,565	)
Inventories			(3,556	)			(5,627	)
Net book value of demonstration inventory sold			419				543
Prepaid expenses and other current assets			(466	)			(108	)
Accounts payable			1,010				3,371
Due to related party			(485	)			1,225
Tax benefit from stock option exercises			(25	)			(32	)
Accrued expenses			127				1,750
Deferred revenue			2,870				(243	)
Net cash provided by operating activities			7,310				58
Investing activities:
Purchases of property and equipment			(1,024	)			(560	)
Proceeds from the sales and maturities of marketable securities			25,262				49,103
Purchases of marketable securities			(30,725	)			(28,196	)
Acquisitions			—				(26,970	)
Decrease in other noncurrent assets			140				4
Net cash used in investing activities			(6,347	)			(6,619	)
Financing activities:
Excess tax benefit on options exercised			25				32
Proceeds from stock option exercises			523				198
Payments on capital lease obligation			(150	)			(29	)
Net cash provided by financing activities			398				201
Effect of exchange rate changes on cash and cash equivalents			59				(165	)
Net increase (decrease) in cash and cash equivalents			1,420				(6,525	)
Cash and cash equivalents, beginning of the period			35,694				27,434
Cash and cash equivalents, end of the period		$	37,114			$	20,909
Supplemental cash flow information
Cash paid for interest		$	24			$	8
Cash paid for income taxes		$	979			$	491
Supplemental noncash investing and financing activities
Transfer of demonstration equipment from inventory to fixed assets		$	2,227			$	1,788
Assets acquired under capital lease		$	276			$	—

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, 2011. 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 six months ended June 30, 2012 may not be indicative of the results that may be expected for the year ending December 31, 2012, or any other period.

Note 2 — Stock-Based Compensation

Cynosure recorded stock-based compensation expense of $0.7 million for both the three months ended June 30, 2012 and 2011, respectively. Cynosure recorded stock-based compensation expense of $1.4 million and $1.3 million for the six months ended June 30, 2012 and 2011, respectively. Cynosure capitalized $15,000 and $18,000 of stock-based compensation expense as part of inventory during the six months ended June 30, 2012 and 2011, 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 June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
		(In thousands)
Cost of revenues		$	30			$	37			$	59			$	73
Sales and marketing			214				214				422				444
Research and development			129				116				249				236
General and administrative			359				292				667				572
Total stock-based compensation expense		$	732			$	659			$	1,397			$	1,325

Cash received from option exercises was $0.5 million and $0.2 million during the six months ended June 30, 2012 and 2011, respectively.

Cynosure granted 332,000 and 344,500 stock options during the six months ended June 30, 2012 and 2011, respectively. Cynosure has elected to use the Black-Scholes model to determine the weighted average fair value of options. The weighted average fair value of the options granted during the six months ended June 30, 2012 and 2011 was $8.66 and $7.47, respectively, using the following assumptions:

 

 

		Six Months Ended June 30,
		2012				2011
Risk-free interest rate			0.77%-0.86%				1.60%-2.37%
Expected dividend yield			—				—
Expected term			5.8 years				5.8 years
Expected volatility			57%				55% -56%
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 six months ended June 30, 2012 and 2011 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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In March 2012, Cynosure commenced an option exchange program (the “Exchange Offer”) in which it offered eligible option holders the opportunity to voluntarily exchange certain “underwater” stock options for a lesser number of new stock options with a lower exercise price. Cynosure’s U.S. employees were eligible to participate in the Exchange Offer, and Cynosure’s directors and executive officers were not eligible to participate. The exchange ratios for the Exchange Offer were determined by using the Black-Scholes option pricing model to approximate a “value-for-value” exchange, meaning that the value of the eligible stock options was equal to the value of the new stock options. The Exchange Offer, which was subject to Rule 13e-4 under the Securities Exchange Act of 1934, as amended, expired on April 13, 2012.

In the Exchange Offer, 90 eligible option holders tendered eligible options with exercise prices of $20.00 or greater to purchase an aggregate of 325,946 shares of Class A common stock, representing 96% of the total shares of Class A common stock underlying options eligible for exchange. New stock options were granted to purchase an aggregate of 280,771 shares of Class A common stock in exchange for the cancellation of the tendered eligible options. The exercise price per share of each new option granted in the Exchange Offer is $19.78, which was the closing price of Cynosure’s Class A common stock as reported by The Nasdaq Global Market on April 13, 2012. All eligible stock options were fully vested as of April 13, 2012, the expiration date of the Exchange Offer. Because the fair value of the eligible stock options was equal to the fair value of the new stock options calculated using the Black-Scholes option pricing model, Cynosure did not recognize any stock-based compensation expense as a result of the Exchange Offer.

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:

 

 

		June 30, 2012				December 31, 2011
		(in thousands)
Raw materials		$	7,009			$	7,645
Work in process			2,015				1,437
Finished goods			21,762				20,486
		$	30,786			$	29,568

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. The following table represents Cynosure’s fair value hierarchy for its financial assets (cash equivalents and marketable securities) measured at fair value as of June 30, 2012 (in thousands):

 

		Level 1				Level 2				Level 3				Total
Money market funds (1)		$	7,417			$	—			$	—			$	7,417
State and municipal bonds (2)			—				36,718				—				36,718
Treasuries and government agencies			—				9,891				—				9,891
Equity securities			17				—				—				17
Total		$	7,434			$	46,609			$	—			$	54,043

 

(1)	Included in cash and cash equivalents at June 30, 2012.

 

(2)	$3.8 million included in cash and cash equivalents at June 30, 2012.

 

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During the six months ended June 30, 2012, there were no significant transfers in and out of Level 1 and Level 2. Cynosure did not have any Level 3 financial assets at June 30, 2012 or December 31, 2011.

Note 5 — Short and Long-Term Marketable Securities

Cynosure’s available-for-sale securities at June 30, 2012 consist of approximately $46.6 million of investments in debt securities consisting of state and municipal bonds, treasuries and government agencies and approximately $17,000 in equity 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. As of June 30, 2012, 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		$	3,765			$	3,764			$	1			$	—
Total cash equivalents		$	3,765			$	3,764			$	1			$	—
Short-term marketable securities:
State and municipal bonds		$	27,395			$	27,387			$	12			$	(4	)
Treasuries and government agencies			7,359				7,355				4				—
Equity securities			17				18				—				(1	)
Total short-term marketable securities		$	34,771			$	34,760			$	16			$	(5	)
Long-term marketable securities:
State and municipal bonds		$	5,558			$	5,550			$	8			$	—
Treasuries and government agencies			2,532				2,532				1				(1	)
Total long-term marketable securities		$	8,090			$	8,082			$	9			$	(1	)
Total available-for-sale securities		$	46,626			$	46,606			$	26			$	(6	)
Total marketable securities		$	42,861

As of December 31, 2011, 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		$	3,264			$	3,263			$	1			$	—
Total cash equivalents		$	3,264			$	3,263			$	1			$	—
Short-term marketable securities:
State and municipal bonds		$	18,868			$	18,858			$	12			$	(2	)
Treasuries and government agencies			12,505				12,499				6				—
Equity securities			6				5				1				—
Total short-term marketable securities		$	31,379			$	31,362			$	19			$	(2	)
Long-term marketable securities:
State and municipal bonds		$	4,719			$	4,713			$	6			$	—
Treasuries and government agencies			1,876				1,875				1				—
Total long-term marketable securities		$	6,595			$	6,588			$	7			$	—
Total available-for-sale securities		$	41,238			$	41,213			$	27			$	(2	)
Total marketable securities		$	37,974

 

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As of June 30, 2012, 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		$	36,718			$	31,160			$	5,558			$	—
Treasuries and government agencies			9,891				7,359				2,532				—
Total available-for-sale debt securities		$	46,609			$	38,519			$	8,090			$	—

Note 6 — Goodwill and Other Intangible Assets

Changes to goodwill during the six months ended June 30, 2012 were as follows (in thousands):

 

 

		Total
Balance — December 31, 2011		$	15,712
Translation adjustment			(3	)
Balance — June 30, 2012		$	15,709

Other intangible assets consist of the following at June 30, 2012 and December 31, 2011 (in thousands):

 

 

		Developed Technology & Patents				Business Licenses				Customer Relationships				Trade Names				Other				Total
June 30, 2012
Cost		$	3,250			$	384			$	3,323			$	2,650			$	48			$	9,655
Translation adjustment			—				27				17				—				2				46
Accumulated amortization			(1,082	)			(167	)			(1,410	)			(182	)			(5	)			(2,846	)
Balance, June 30, 2012		$	2,168			$	244			$	1,930			$	2,468			$	45			$	6,855
December 31, 2011
Cost		$	3,250			$	384			$	3,323			$	2,650			$	48			$	9,655
Translation adjustment			—				27				20				—				2				49
Accumulated amortization			(874	)			(147	)			(812	)			(93	)			(4	)			(1,930	)
Balance, December 31, 2011		$	2,376			$	264			$	2,531			$	2,557			$	46			$	7,774

Amortization expense related to developed technology and patents is classified as a component of cost of revenues in the Consolidated Statements of Operations. Amortization expense related to customer relationships and trade names is classified as a component of amortization of intangible assets acquired in the Consolidated Statements of Operations. Amortization expense related to business licenses and other is classified as a component of general and administrative expenses in the Consolidated Statements of Operations.

Amortization expense for the three months ended June 30, 2012 and 2011 was $0.5 million and $0.1 million, respectively. Amortization expense for the six months ended June 30, 2012 and 2011 was $0.9 million and $0.1 million, respectively. Cynosure has approximately $41,000 of indefinite-life intangible assets that are included in other intangible

 

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assets in the table above. As of June 30, 2012, amortization expense on existing intangible assets for the next five years and beyond is as follows (table in thousands):

 

 

Remainder of 2012		$	922
2013			1,299
2014			950
2015			765
2016 and thereafter			2,878
Total		$	6,814

The table above includes $0.7 million for the remainder of 2012, $0.9 million for 2013, $0.6 million for 2014, $0.4 million for 2015 and $1.8 million for 2016 and thereafter, to be recognized within operating expenses related to intangible assets acquired through the Eleme Medical and ConBio acquisitions.

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 six months ended June 30, 2012, which is a component of accrued expenses in the consolidated balance sheets:

 

 

		June 30, 2012
		(in thousands)
Warranty accrual, beginning of period		$	3,171
Warranty provision related to new sales			2,113
Costs incurred			(2,078	)
Warranty accrual, end of period		$	3,206

Note 8 — Segment Information

In accordance with ASC 280, Segment Reporting Topic, 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 June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
		(in thousands)
United States		$	19,034			$	10,429			$	34,194			$	18,414
Europe			7,153				7,253				14,172				14,721
Asia / Pacific			11,016				5,449				20,292				9,571
Other			2,370				3,208				5,083				5,517
Total		$	39,573			$	26,339			$	73,741			$	48,223

 

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Total assets by geographic area are as follows:

 

 

		June 30, 2012				December 31, 2011
		(in thousands)
United States		$	139,871			$	132,041
Europe			13,013				12,688
Asia / Pacific			9,840				8,855
Eliminations			(2,371	)			(2,004	)
Total		$	160,353			$	151,580

Long-lived assets by geographic area are as follows:

 

 

		June 30, 2012				December 31, 2011
		(in thousands)
United States		$	6,925			$	6,461
Europe			1,155				1,344
Asia / Pacific			525				461
Total		$	8,605			$	8,266

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

Note 9 — Net Income (Loss) Per Common Share

Basic net income (loss) per share was determined by dividing net income (loss) by the weighted average common shares outstanding during the period. Diluted net income (loss) per share was determined by dividing net income (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 June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Net income (loss)		$	2,680			$	(1,300	)		$	3,499			$	(3,194	)
Basic weighted average common shares outstanding			12,605				12,599				12,591				12,588
Weighted average common equivalent shares			673				—				550				—
Diluted weighted average common shares outstanding			13,278				12,599				13,141				12,588
Basic net income (loss) per share		$	0.21			$	(0.10	)		$	0.28			$	(0.25	)
Diluted net income (loss) per share		$	0.20			$	(0.10	)		$	0.27			$	(0.25	)

For the three and six months ended June 30, 2012, respectively, options to purchase approximately 0.6 million and 1.3 million shares of the Company’s Class A common stock were excluded from the calculation of diluted weighted average common shares outstanding as their effect was antidilutive.

For the three and six months ended June 30, 2011, the number of basic and diluted weighted average shares outstanding was the same, as any increase in the number of shares of common stock equivalents for the three and six months ended June 30, 2011 would be antidilutive based on the net loss for the period. During the three and six months ended June 30, 2011, respectively, outstanding options to purchase 2.0 million shares were excluded from the computation of diluted earnings per share because their inclusion would have been antidilutive.

 

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Note 10 — Accumulated Other Comprehensive Loss

Changes to accumulated other comprehensive loss during the six months ended June 30, 2012 were as follows (in thousands):

 

 

		Unrealized Gain on Marketable Securities, net of taxes				Translation Adjustment				Accumulated Other Comprehensive Loss
Balance — December 31, 2011		$	23			$	(2,064	)		$	(2,041	)
Current period other comprehensive loss			12				(141	)			(129	)
Balance — June 30, 2012		$	35			$	(2,205	)		$	(2,170	)

Note 11 — 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 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. In 2008, the plaintiff served, and the Court held a hearing regarding a motion for class certification. In 2010, the Court issued an order dismissing the complaint without prejudice for Dr. Weitzner’s failure to prosecute the case and subsequently allowed a plaintiff motion for relief from the dismissal order. In January 2012, the Court issued a Memorandum of Decision denying the class certification motion. The Court has scheduled a status conference for September 20, 2012 regarding Dr. Weitzner’s individual claims. On July 23, 2012, Dr. Weitzner filed a new purported class action, based on the same operative facts and asserting the same claims as the Massachusetts action, in federal court in the Eastern District of New York. Cynosure has not been served with a summons or complaint in the New York action. Cynosure believes it has numerous defenses to Dr. Weitzner’s claims.

In addition to the matter 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 June 30, 2012, 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 June 30, 2012 and 2011 were approximately $1.0 million and $2.2 million, respectively. Purchases of inventory from El.En. during the six months ended June 30, 2012 and 2011 were approximately $2.1 million and $4.3 million, respectively. As of June 30, 2012 and December 31, 2011, amounts due to related party for these purchases were approximately $1.1 million and $1.5 million, respectively. There were no amounts due from El.En. as of June 30, 2012 or December 31, 2011.

Note 13 — Income Taxes

At June 30, 2012, Cynosure had no 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 income tax examinations by tax authorities for years before 2008. Additionally, certain non-U.S. jurisdictions are no longer subject for income tax examinations by tax authorities for years before 2007.

 

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Note 14 — Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board, or FASB, issued new accounting guidance that requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements and eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The guidance does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. Cynosure adopted this new accounting guidance effective January 1, 2012. The adoption of this guidance had no material effect on Cynosure’s financial condition, results of operations or cash flows.

 

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, 2011, 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 8, 2012. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.

Company Overview

We develop and market aesthetic treatment systems that are used by physicians and other practitioners to perform non-invasive and minimally invasive procedures to remove hair, treat vascular and pigmented lesions, remove multi-colored tattoos, rejuvenate the skin, liquefy and remove unwanted fat through laser lypolysis, reduce cellulite and treat onychomycosis. We are also developing in conjunction with our development agreement with Unilever Ltd. (Unilever) a laser treatment system for the home use market.

 

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Our systems incorporate a broad range of laser and other light-based energy sources, including Alexandrite, pulse dye, Nd:Yag and diode lasers, as well as intense pulsed light. We believe that we are one of only a few companies that currently offer aesthetic treatment systems utilizing Alexandrite and pulse dye lasers, which are particularly well suited for some applications and skin types. We offer single energy source systems as well as workstations that incorporate two or more different types of lasers or pulsed light technologies. We offer multiple technologies and system alternatives at a variety of price points depending primarily on the number and type of energy sources included in the system. Our newer products are designed to be easily upgradeable to add additional energy sources and handpieces, which provides our customers with technological flexibility as they expand their practices. As the aesthetic treatment market evolves to include new customers, such as aesthetic spas and additional physician specialties, we believe that our broad technology base and tailored solutions will provide us with a competitive advantage.

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

 

•

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;

 

•

the Cellulaze product line for the reduction of cellulite;

 

•

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

 

•

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

 

•

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

 

•

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

A key element of our business strategy is to launch innovative new products and technologies into high-growth aesthetic applications. Our research and development team builds on our existing broad range of laser and light-based technologies to develop new solutions and products to target unmet needs in significant aesthetic treatment markets. Innovation continues to be a strong contributor to our strength. Since 2002, we have introduced 24 new products. In January 2012, we received FDA clearance in the United States to sell and market Cellulaze, the world’s first aesthetic laser device for the reduction of cellulite. On July 18, 2012 we received FDA clearance in the United States to market an at home device for the treatment of wrinkles being developed in partnership with Unilever. Unilever expects to launch the product commercially in 2013.

We generate revenues primarily from sales of our products and parts and accessories and from services, including product warranty revenues. During the six months ended June 30, 2012, we derived approximately 83% of our revenues from sales of our products and 17% of our revenues from parts, accessories and service revenues. During the six months ended June 30, 2011, we derived approximately 77% of our revenues from sales of products and 23% of our revenues from parts, accessories and service revenues. Generally, we recognize revenues from the sales of our products upon delivery to our customers, revenues from service contracts and extended product warranties ratably over the coverage period and revenues from service in the period in which the service occurs.

We sell our products through a direct sales force in North America, France, Spain, the United Kingdom, Germany, Korea, China, Japan and Mexico, and use distributors to sell our products in other countries where we do not have a direct presence. During the six months ended June 30, 2012 and 2011, we derived 52% and 57% of our revenues, respectively, from sales outside North America. As of June 30, 2012, we had 39 sales employees covering North America, 36 sales employees in France, Spain, the United Kingdom, Germany, Korea, China and Japan and 68 distributors covering 97 countries.

The following table provides revenue data by geographical region for the six months ended June 30, 2012 and 2011:

 

		Percentage of Revenues
		Six Months Ended June 30,
Region		2012				2011
North America			48	%			43	%
Europe			19				31
Asia/Pacific			28				20
Other			5				6
Total			100	%			100	%

 

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

Results of Operations

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 June 30, 2012 and 2011, respectively (in thousands, except for percentages):

 

		Three Months Ended June 30,																$ Change				% Change
		2012								2011
		Amount				As a % of Total Revenues				Amount				As a % of Total Revenues
Product revenues		$	32,923				83	%		$	20,675				78	%		$	12,248				59	%
Parts, accessories and service revenues			6,650				17				5,664				22				986				17
Total revenues			39,573				100				26,339				100				13,234				50
Cost of revenues			16,533				42				11,273				43				5,260				47
Gross profit			23,040				58				15,066				57				7,974				53
Operating expenses
Sales and marketing			11,878				30				9,656				37				2,222				23
Research and development			3,460				9				2,431				9				1,029				42
Amortization of intangible assets acquired			342				1				14				—				328				2,343
General and administrative			3,667				9				4,161				16				(494	)			(12	)
Total operating expenses			19,347				49				16,262				62				3,085				19
Income (loss) from operations			3,693				9				(1,196	)			(5	)			4,889				409
Interest income, net			13				—				46				—				(33	)			(72	)
Other expense, net			(298	)			(1	)			(1	)			—				(297	)			(29,700	)
Income (loss) before provision for income taxes			3,408				9				(1,151	)			(4	)			4,559				396
Provision for income taxes			728				2				149				—				579				389
Net income (loss)		$	2,680				7	%		$	(1,300	)			(5	)%		$	3,980				306	%

Revenues

Revenues in the three months ended June 30, 2012 increased from the three months ended June 30, 2011 by $13.2 million or 50%. The increase was attributable to a number of factors (in thousands, except for percentages):

 

		Three Months Ended June 30,								$ Change				% Change
		2012				2011
Product sales in North America		$	16,432			$	8,555			$	7,877				92	%
Product sales outside North America			16,491				12,120				4,371				36
Global parts, accessories and service sales			6,650				5,664				986				17
Total Revenues		$	39,573			$	26,339			$	13,234				50	%

 

•

Revenues from the sale of products in North America increased by approximately $7.9 million, or 92%, from the 2011 period, reflecting the increased number of units sold from the first full quarter of Cellulaze sales along with sales of our ConBio and PinPointe FootLaser product lines.

 

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•

Revenues from the sale of products outside of North America increased by approximately $4.4 million, or 36%, from the 2011 period primarily due to an increase in the number of units sold through our ConBio, SmoothShapes and Pin Pointe FootLaser product lines.

 

•

Revenues from the sale of parts, accessories and services increased by approximately $1.0 million, or 17%, from the 2011 period, primarily due to an increase in revenues generated from our extended service contracts and revenues generated from performing service on laser systems.

Cost of Revenues

 

		Three Months Ended June 30,								$ Change				% Change
		2012				2011
Cost of revenues (in thousands)		$	16,533			$	11,273			$	5,260				47	%
Cost of revenues (as a percentage of total revenues)			42	%			43	%

Total cost of revenues increased $5.3 million, or 47%, to $16.5 million for three months ended June 30, 2012, as compared to $11.3 million for the three months ended June 30, 2011, primarily related to the 50% increase in total revenues. Our total cost of revenues decreased slightly as a percentage of total revenues to 42% for the three months ended June 30, 2012, from 43% for the three months ended June 30, 2011, due to a higher percentage of laser revenue from our North American distribution, where average selling prices tend to be higher.

Sales and Marketing

 

		Three Months Ended June 30,								$ Change				% Change
		2012				2011
Sales and marketing (in thousands)		$	11,878			$	9,656			$	2,222				23	%
Sales and marketing (as a percentage of total revenues)			30	%			37	%

Sales and marketing expenses increased $2.2 million, or 23%, for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. The increase is attributed to an increase in commission expense of $1.2 million due to the 59% increase in product revenues. Our personnel, administrative costs and travel expenses increased $1.0 million as a result of efforts related to the launch of Cellulaze and an increase in the number of our sales employees. Our sales and marketing expenses for the three months ended June 30, 2012 decreased as a percentage of total revenues to 30% primarily due to the 50% increase in total revenues.

Research and Development

 

		Three Months Ended June 30,								$ Change				% Change
		2012				2011
Research and development (in thousands)		$	3,460			$	2,431			$	1,029				42	%
Research and development (as a percentage of total revenues)			9	%			9	%

Research and development expenses increased $1.0 million, or 42% for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. This increase was primarily due to a $0.6 million increase in personnel and administrative costs associated with the integration of our ConBio research and development team. Professional fees and project materials expenses increased $0.4 million related to increased clinical studies and other research and development efforts.

 

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Amortization of Intangible Assets Acquired

 

		Three Months Ended June 30,								$ Change				% Change
		2012				2011
Amortization of intangible assets acquired (in thousands)		$	342			$	14			$	328				2,343	%
Amortization of intangible assets acquired (as a percentage of total revenues)			1	%			—

For the three month period ending June 30, 2012, we recognized amortization expense of $0.3 million in our operating expenses relating to certain intangible assets acquired through our acquisitions of Eleme Medical and ConBio’s aesthetic business. We expect our amortization expense associated with these intangible assets that will be recognized in our operating expenses over the next five years and beyond to be $0.7 million for the remainder of 2012, $0.9 million for 2013, $0.6 million for 2014, $0.4 million for 2015 and $1.8 million for 2016 and beyond.

General and Administrative

 

		Three Months Ended June 30,								$ Change				% Change
		2012				2011
General and administrative (in thousands)		$	3,667			$	4,161			$	(494	)			(12	)%
General and administrative (as a percentage of total revenues)			9	%			16	%

General and administrative expenses decreased $0.5 million, or 12%, for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. The decrease is primarily due to acquisition costs of $1.2 million in legal, accounting, and investment banking fees associated with the acquisition of ConBio that were recognized in 2011, partially offset by an increase in personnel and other administrative costs.

Interest Income, net

 

		Three Months Ended June 30,								$ Change				% Change
		2012				2011
Interest income, net (in thousands)		$	13			$	46			$	(33	)			(72	)%

The decrease in interest income, net was primarily due to less cash invested in 2012 when compared to 2011, due to cash used for acquisitions during the first half of 2011, as well as increased interest payments associated with capital leases.

Other Expense, net

 

		Three Months Ended June 30,								$ Change				% Change
		2012				2011
Other expense, net (in thousands)		$	(298	)		$	(1	)		$	(297	)			(29,700	)%

The change in other expense, net is primarily a result of increased net foreign currency remeasurement losses in the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 due to the strengthening of the U.S. dollar against the euro.

 

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Provision for Income Taxes

 

		Three Months Ended June 30,								$ Change				% Change
		2012				2011
Provision for income taxes (in thousands)		$	728			$	149			$	579				389	%
Provision as a percentage of income before provision for income taxes			21	%			(13	)%

The provision for income taxes results from a combination of the activities of our domestic and foreign subsidiaries. During the three months ended June 30, 2012, we recorded an income tax provision of $0.7 million, representing an effective tax rate of 21%. We continue to maintain a valuation allowance against our net domestic deferred tax assets as well as the deferred tax assets of our German, Japanese and Mexican subsidiaries at June 30, 2012. During the three months ended June 30, 2011, we recorded an income tax provision of $0.1 million, representing an effective tax rate of (13)% mainly attributable to taxable income generated in foreign jurisdictions. We recorded a tax provision on a pre-tax loss for the three months ended June 30, 2011 because we did not record a benefit for our domestic tax loss. The change in the effective tax rate from the 2011 period to the 2012 period is primarily due to changes in the jurisdictional mix of earnings.

SIX MONTHS ENDED JUNE 30, 2012 AND 2011

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

 

		Six Months Ended June 30,																$ Change				% Change
		2012								2011
		Amount				As a % of Total Revenues				Amount				As a % of Total Revenues
Product revenues		$	61,018				83	%		$	37,286				77	%		$	23,732				64	%
Parts, accessories and service revenues			12,723				17				10,937				23				1,786				16
Total revenues			73,741				100				48,223				100				25,518				53
Cost of revenues			31,193				42				21,076				44				10,117				48
Gross profit			42,548				58				27,147				56				15,401				57
Operating expenses
Sales and marketing			23,429				32				18,412				38				5,017				27
Research and development			6,699				9				4,671				10				2,028				43
Amortization of intangible assets acquired			684				1				24				—				660				2,750
General and administrative			7,185				10				7,102				15				83				1
Total operating expenses			37,997				52				30,209				63				7,788				26
Income (loss) from operations			4,551				6				(3,062	)			(6	)			7,613				249
Interest income, net			23				—				100				—				(77	)			(77	)
Other income (expense), net			(89	)			—				213				—				(302	)			(142	)
Income (loss) before provision for income taxes			4,485				6				(2,749	)			(6	)			7,234				263
Provision for income taxes			986				1				445				1				541				122
Net income (loss)		$	3,499				5	%		$	(3,194	)			(7	)%		$	6,693				210	%

 

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Revenues

Revenues in the six months ended June 30, 2012 increased from the six months ended June 30, 2011 by $25.5 million, or 53%. The increase was attributable to a number of factors (in thousands, except for percentages):

 

		Six Months Ended June 30,								$ Change				% Change
		2012				2011
Product sales in North America		$	29,993			$	15,649			$	14,344				48	%
Product sales outside North America			31,025				21,637				9,388				43
Global parts, accessories and service sales			12,723				10,937				1,786				16
Total Revenues		$	73,741			$	48,223			$	25,518				53	%

 

•

Revenues from the sale of products in North America increased by approximately $14.3 million, or 48%, from the 2011 period, reflecting the increased number of units sold through the launch of Cellulaze and sales of our ConBio and PinPointe FootLaser product lines.

 

•

Revenues from the sale of products outside of North America increased by approximately $9.4 million, or 43%, from the 2011 period primarily due to an increase in the number of units sold through our ConBio, SmoothShapes and Pin Pointe FootLaser product lines.

 

•

Revenues from the sale of parts, accessories and services increased by approximately $1.8 million, or 16%, from the 2011 period, primarily due to an increase in revenues generated from our extended service contracts and revenues generated from performing service on laser systems.

Cost of Revenues

 

		Six Months Ended June 30,								$ Change				% Change
		2012				2011
Cost of revenues (in thousands)		$	31,193			$	21,076			$	10,117				48	%
Cost of revenues (as a percentage of total revenues)			42	%			44	%

Total cost of revenues increased $10.1 million, or 48%, to $31.2 million for the six months ended June 30, 2012, as compared to $21.1 million for the six months ended June 30, 2011, primarily related to the 53% increase in total revenues. Our cost of revenues decreased slightly as a percentage of total revenues to 42% for the six months ended June 30, 2012, from 44% for the six months ended June 30, 2011, due to a higher percentage of laser revenue from our North American distribution, where average selling prices tend to be higher.

Sales and Marketing

 

		Six Months Ended June 30,								$ Change				% Change
		2012				2011
Sales and marketing (in thousands)		$	23,429			$	18,412			$	5,017				27	%
Sales and marketing (as a percentage of total revenues)			32	%			38	%

Sales and marketing expenses increased by $5.0 million, or 27%, for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. The increase is attributed to an increase in commission expense of $2.2 million due to the 64% increase in product revenues. Our personnel, administrative costs and travel expenses increased $2.1 million as a result of efforts related to the launch of Cellulaze and an increase in the number of our sales employees. Promotional costs increased $0.7 million, due to an increased number of workshops, trade shows and other promotional efforts, including those related to the launch of Cellulaze. Our sales and marketing expenses for the six months ended June 30, 2012 decreased as a percentage of total revenues to 32% primarily due to the 53% increase in total revenues.

 

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Research and Development

 

		Six Months Ended June 30,								$ Change				% Change
		2012				2011
Research and development (in thousands)		$	6,699			$	4,671			$	2,028				43	%
Research and development (as a percentage of total revenues)			9	%			10	%

Research and development expenses increased by $2.0 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. This increase was primarily due to a $1.3 million increase in personnel and administrative costs associated with the integration of our ConBio research and development team. Professional fees and project materials expenses increased $0.7 million related to increased clinical studies and other research and development efforts. Our research and development expenses for the six months ended June 30, 2012 decreased as a percentage of total revenues to 9% primarily due to the 53% increase in total revenues.

Amortization of Intangible Assets Acquired

 

		Six Months Ended June 30,								$ Change				% Change
		2012				2011
Amortization of intangible assets acquired (in thousands)		$	684			$	24			$	660				2,750	%
Amortization of intangible assets acquired (as a percentage of total revenues)			1	%			—

For the six month period ending June 30, 2012, we recognized amortization expense of $0.7 million in our operating expenses relating to certain intangible assets acquired through our acquisitions of Eleme Medical and ConBio’s aesthetic business.

General and Administrative

 

		Six Months Ended June 30,								$ Change				% Change
		2012				2011
General and administrative (in thousands)		$	7,185			$	7,102			$	83				1	%
General and administrative (as a percentage of total revenues)			10	%			15	%

General and administrative expenses increased $0.1 million, or 1%, for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. The increase is primarily due to an increase in personnel and other administrative costs offset by legal, accounting, and investment banking fees associated with the acquisition of ConBio that were recognized in 2011.

Interest Income, net

 

		Six Months Ended June 30,								$ Change				% Change
		2012				2011
Interest income, net (in thousands)		$	23			$	100			$	(77	)			(77	)%

The decrease in interest income, net was primarily due to less cash invested in 2012 when compared to 2011, due to cash used for acquisitions during the first half of 2011, as well as increased interest payments associated with capital leases.

 

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Other Income (Expense), net

 

		Six Months Ended June 30,								$ Change				% Change
		2012				2011
Other income (expense), net (in thousands)		$	(89	)		$	213			$	(302	)			(142	)%

The change in other income (expense), net is primarily a result of net foreign currency remeasurement losses in the six months ended June 30, 2012 due to the strengthening of the U.S. dollar, compared to net foreign currency remeasurement gains in the six months ended June 30, 2011 due to the weakening of the U.S. dollar, primarily against the euro.

Provision for Income Taxes

 

		Six Months Ended June 30,								$ Change				% Change
		2012				2011
Provision for income taxes (in thousands)		$	986			$	445			$	541				122	%
Provision as a percentage of income before provision for income taxes			22	%			(16	)%

The provision for income taxes results from a combination of the activities of our domestic and foreign subsidiaries. During the six months ended June 30, 2012, we recorded an income tax provision of $1.0 million, representing an effective tax rate of 22%. We continue to maintain a valuation allowance against our net domestic deferred tax assets as well as the deferred tax assets of our German, Japanese and Mexican subsidiaries at June 30, 2012. During the six months ended June 30, 2011, we recorded an income tax provision of $0.4 million, representing an effective tax rate of (16)% mainly attributable to taxable income generated in foreign jurisdictions. We recorded a tax provision on a pre-tax loss for the three months ended June 30, 2011 because we did not record a benefit for our domestic tax loss. The change in the effective tax rate from the 2011 period to the 2012 period is primarily due to changes in the jurisdictional mix of earnings.

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 our 2005 initial public offering, private placements of equity securities, short-term borrowings and funds generated from our operations.

At June 30, 2012, our cash, cash equivalents and short and long-term marketable securities were $80.0 million. Our cash and cash equivalents of $37.1 million are highly liquid investments with maturity of 90 days or less at date of purchase and consist of cash in operating accounts, investments in money market funds and various state and municipal governments. Our short-term marketable securities of $34.8 million consist of investments in various state and municipal governments, U.S. government agencies and treasuries all of which mature by June 15, 2013. Our long-term marketable securities of $8.1 million consist of investments in various state and municipal governments, U.S. government agencies and treasuries, all of which mature by April 1, 2014.

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. Our capital expenditures increased for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011, and we expect that our capital expenditures during the remainder of 2012 will increase as a result of manufacturing and purchasing new demonstration equipment. During the six months ended June 30, 2012 and 2011, respectively, we transferred $2.2 million and $1.8 million of demonstration equipment to fixed assets.

In March 2012, we commenced an option exchange program (the “Exchange Offer”) in which we offered eligible option holders the opportunity to voluntarily exchange certain “underwater” stock options for a lesser number of new stock options with a lower exercise price. Our U.S. employees were eligible to participate in the Exchange Offer, and our directors and executive officers were not eligible to participate. The exchange ratios for the Exchange Offer were determined by using the Black-Scholes option pricing model to approximate a “value-for-value” exchange, meaning that the value of the eligible stock options was equal to the value of the new stock options. The Exchange Offer, which was subject to Rule 13e-4 under the Securities Exchange Act of 1934, as amended, expired on April 13, 2012.

In the Exchange Offer, 90 eligible option holders tendered eligible options with exercise prices of $20.00 or greater to purchase an aggregate of 325,946 shares of Class A common stock, representing 96% of the total shares of Class A common

 

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stock underlying options eligible for exchange. New stock options were granted to purchase an aggregate of 280,771 shares of Class A common stock in exchange for the cancellation of the tendered eligible options. The exercise price per share of each new option granted in the Exchange Offer is $19.78, which was the closing price of our Class A common stock as reported by The Nasdaq Global Market on April 13, 2012. All eligible stock options were fully vested as of April 13, 2012, the expiration date of the Exchange Offer. Because the fair value of the eligible stock options was equal to the fair value of the new stock options calculated using the Black-Scholes option pricing model, we did not recognize any stock-based compensation expense as a result of the Exchange Offer.

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 upon the purchase of $10 million in common stock, unless our Board of Directors discontinues it sooner. During the six months ended June 30, 2012, we did not repurchase any shares of our common stock under this program. As of June 30, 2012 we have repurchased an aggregate of 196,970 shares under this program at an aggregate cost of $1.9 million.

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 provided by operating activities was $7.3 million for the six months ended June 30, 2012, and resulted primarily from the net income for the period of $3.5 million, increased by approximately $4.9 million in depreciation and amortization and stock-based compensation expense and by approximately $0.6 million in net accretion of marketable securities. Net changes in working capital items decreased cash from operating activities by approximately $1.7 million primarily related to an increase in inventory of $3.6 million, net of demonstration equipment transfers, associated with increased purchases to meet the increased revenue requirements. Accounts receivable increased $1.5 million associated with increased revenues. These increases were partially offset by an increase in deferred revenue of $2.9 million and an increase in accounts payable of $1.0 million. Net cash used in investing activities was $6.3 million for the six months ended June 30, 2012, which consisted of net purchases of marketable securities of $5.4 million and purchases of property and equipment of $1.0 million, offset by a decrease in other noncurrent assets of $0.1 million. Net cash provided by financing activities during the six months ended June 30, 2012 was $0.4 million, principally relating to the proceeds of stock option exercises.

Net cash provided by operating activities was $0.1 million for the six months ended June 30, 2011, and resulted primarily from the net loss for the period of $3.2 million, increased by approximately $4.3 million in depreciation and amortization and stock-based compensation expense and by approximately $0.6 million in accretion of discounts on marketable securities. Net changes in working capital items decreased cash from operating activities by approximately $1.7 million primarily related to an increase in inventory of $5.6 million due to increased purchases to meet the increased revenue requirements. Accounts receivable increased $2.6 million associated with increased revenues. These increases were partially offset by an increase in accounts payable of $3.4 million, accrued expenses of $1.7 million and amounts due to related party of $1.2 million. Net cash used in investing activities was $6.6 million for the six months ended June 30, 2011, which consisted primarily of $27.0 million used to acquire Eleme Medical and ConBio, and $0.6 million used for fixed asset purchases, partially offset by net proceeds of marketable securities of $20.9 million. Net cash provided by financing activities during the six months ended June 30, 2011 was $0.2 million, principally relating to the proceeds of stock option exercises.

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 described in our Annual Report on Form 10-K for the year ended December 31, 2011. 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 year ended December 31, 2011. There have been no material changes to our critical accounting policies as of June 30, 2012.

 

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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, U.S. government agencies and treasuries. The securities, other than money market funds, 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. All investments mature by April 1, 2014. 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.

 

		June 30, 2012				2012				2013				2014
Investments (at fair value)		$	46,609			$	21,623			$	22,788			$	2,198
Weighted average interest rate			0.29	%			0.28	%			0.30	%			0.37	%

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 54% of our total international revenues during the six months ended June 30, 2012. Substantially all of the remaining 46% 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. We have not historically engaged in hedging activities relating to our non-U.S. dollar operations. We sell inventory to our subsidiaries in U.S. dollars. These amounts at our local subsidiaries are recorded in local currency rates in effect on the transaction date. Therefore, we may be exposed to exchange rate fluctuations that occur while the debt is outstanding which we recognize as unrealized gains and losses in our statements of operations. Upon settlement of these debts, we may record realized foreign exchange gains and losses in our statements of operations. We may incur negative foreign currency translation charges as a result of changes in currency exchange rates.

 

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 June 30, 2012. 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 June 30, 2012, 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.

 

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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 June 30, 2012 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 (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. In 2008, the plaintiff served, and the Court held a hearing regarding a motion for class certification. In 2010, the Court issued an order dismissing the complaint without prejudice for Dr. Weitzner’s failure to prosecute the case and subsequently allowed a plaintiff motion for relief from the dismissal order. In January 2012, the Court issued a Memorandum of Decision denying the class certification motion. The Court has scheduled a status conference for September 20, 2012 regarding Dr. Weitzner’s individual claims. On July 23, 2012, Dr. Weitzner filed a new purported class action, based on the same operative facts and asserting the same claims as the Massachusetts action, in federal court in the Eastern District of New York. We have not been served with a summons or complaint in the New York action. We believe we have numerous defenses to Dr. Weitzner’s claims.

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, 2011 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 June 30, 2012, 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, 2011, 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 upon the purchase of $10 million in common stock, unless our Board of Directors terminates it sooner. During the six months ended June 30, 2012, we did not repurchase any shares of our common stock. As of June 30, 2012, we have repurchased an aggregate of 196,970 shares under the program at an aggregate cost of $1.9 million.

 

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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
101*		The following materials from the Cynosure, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language); (i) Condensed Statement of Earnings for the three and six months ended June 30, 2012 and 2011, (ii) Condensed Statement of Financial Position at June 30, 2012 and December 31, 2011, (iii) Condensed Statement of Cash Flows for the six months ended June 30, 2012 and 2011, and (iv) Notes to Condensed Consolidated Financial Statements.

 

*

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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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: August 3, 2012		By:		/S/ MICHAEL R. DAVIN
				Michael R. Davin
				Chairman, President, Chief Executive Officer
Date: August 3, 2012		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
101*		The following materials from the Cynosure, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language); (i) Condensed Statement of Earnings for the three and six months ended June 30, 2012 and 2011, (ii) Condensed Statement of Financial Position at June 30, 2012 and December 31, 2011, (iii) Condensed Statement of Cash Flows for the six months ended June 30, 2012 and 2011, and (iv) Notes to Condensed Consolidated Financial Statements.

 

*

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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