CYNOSURE INC - FORM 10-Q - November 7, 2014

CYNOSURE INC - FORM 10-Q - November 7, 2014

Attached files

Attached files

CYNOSURE INC Reports

file	filename
EX-31.1 - EX-31.1 - CYNOSURE INC	d802931dex311.htm
EX-32.2 - EX-32.2 - CYNOSURE INC	d802931dex322.htm
EX-31.2 - EX-31.2 - CYNOSURE INC	d802931dex312.htm
EXCEL - IDEA: XBRL DOCUMENT - CYNOSURE INC	Financial_Report.xls
EX-32.1 - EX-32.1 - CYNOSURE INC	d802931dex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

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

For the quarterly period ended September 30, 2014

¨	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):

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

The number of shares outstanding of each of the registrant’s classes of common stock, as of October 31, 2014:


Class	Number of Shares
Class A Common Stock, $0.001 par value		21,648,006

Cynosure, Inc.

Table of Contents


		Page No.
PART I.	Financial Information

Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013		1
	Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2014 and 2013		2
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Month Periods Ended September 30, 2014 and 2013		3
	Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2014 and 2013		4
	Notes to Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24
Item 4.	Controls and Procedures		25

PART II	Other Information
Item 1.	Legal Proceedings		25
Item 1A.	Risk Factors		28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		42
Item 6.	Exhibits		42

SIGNATURES			43
EXHIBIT INDEX			44

EX-2.1 Asset Purchase Agreement, dated as of September 5, 2014, among Cynosure, Inc., Ellman International, Inc., Ellman Holdings, Inc., and Ellman Holding Corporation (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed September 8, 2014)

EX-31.1 Section 302 Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

EX-31.2 Section 302 Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

EX-32.1 Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX-32.2 Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX-101 The following materials from the Cynosure, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013, (ii) Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and 2013, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, and (v) Notes to Consolidated Financial Statements.

Cynosure, Inc.

Consolidated Balance Sheets

(in thousands)


	(Unaudited) September 30, 2014			(Recast) December 31, 2013
Assets
Current assets:
Cash and cash equivalents	$	53,754		$	93,655
Short-term marketable securities		34,171			26,633
Accounts receivable, net		44,121			36,587
Inventories		59,034			50,251
Prepaid expenses and other current assets		12,201			6,891
Deferred income taxes		9,475			9,341

Total current assets		212,756			223,358

Property and equipment, net		35,039			26,445
Long-term marketable securities		25,071			8,804
Goodwill		105,115			99,237
Intangibles, net		55,863			55,179
Other assets		1,829			1,678

Total assets	$	435,673		$	414,701

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	20,960		$	13,985
Amounts due to related party		—			1,268
Accrued expenses		36,501			36,954
Deferred revenue		9,621			9,163
Capital lease obligation		171			286

Total current liabilities		67,253			61,656

Capital lease obligation, net of current portion		15,689			14,957
Deferred revenue, net of current portion		818			1,010
Other noncurrent liability		16,058			8,726
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 — 23,203 Class A shares and no Class B shares at September 30, 2014 Issued — 22,633 Class A shares and no Class B shares at December 31, 2013		23			23
Additional paid-in capital		354,726			338,742
Retained earnings		16,974			8,636
Accumulated other comprehensive loss		(2,764	)		(1,499	)
Treasury stock, 1,629 Class A shares, at cost, at September 30, 2014; 886 Class A shares, at cost, at December 31, 2013		(33,104	)		(17,550	)

Total stockholders’ equity		335,855			328,352

Total liabilities and stockholders’ equity	$	435,673		$	414,701

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

Cynosure, Inc.

Consolidated Statements of Operations

(Unaudited, in thousands, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Product revenues	$	55,672		$	50,147		$	164,969		$	127,286
Parts, accessories, service and royalties revenues		15,858			10,545			41,138			24,187

Total revenues		71,530			60,692			206,107			151,473
Cost of revenues		31,232			26,558			89,721			65,865

Gross profit		40,298			34,134			116,386			85,608
Operating expenses:
Sales and marketing		21,721			17,364			62,710			44,198
Research and development		5,746			5,033			16,319			12,350
Amortization of intangible assets acquired		740			451			2,166			948
General and administrative		6,841			12,712			22,197			42,189

Total operating expenses		35,048			35,560			103,392			99,685

Income (loss) from operations		5,250			(1,426	)		12,994			(14,077	)

Interest (expense) income, net		(342	)		25			(1,034	)		80
Other (expense) income, net		(827	)		721			(548	)		318

Income (loss) before provision for income taxes		4,081			(680	)		11,412			(13,679	)

Provision (benefit) for income taxes		1,007			601			3,074			(4,683	)

Net income (loss)	$	3,074		$	(1,281	)	$	8,338		$	(8,996	)

Basic net income (loss) per share	$	0.14		$	(0.06	)	$	0.38		$	(0.49	)

Diluted net income (loss) per share	$	0.14		$	(0.06	)	$	0.37		$	(0.49	)

Basic weighted-average common shares outstanding		21,637			22,331			21,900			18,406

Diluted weighted-average common shares outstanding		21,900			22,331			22,280			18,406

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

Cynosure, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited, in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Net income (loss)	$	3,074		$	(1,281	)	$	8,338		$	(8,996	)

Other comprehensive (loss) income components:
Cumulative translation adjustment		(1,429	)		713			(1,249	)		85
Unrealized (loss) gain on marketable securities		(12	)		11			(16	)		32

Total other comprehensive (loss) income		(1,441	)		724			(1,265	)		117

Comprehensive income (loss)	$	1,633		$	(557	)	$	7,073		$	(8,879	)

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

Cynosure, Inc.

Consolidated Statements of Cash Flows

(Unaudited, in thousands)


	Nine Months Ended September 30,
	2014			2013
Operating activities:
Net income (loss)	$	8,338		$	(8,996	)
Reconciliation of net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		13,100			6,579
Impairment loss on assets held for sale		—			468
Stock-based compensation expense		5,320			2,570
Loss on disposal of fixed assets		67			105
Noncash interest expense on capital lease obligations		1,110			—
Deferred income taxes		(127	)		(5,641	)
Net accretion of marketable securities		1,134			1,300
Changes in operating assets and liabilities:
Accounts receivable		(5,994	)		(13,149	)
Inventories		(6,325	)		(4,381	)
Net book value of demonstration inventory sold		500			465
Prepaid expenses and other current assets		759			970
Accounts payable		5,774			(2,850	)
Due to related party		—			(621	)
Tax benefit from stock option exercises		(3,033	)		(39	)
Accrued expenses		(2,599	)		5,799
Deferred revenue		(63	)		2,364
Other noncurrent liability		—			(109	)

Net cash provided by (used in) operating activities		17,961			(15,166	)
Investing activities:
Purchases of property and equipment		(14,011	)		(2,202	)
Proceeds from the sales and maturities of marketable securities		25,755			75,562
Purchases of marketable securities		(50,712	)		(10,961	)
Cash paid for acquisitions, net of cash received		(13,235	)		(64,978	)
Increase in other noncurrent assets		(89	)		(64	)

Net cash used in investing activities		(52,292	)		(2,643	)
Financing activities:
Excess tax benefit on options exercised		3,033			39
Repurchases of common stock		(15,554	)		—
Proceeds from stock option exercises		7,629			2,613
Acquisition-related equity issuance costs		—			(568	)
Payments on capital lease obligation		(602	)		(230	)

Net cash (used in) provided by financing activities		(5,494	)		1,854
Effect of exchange rate changes on cash and cash equivalents		(76	)		(1	)

Net decrease in cash and cash equivalents		(39,901	)		(15,956	)
Cash and cash equivalents, beginning of the period		93,655			86,057

Cash and cash equivalents, end of the period	$	53,754		$	70,101

Supplemental cash flow information
Cash paid for interest	$	14		$	20
Cash paid for income taxes	$	1,827		$	791

Supplemental noncash investing and financing activities
Transfer of demonstration equipment from inventory to fixed assets	$	3,151		$	5,325
Transfer of long-lived assets held for sale from fixed assets to long-lived assets held for sale	$	—		$	26,396
Assets acquired under capital lease	$	166		$	82

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

Cynosure, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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 (U.S. GAAP) 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, 2013. The December 31, 2013 consolidated balance sheet within this Quarterly Report on Form 10-Q has been recast to reflect updated purchase accounting adjustments associated with the 2013 acquisition of Palomar Medical Technologies, Inc. (Palomar). In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations, and cash flows as of the dates and for the periods presented have been included. The results of operations for the three and nine months ended September 30, 2014 may not be indicative of the results that may be expected for the year ending December 31, 2014, or any other period.

Note 2 — Stock-Based Compensation

Cynosure recorded stock-based compensation expense of $2.0 million and $0.9 million for the three months ended September 30, 2014 and 2013, respectively. Cynosure recorded stock-based compensation expense of $5.3 million and $2.6 million for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014 and 2013, respectively, Cynosure had $25,000 and $20,000 of stock-based compensation expense capitalized as a part of inventory.

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 share-based payments, as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(In thousands)
Cost of revenues	$	79	$	44	$	219	$	121
Sales and marketing		519		260		1,481		761
Research and development		270		133		757		424
General and administrative		1,108		430		2,863		1,264

Total stock-based compensation expense	$	1,976	$	867	$	5,320	$	2,570

Cash received from option exercises was $7.6 million and $2.6 million during the nine months ended September 30, 2014 and 2013, respectively.

Cynosure granted 849,680 and 386,010 stock options during the nine months ended September 30, 2014 and 2013, 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 nine months ended September 30, 2014 and 2013 was $10.51 and $13.10, respectively, using the following assumptions:


	Nine Months Ended September 30,
	2014	2013
Risk-free interest rate	1.44% - 1.80%	0.79% - 1.49%
Expected dividend yield	—	—
Expected term	4.6 years	4.8 years
Expected volatility	43% - 44%	54% - 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 represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and Cynosure’s historical exercise patterns. 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.

Cynosure granted 44,840 restricted stock units (RSUs) during the nine months ended September 30, 2014 to employees at a fair market value of its common stock on the date of grant and which vest quarterly over a three-year period. Cynosure is recognizing related compensation expense on a straight-line basis over the three-year period.

Cynosure granted 43,500 RSUs during the nine months ended September 30, 2014 to non-employee directors at a fair market value of its common stock on the date of grant and which vest quarterly over a one-year period. Cynosure is recognizing related compensation expense on a straight-line basis over the one-year period.

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:


	September 30, 2014		December 31, 2013 (recast)
	(in thousands)
Raw materials	$	15,158	$	16,900
Work in process		3,886		2,316
Finished goods		39,990		31,035

	$	59,034	$	50,251

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 September 30, 2014 (in thousands):


	Level 1		Level 2		Level 3		Total
Money market funds (1)	$	887	$	—	$	—	$	887
State and municipal bonds		—		48,720		—		48,720
Treasuries and government agencies		—		8,498		—		8,498
Corporate obligations and commercial paper		—		2,007		—		2,007
Equity securities		17		—		—		17

Total	$	904	$	59,225	$	—	$	60,129

(1)	Included in cash and cash equivalents at September 30, 2014.

During the nine months ended September 30, 2014, there were no significant transfers in and out of Level 1 and Level 2. Cynosure did not have any Level 3 financial assets at September 30, 2014 or December 31, 2013.

Note 5 — Short and Long-Term Marketable Securities

Cynosure’s available-for-sale securities at September 30, 2014 consist of approximately $59.2 million of investments in debt securities consisting of state and municipal bonds, treasuries and government agencies, corporate obligations and commercial paper 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 September 30, 2014, Cynosure’s marketable securities consist of the following (in thousands):


	Market Value		Amortized Cost		Unrealized Gains		Unrealized Losses
*Available-for-Sale Securities:*
Short-term marketable securities:
State and municipal bonds	$	26,145	$	26,129	$	16	$	—
Treasuries and government agencies		6,002		6,001		1		—
Corporate obligations and commercial paper		2,007		2,005		2		—
Equity securities		17		22		—		(5	)

Total short-term marketable securities	$	34,171	$	34,157	$	19	$	(5	)

Long-term marketable securities:
State and municipal bonds	$	22,575	$	22,569	$	11	$	(5	)
Treasuries and government agencies		2,496		2,500		—		(4	)

Total long-term marketable securities	$	25,071	$	25,069	$	11	$	(9	)

Total available-for-sale securities	$	59,242	$	59,226	$	30	$	(14	)

Total marketable securities	$	59,242

As of December 31, 2013, 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	$	793	$	793	$	—	$	—

Total cash equivalents	$	793	$	793	$	—	$	—

Short-term marketable securities:
State and municipal bonds	$	10,552	$	10,551	$	1	$	—
Treasuries and government agencies		15,028		15,018		10		—
Corporate obligations and commercial paper		1,004		1,004		—		—
Equity securities		49		8		41		—

Total short-term marketable securities	$	26,633	$	26,581	$	52	$	—

Long-term marketable securities:
State and municipal bonds	$	6,788	$	6,787	$	1	$	—
Corporate obligations and commercial paper		2,016		2,015		1		—

Total long-term marketable securities	$	8,804	$	8,802	$	2	$	—

Total available-for-sale securities	$	36,230	$	36,176	$	54	$	—

Total marketable securities	$	35,437

As of September 30, 2014, Cynosure’s available-for-sale debt securities mature as follows (in thousands):


	Total		Maturities
	Total		Less Than One Year		One to Five Years		More than Five Years
State and municipal bonds	$	48,720	$	26,145	$	22,575	$	—
Treasuries and government agencies		8,498		6,002		2,496		—
Corporate obligations and commercial paper		2,007		2,007		—		—

Total available-for-sale debt securities	$	59,225	$	34,154	$	25,071	$	—

Note 6 — Acquisitions

Ellman International, Inc.

On September 5, 2014, Cynosure acquired substantially all of the assets of Ellman International, Inc. (Ellman) for $13.2 million in cash. In addition, Cynosure assumed current liabilities associated with normal working capital and certain contractual liabilities. The purchase price was based primarily on the net working capital on the date of purchase plus an amount to retire all of Ellman’s long term debt on the date of sale. Cynosure also assumed a license transfer agreement as part of the purchase valued at $4.2 million. The acquisition complements Cynosure’s aesthetic treatment platform with radiofrequency energy sources and accessory products. The acquisition of Ellman was considered a business acquisition for accounting purposes.

Cynosure has retained an independent valuation firm to assess the fair value of the assets acquired and liabilities assumed. Pro forma financial information was filed with the SEC within the applicable time period. Cynosure has preliminarily allocated the purchase price to the net tangible and intangible assets based on their estimated fair values as of September 5, 2014. As such, the fair value of the assets acquired and liabilities assumed, including intangible assets, presented in the table below are provisional and will be finalized in a later period once the fair value procedures are completed. Goodwill represents the excess of purchase price over the fair value of the net assets acquired.

The following table summarizes the estimated fair value as of September 5, 2014 of the net assets acquired (in thousands):


Purchase price:
Cash paid	$	13,235

Total	$	13,235

Assets (liabilities) acquired:
Accounts receivable		2,147
Inventory		4,419
Prepaids and other assets		488
Property and equipment		576
Intangible assets		6,800
Goodwill		5,886
Accounts payable		(9	)
Accrued expenses		(2,452	)
Deferred revenue		(460	)
Other noncurrent liability		(4,160	)

Total	$	13,235

Revenue related to Ellman’s operations was $2.6 million for the period following the September 5, 2014 acquisition date, and is included in Cynosure’s consolidated statements of operations for the three and nine months ended September 30, 2014. As a result of the integration of the operations of Ellman into Cynosure’s operations, disclosures of earnings included in the accompanying consolidated statement of operations since the acquisition date is not practicable.

The following unaudited pro forma condensed consolidated operating results for the three and nine months ended September 30, 2014 and 2013 summarize the combined results of operations for Cynosure and Ellman. The unaudited pro forma condensed consolidated operating results includes the business combination accounting effects as if the acquisition had been completed as of

January 1, 2013 (for both the 2014 and 2013 period results) after giving effect to certain adjustments. These pro forma financial statements are for informational purposes only and are not necessarily indicative of the operating results that would have occurred if the transaction had occurred on such date. No effect has been given for synergies, if any, that may be realized through the acquisition.


	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014		2013
	(In thousands)
Revenue (unaudited)	$	75,433	$	66,868		$	222,746	$	171,019
Pre-tax income (loss) (unaudited)	$	4,027	$	(1,428	)	$	10,326	$	(15,735	)

The unaudited consolidated pro forma financial information above includes significant, non-recurring adjustments made to account for certain costs which would have been incurred if the acquisition had been completed on January 1, 2013, including $0.3 million associated with the step up in fair value of finished goods inventory acquired through the acquisition.

Palomar Medical Technologies, Inc.

On June 24, 2013, Cynosure acquired Palomar. Certain adjustments related to Palomar’s opening balance sheet were finalized during the first half of 2014, after the December 31, 2013 financial statements were issued. The adjustments were based on facts that existed at the acquisition date and were finalized using information that came available during the first half of 2014. Under Accounting Standards Codification (ASC) 805, Business Combinations, an acquirer is required to recognize adjustments to provisional amounts during the measurement period as they are identified, and to recognize such adjustments retrospectively – as if the accounting from the business combination had been completed at the acquisition date. As a result, the carrying amount of inventory acquired in the acquisition of Palomar was retrospectively decreased by $3.8 million on June 24, 2013, and the carrying amounts of the deferred tax liability and accounts payable acquired in the acquisition of Palomar were retrospectively increased by $0.2 million and $0.1 million, respectively, on June 24, 2013, with corresponding increases to goodwill. The carrying amount of accrued expenses acquired in the acquisition of Palomar was retrospectively decreased by $23,000 on June 24, 2013, with a corresponding decrease to goodwill. The December 31, 2013 consolidated balance sheet within this Quarterly Report on Form 10-Q has been updated to disclose these recast values.

Note 7 — Goodwill

Changes to goodwill during the nine months ended September 30, 2014 were as follows (in thousands):


Balance – December 31, 2013 (recast)	$	99,237
Ellman acquisition		5,886
Translation adjustment		(8	)

Balance – September 30, 2014	$	105,115

Note 8 — Other Intangible Assets

Other intangible assets consist of the following at September 30, 2014 and December 31, 2013 (in thousands):


	Developed Technology & Patents			Business Licenses			Customer Relationships			Trade Names			Other			Total
September 30, 2014
Cost	$	29,240		$	384		$	19,718		$	18,390		$	1,338		$	69,070
Translation adjustment		—			41			5			—			3			49
Accumulated amortization		(6,370	)		(255	)		(5,244	)		(1,379	)		(8	)		(13,256	)

Balance, September 30, 2014	$	22,870		$	170		$	14,479		$	17,011		$	1,333		$	55,863

December 31, 2013
Cost	$	27,510		$	384		$	15,833		$	16,930		$	1,338		$	61,995
Translation adjustment		—			40			26			—			4			70
Accumulated amortization		(2,216	)		(239	)		(3,662	)		(761	)		(8	)		(6,886	)

Balance, December 31, 2013	$	25,294		$	185		$	12,197		$	16,169		$	1,334		$	55,179

Cynosure acquired $6.8 million of identifiable intangible assets in the Ellman acquisition, of which $1.7 million was assigned to technology patents, $3.6 million was assigned to customer relationships and $1.5 million was assigned to trademarks. The technology patents are being amortized on an economic patterned basis over a 7.0 year weighted-average amortization period and the customer relationships and trademarks are being amortized on a straight-line basis over a 15.0 year weighted-average amortization period. In total, the weighted-average amortization period for these intangible assets is 13.0 years.

Cynosure is currently evaluating the fair value of assets acquired and liabilities assumed from the Ellman acquisition, including identifiable intangible assets and their related amortization periods. As such, the $6.8 million in intangible assets presented in the table above is provisional and will be finalized in a later period once the fair value procedures are completed.

Amortization expense related to developed technology and patents is classified as a component of cost of revenues. Amortization expense related to customer relationships and trade names is classified as a component of amortization of intangible assets acquired. Amortization expense related to business licenses and other is classified as a component of general and administrative expenses. For the three and nine months ended September 30, 2014, Cynosure recognized $27,000 in amortization expense, classified as a component of amortization of intangible assets acquired, related to the identifiable intangible assets from the Ellman acquisition. For the three and nine months ended September 30, 2014, Cynosure recognized $32,000 in amortization expense, classified as a component of cost of revenues, related to the identifiable intangible assets from the Ellman acquisition.

Amortization expense for the three months ended September 30, 2014 and 2013 was $2.2 million and $1.4 million, respectively. Amortization expense for the nine months ended September 30, 2014 and 2013 was $6.4 million and $2.1 million, respectively. Cynosure has approximately $1.3 million of indefinite-life intangible assets that are included in other intangible assets in the table above. As of September 30, 2014, amortization expense on existing intangible assets for the next five years and beyond is as follows (in thousands):


Remainder of 2014	$	2,282
2015		9,156
2016		8,365
2017		6,376
2018		4,860
2019 and thereafter		23,494

Total	$	54,533

Note 9 — Warranty Costs

Cynosure typically provides a one-year parts and labor warranty on end-user sales of lasers. Distributor sales generally include a one-year warranty on parts only. Estimated future costs for initial product warranties are provided for at the time of revenue recognition. The following table provides the detail of the change in Cynosure’s product warranty accrual during the nine months ended September 30, 2014, which is a component of accrued expenses in the consolidated balance sheets (in thousands):


Balance – December 31, 2013	$	6,651
Warranty provision related to new sales		10,484
Costs incurred		(9,979	)

Balance – September 30, 2014	$	7,156

Note 10 — 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 September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(in thousands)
United States	$	39,734	$	30,906	$	100,404	$	71,340
Europe		10,207		10,013		35,830		26,786
Asia / Pacific		15,131		13,570		47,857		37,300
Other		6,458		6,203		22,016		16,047

Total	$	71,530	$	60,692	$	206,107	$	151,473

Total assets by geographic area are as follows:


	September 30, 2014			December 31, 2013
	(in thousands)
United States	$	400,149		$	380,383
Europe		23,017			21,741
Asia / Pacific		17,889			16,437
Eliminations		(5,382	)		(3,860	)

Total	$	435,673		$	414,701

Long-lived assets by geographic area are as follows:


	September 30, 2014		December 31, 2013
	(in thousands)
United States	$	32,353	$	24,120
Europe		2,259		2,403
Asia / Pacific		2,256		1,600

Total	$	36,868	$	28,123

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.

The increase in the amount of total assets is due primarily to the Ellman acquisition. The increase in the amount of long-lived assets is primarily due to the tangible net assets acquired from the Ellman acquisition. Cynosure is currently evaluating the fair value of assets acquired and liabilities assumed.

Note 11 — Net Income (Loss) Per Common Share

Basic net income (loss) per share is determined by dividing net income (loss) by the weighted average common shares outstanding during the period. Diluted net income (loss) per share is determined by dividing net income (loss) by the diluted weighted average shares outstanding during the period. Diluted weighted average shares reflect the dilutive effect, if any, of common stock options and RSUs based on the treasury stock method. For the three and nine months ended September 30, 2014 and 2013, there were no outstanding Class B shares, and Cynosure may not issue Class B shares in the future.

A reconciliation of basic and diluted shares is as follows (in thousands, except per share data):


	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014		2013
Net income (loss)	$	3,074	$	(1,281	)	$	8,338	$	(8,996	)

Basic weighted average common shares outstanding		21,637		22,331			21,900		18,406
Weighted average common equivalent shares		263		—			380		—

Diluted weighted average common shares outstanding		21,900		22,331			22,280		18,406

Basic net income (loss) per share	$	0.14	$	(0.06	)	$	0.38	$	(0.49	)

Diluted net income (loss) per share	$	0.14	$	(0.06	)	$	0.37	$	(0.49	)

For the three and nine months ended September 30, 2014, approximately 1.7 million and 1.5 million, respectively, weighted average stock options and RSUs to purchase 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 nine months ended September 30, 2013, 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 nine months ended September 30, 2013 would be antidilutive based on the net loss for the periods. For the three and nine months ended September 30, 2013, respectively, outstanding options to purchase 1.0 million and 1.1 million shares were excluded from the computation of diluted earnings per share because their inclusion would have been antidilutive.

Note 12 — Accumulated Other Comprehensive Loss

Changes to accumulated other comprehensive loss during the nine months ended September 30, 2014 were as follows (in thousands):


	Unrealized Gain on Marketable Securities, net of taxes			Translation Adjustment			Accumulated Other Comprehensive Loss
Balance — December 31, 2013	$	36		$	(1,535	)	$	(1,499	)
Current period other comprehensive loss		(16	)		(1,249	)		(1,265	)

Balance — September 30, 2014	$	20		$	(2,784	)	$	(2,764	)

Note 13 — Income Taxes

During the three months ended September 30, 2014 and 2013, Cynosure recorded an income tax provision of $1.0 million and $0.6 million, respectively, representing an effective tax rate of 25% and (88)%, respectively. The income tax provisions for the three months ended September 30, 2014 and 2013 are primarily attributable to the tax provision on the earnings of its foreign and domestic operations.

At December 31, 2013, Cynosure had gross unrecognized tax benefits of $1.7 million, of which $0.1 million, if recognized, would favorably impact the effective tax rate. During the nine months ended September 30, 2014, unrecognized tax benefits decreased by $0.8 million, of which none impacted the effective rate. The decrease of $0.8 million in the Company’s unrecognized tax benefits resulted from management’s finalization of its assessment of pre-existing Palomar uncertain tax positions within the purchase accounting period during the second quarter of 2014. At September 30, 2013, Cynosure had gross unrecognized tax benefits of $0.9 million, of which $0.1 million, if recognized, would favorably impact the effective tax rate. During the nine months ended September 30, 2014, the amount of interest and penalties recorded on unrecognized tax benefits was immaterial. Cynosure classifies interest and penalties related to income taxes as a component of its provision for income taxes. Cynosure does not expect any material changes in the amounts of unrecognized tax benefits over the next 12 months.

Cynosure files income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. Cynosure is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2011. With few exceptions, Cynosure is no longer subject to U.S. state tax examinations for years before 2009. Additionally, certain non-U.S. jurisdictions are no longer subject to income tax examinations by tax authorities for years before 2009.

Note 14 — Commitments and Contingencies

Lease Commitments

Cynosure leases the land portion of its U.S. operating facility and certain foreign facilities under non-cancelable operating lease agreements expiring through May 2027. These leases are non-cancellable and typically contain renewal options. Certain leases contain rent escalation clauses for which Cynosure recognizes the expense on a straight-line basis. Rent expense for the three and nine months ended September 30, 2014 was approximately $0.6 million and $2.5 million, respectively.

Cynosure leases the buildings portion of its U.S. operating facility and certain equipment and vehicles under capital lease agreements with payments due through May 2027. Commitments under Cynosure’s lease arrangements are as follows (in thousands):


	Operating Leases		Capital Leases
Remainder of 2014	$	420	$	73
2015		1,292		146
2016		1,396		2,165
2017		1,418		2,550
2018		1,369		2,515
2019 and thereafter		3,726		22,680

Total minimum lease payments	$	9,621	$	30,129

Less amount representing interest				(14,269	)

Present value of obligations under capital leases			$	15,860
Current portion of capital lease obligations				171

Capital lease obligations, net of current portion			$	15,689

Contractual Obligations

Cynosure’s significant outstanding contractual obligations relate to its capital leases from its facilities leases, including the buildings portion of its U.S. operating facility, and equipment financings. Cynosure’s leases are non-cancellable and typically contain renewal options. Certain leases contain rent escalation clauses for which Cynosure recognizes the expense on a straight-line basis. Cynosure has summarized in the table below its fixed contractual cash obligations as of September 30, 2014.


	Total		Less Than One Year		One to Three Years		Three to Five Years		More than Five Years
	(In thousands)
Capital lease obligations, including interest	$	30,129	$	183	$	4,114	$	5,036	$	20,796
Operating leases		9,621		1,389		2,782		2,064		3,386

Total contractual obligations	$	39,750	$	1,572	$	6,896	$	7,100	$	24,182

Note 15 — Recent Accounting Pronouncements

In May 2014, the FASB issued guidance codified in ASC 606, Revenue Recognition – Revenue from Contracts with Customers, which amends the guidance in ASC 605, Revenue Recognition. This new revenue standard creates a single source of revenue guidance for all companies in all industries and is more principles-based than the current revenue guidance. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. ASC 606 is effective for interim and annual periods beginning after December 15, 2016. Cynosure is currently evaluating the impact of the provisions of ASC 606.

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 on Form 10-Q regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

•

our ability to identify and penetrate new markets for our products and technology;

•

our strategy of growing through acquisitions;

•

our ability to innovate, develop and commercialize new products;

•

our ability to obtain and maintain regulatory clearances;

•

our sales and marketing capabilities and strategy in the United States and internationally;

•

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

•

our intellectual property portfolio; and

•

our estimates regarding expenses, future revenues, capital requirements and needs for additional financing.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors below under the heading “Risk Factors” in Part II, Item 1A, and in our other public filings with the Securities and Exchange Commission (SEC) that could cause actual results or events to differ materially from the forward-looking statements that we make.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to the Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. It is routine for internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations are made as of the date of this Quarterly Report on Form 10-Q and may change prior to the end of each quarter or the year. While we may elect to update forward-looking statements at some point in the future, we do not undertake any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K filed with the SEC on March 17, 2014. 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 laser and light-based aesthetic treatment systems that enable plastic surgeons, dermatologists and other medical practitioners to perform non-invasive and minimally invasive procedures to remove hair, treat vascular and benign pigmented lesions, remove multi-colored tattoos, revitalize the skin, liquefy and remove unwanted fat through laser lipolysis, reduce cellulite, clear nails infected by toe fungus and ablate sweat glands. We also have developed in conjunction with our development agreement with Unilever Ltd. (Unilever) a laser treatment system for the home use market.

Our product portfolio is composed of a broad range of energy sources including Alexandrite, diode, Nd:YAG, picosecond, pulse dye, and Q-switched lasers and intense pulsed light. We believe that we are one of only a few companies that currently offer aesthetic treatment systems utilizing Alexandrite and pulse dye lasers, which are particularly well suited for some applications and skin types. We offer single energy source systems as well as workstations that incorporate two or more different types of lasers or pulsed light technologies. We offer multiple technologies and system alternatives at a variety of price points depending primarily on the number and type of energy sources included in the system. Our products are designed to be easily upgradeable to add additional energy sources and handpieces, which provide our customers with technological flexibility as they expand their practices.

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

•

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

•

our SmartLipo product line for LaserBodySculpting^S for the removal of unwanted fat;

•

our Cellulaze product line for the treatment of cellulite;

•

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

•

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

•

our Cynergy product line for the treatment of vascular lesions;

•

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

•

our PicoSure product line for the treatment of tattoos, benign pigmented lesions, acne scars, fine lines and wrinkles;

•

our Icon Aesthetic System for hair removal, wrinkle reduction and scar and stretch mark treatment;

•

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

•

our Vectus diode laser for high volume hair removal.

On September 5, 2014, we acquired substantially all of the assets of Ellman International, Inc., which we refer to as Ellman, for $13.2 million in cash. In addition, we assumed certain contractual and current liabilities.

The Ellman acquisition complements our platform with radiofrequency (RF) energy sources and accessory products for aesthetic and surgical indications. Ellman’s product line encompasses multiple RF generators and single-use electrodes for aesthetic and multi-specialty surgical indications such as facial plastic and general surgery, gynecology, ear, nose and throat procedures, ophthalmology, oral and maxillofacial surgery, podiatry and proctology. Ellman’s proprietary high frequency, low-temperature RF technology is optimized for achieving surgical precision and controlled hemostasis. The main aesthetic products which have been added to our portfolio as a result of the acquisition include:

•

the Surgitron^® radiowave platform technology line of RF surgical generators;

•

the Pelleve^® wrinkle reduction system for skin tightening and non-ablative skin rejuvenation; and

•

the PelleFirm™ RF body treatment system for skin tightening and reduction in the appearance of cellulite.

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, light-based technologies and other energies to develop new solutions and products to target unmet needs in significant aesthetic treatment markets. Innovation continues to be a strong contributor to our strength.

In March 2013, we commenced commercialization of our PicoSure^® system, our picosecond laser technology platform for the treatment of tattoos and benign pigmented lesions. The PicoSure system is the first commercially available picosecond Alexandrite aesthetic laser platform. Picosecond lasers deliver pulses that are measured in trillionths of a second, in contrast with nanosecond technology, such as our MedLite^® and RevLite™ products, which deliver pulses in billionths of a second. U.S. Food and Drug Administration (FDA) clearance to market the PicoSure laser was received in November 2012. In October 2013, we launched the PicoSure FOCUS Lens Array which microscopically concentrates the PicoSure laser pulse to a precise depth and exposes less than 10% of the skin to areas of high fluence while the surrounding skin is exposed to a low background fluence. We received marketing authorization for our PicoSure system in Canada in July 2013, in Australia in November 2013, and in Korea and Taiwan in January 2014. In July 2014, we received FDA clearance to market PicoSure for the treatment of acne scars. In September 2014, we received FDA clearance to market PicoSure for the treatment of wrinkles with PicoSure FOCUS Lens Array.

In 2012, we received FDA clearance in the United States to market an at home device for the treatment of wrinkles that we have developed in partnership with Unilever. In January 2014, we received a second FDA clearance. Unilever has advised us that it launched the product commercially during the third quarter of 2014.

Revenues

We generate revenues primarily from sales of our products and parts and accessories and from services, including product warranty revenues, and royalty payments received from our licensees. During the nine months ended September 30, 2014, we derived approximately 80% of our revenues from sales of our products and 20% of our revenues from parts, accessories, service and royalty revenues. During the nine months ended September 30, 2013, we derived approximately 84% of our revenues from sales of products and 16% of our revenues from parts, accessories, service and royalty 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 recognize royalty revenues when we can reliably estimate such amounts and collectability is reasonably assured. As such, we recognize royalty revenues in the quarter reported to us by our licensees, which is generally one quarter following the quarter in which sales by our licensees occurred. Royalty revenues also include amounts due from settlements with licensees for back-owed royalties from prior periods. These settlement amounts are considered revenue, when collectability is reasonably assured, because they constitute our ongoing major or central operations.

We sell our products globally under the Cynosure, Palomar, Ellman and ConBio names through a direct sales force in the United States, Canada, Mexico, France, Germany, Spain, the United Kingdom, Australia, China, Japan and Korea, and use distributors to sell our products in other countries where we do not have a direct presence. During the nine months ended September 30, 2014 and 2013, we derived 49% and 50% of our revenues, respectively, from sales outside North America. As of September 30, 2014, including expansion from the acquisition of Ellman, we had 116 sales employees covering North America and 78 sales employees in France, Germany, Spain, the United Kingdom, Australia, China, Japan and Korea. We utilize a global distribution network covering approximately 120 countries.

The following table provides revenue data by geographical region for the nine months ended September 30, 2014 and 2013:


	Percentage of Revenues
	Nine Months Ended September 30,
Region	2014			2013
North America		51	%		50	%
Europe		17			18
Asia/Pacific		23			25
Other		9			7

Total		100	%		100	%

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

Results of Operations

THREE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

The following table contains selected statement of operations information, which serves as the basis of the discussion of our results of operations for the three months ended September 30, 2014 and 2013, respectively (in thousands, except for percentages):


	Three Months Ended September 30,										$ Change		% Change
	2014					2013
	Amount		As a % of Total Revenues			Amount		As a % of Total Revenues
Product revenues	$	55,672		78	%	$	50,147		83	%	$	5,525		11	%
Parts, accessories, service and royalty revenues		15,858		22			10,545		17			5,313		50

Total revenues		71,530		100			60,692		100			10,838		18
Cost of revenues		31,232		44			26,558		44			4,674		18


	Three Months Ended September 30,												$ Change			% Change
	2014						2013
	Amount			As a % of Total Revenues			Amount			As a % of Total Revenues
Gross profit		40,298			56			34,134			56			6,164			18
Operating expenses
Sales and marketing		21,721			30			17,364			28			4,357			25
Research and development		5,746			8			5,033			8			713			14
Amortization of intangible assets acquired		740			1			451			1			289			64
General and administrative		6,841			10			12,712			21			(5,871	)		(46	)

Total operating expenses		35,048			49			35,560			58			(512	)		(1	)

Income (loss) from operations		5,250			7			(1,426	)		(2	)		6,676			468
Interest (expense) income, net		(342	)		—			25			—			(367	)		(1,468	)
Other (expense) income, net		(827	)		(1	)		721			1			(1,548	)		(215	)

Income (loss) before provision for income taxes		4,081			6			(680	)		(1	)		4,761			700
Provision for income taxes		1,007			2			601			1			406			68

Net income (loss)	$	3,074			4	%	$	(1,281	)		(2	)%	$	4,355			340	%

Revenues

Total revenue for the three months ended September 30, 2014 increased by $10.8 million, or 18%, to $71.5 million, as compared to the three months ended September 30, 2013 revenues of $60.7 million (in thousands, except for percentages):


	Three Months Ended September 30,				$ Change		% Change
	2014		2013		$ Change		% Change
Product sales in North America	$	31,649	$	27,025	$	4,624		17	%
Product sales outside North America		24,023		23,122		901		4
Global parts, accessories, service and royalty sales		15,858		10,545		5,313		50

Total revenues	$	71,530	$	60,692	$	10,838		18	%

The increase in revenue was attributable to a number of factors:

•

Revenues from the sale of products in North America increased by approximately $4.6 million, or 17%, from the 2013 period, primarily due to an increase in the number of units sold of our PicoSure and Icon systems, as well as our newly acquired Ellman business, which contributed $0.9 million in North America product revenues for the period following the September 5, 2014 acquisition date.

•

Revenues from the sale of products outside of North America increased by approximately $0.9 million, or 4%, from the 2013 period, primarily due to our newly acquired Ellman business, which contributed $0.9 million in product revenues outside of North America for the period following the September 5, 2014 acquisition date.

•

Revenues from the sale of parts, accessories, services and royalties increased by approximately $5.3 million, or 50%, from the 2013 period, primarily due to royalty revenues of $4.7 million for the 2014 period as compared to $1.2 million for the 2013 period. Royalty revenues for the 2014 period include a $3.0 million settlement payment received during the third quarter of 2014 pursuant to our December 2013 patent license agreement with Tria Beauty, Inc. In addition, our newly acquired Ellman business contributed $0.8 million in accessories and service revenues for the period following the September 5, 2014 acquisition date.

Cost of Revenues


	Three Months Ended September 30,						$ Change		% Change
	2014			2013			$ Change		% Change
Cost of revenues (in thousands)	$	31,232		$	26,558		$	4,674		18	%
Cost of revenues (as a percentage of total revenues)		44	%		44	%

Total cost of revenues increased $4.7 million, or 18%, to $31.2 million for the three months ended September 30, 2014, as compared to $26.6 million for the three months ended September 30, 2013. The increase was primarily associated with our 18% increase in total revenues. Our total cost of revenues as a percentage of total revenues remained consistent for the three months ended September 30, 2014 and 2013.

Sales and Marketing


	Three Months Ended September 30,						$ Change		% Change
	2014			2013			$ Change		% Change
Sales and marketing (in thousands)	$	21,721		$	17,364		$	4,357		25	%
Sales and marketing (as a percentage of total revenues)		30	%		28	%

Sales and marketing expenses increased $4.4 million, or 25%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. The increase was primarily due to increases in the number of our sales employees as well as an increase in commission expense due to increased product revenues. Our total sales and marketing expenses for the 2014 period increased as a percentage of total revenues as compared to the 2013 period.

Research and Development


	Three Months Ended September 30,						$ Change		% Change
	2014			2013			$ Change		% Change
Research and development (in thousands)	$	5,746		$	5,033		$	713		14	%
Research and development (as a percentage of total revenues)		8	%		8	%

Research and development expenses increased $0.7 million, or 14%, for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, as we continued to invest in new product development. Our total research and development expenses as a percentage of total revenues remained consistent for the three months ended September 30, 2014 and 2013.

Amortization of Intangible Assets Acquired


	Three Months Ended September 30,						$ Change		% Change
	2014			2013			$ Change		% Change
Amortization of intangible assets acquired (in thousands)	$	740		$	451		$	289		64	%
Amortization of intangible assets acquired (as a percentage of total revenues)		1	%		1	%

Amortization of intangible assets acquired increased $0.3 million, or 64%, for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013. The increase was primarily due to the increasing amortization expense related to the identifiable intangible assets acquired from the Palomar and Ellman acquisitions. Amortization of intangible assets acquired as a percentage of total revenues remained consistent for the three months ended September 30, 2014 and 2013.

General and Administrative


	Three Months Ended September 30,						$ Change			% Change
	2014			2013			$ Change			% Change
General and administrative (in thousands)	$	6,841		$	12,712		$	(5,871	)		(46	)%
General and administrative (as a percentage of total revenues)		10	%		21	%

General and administrative expenses decreased $5.9 million, or 46%, for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013. The decrease is primarily due to $6.2 million less in costs associated with acquisitions during the 2014 period as compared to the 2013 period, as compensation expense in connection with the change of control severance arrangements and other acquisition-related charges for Palomar came to an end. Excluding acquisition costs, our total general and administrative expenses for the 2014 period decreased as a percentage of total revenues as compared to the 2013 period.

Interest (Expense) Income, net


	Three Months Ended September 30,					$ Change			% Change
	2014			2013		$ Change			% Change
Interest (expense) income, net (in thousands)	$	(342	)	$	25	$	(367	)		(1,468	)%

The change in interest (expense) income, net was primarily due to interest charges of $0.4 million during the three months ended September 30, 2014 associated with the capital lease of our U.S. operating facility. In the fourth quarter of 2013, we amended our lease agreement in Westford, MA, extending the term and the rentable space. We are treating the portion of the lease attributable to buildings as a capital lease and incurring interest charges accordingly.

Other (Expense) Income, net


	Three Months Ended September 30,					$ Change			% Change
	2014			2013		$ Change			% Change
Other (expense) income, net (in thousands)	$	(827	)	$	721	$	(1,548	)		(215	)%

The change in other (expense) income, net was primarily a result of net foreign currency unrealized remeasurement losses in the third quarter of 2014, as compared to net foreign currency remeasurement gains the third quarter of 2013 due to the strengthening of the U.S. dollar primarily against the euro and British pound.

Provision for Income Taxes


	Three Months Ended September 30,						$ Change		% Change
	2014			2013			$ Change		% Change
Provision for income taxes (in thousands)	$	1,007		$	601		$	406		68	%
Provision as a percentage of income (loss) before provision for income taxes		25	%		(88	)%

The provision for income taxes results from a combination of the activities of our U.S. entities and foreign subsidiaries. In the third quarter of 2014, we recorded an income tax provision of $1.0 million, representing an effective tax rate of 25%. The income tax provision in the 2014 and 2013 periods were primarily attributable to the tax provision recorded on current domestic and foreign taxable earnings. We have a partial valuation allowance on the net deferred tax assets in the United States as we have benefitted from our U.S. deferred tax assets to the extent we have taxable income in a carryback year and existing taxable temporary differences. We continue to maintain a full valuation allowance on the net deferred tax assets of our foreign subsidiaries in Japan, Mexico and Australia, as well as Palomar Germany.

NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

The following table contains selected statement of operations information, which serves as the basis of the discussion of our results of operations for the nine months ended September 30, 2014 and 2013, respectively (in thousands, except for percentages):


	Nine Months Ended September 30,
	2014						2013
	Amount			As a % of Total Revenues			Amount			As a % of Total Revenues			$ Change			% Change
Product revenues	$	164,969			80	%	$	127,286			84	%	$	37,683			30	%
Parts, accessories, service and royalties revenues		41,138			20			24,187			16			16,951			70

Total revenues		206,107			100			151,473			100			54,634			36
Cost of revenues		89,721			44			65,865			43			23,856			36

Gross profit		116,386			56			85,608			57			30,778			36
Operating expenses
Sales and marketing		62,710			30			44,198			29			18,512			42
Research and development		16,319			8			12,350			8			3,969			32
Amortization of intangible assets acquired		2,166			1			948			1			1,218			128
General and administrative		22,197			11			42,189			28			(19,992	)		(47	)

Total operating expenses		103,392			50			99,685			66			3,707			4

Income (loss) from operations		12,994			6			(14,077	)		(9	)		27,071			192
Interest (expense) income, net		(1,034	)		(1	)		80			—			(1,114	)		(1,393	)
Other (expense) income, net		(548	)		—			318			—			(866	)		(272	)

Income (loss) before provision (benefit) for income taxes		11,412			5			(13,679	)		(9	)		25,091			183
Provision (benefit) for income taxes		3,074			1			(4,683	)		(3	)		7,757			166

Net income (loss)	$	8,338			4	%	$	(8,996	)		(6	)%	$	17,334			193	%

Revenues

Total revenue for the nine months ended September 30, 2014 increased by $54.6 million, or 36%, to $206.1 million, as compared to the nine months ended September 30, 2013 revenues of $151.5 million (in thousands, except for percentages):


	Nine Months Ended September 30,				$ Change		% Change
	2014		2013		$ Change		% Change
Product sales in North America	$	80,893	$	64,100	$	16,793		26	%
Product sales outside North America		84,076		63,186		20,890		33
Global parts, accessories, service and royalties		41,138		24,187		16,951		70

Total revenues	$	206,107	$	151,473	$	54,634		36	%

The increase in revenue was attributable to a number of factors:

•

Revenues from the sale of products in North America increased by approximately $16.8 million, or 26%, from the 2013 period, primarily due to an increase in the number of units sold attributable to the 2014 period, which contained three full quarters of sales of the Vectus and Icon systems acquired through the Palomar acquisition, as well as an increase in the number of units sold of our PicoSure system. The 2013 period contained sales of the Vectus and Icon systems for just the period following the June 24, 2013 Palomar acquisition date. Our newly acquired Ellman business contributed $0.9 million in North America product revenues for the period following the September 5, 2014 acquisition date.

•

Revenues from the sale of products outside of North America increased by approximately $20.9 million, or 33%, from the 2013 period, primarily due to an increase in the number of units sold attributable to the 2014 period, which contained three full quarters of sales of the Vectus and Icon systems acquired through the Palomar acquisition, as well as an increase in the number of units sold of our PicoSure system. Our newly acquired Ellman business contributed $0.9 million in product revenues outside of North America for the period following the September 5, 2014 acquisition date.

•

Revenues from the sale of parts, accessories, services and royalties increased by approximately $17.0 million, or 70%, from the 2013 period, primarily due to three full quarters of parts, accessories, service and royalties revenues attributable to the Palomar business, along with the $3.0 million settlement payment received during the third quarter of 2014 pursuant to our December 2013 patent license agreement with Tria Beauty, Inc.

Cost of Revenues


	Nine Months Ended September 30,						$ Change		% Change
	2014			2013			$ Change		% Change
Cost of revenues (in thousands)	$	89,721		$	65,865		$	23,856		36	%
Cost of revenues (as a percentage of total revenues)		44	%		43	%

Total cost of revenues increased $23.9 million, or 36%, to $89.7 million for the nine months ended September 30, 2014, as compared to $65.9 million for the nine months ended September 30, 2013. The increase was primarily associated with our 36% increase in total revenues. Our total cost of revenues as a percentage of total revenues remained relatively consistent for the nine months ended September 30, 2014 and 2013.

Sales and Marketing


	Nine Months Ended September 30,						$ Change		% Change
	2014			2013			$ Change		% Change
Sales and marketing (in thousands)	$	62,710		$	44,198		$	18,512		42	%
Sales and marketing (as a percentage of total revenues)		30	%		29	%

Sales and marketing expenses increased $18.5 million, or 42%, for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. The increase was primarily due to three full quarters of sales and marketing expenses attributable to the integration of the Palomar sales and marketing team included in the 2014 period, increases in the number of our sales employees and an increase in commission expense due to increased product revenues. Our total sales and marketing expenses for the 2014 period increased as a percentage of total revenues as compared to the 2013 period.

Research and Development


	Nine Months Ended September 30,						$ Change		% Change
	2014			2013			$ Change		% Change
Research and development (in thousands)	$	16,319		$	12,350		$	3,969		32	%
Research and development (as a percentage of total revenues)		8	%		8	%

Research and development expenses increased by $4.0 million, or 32%, for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. The increase was primarily due to three full quarters of research and development expenses attributable to the integration of the Palomar research and development team included in the 2014 period. Our total research and development expenses as a percentage of total revenues remained consistent for the nine months ended September 30, 2014 and 2013.

Amortization of Intangible Assets Acquired


	Nine Months Ended September 30,						$ Change		% Change
	2014			2013			$ Change		% Change
Amortization of intangible assets acquired (in thousands)	$	2,166		$	948		$	1,218		128
Amortization of intangible assets acquired (as a percentage of total revenues)		1	%		1	%

Amortization of intangible assets acquired increased $1.2 million, or 128%, for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. The increase resulted from a full three quarters of amortization expense for the identifiable intangible assets from the Palomar acquisition, as well as amortization expense for the identifiable intangible assets from the Ellman acquisition, included in the 2014 period. Amortization of intangible assets acquired as a percentage of total revenues remained consistent for the nine months ended September 30, 2014 and 2013.

General and Administrative


	Nine Months Ended September 30,						$ Change			% Change
	2014			2013			$ Change			% Change
General and administrative (in thousands)	$	22,197		$	42,189		$	(19,992	)		(47	)%
General and administrative (as a percentage of total revenues)		11	%		28	%

General and administrative expenses decreased $20.0 million, or 47%, for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. The decrease is primarily due to $24.5 million less in costs associated with acquisitions during the 2014 period as compared to 2013 period, as compensation expense in connection with the change of control severance arrangements and other acquisition-related charges for Palomar came to an end. Excluding acquisition costs, our total general and administrative expenses as a percentage of total revenues remained consistent for the nine months ended September 30, 2014 and 2013.

Interest (Expense) Income, net


	Nine Months Ended September 30,					$ Change			% Change
	2014			2013		$ Change			% Change
Interest (expense) income, net (in thousands)	$	(1,034	)	$	80	$	(1,114	)		(1,393	)%

The change in interest (expense) income, net was primarily due to interest charges of $1.1 million during the nine months ended September 30, 2014 associated with the capital lease of our U.S. operating facility. In the fourth quarter of 2013, we amended our lease agreement in Westford, MA, extending the term and the rentable space. We are treating the portion of the lease attributable to buildings as a capital lease and incurring interest charges accordingly.

Other (Expense) Income, net


	Nine Months Ended September 30,					$ Change			% Change
	2014			2013		$ Change			% Change
Other (expense) income, net (in thousands)	$	(548	)	$	318	$	(866	)		(272	)%

The change in other (expense) income, net was primarily a result of net foreign currency remeasurement losses in the nine months ended September 30, 2014, as compared to net foreign currency remeasurement gains in the nine months ended September 30, 2013 due to the strengthening of the U.S. dollar primarily against the euro and British pound.

Provision (Benefit) for Income Taxes


	Nine Months Ended September 30,						$ Change		% Change
	2014			2013			$ Change		% Change
Provision (benefit) for income taxes (in thousands)	$	3,074		$	(4,683	)	$	7,757		166	%
Provision (benefit) as a percentage of income (loss) before provision (benefit) for income taxes		27	%		34	%

The provision (benefit) for income taxes results from a combination of the activities of our U.S. entities and foreign subsidiaries. During the nine months ended September 30, 2014, we recorded an income tax provision of $3.1 million, representing an effective tax rate of 27%. The income tax provision in the 2014 period was primarily attributable to the tax provision recorded on current domestic and foreign taxable earnings, and includes a $0.3 million discrete tax benefit for the release of valuation allowance previously maintained against the net deferred tax asset of Palomar Spain. The income tax benefit for the nine months ended September 30, 2013 is primarily attributable to a non-recurring benefit of $5.8 million for the release of a portion of the legacy Cynosure domestic valuation allowance due to taxable temporary differences available as a source of income as a result of the Palomar business combination. We have a partial valuation allowance on the net deferred tax assets in the United States as we have benefitted from our U.S. deferred tax assets to the extent we have taxable income in a carryback year and existing taxable temporary differences. We continue to maintain a full valuation allowance on the net deferred tax assets of our foreign subsidiaries in Japan, Mexico and Australia, as well as Palomar Germany.

Liquidity and Capital Resources

We require cash to pay our operating expenses, make capital expenditures, fund acquisitions and pay our long-term liabilities. We have funded our operations through proceeds from public offerings of our Class A common stock and funds generated from our operations.

At September 30, 2014, our cash, cash equivalents and short and long-term marketable securities were $113.0 million. Our cash and cash equivalents of $53.7 million are highly liquid investments with maturities of 90 days or less at date of purchase and consist of cash in operating accounts and investments in money market funds. Our short-term marketable securities of $34.2 million consist of investments in various state and municipal governments, U.S. government agencies and treasuries, and corporate obligations and commercial paper, all of which mature by September 15, 2015. Our long-term marketable securities of $25.1 million consist of investments in various state and municipal governments, U.S. government agencies and treasuries, all of which mature by September 26, 2016.

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. During the nine months ended September 30, 2014 and 2013, we purchased $14.0 million and $2.2 million, respectively, of property and equipment. During the nine months ended September 30, 2014 and 2013, we transferred $3.2 million and $5.3 million, respectively, of demonstration equipment to fixed assets. We expect that our capital expenditures during the remainder of 2014 will increase compared with the 2013 period.

On October 29, 2013, we announced that our board of directors authorized the repurchase of up to $25 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. On April 30, 2014, our board of directors approved an increase of $10 million to the stock repurchase program. The program will terminate upon the purchase of $35 million in common stock or expiration of the program on November 1, 2015. During the nine months ended September 30, 2014, we repurchased 742,179 shares of our common stock at an aggregate cost of $15.6 million and at a weighted average price of $20.96 per share under this program. As of September 30, 2014, approximately $4.1 million remains available to repurchase shares under the program. As of September 30, 2014, we have repurchased an aggregate of 1,628,586 shares under this program and previous programs at an aggregate cost of $33.1 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 $18.0 million for the nine months ended September 30, 2014, and resulted primarily from the $8.3 million of net income for the period and $18.4 million in depreciation and amortization and stock-based compensation expense. Net changes in working capital items decreased cash from operating activities by $11.0 million primarily related to an increase in accounts receivable of $6.0 million and an increase in inventories of $6.3 million. Net cash used in investing activities was $52.3 million for the nine months ended September 30, 2014, which consisted primarily of purchases of marketable

securities of $50.7 million, cash paid for the Ellman acquisition of $13.2 million and purchases of property and equipment of $14.0 million, partially offset by proceeds from the sales and maturities of marketable securities of $25.8 million. Net cash used in financing activities during the nine months ended September 30, 2014 was $5.5 million, principally relating to repurchases of common stock offset by the proceeds of stock option exercises.

Net cash used in operating activities was $15.2 million for the nine months ended September 30, 2013, and resulted primarily from the $9.0 million of net loss for the period and changes in deferred income taxes of $5.6 million, partially offset by $9.1 million in depreciation and amortization and stock-based compensation expense, $1.3 million in net accretion of marketable securities and $0.5 million in impairment loss on long-lived assets held for sale. Net changes in working capital items decreased cash from operating activities by $11.5 million primarily related to an increase in accounts receivable of $13.1 million and an increase in inventories of $4.4 million. These were partially offset by an increase in accrued expenses of $5.8 million. Net cash used in investing activities was $2.6 million for the nine months ended September 30, 2013, which consisted primarily of the cash paid for the Palomar acquisition, net of cash received, of $65.0 million, purchases of marketable securities of $11.0 million and purchases of property and equipment of $2.2 million, partially offset by proceeds from the sales and maturities of marketable securities of $75.6 million. Net cash provided by financing activities during the nine months ended September 30, 2013 was $1.9 million, principally relating to the proceeds of stock option exercises, partially offset by acquisition-related stock issuance costs.

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, 2013. 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, 2013. There have been no material changes to our critical accounting policies as of September 30, 2014.

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 and corporate obligations and commercial paper. 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 September 26, 2016. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase, which could result in a realized loss if we are forced to sell an investment before its scheduled maturity. We currently have the ability and intent to hold our fixed income investments until maturity. We do not utilize derivative financial instruments to manage our interest rate risks.

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


	September 30, 2014			Future Maturities in 2014			Future Maturities in 2015			Future Maturities in 2016
Investments (at fair value)	$	59,225		$	6,667		$	32,253		$	20,305
Weighted average interest rate		0.23	%		0.19	%		0.25	%		0.30	%

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 46% of our total international revenues during the nine months ended September 30, 2014. Substantially all of the remaining 54% were sales in euros, British pounds, Japanese yen, Chinese yuan, South Korean won and Australian dollars. 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 are recorded at our local subsidiaries in local currency rates in effect on the transaction date. Therefore, we may be exposed to exchange rate fluctuations that occur while the payment is outstanding, which we recognize as unrealized gains and losses in our statements of operations. Upon settlement of these payments, we may record realized foreign exchange gains and losses. 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 chief executive officer and chief financial officer (our principal executive and principal financial officers, respectively), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2014, our chief executive officer and chief financial officer 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

We acquired Ellman on September 5, 2014. We are in the process of integrating the acquired operations into our overall internal control over financial reporting process and have extended our oversight and monitoring processes that support our internal control over financial reporting to include the acquired operations. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — Other Information

Item 1.

Legal Proceedings

Telephone Consumer Protection Act Litigation

In 2005, a plaintiff, 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, captioned Weitzner v. Cynosure, Inc., No. MICV2005-01778 (Superior Court, 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 January 2012, the court denied the class certification motion. In November 2012, the court issued the final judgment and awarded the plaintiff $6,000 in damages and awarded us $3,495 in costs. The plaintiff appealed this decision, and oral argument on the appeal was held in October 2013 before the Commonwealth of Massachusetts Appeals Court. In March 2014, the appeals court affirmed the lower court’s ruling, and in April 2014 plaintiff filed a request for further appellate review by the Supreme Judicial Court. On May 6, 2014, the Supreme Judicial Court issued a Notice of Denial of Application for Further Appellate Review. No further appeals are possible in Massachusetts. In addition, in July 2012, the plaintiff filed a new purported class action, based on the same operative facts and asserting the same claims as in the Massachusetts action, in federal court in the Eastern District of New York, captioned Weitzner, et al. v. Cynosure, Inc., No. 1:12-cv-03668-MKB-RLM (U.S District Court, Eastern District of New York). In February 2013, that court granted our motion to dismiss the plaintiff’s claims. In March 2013, the plaintiff drafted a motion seeking reconsideration of the court’s judgment and vacation of the court’s order of dismissal. In April 2013, we drafted a response opposing the plaintiff’s motion. In August 2013, plaintiff filed its motion with the court, although the deadline had been April 2013. We filed a letter with the court objecting to this untimely motion and requesting

sanctions. In February 2014, the court denied plaintiff’s motion and denied our request for sanctions. On March 6, 2014, plaintiff filed an appeal of the court’s judgment entered on March 5, 2013. On July 23, 2014, the Second Circuit notified the parties that it will not hear oral arguments and will decide the case based on the briefs.

Merger Litigation

On March 21, 2013, a putative stockholder class action complaint, captioned Edgar Calin v. Palomar Medical Technologies, Inc., et al., No. 13-1051 BLS1 (Superior Court, Suffolk County), was filed against Palomar, its board of directors, us and Commander Acquisition, LLC, a Delaware limited liability company and our wholly-owned subsidiary (Commander), in Massachusetts Superior Court in Suffolk County. On April 9, 2013, a second putative stockholder class action complaint, captioned Vladimir Gusinsky Living Trust v. Palomar Medical Technologies, Inc., et al., No. 13-1328 BLS1 (Superior Court, Suffolk County), was filed against Palomar, its board of directors and us in Massachusetts Superior Court in Suffolk County. On April 12, 2013, a third putative stockholder class action complaint, captioned Albert Saffer v. Palomar Medical Technologies, Inc. et al., No. 13-1385 BLS1 (Superior Court, Suffolk County), was filed against Palomar, its board of directors, us and Commander in Massachusetts Superior Court in Suffolk County (collectively with Edgar Calin and Vladimir Gusinsky Living Trust, the “Massachusetts State Actions”). On April 23, 2013, each of the plaintiffs in the foregoing suits filed an amended complaint. Each amended complaint alleges that members of the Palomar board of directors breached their fiduciary duties in connection with the approval of the merger contemplated by the agreement and plan of merger, dated as of March 17, 2013, by and among Palomar, us and Commander, and that we and, with respect to the Calin and Saffer suits, Commander, aided and abetted the alleged breach of fiduciary duties. Each amended complaint alleges that the Palomar directors breached their fiduciary duties in connection with the proposed transaction by, among other things, conducting a flawed sale process and failing to maximize stockholder value and obtain the best financial and other terms, and that the registration statement filed by us is materially deficient. Each of these plaintiffs seeks injunctive and other equitable relief, including enjoining the defendants from consummating the merger, in addition to other unspecified damages, fees and costs. The plaintiffs in the Massachusetts State Actions moved to expedite the proceedings on May 1, 2013 and moved to consolidate the actions on May 1, 2013. On May 13, 2013, each of the defendants in the Massachusetts State Actions filed an opposition to expedite, an opposition to consolidate and a cross motion to stay its respective action. On May 16, 2013, each of the plaintiffs filed oppositions to defendants’ cross motion to stay. On May 17, 2013, the Massachusetts Superior Court issued an order denying plaintiffs’ motion for expedited proceedings and granting defendants’ cross motion to stay the Massachusetts State Actions.

On April 19, 2013, a fourth putative stockholder class action complaint, captioned Gary Drabek v. Palomar Medical Technologies, Inc. et al., No. 8491, (Del. Ch.) was filed against Palomar, its board of directors, us and Commander in Delaware Chancery Court. On May 1, 2013, a fifth putative stockholder class action complaint, captioned Daniel Moore v. Palomar Medical Technologies, Inc. et al., No. 8516, (Del. Ch.) was filed against Palomar, its board of directors, us and Commander in Delaware Chancery Court. Each of the foregoing lawsuits alleges that members of the Palomar board of directors breached their fiduciary duties in connection with the approval of the merger and that we and Commander aided and abetted the alleged breach of fiduciary duties. Each complaint alleges that the Palomar directors breached their fiduciary duties in connection with the proposed transaction by, among other things, conducting a flawed sale process and failing to maximize stockholder value and obtain the best financial and other terms, and that the registration statement filed by us is materially deficient. Each of these plaintiffs seeks injunctive and other equitable relief, including enjoining the defendants from consummating the merger, in addition to other unspecified damages, fees and costs. The plaintiff in the Drabek action moved to expedite the proceedings on April 29, 2013, and the plaintiff in the Moore action moved to expedite and moved for a preliminary injunction on May 3, 2013. On May 7, 2013, the plaintiffs in the Drabek and Moore actions jointly submitted a proposed order of consolidation to consolidate the class actions as In re Palomar Medical Technologies Shareholder Litigation, C.A. No. 8491-VCP, which order was granted by the court on the same day.

On May 28, 2013, a sixth putative stockholder class action complaint, captioned Melvin Lax v. Palomar Medical Technologies, Inc., et al., No. 13-11276 (D. Mass.) (Massachusetts Federal Action), was filed against Palomar, its board of directors, us, and Commander in the U.S. District Court for the District of Massachusetts. The lawsuit alleges that members of the Palomar board of directors breached their fiduciary duties in connection with the approval of the merger, that we and Commander aided and abetted the alleged breach of fiduciary duties, and that the defendants violated Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder by issuing a materially misleading Proxy Statement. Plaintiff seeks injunctive and other equitable relief, including enjoining the defendants from consummating the merger, in addition to other unspecified damages, fees and costs. On August 5, 2013, the parties filed a stipulation and joint motion to stay proceedings.

On June 7, 2013, Palomar entered into a memorandum of understanding, which we refer to as the Delaware Memorandum of Understanding, with the Delaware plaintiffs regarding the settlement of the Delaware putative stockholder class actions and, on June 10, 2013, Palomar filed with the SEC a Current Report on Form 8-K to supplement the Proxy Statement pursuant to the terms of the Delaware Memorandum of Understanding.

On June 14, 2013, Palomar entered into a memorandum of understanding, which we refer to as the Massachusetts Memorandum of Understanding, with the Massachusetts plaintiffs, pursuant to which the plaintiffs in the Massachusetts state and federal actions agreed to be bound by the terms of the Delaware Memorandum of Understanding and on June 14, 2013, Palomar filed with the SEC a Current Report on Form 8-K to supplement the Proxy Statement pursuant to the terms of the Massachusetts Memorandum of Understanding.

The Delaware Memorandum of Understanding and the Massachusetts Memorandum of Understanding contemplate that the parties will enter into a stipulation of settlement. On May 1, 2014, we, Palomar and the Delaware plaintiffs entered into a stipulation of settlement. The stipulation of settlement was filed with the Court of Chancery of the State of Delaware and the court approved the form of notice for mailing to the former stockholders of Palomar. Following notice, the court scheduled a hearing for July 21, 2014 at which the Court of Chancery of the State of Delaware considered the fairness, reasonableness and adequacy of the settlement and approved the settlement, resolved and released all claims that were or could have been brought challenging any aspect of the proposed merger, the merger agreement, and any disclosure made in connection therewith (but excluding claims for appraisal under Section 262 of the Delaware General Corporation Law), and dismissed the Delaware actions with prejudice. The court also awarded the plaintiffs’ counsel attorneys’ fees and expenses in the amount of $420,000 to be paid by Palomar or its successor. As Palomar’s successor, we paid through our insurance company the attorneys’ fees and expenses awarded by the Court of Chancery of the State of Delaware. In addition, also on May 1, 2014, we, Palomar and the Massachusetts plaintiffs filed a joint stipulation seeking dismissal of the Massachusetts State Actions, and the court dismissed the Massachusetts State Actions with prejudice on May 7, 2014. Finally, on July 16, 2014, the parties to the Massachusetts Federal Action informed the court that if the Court of Chancery for the State of Delaware approved the settlement during the July 21, 2014 hearing, the plaintiff would dismiss the Massachusetts Federal Action with prejudice and we will pay the plaintiff an additional amount for his attorneys’ fees and expenses through our insurance company. The Massachusetts Federal Action was dismissed on August 22, 2014.

Asclepion Laser Technologies GmbH, Italian Litigation

In October 2010, Palomar was served with an International Summons for a lawsuit filed in September 2010 by Asclepion Laser Technologies GmbH (Asclepion) in the Court of Rome in Italy. In this suit, Asclepion asked the Italian court to declare that Asclepion’s MedioStar and RubyStar products do not infringe either the Italian or German portions of EP 0 806 913 B1 or EP 1 230 900 B1, which are the first two issued European patents corresponding to U.S. Patent Nos. 5,595,568 and 5,735,844, which are exclusively licensed to Palomar by Massachusetts General Hospital (“MGH”). We filed a request with the Italian Supreme Court challenging the international jurisdiction of the Italian courts for deciding infringement of the non-Italian parts of the European patents. A hearing was held in May 2013, and in a development contrary to settled Italian case law, the Italian Supreme Court ruled that the Italian courts have jurisdiction over the Italian as well as the German portions of the European patent. Asclepion has resumed its case before the Court of Rome. In March 2014, we, Palomar and MGH entered into a comprehensive settlement agreement with Asclepion which ended the patent disputes between the companies, including this patent dispute, which terminated on April 24, 2014, the Asclepion Laser Technologies GmbH, German Litigation described below, which terminated on March 21, 2014, and pending opposition proceedings before the European Patent Office. This settlement agreement includes a Non-exclusive Patent License Agreement under which Asclepion is granted a non-exclusive, worldwide, fully paid-up license to U.S. Patent Nos. 5,735,844 and 5,595,568 and foreign counterparts, for professional hair removal products and we and Palomar are granted a non-exclusive, worldwide, royalty-free license to certain Asclepion patents. As part of the agreement, Asclepion will make two payments to us for the paid-up license. The first payment was made in March 2014 and the second payment is to be made on the earlier of March 17, 2015 or five business days following an initial public offering by Asclepion or a change of control of Asclepion. MGH will receive 40% of the first and second payments from Asclepion, after deducting our related outside legal costs.

Asclepion Laser Technologies GmbH, German Litigation

In October 2010, prior to being served the International Summons for the above described lawsuit in Italy (see Asclepion Laser Technologies GmbH, Italian Litigation), Palomar commenced an action for patent infringement against Asclepion in the District Court of Düsseldorf, Germany seeking both monetary damages and injunctive relief. The complaint alleged that Asclepion’s MeDioStar and RubyStar products infringe European Patent Number EP 0 806 913, which is the first issued European patent corresponding to U.S. Patent Nos. 5,595,568 and 5,735,844, which are exclusively licensed to Palomar by MGH. This proceeding was stayed by mutual agreement of the parties in January 2011 pending the outcome of Asclepion Laser Technologies GmbH, Italian Litigation and a final decision in opposition proceedings rendered by the European Patent Office, in which Asclepion filed an intervention in December 2010. In March 2014, we, Palomar and MGH entered into a comprehensive settlement agreement with Asclepion which ended the patent disputes between the companies, including this patent dispute, which terminated on March 21, 2014, the Asclepion Laser Technologies GmbH, Italian Litigation described above, which terminated on April 24, 2014, and the pending opposition proceedings before the European Patent Office. This settlement agreement includes a Non-exclusive Patent License Agreement under which Asclepion is granted a non-exclusive, worldwide, fully paid-up license to U.S. Patent Nos. 5,735,844 and 5,595,568 and foreign counterparts, for professional hair removal products and we and Palomar are granted a non-exclusive, worldwide, royalty-free license

to certain Asclepion patents. As part of the agreement, Asclepion will make two payments to us for the paid-up license. The first payment was made in March 2014 and the second payment is to be made on the earlier of March 17, 2015 or five business days following an initial public offering by Asclepion or a change of control of Asclepion. MGH will receive 40% of the first and second payments from Asclepion, after deducting our related outside legal costs.

Cirrex Systems LLC

In May 2014, Cirrex Systems LLC (Cirrex) commenced an action for alleged patent infringement against us in the U.S. District Court for the District of Delaware seeking both monetary damages and injunctive relief. The complaint alleges that our SideLaze800 and SideLaze3D fibers used with our Cellulaze™ laser workstation and PrecisionTx™ laser infringe U.S. Patent Nos. 5,953,477 and 6,144,791. Cirrex is seeking to enjoin us from manufacturing, using or selling these products in the United States if we are found to infringe the patents and to obtain compensatory damages, interest and other relief. On July 21, 2014, we answered the complaint, denying that our products infringe the asserted patents and asserting that the patents are invalid and unenforceable. We will defend the action vigorously and believe that we have meritorious defenses. However, litigation is unpredictable and we may not prevail in successfully defending or asserting our position. If we do not prevail, we may be ordered to pay damages for past sales and an ongoing royalty for future sales of products found to infringe in the United States. We could also be ordered to stop manufacturing and selling any products in the United States that are found to infringe.

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

We have revised our discussion of the risk factors affecting our business since those presented in our Quarterly Report on Form 10-Q, Part II, Item 1A, for the quarterly period ended June 30, 2014. We have denoted with an asterisk (*) those risk factors that have been materially revised or added. If any of the following risks actually occurs, our business, financial condition, results of operations and cash flows could be materially adversely affected. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements beginning on page 15.

Risks Related to Our Business and Industry

We have incurred net losses in prior periods.

We incurred net losses of approximately $2.9 million in 2011 and $5.5 million in 2010. Although we were profitable in 2012 and the first quarter of 2013 and returned to profitability in the fourth quarter of 2013 and first three quarters of 2014, we incurred a net loss in the second and third quarters of 2013. If we are unable to maintain profitability, the market value of our stock may decline, and an investor could lose all or a part of their investment.

If there is not sufficient consumer demand for the procedures performed with our products, practitioner demand for our products could decline, which would adversely affect our operating results.

The aesthetic laser and light-based treatment system industry in which we operate is particularly vulnerable to economic trends. Most procedures performed using our aesthetic treatment systems are elective procedures that are not reimbursable through government or private health insurance. The cost of these elective procedures must be borne by the patient. As a result, the decision to undergo a procedure that utilizes our products may be influenced by the cost.

Consumer demand, and therefore our business, is sensitive to a number of factors that affect consumer spending, including political and macroeconomic conditions, health of credit markets, disposable consumer income levels, consumer debt levels, interest rates, consumer confidence and other factors. If there is not sufficient consumer demand for the procedures performed with our products, practitioner demand for our products would decline, and our business would suffer.

Consumer demand for these procedures, and practitioner demand for our products, decreased dramatically during 2009, which contributed to a decrease in our total product revenues from $123.2 million in 2008 to $55.9 million in 2009. Although demand increased from 2010 through the first nine months of 2014, we believe that consumer demand for discretionary aesthetic laser treatments remains uncertain and may continue to adversely affect our operating results.

Our financial results may fluctuate from quarter to quarter, which makes our results difficult to predict and could cause our results to fall short of expectations.

Our financial results may fluctuate as a result of a number of factors, many of which are outside of our control. For these reasons, comparing our financial results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our future quarterly and annual expenses as a percentage of our revenues may be significantly different from those we have recorded in the past or which we expect for the future. Our financial results in some quarters may fall below our expectations or the expectations of market analysts or investors. Any of these events could cause our stock price to fall. Each of the risk factors listed in this “Risk Factors” section, and the following factors, may adversely affect our financial results:

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our inability to introduce new products to the market in a timely fashion, or at all;

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our inability to quickly address and resolve reliability issues in our products and/or meet warranty and service obligations to our customers;

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continued availability of attractive equipment leasing terms for our customers, which may be negatively influenced by interest rate increases or lack of available credit;

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increases in the length of our sales cycle; and

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reductions in the efficiency of our manufacturing processes.

In addition, we may be subject to seasonal fluctuations in our results of operations, because our customers may be more likely to make equipment purchasing decisions near year-end, and because practitioners may be less likely to make purchasing decisions in the summer months.

Our competitors may prevent us from achieving further market penetration or improving operating results.

Competition in the aesthetic device industry is intense. Our products compete against products offered by public companies, such as Cutera, Solta Medical (acquired in January 2014 by Valeant Pharmaceuticals International, Inc.), Syneron Medical, and ZELTIQ Aesthetics, as well as several smaller specialized private companies, such as Alma Lasers (acquired in May 2013 by Shanghai Fosun Pharmaceutical (Group) Ltd.). Some of these competitors have greater financial and human resources than we do and have established reputations, as well as worldwide distribution channels and sales and marketing capabilities that are larger and more established than ours. Additional competitors may enter the market, and we are likely to compete with new companies in the future.

We also face competition against non-light-based medical products, such as BOTOX^® and collagen injections, and surgical and non-surgical aesthetic procedures, such as face lifts, chemical peels, abdominoplasty, liposuction, microdermabrasion, sclerotherapy and electrolysis. We may also face competition from manufacturers of pharmaceutical and other products that have not yet been developed. As a result of competition with these companies, products and procedures, we could experience loss of market share and decreasing revenue as well as reduced prices and profit margins, any of which would harm our business and operating results.

As a result of competition with our competitor companies, products and procedures, we could experience loss of market share and decreasing revenue as well as reduced prices and profit margins, any of which would harm our business and operating results.

Our ability to compete effectively depends upon our ability to distinguish our company and our products from our competitors and their products. Factors affecting our competitive position include:

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product performance, reliability and design;

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ability to sell products tailored to meet the applications needs of clients and patients;

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quality of customer support;

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product pricing;

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product safety;

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sales, marketing and distribution capabilities;

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success and timing of new product development and introductions; and

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intellectual property protection.

We may be exposed to credit risk of customers that have been adversely affected by weakened markets.

In the event of deterioration of general business conditions or the availability of credit, the financial strength and stability of our customers and potential customers may deteriorate over time, which may cause them to cancel or delay their purchase of our products. In addition, we may be subject to increased risk of non-payment of our accounts receivables. We may also be adversely affected by bankruptcies or other business failures of our customers and potential customers. A significant delay in the collection of funds or a reduction of funds collected may impact our liquidity or result in bad debts.

If we do not continue to develop and commercialize new products and identify new markets for our products and technology, we may not remain competitive, and our revenues and operating results could suffer.

The aesthetic laser and light-based treatment system industry is subject to continuous technological development and product innovation. If we do not continue to innovate and develop new products and applications, our competitive position will likely deteriorate as other companies successfully design and commercialize new products and applications. Accordingly, our success depends in part on developing or acquiring new and innovative applications of laser and other light-based technology and identifying new markets for and applications of existing products and technology. If we are unable to develop and commercialize new products, identify and acquire complementary businesses, products or technologies, and identify new markets for our products and technology, our product and technology offerings could become obsolete and our revenues and operating results could be adversely affected.

To remain competitive, we must:

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develop or acquire new technologies that either add to or significantly improve our current products;

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convince our target practitioner customers that our new products or product upgrades would be attractive revenue-generating additions to their practices;

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sell our products to non-traditional customers, including primary care physicians, gynecologists and other specialists;

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identify new markets and emerging technological trends in our target markets and react effectively to technological changes;

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preserve goodwill and brand value with customers; and

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maintain effective sales and marketing strategies.

If our new products do not gain market acceptance, our revenues and operating results could suffer, and our newer generation product sales could cause earlier generation product sales to suffer.

The commercial success of the products and technology we develop will depend upon the acceptance of these products by providers of aesthetic procedures and their patients and clients, and in the case of our home-use system, consumers. It is difficult for us to predict how successful recently introduced products, or products we are currently developing, will be over the long term. If the products we develop do not gain market acceptance or meet customer expectations, our revenues and operating results could suffer.

We expect that many of the products we develop will be based upon new technologies or new applications of existing technologies. It may be difficult for us to achieve market acceptance of some of our products, particularly the first products that we introduce to the market based on new technologies or new applications of existing technologies.

For example, in conjunction with Unilever, we developed a laser treatment system for the home-use market. This system has been cleared by the FDA for marketing in the United States for the treatment of wrinkles. Unilever holds exclusive rights to sell this product, and Unilever launched this product commercially in the second quarter of 2014. However, because competitors have already introduced home-use laser systems to the market, this home-use system may not gain anticipated levels of market acceptance. If these products or others that we introduce do not gain market acceptance, our business would suffer.

As we introduce new technologies to the market, our earlier generation product sales could suffer, which may result in write-offs of those earlier generation products. For example, in 2009, we recorded a $2.1 million charge to cost of product revenues related to the write-down of an earlier generation product. The write-down resulted, in part, from customers adopting our newer generation products more quickly than we anticipated, coupled with the downturn in the overall aesthetic laser market.

If demand for our aesthetic treatment systems by physician customers does not increase, or if our home-use product does not achieve market acceptance, our revenues will suffer and our business will be harmed.

We market our aesthetic treatment systems to physicians and other practitioners. In addition, through our development agreement with Unilever, we have begun to address the home-use aesthetic laser market in the second half of 2014. We believe, and

our growth expectations assume, that we and other companies selling lasers and other light-based aesthetic treatment systems have not fully penetrated these markets and that we will continue to receive a significant percentage of our revenues from selling to these markets. If our expectations as to the size of these markets and our ability to sell our products to participants in these markets are not correct, our revenues will suffer and our business will be harmed.

We sell our products and services through subsidiaries and distributors in numerous international markets. Our operating results may suffer if we are unable to manage our international operations effectively.

We sell our products and services through subsidiaries and distributors in approximately 120 foreign countries, and we therefore are subject to risks associated with having international operations. We derived 48%, 49% and 56% of our product revenues from sales outside North America for the years ended December 31, 2013, 2012 and 2011, respectively. In the first three quarters of 2014 we derived 51% of our product revenues from sales outside of North America.

Our international sales are subject to a number of risks, including:

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foreign certification and regulatory requirements;

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difficulties in staffing and managing our foreign operations;

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import and export controls; and

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political and economic instability.

If we are unsuccessful at managing these risks, our results of operations may be adversely affected.

We may incur foreign currency translation charges as a result of changes in currency exchange rates, which could cause our operating results to suffer.

The U.S. dollar is our functional currency. Although we sell our products and services through subsidiaries and distributors in approximately 120 foreign countries, approximately 51% of our revenues outside of North America for the year ended December 31, 2013, and 50% of our revenues outside of North America for the year ended December 31, 2012, were denominated in or linked to the U.S. dollar. In the third quarter of 2014, 46% of our revenues outside of North America were denominated in or linked to the U.S. dollar. Substantially all of our remaining revenues and all of our operating costs outside of North America are recognized in euros, British pounds, Japanese yen, Chinese yuan, South Korean won and Australian dollars. We have not historically engaged in hedging activities relating to our non-U.S. dollar operations. Fluctuations in exchange rates between the currencies in which such revenues are realized or costs are incurred and the U.S. dollar may have a material adverse effect on our results of operations and financial condition.

We may not receive revenues from our current research and development efforts for several years, if at all.

Investment in product development often involves a long payback cycle and risks associated with new technology. For example, our PicoSure laser system, which we launched in the first quarter of 2013, was in development for several years. We have made and expect to continue making significant investments in research and development and related product opportunities. Accelerated product introductions and short product life cycles require high levels of expenditures for research and development that could adversely affect our operating results if not offset by revenue increases. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we may not generate anticipated revenues from these investments for several years, if at all.

Because we do not require training for users of our non-invasive products, and we sell these products to non-physicians, there exists an increased potential for misuse of these products, which could harm our reputation and our business.

Federal regulations allow us to sell our products to or on the order of practitioners licensed by law to use or order the use of a prescription device. The definition of “licensed practitioners” varies from state to state. As a result, our products may be purchased or operated by physicians with varying levels of training and, in many states, by non-physicians, including nurse practitioners, chiropractors and technicians. Outside the United States, many jurisdictions do not require specific qualifications or training for purchasers or operators of our products. We do not supervise the procedures performed with our products, nor can we require that direct medical supervision occur. We and our distributors offer product training sessions, but neither we nor our distributors require purchasers or operators of our non-invasive products to attend training sessions. The lack of required training and the purchase and use of our non-invasive products by non-physicians may result in product misuse and adverse treatment outcomes, which could harm our reputation and expose us to costly product liability litigation.

We may be unable to attract and retain management and other personnel we need to succeed.

Our success depends on the services of our senior management and other key research and development, manufacturing, sales and marketing employees. The loss of the services of one or more of these employees could have a material adverse effect on our business. We consider retaining Michael R. Davin, our chief executive officer, to be key to our efforts to develop, sell and market our products and remain competitive. We have entered into an employment agreement with Mr. Davin; however, the employment agreement is terminable by him on short notice and may not ensure his continued service with our company. Our future success will depend in large part upon our ability to attract, retain and motivate highly skilled employees. We cannot be certain that we will be able to do so.

Our stock price has fluctuated substantially, and we expect it will continue to do so.

Our Class A common stock price has fluctuated substantially in recent years. From January 1, 2012 through October 31, 2014, our Class A common stock has traded as high as $31.48 per share and as low as $11.64 per share. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our Class A common stock may be influenced by many factors, including:

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the success of competitive products or technologies;

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regulatory developments in the United States and foreign countries;

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developments or disputes concerning patents or other proprietary rights;

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the recruitment or departure of key personnel;

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variations in our financial results or those of companies that are perceived to be similar to us;

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market conditions in our industry and issuance of new or changed securities analysts’ reports or recommendations; and

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general economic, industry and market conditions.

In addition, if the stock market in general experiences a loss of investor confidence, the trading price of our Class A common stock could decline for reasons unrelated to our business, financial condition or results of operations.

The shelf registration statement on Form S-3 that was declared effective on October 26, 2012, which we refer to as the shelf registration statement, permits us and El.En. S.p.A. (El.En.) to offer and sell shares of our common stock in one or more offerings. A decline in our stock price could result in the loss of all or a part of our stockholders’ investments.

Our common stock could be further diluted by the conversion of outstanding options and restricted stock units.

In the past, we have issued and still have outstanding convertible securities in the form of options and restricted stock units. We may continue to issue options, restricted stock units, and other equity rights as compensation for services and incentive compensation for our employees, directors and consultants or others who provide services to us. We have a substantial number of shares of common stock reserved for issuance upon the conversion and exercise of these securities. Such a conversion would dilute our stockholders and could adversely affect the market price of our common stock.

We may not be able to successfully collect licensing royalties.

Portions of our revenues consist of royalties from sub-licensing patents, including patents licensed to us on an exclusive basis by MGH. These patents expire in the United States on February 1, 2015. If we are unable to collect our licensing royalties, our revenues will decline. In addition, though we receive royalty revenues on other patents, our revenues will decline following expiration of the MGH patents as we will no longer receive any royalties from such patents.

We face risks associated with product warranties.

We could incur substantial costs as a result of product failures for which we are responsible under warranty obligations.

If we are unable to protect our information technology infrastructure against service interruptions, data corruption, cyber-based attacks or network security breaches, our business and operating results may suffer.

We rely on information technology networks and systems, including the Internet, to process and transmit sensitive electronic information and to manage or support a variety of business processes and activities, including procurement and supply chain, manufacturing, distribution, and invoicing and collection of payments for our products. We use enterprise information technology

systems to record, process, and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal, and tax requirements. Our information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors or catastrophic events. If our information technology systems suffer severe damage, disruption or shutdown and we are unable to effectively resolve the issues in a timely manner, our business and operating results may suffer.

Risks Related to Our Reliance on Third Parties

If we fail to obtain key components of our products from our sole source or limited source suppliers or service providers, our ability to manufacture and sell our products would be impaired and our business could be materially harmed.

We depend on sole or limited suppliers of certain components and systems that are critical to the products that we manufacture and sell, and to which the significant majority of our revenues are attributable. We depend on El.En. for the SmartLipo MPX system and the SLT II laser system that we integrate with our own proprietary software and delivery systems into our SmartLipo Triplex, Cellulaze systems and PrecisionTx. We use Alexandrite rods to manufacture the lasers for our Elite and PicoSure products and Nd:YAG rods to manufacture the lasers for our RevLite / MedLite C6 products. We depend exclusively on Northrop Grumman SYNOPTICS to supply both the Alexandrite and Nd:YAG rods to us, and we are aware of no alternative supplier of Alexandrite rods meeting our quality standards. We use gaussian mirrors and polarizers to manufacture our RevLite / MedLite C6 product lines, for which we depend exclusively on Channel Islands Opto-Mechanical Engineering and JDS Uniphase Corporation, respectively. We offer our SmartCool treatment cooling systems for use with our laser aesthetic treatment systems, and we depend exclusively on Zimmer Elektromedizin GmbH to supply SmartCool systems to us. In addition, one third party supplier assembles and tests many of the components and subassemblies for our Elite, Cynergy, SmoothShapes XV and Accolade product families. We use diode laser subassemblies from IPG Photonics to manufacture our Aspire^® body sculpting system with SlimLipo handpiece, and we use diode laser bars from Coherent to manufacture our Vectus Laser. Although alternative suppliers exist for the diode laser subassemblies and diode laser bars, they could take months to qualify and implement.

In October 2012, we entered into a new exclusive distribution agreement with El.En., which replaced our prior distribution agreements with El.En., and pursuant to which we purchase from it the SmartLipo MPX system and the SLT II laser system. We have exclusive worldwide rights under this agreement to sell the SmartLipo MPX systems and products containing the SLT II laser system. The price at which we purchase the SLT II laser system from El.En.is specified in the agreement; however, it may be changed by El.En. at its discretion upon 30 days’ notice. We are required to use commercially reasonable efforts to sell and promote our systems containing the SLT II laser system, and we are responsible for obtaining and maintaining regulatory approvals for systems containing the SLT II laser system. The new distribution agreement has an initial term that expires in October 2019, and it will automatically renew for additional one-year terms unless either party provides notice of termination at least six months prior to the expiration of the initial term or any subsequent renewal term. We or El.En. may terminate the agreement at any time based upon material uncured breaches by, or the insolvency of, the other party. In addition, El.En. may terminate the agreement if we do not meet annual minimum purchase obligations specified in the agreement and we may terminate if El.En. rejects a purchase order that is in line with our forecast.

Other than with El.En., we do not have long-term arrangements with any of our suppliers for the supply of these components or systems or with the assembly and test service provider referenced above, but instead purchase from them on a purchase order basis. Northrop Grumman SYNOPTICS, Channel Islands Opto-Mechanical Engineering, JDS Uniphase, Zimmer Elektromedizin, IPG Photonics and Coherent are not required, and may not be able or willing, to meet our future requirements at current prices, or at all.

Under our agreement with El.En. and our purchase order arrangements with our other suppliers and service providers, we are vulnerable to supply shortages and cessations and price fluctuations with respect to these critical components and systems and services. Such shortages or cessations could occur either as a result of breach by El.En. or us of our new distribution agreement, or as a result of other types of business decisions made by El.En. or other suppliers and service providers. Any extended interruption in our supplies of these components or systems or in the assembly and test services could materially harm our business.

We rely on third party distributors to market, sell and service a significant portion of our products. If these distributors do not commit the necessary resources to effectively market, sell and service our products or if our relationships with these distributors are disrupted, our business and operating results may be harmed.

In the United States, Canada, Mexico, France, Spain, the United Kingdom, Germany, Korea, China, Japan and Australia, we sell our products through our internal sales organization. Outside of these markets, we sell our products through third party distributors. Our home-use laser system for the treatment of wrinkles, which launched in the United States in the second quarter of 2014, is sold by Unilever. Our sales and marketing success in these other markets depends on these distributors, in particular their sales and service

expertise and relationships with the customers in the marketplace. Sales of our aesthetic treatment systems by third party distributors represented 25%, 25%, and 25% of our product revenue in 2013, 2012 and 2011, respectively. In the first three quarters of 2014, sales of our aesthetic treatment systems by third party distributors represented 23% of our product revenue.

We do not control our distributors or Unilever, and these parties may not be successful in marketing our products. These parties may fail to commit the necessary resources to market and sell our products to the level of our expectations. Currently, we have written distributor agreements in place with most of our third party distributors and a distribution and licensing agreement in place with Unilever. We cannot be sure that our distributors or Unilever will agree with our interpretation of the terms of the agreements or that we will receive payments under the agreements. The third party distributors with which we do not have written distributor agreements may also disagree with the terms of our relationship. Our distributors and Unilever may terminate their relationships with us and stop selling and servicing our products with little or no notice. If current or future third party distributors or other parties that sell our products do not perform adequately, or if we fail to maintain our existing relationships with these parties or fail to recruit and retain distributors in particular geographic areas, our revenue from international sales may be adversely affected and our operating results could suffer. If Unilever fails to successfully sell the home-use product or we fail to maintain our relationship with Unilever, this could have an adverse effect on our business, results of operations and financial condition.

Risks Related to Our Relationship with El.En. and Our Corporate Structure

El.En. and its subsidiaries market and sell products that compete with our products, and any increased competition from El.En. could have a material adverse effect on our business.

El.En. is a leading laser manufacturer in Europe and a leading light-based medical device manufacturer worldwide. El.En. and its subsidiaries develop and produce laser systems with scientific, industrial, commercial and medical applications. Under our exclusive distribution agreement with El.En., we purchase from El.En. its proprietary SmartLipo MPX system and its SLT II laser system. The SLT II laser system is an essential component of our SmartLipo Triplex and Cellulaze systems, which also incorporate our proprietary software and delivery systems. The distribution agreement has an initial term that expires in October 2019, and will automatically renew for additional one-year terms unless either party provides notice of termination at least six months prior to the expiration of the initial term or any subsequent renewal term. We or El.En. may terminate the agreement at any time based upon material uncured breaches by, or the insolvency of, the other party. In addition, El.En. may terminate the agreement if we do not meet annual minimum purchase obligations specified in the agreement and we may terminate if El.En. rejects a purchase order that is in line with our forecast.

El.En. markets, sells, promotes and licenses other products that compete with our products, both in North America and elsewhere throughout the world, and our agreement with El.En. does not prevent El.En. from competing with us by selling products that we purchased in the past from El.En., including earlier generation SmartLipo systems. In the event that this agreement terminates, El.En. would be able to compete with us worldwide with the SmartLipo MPX system and with products containing the SLT II laser system. Our business could be materially and adversely affected by increased competition from El.En.

Provisions in our corporate charter documents and under Delaware law may delay or prevent attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us.

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

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the classification of the members of our board of directors;

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limitations on the removal of our directors;

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advance notice requirements for stockholder proposals and nominations;

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the inability of stockholders to act by written consent or to call special meetings; and

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the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors.

The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our certificate of incorporation. In addition, absent approval of our board of directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least 75% of the voting power of our shares of capital stock entitled to vote. In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from

engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns or within the last three years has owned 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a change in control of our company.

The price of our common stock may decline because of future sales of our shares by El.En.

El.En. may sell all or part of the shares of our common stock that it owns. El.En. is not subject to any contractual obligation to maintain its ownership position in our shares, and, consequently, El.En. may not maintain its ownership of our common stock. Sales by El.En. of substantial amounts of our common stock in the public market could adversely affect prevailing market prices for our common stock. We maintain an effective shelf registration statement that permits us and El.En. to offer and sell shares of our common stock in one or more offerings. On March 21, 2014, El.En. announced it had sold 1,100,000 shares of our Class A common stock. As of September 30, 2014, El. En. owned less than 5% of Cynosure’s outstanding common stock.

If El.En. sells the shares of our stock held by it, our commercial relationship with El.En. may be adversely affected.

El.En. is not subject to any contractual obligation to maintain an ownership position in our shares. The shelf registration statement permits us and El.En. to offer and sell shares of our common stock in one or more offerings. If El.En. does not have a continuing interest or reduced interest in our financial success, it may be more inclined to compete with us in North America and in other markets, not to enter into future commercial agreements with us or to terminate or not renew our existing distribution agreement. If any of these events were to occur, it could harm our business. On March 21, 2014, El.En. announced it had sold 1,100,000 shares of our Class A common stock.

Risks Related to Intellectual Property

If we infringe or are alleged to infringe intellectual property rights of third parties, our business could be adversely affected.

Our products may infringe or be claimed to infringe patents or patent applications under which we do not hold licenses or other rights. Third parties may own or control these patents and patent applications in the United States and abroad. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successfully asserted against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay manufacturing or sales of the product that is the subject of the suit.

As a result of patent infringement claims, or in order to avoid potential claims, we may choose or be required to seek a license from the third party and be required to pay license fees or royalties or both, as we did in a 2006 patent license agreement with Palomar. Such licenses may not be available on acceptable terms, or at all. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. This could harm our business significantly.

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in our industry. In addition to infringement claims against us, we may become a party to other types of patent litigation and other proceedings, including reexamination proceedings, inter partes or post-grant review or interference proceedings declared by the U.S. Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our products and technology. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

If we are unable to obtain or maintain intellectual property rights relating to our technology and products, the commercial value of our technology and products will be adversely affected and our competitive position could be harmed.

Our success and ability to compete depends in part upon our ability to obtain protection in the United States and other countries for our products by establishing and maintaining intellectual property rights relating to or incorporated into our technology and products. We own numerous patents and patent applications in the United States and corresponding patents and patent applications in many foreign jurisdictions. We do not know how successful we would be in any instance in which we asserted our patents against suspected infringers. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that would be advantageous to us. Even if issued, our patents may be challenged, narrowed, invalidated or circumvented, which could limit

our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how. We generally seek to protect this information in part by confidentiality agreements with our employees, consultants and third parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors.

Risks Related to Government Regulation

If we fail to obtain and maintain necessary U.S. Food and Drug Administration clearances for our products and indications or if clearances for future products and indications are delayed or not issued, our business would be harmed.

Our products are classified as medical devices and are subject to extensive regulation by the FDA and other federal, state and local authorities. These regulations relate to manufacturing, labeling, sale, promotion, distribution, importing and exporting and shipping of our products. In the United States, before we can market a new medical device, or a new use of, or claim for, an existing product, we must first receive either 510(k) clearance or premarket approval from the FDA, unless an exemption applies. Both of these processes can be expensive and lengthy and entail significant user fees, unless exempt. The FDA’s 510(k) clearance process often takes from three to 12 months. The FDA may require us to withdraw an application if they cannot make a determination that the device is substantially equivalent according to the regulations. In such situations, we may re-submit the 510(k) application with additional data for reconsideration or we may determine not to commercialize the device or the new indication for use. The process of obtaining premarket approval is much more costly and uncertain than the 510(k) clearance process. It generally takes from one to three years, or even longer, from the time the premarket approval application is submitted to the FDA until an approval is obtained.

In order to obtain premarket approval and, in some cases, a 510(k) clearance, a product sponsor must conduct well controlled clinical trials designed to test the safety and effectiveness of the product. Conducting clinical trials generally entails a long, expensive and uncertain process that is subject to delays and failure at any stage. The data obtained from clinical trials may be inadequate to support approval or clearance of a submission. In addition, the occurrence of unexpected findings in connection with clinical trials may prevent or delay obtaining approval or clearance. If we conduct clinical trials, they may be delayed or halted, or be inadequate to support approval or clearance, for numerous reasons, including:

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the FDA, other regulatory authorities or an institutional review board may place a clinical trial on hold;

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patients may not enroll in clinical trials, or patient follow-up may not occur, at the rate we expect;

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patients may not comply with trial protocols;

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institutional review boards and third party clinical investigators may delay or reject our trial protocol;

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third party clinical investigators may decline to participate in a trial or may not perform a trial on our anticipated schedule or consistent with the clinical trial protocol, good clinical practices, or other FDA requirements;

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third party organizations may not perform data collection and analysis in a timely or accurate manner;

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regulatory inspections of our clinical trials or manufacturing facilities may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials, or invalidate our clinical trials;

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changes in governmental regulations or administrative actions; and

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the interim or final results of the clinical trials may be inconclusive or unfavorable as to safety or effectiveness.

Medical devices may be marketed only for the indications for which they are approved or cleared. The FDA may not approve or clear indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance or premarket approval of new products, new intended uses or modifications to existing products. Our clearances can be revoked if safety or effectiveness problems develop.

After clearance or approval of our products, we are subject to continuing regulation by the FDA, and if we fail to comply with FDA regulations, our business could suffer.

Even after clearance or approval of a product, we are subject to continuing regulation by the FDA, including the requirements that our facility be registered and our devices listed with the agency. We are subject to Medical Device Reporting regulations, which require us to report to the FDA if our products may have caused or contributed to a death or serious injury or malfunction in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. We must report corrections and removals to the FDA where the correction or removal was initiated to reduce a risk to health posed by the device or to remedy a violation of the Federal Food, Drug, and Cosmetic Act caused by the device that may present a risk to health, and maintain records of other corrections or removals. The FDA closely regulates promotion and advertising and our promotional and advertising activities could come under scrutiny. If the FDA objects to our promotional and advertising activities or finds that we failed to submit reports under the Medical Device Reporting regulations, for example, the FDA may allege our activities resulted in violations.

The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA or state agencies, which may include any of the following sanctions:

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untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;

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repair, replacement, refunds, recall or seizure of our products;

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operating restrictions or partial suspension or total shutdown of production;

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refusing or delaying our requests for 510(k) clearance or premarket approval of new products or new intended uses;

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withdrawing 510(k) clearance or premarket approvals that have already been granted; and

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criminal prosecution.

If any of these events were to occur, they could harm our business.

Federal regulatory reforms may adversely affect our ability to sell our products profitably.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of a device. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. For example, the FDA recently proposed changing its standards for determining when a medical device modification must receive premarket clearance or approval. Although Congress objected to these revised standards, it is possible that the FDA will seek to implement these or similar changes in the future.

In addition, most of the products and systems that we sell became subject in 2013 to a new excise tax on sales of certain medical devices in the United States after December 31, 2012 by the manufacturer, producer or importer in an amount equal to 2.3% of the sale price. Under the law, additional charges, including warranties, may be deemed to be included in the sale price for purposes of determining the amount of the excise tax. We believe this excise tax could harm our sales and reduce our profitability.

In 2012, the SEC adopted a final rule that requires public companies to make disclosures about the use of certain “conflict minerals” in the products that they manufacture. The rule requires annual disclosures by public companies for which conflict minerals (regardless of the place of origin of such minerals) are necessary to the functionality or production of products that they manufacture. Such companies must conduct inquiries into the country of origin of their necessary conflict minerals and disclose the results of such inquiries. If, based on its country of origin, a company determines that its conflict minerals originated in the Democratic Republic of Congo, or adjacent nations, and did not come from recycled or scrap sources, or has reason to believe that such conflict minerals may have originated in the covered countries and may not have come from recycled or scrap sources, then it must (i) exercise due diligence on the source and chain of custody of such conflict minerals and (ii) prepare an independently audited Conflict Minerals Report that, among other things, describes its due diligence efforts and identifies products containing conflict minerals that directly or indirectly finance or benefit designated armed groups perpetrating serious human rights abuses in the covered countries. The rules include an exception from the audit requirement for two years where the company is unable to determine if the minerals are “DRC conflict free.” All companies providing disclosures under the final rule must do so on a new Form SD, to be filed annually with the SEC on or before May 31 of each year. Information on Form SD covers a company’s conflict minerals disclosure for the prior calendar year, regardless of the company’s fiscal year end. Because certain materials used in the manufacturing of our products are considered conflict minerals, we filed a Form SD on June 2, 2014 for conflict minerals disclosures for calendar year 2013. We believe our efforts to comply with these requirements will continue to be costly and time consuming.

It is impossible to predict whether other legislative changes will be enacted or government regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.

We have modified some of our products without FDA clearance. The FDA could retroactively determine that the modifications were improper and require us to stop marketing and recall the modified products.

Any modifications to one of our FDA-cleared devices that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or a premarket approval. We may be required to submit extensive pre-clinical and clinical data depending on the nature of the changes. We may not be able to obtain additional 510(k) clearances or premarket approvals for modifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenue and operating results. We have made modifications to our devices in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees, and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing the modified devices, which could harm our operating results and require us to redesign, among other things, our products.

If we fail to comply with the FDA’s Quality System Regulation (QSR) and laser performance standards, our manufacturing operations could be halted, and our business would suffer.

We are currently required to demonstrate and maintain compliance with the FDA’s QSR. The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. Because our products involve the use of lasers, our products also are covered by a performance standard for lasers set forth in FDA regulations. The laser performance standard imposes specific record keeping, reporting, product testing and product labeling requirements. These requirements include affixing warning labels to laser products as well as incorporating certain safety features in the design of laser products. The FDA enforces the QSR and laser performance standards through periodic unannounced inspections. We have been, and anticipate in the future being, subject to such inspections. Our failure to comply with the QSR or to take satisfactory corrective action in response to an adverse QSR inspection or our failure to comply with applicable laser performance standards could result in enforcement actions, including a public warning letter, a shutdown of or restrictions on our manufacturing operations, delays in approving or clearing a product, refusal to permit the import or export of our products, a recall or seizure of our products, fines, injunctions, civil or criminal penalties, or other sanctions, such as those described in the preceding paragraphs, any of which could cause our business and operating results to suffer.

If we fail to comply with state laws and regulations, or if state laws or regulations change, our business could suffer.

In addition to FDA regulations, most of our products are also subject to state regulations relating to their sale and use. These regulations are complex and vary from state to state, which complicates monitoring compliance. In addition, these regulations are in many instances in flux. For example, federal regulations allow our prescription products to be sold to or on the order of “licensed practitioners,” that is, practitioners licensed by law to use or order the use of a prescription device. Licensed practitioners are defined on a state-by-state basis. As a result, some states permit non-physicians to purchase and operate our products, while other states do not. Additionally, a state could change its regulations at any time to prohibit sales to particular types of customers. We believe that, to date, we have sold our prescription products only to licensed practitioners. However, our failure to comply with state laws or regulations and changes in state laws or regulations may adversely affect our business.

*The implementation of the reporting and disclosure obligations of the Physician Payment Sunshine Act provisions of the Affordable Care Act could adversely affect our business.

The Patient Protection and Affordable Care Act includes reporting and disclosure requirements, commonly referred to as the “Sunshine Act”, for manufacturers of drugs, biological, medical devices and medical supplies with regard to payments or other transfers of value made to certain physicians and teaching hospitals.

The final rules implementing the Sunshine Act are complex, ambiguous, and broad in scope. We are in the process of analyzing their application to our existing business following our September 2014 acquisition of the assets of Ellman International, Inc.; however, these requirements may adversely impact our relationships with manufacturers, distributors, physicians, and teaching hospitals, and we expect to incur increased costs of compliance.

We, or our distributors, may be unable to obtain or maintain international regulatory qualifications or approvals for our current or future products and indications, which could harm our business.

Sales of our products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. In many countries, our third party distributors are responsible for obtaining and maintaining regulatory approvals for our products. We do not control our third party distributors, and they may not be successful in obtaining or maintaining these regulatory approvals. In addition, the FDA regulates exports of medical devices from the United States.

Complying with international regulatory requirements can be an expensive and time consuming process, and approval is not certain. The time required to obtain foreign clearances or approvals may be longer than that required for FDA clearance or approval, and requirements for such clearances or approvals may differ significantly from FDA requirements. Foreign regulatory authorities may not clear or approve our products for the same indications cleared or approved by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA clearance or approval in addition to other risks. Although we or our distributors have obtained regulatory approvals in the European Union and other countries outside the United States for many of our products, we or our distributors may be unable to maintain regulatory qualifications, clearances or approvals in these countries or obtain qualifications, clearances or approvals in other countries. For example, we are in the process of seeking regulatory approvals from the Japanese Ministry of Health, Labour and Welfare for the direct sale of certain of our products into that country. If we are not successful in doing so, our business will be harmed. We may also incur significant costs in attempting to obtain and in maintaining foreign regulatory clearances, approvals or qualifications. Foreign regulatory agencies, as well as the FDA, periodically inspect manufacturing facilities both in the United States and abroad. If we experience delays in receiving necessary qualifications, clearances or approvals to market our products outside the United States, or if we fail to receive those qualifications, clearances or approvals, or if we fail to comply with other foreign regulatory requirements, we and our distributors may be unable to market our products or enhancements in international markets effectively, or at all. Additionally, the imposition of new requirements may significantly affect our business and our products. We may not be able to adjust to such new requirements.

Risks Related to Litigation

Product liability and business liability suits could be brought against us due to defective design, material or workmanship or due to misuse of our products. These lawsuits could be expensive and time consuming and result in substantial damages to us and increases in our insurance rates.

If our products are defectively designed, manufactured or labeled, contain defective components or are misused, we may become subject to substantial and costly litigation by our customers or their patients or clients. Misusing our products or failing to adhere to operating guidelines for our products can cause severe burns or other significant damage to the eyes, skin or other tissue. If our products fail to function properly, we may be required to conduct product recalls and our customers may lose the ability to treat their patients or clients resulting in a loss of business for our customers. We are routinely involved in claims related to the use of our products. Product liability and business liability claims could divert management’s attention from our core business, be expensive to defend and result in sizable damage awards against us. Our current insurance coverage may not apply or may not be sufficient to cover these claims, and the coverage we have is subject to deductibles for which we are responsible. Moreover, in the future, we may not be able to obtain insurance in amount or scope sufficient to provide us with adequate coverage against potential liabilities. Any product liability or other claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry and reduce product sales. We would need to pay any losses in excess of our insurance coverage out of cash reserves, harming our financial condition and adversely affecting our operating results.

We may incur substantial expenses if our past practices are shown to have violated the Telephone Consumer Protection Act.

We previously used facsimiles to disseminate information about our clinical workshops to large numbers of customers and potential customers. These facsimiles were transmitted by third parties retained by us, and were sent to recipients whose facsimile numbers were supplied by us as well as other recipients whose facsimile numbers we purchased from other sources. In May 2005, we stopped sending unsolicited facsimiles to customers and potential customers.

Under the federal Telephone Consumer Protection Act (TCPA), recipients of unsolicited facsimile “advertisements” may be entitled to damages of up to $500 per facsimile for inadvertent violations and up to $1,500 per facsimile for knowing or willful violations. Recipients of unsolicited facsimile advertisements may seek enforcement of the TCPA in state courts. The TCPA also permits states to initiate a civil action in a federal district court to enforce the TCPA against a party who engages in a pattern or practice of violations of the TCPA. In addition, complaints may be filed with the Federal Communications Commission, which has the power to assess penalties against parties for violations of the TCPA.

In 2005, a plaintiff, individually and as putative representative of a purported class, filed a complaint against us under the TCPA in Massachusetts Superior Court in Middlesex County seeking monetary damages, injunctive relief, costs and attorneys’ fees. The complaint alleged 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. 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 January 2012, the court denied the class certification motion. In November 2012, the court issued the final judgment and awarded the plaintiff $6,000 in damages and awarded us $3,495 in costs. The plaintiff appealed this decision and oral argument on the appeal was heard in October 2013 before the Commonwealth of Massachusetts Appeals Court. In March 2014, the appeals court affirmed the lower court’s ruling, and in April 2014 plaintiff filed a request for further appellate review by the Supreme Judicial Court. On May 6, 2014, the Supreme

Judicial Court issued a Notice of Denial of Application for Further Appellate Review. No further appeals are possible in Massachusetts. In addition, in July 2012, the plaintiff filed a new purported class action, based on the same operative facts and asserting the same claims as in the Massachusetts action, in federal court in the Eastern District of New York. In February 2013 that court granted our motion to dismiss the plaintiff’s claims. In March 2013, the plaintiff drafted a motion seeking reconsideration of the court’s judgment and vacation of the court’s order of dismissal. In April 2013, we drafted a response opposing the plaintiff’s motion. On August 14, 2013, plaintiff filed its motion with the court, although the deadline had been April 26, 2013. We filed a letter with the court objecting to this untimely motion and requesting sanctions. On February 6, 2014, the court denied plaintiff’s motion and denied our request for sanctions. On March 6, 2014, plaintiff filed an appeal of the court’s judgment entered on March 5, 2013. On July 23, 2014, the Second Circuit notified the parties that it will not hear oral arguments and will decide the case based on the briefs.

We are vigorously defending these lawsuits. However, litigation is subject to numerous uncertainties and we are unable to predict the ultimate outcome of this or any other matter. Moreover, the amount of any potential liability in connection with this lawsuit will depend, to a large extent, on whether a class in a class action lawsuit is certified and, if one is certified, on the scope of the class, neither of which we can predict at this time.

These and any future lawsuits that we may face regarding these issues could materially and adversely affect our results of operations, cash flows and financial condition, cause us to incur significant expenses and divert the attention of our management and key personnel from our business operations.

Employment related lawsuits could be brought against us for improper termination of employment, sexual harassment, hostile work environment and other claims. These lawsuits could be expensive and time consuming and result in substantial damages to us and increases in our insurance rates.

If we terminate employment for improper reasons or fail to provide an appropriate work environment or it is alleged that we did so, we may become subject to substantial and costly litigation by our former and current employees. We are routinely involved in claims related to improper termination and other claims. Such claims could divert management’s attention from our core business, be expensive to defend and result in sizable damage awards against us. Our current insurance coverage may not apply or may not be sufficient to cover these claims, and the coverage we have is subject to deductibles for which we are responsible. Moreover, in the future, we may not be able to obtain insurance in amount or scope sufficient to provide us with adequate coverage against potential liabilities. Any employment related claims brought against us, with or without merit, could increase our employment law insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry and reduce product sales. We would need to pay any losses in excess of our insurance coverage out of cash reserves, harming our financial condition and adversely affecting our operating results.

Risks Related to Our Acquisition of Palomar

*We may be unable to realize additional benefits of our acquisition of Palomar.

Following our acquisition of Palomar, significant management attention and resources have been required to integrate the two companies, which is now complete. Although we have achieved the anticipated synergies from the acquisition, achieving additional benefits of the acquisition will continue to depend, in part, on the integration of operations, personnel and technology of Palomar into our company.

We have incurred direct transaction costs of approximately $39 million in connection with the acquisition, including approximately $25.2 million in “golden parachute” compensation (also known as change of control payments). While we have assumed that a certain level of expenses would be incurred from the integration of the two companies, there are a number of factors beyond our control that could affect the total amount or the timing of all the expected integration expenses. These expenses could exceed the savings that we expect to achieve from the elimination of duplicative expenses, the realization of economies of scale, and cost savings and revenue synergies related to the integration of the two companies. In addition, the combined company may incur additional material charges in subsequent fiscal quarters to reflect additional costs in connection with the acquisition.

Our integration with Palomar, and our respective internal control systems and procedures, may result in or lead to a future material weakness in our internal controls, or we or our independent registered public accounting firm may identify a material weakness in our internal controls in the future. A material weakness in internal control over financial reporting would require management and our independent public accounting firm to evaluate our internal controls as ineffective. If our internal control over financial reporting is not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and stock price.

Sales of substantial amounts of our Class A common stock in the open market by former Palomar stockholders could depress the market price of our Class A common stock.

Shares of our Class A common stock that were issued to stockholders of Palomar in the merger are freely tradable by such stockholders without restrictions or further registration under the Securities Act of 1933, as amended.

We issued approximately 6.0 million shares of our Class A common stock in the merger.

Palomar’s former stockholders may sell substantial amounts of our Class A common stock in the public market. Consequently, the market price of our Class A common stock may decrease. These sales might also make it more difficult for us to raise capital by selling equity or equity-related securities at a time and price that we otherwise would deem appropriate.

Charges to earnings resulting from the application of the acquisition method of accounting may adversely affect the market value of our Class A common stock.

In accordance with generally accepted accounting principles in the United States, our acquisition of Palomar was accounted for using the acquisition method of accounting, which resulted in charges to earnings that could have an adverse impact on the market value of our Class A common stock. Under the acquisition method of accounting, the total estimated purchase price was allocated to Palomar’s net tangible assets and identifiable intangible assets based on their respective fair values as of the date of completion of the merger. Any excess of the purchase price over those fair values was recorded as goodwill. The combined company will incur additional amortization expense based on the identifiable amortizable intangible assets acquired pursuant to the merger agreement and their relative useful lives. Additionally, to the extent the value of goodwill or identifiable intangible assets or other long-lived assets may become impaired, the combined company will be required to incur material charges relating to the impairment. These amortization and potential impairment charges could have a material impact on the combined company’s results of operations.

We will incur approximately $52.3 million of incremental amortization expense relating to the acquisition of Palomar. The incremental amortization expense is based on the preliminary estimate of the fair value of the developed technology and patents, customer relationships and trade names acquired in the merger. Changes in earnings per share, including as a result of this incremental expense, could adversely affect the market price of our Class A common stock.

*Stockholder class-action lawsuits have been brought against Palomar, its directors and us in connection with the merger. These lawsuits could be expensive and time consuming and cause Palomar’s former directors and us to pay substantial damages and incur additional costs and expenses.

Following the announcement of the merger on March 18, 2013, six putative stockholder class action complaints were filed against Palomar, its directors and us. The complaints allege that the Palomar board of directors breached their fiduciary duties to the Palomar stockholders in connection with the approval of the merger and that we and, in five of the six lawsuits, Commander Acquisition, LLC, a Delaware limited liability company and wholly-owned subsidiary of us, aided and abetted the alleged breach of fiduciary duties. The complaints allege that the Palomar board of directors breached their fiduciary duties in connection with the proposed transaction by, among other things, conducting a flawed sale process, failing to maximize stockholder value and to obtain the best financial and other terms, and that the registration statement we filed is materially deficient. In all six lawsuits, we have entered into memorandums of understanding that contemplate the parties entering into a stipulation of settlement. On May 1, 2014, we and the Delaware plaintiffs entered into a stipulation of settlement. The stipulation of settlement was filed with the Court of Chancery of the State of Delaware and the court approved the form of notice for mailing to the former stockholders of Palomar. Following notice, the court scheduled a hearing for July 21, 2014 at which the Court of Chancery of the State of Delaware considered the fairness, reasonableness and adequacy of the settlement and approved the settlement, resolved and released all claims that were or could have been brought challenging any aspect of the proposed merger, the merger agreement, and any disclosure made in connection therewith (but excluding claims for appraisal under Section 262 of the Delaware General Corporation Law), and dismissed the Delaware actions with prejudice. The Court also awarded the plaintiffs’ counsel attorneys’ fees and expenses in the amount of $420,000 to be paid by Palomar or its successor. As Palomar’s successor, we paid through our insurance company the attorneys’ fees and expenses awarded by the Court of Chancery of the State of Delaware. In addition, also on May 1, 2014, we, Palomar and the Massachusetts plaintiffs filed a joint stipulation seeking dismissal of the Massachusetts State Actions, and the court dismissed the Massachusetts State Actions with prejudice on May 7, 2014. Finally, on July 16, 2014, the parties to the Massachusetts Federal Action informed the court that if the Court of Chancery of the State of Delaware approved the settlement during the July 21, 2014 hearing, the plaintiff would dismiss the Massachusetts Federal Action with prejudice and we will pay the plaintiff an additional amount for his attorneys’ fees and expenses through our insurance company. The Massachusetts Federal Action was dismissed on August 22, 2014. If one or more of the lawsuits was successful, it could have resulted in substantial damages to Palomar’s former directors and us and cause us to incur additional costs and expenses in connection with the merger.

Risks Related to Future Acquisitions

Any delay in the completion of the integration of future acquired businesses, products or technologies, including employees, into us following an acquisition may significantly reduce the benefits expected to be obtained from the acquisition or could adversely affect the market price of our Class A common stock or our future business and financial results.

We may, from time to time, evaluate potential strategic acquisitions of other complementary businesses, products or technologies, as well as consider joint ventures and other collaborative projects. However, we cannot assure you that these completed acquisitions, including our September 2014 acquisition of the assets of Ellman International, Inc., or any future acquisitions that we may make, will enhance our products or strengthen our competitive position. In particular, we may encounter difficulties assimilating or integrating the acquired businesses, technologies, products, personnel or operations of the acquired companies, and in retaining and motivating key personnel from these businesses. The integration of these businesses may not result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that may be possible from this integration and these benefits may not be achieved within a reasonable period of time.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information relating to our repurchases of shares of our common stock during the quarter ended September 30, 2014 (in thousands, except average price paid per share data):


	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program (2)
July 1, 2014 to July 31, 2014		326,103	$	20.19		326,103	$	4,069
August 1, 2014 to August 31, 2014		—	$	—		—	$	4,069
September 1, 2014 to September 30, 2014		—	$	—		—	$	4,069

Total		326,103				326,103

(1)

On October 29, 2013, we announced that our board of directors authorized the repurchase of up to $25 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. On April 30, 2014, our board of directors approved an increase of $10 million to the stock repurchase program. The program will terminate upon the purchase of $35 million in common stock or expiration of the program on November 1, 2015. During the three months ended September 30, 2014, we repurchased 326,103 shares of our common stock at an aggregate cost of $6.6 million and at a weighted average price of $20.19 per share under this program.

(2)	Consists of amounts that remain available for repurchase under the program.

Item 6.

Exhibits

(a) Exhibits


Exhibit No.		Description

2.1		Asset Purchase Agreement, dated as of September 5, 2014, among Cynosure, Inc., Ellman International, Inc., Ellman Holdings, Inc., and Ellman Holding Corporation (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed September 8, 2014)

31.1		Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

31.2		Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

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 September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013, (ii) Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and 2013, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, and (v) Notes to Consolidated Financial Statements.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Cynosure, Inc. (Registrant)

Date: November 7, 2014	By:	/^s/ MICHAEL R. DAVIN
		Michael R. Davin
		Chairman and Chief Executive Officer

Date: November 7, 2014	By:	/^s/ TIMOTHY W. BAKER
		Timothy W. Baker
		President, Chief Financial Officer and Treasurer

EXHIBIT INDEX


Exhibit No.		Description

2.1		Asset Purchase Agreement, dated as of September 5, 2014, among Cynosure, Inc., Ellman International, Inc., Ellman Holdings, Inc., and Ellman Holding Corporation (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed September 8, 2014)

31.1		Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

31.2		Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

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 September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013, (ii) Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and 2013, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, and (v) Notes to Consolidated Financial Statements.

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