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
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For the quarterly period ended September 30, 2007
OR
¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number 000-51623
Cynosure,
Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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04-3125110
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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5 Carlisle Road
Westford, MA
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01886
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(Address of principal executive offices)
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(Zip code)
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(978) 256-4200
(Registrants 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
filer
¨
Accelerated filer
x
Non-accelerated filer
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
¨
Yes
x
No
The number of shares outstanding of each of the registrants classes of common stock, as of November 1, 2007:
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Class
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Number of Shares
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Class A Common Stock, $0.001 par value
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8,447,006
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Class B Common Stock, $0.001 par value
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3,909,161
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Cynosure, Inc.
Table of Contents
2
Cynosure, Inc.
Consolidated Balance Sheets
(Unaudited, in thousands)
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September 30,
2007
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December 31,
2006
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Assets
|
|
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|
|
|
|
|
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Current assets:
|
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|
|
|
|
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Cash and cash equivalents
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$
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27,561
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$
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13,690
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Marketable securities
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49,402
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43,556
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Accounts receivable, net
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22,549
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19,871
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Amounts due from related party (Note 12)
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16
|
|
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|
335
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|
Inventories
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23,216
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|
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17,624
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Prepaid expenses and other current assets
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2,857
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4,977
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Deferred income taxes
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2,714
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2,604
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|
|
|
|
|
|
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Total current assets
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128,315
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102,657
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Property and equipment, net
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6,670
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5,662
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Other assets
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1,272
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1,247
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|
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Total assets
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$
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136,257
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$
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109,566
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|
|
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|
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Liabilities and Stockholders Equity
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Current liabilities:
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Short-term loan
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$
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|
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$
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167
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Accounts payable
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4,177
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5,986
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Amounts due to related party (Note 12)
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2,021
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1,052
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Accrued expenses
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15,458
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11,077
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Deferred revenue
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4,409
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3,476
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Capital lease obligation
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465
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439
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|
|
|
|
|
|
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Total current liabilities
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26,530
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|
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22,197
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|
|
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Capital lease obligation, net of current portion
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829
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1,069
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Deferred revenue, net of current portion
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374
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311
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Other noncurrent liability
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157
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119
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Commitments and contingencies (Note 10)
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Stockholders equity:
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Preferred stock, $0.001 par value
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Authorized 5,000 shares; Issued none
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Class A and Class B common stock, $0.001 par value
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Authorized 70,000 shares
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Issued 12,339 and 11,210 shares as of September 30, 2007 and December 31, 2006, respectively
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12
|
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|
|
11
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Additional paid-in capital
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94,100
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|
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81,026
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Retained earnings
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15,026
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|
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5,820
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|
Accumulated other comprehensive loss
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|
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(484
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)
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(700
|
)
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Treasury stock, 36 shares, at cost
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|
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(287
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)
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(287
|
)
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|
|
|
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|
|
|
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Total stockholders equity
|
|
|
108,367
|
|
|
|
85,870
|
|
|
|
|
|
|
|
|
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Total liabilities and stockholders equity
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|
$
|
136,257
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|
|
$
|
109,566
|
|
|
|
|
|
|
|
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The accompanying notes are an integral part of these consolidated financial statements.
3
Cynosure, Inc.
Consolidated Statements of Operations
(Unaudited, in thousands, except per share data)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2007
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2006
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2007
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2006
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Revenues
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$
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31,533
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$
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18,556
|
|
|
$
|
87,742
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$
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53,826
|
|
Cost of revenues
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|
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11,045
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7,442
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|
|
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32,035
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23,015
|
|
|
|
|
|
|
|
|
|
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Gross profit
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|
20,488
|
|
|
11,114
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55,707
|
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30,811
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|
|
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Operating expenses:
|
|
|
|
|
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|
|
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Sales and marketing
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10,310
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6,372
|
|
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29,447
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17,979
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|
Research and development
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1,468
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1,207
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|
4,958
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3,455
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General and administrative
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3,143
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2,041
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8,371
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|
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6,218
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Royalty settlement
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|
|
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|
10,000
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|
|
|
|
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10,000
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total operating expenses
|
|
|
14,921
|
|
|
19,620
|
|
|
|
42,776
|
|
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37,652
|
|
|
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|
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|
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Income (loss) from operations
|
|
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5,567
|
|
|
(8,506
|
)
|
|
|
12,931
|
|
|
(6,841
|
)
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Interest income, net
|
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|
661
|
|
|
680
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1,762
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|
|
2,063
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Other income, net
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|
356
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|
215
|
|
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|
440
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|
621
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|
|
|
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Income (loss) before provision for (benefit from) income taxes and minority interest
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6,584
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(7,611
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)
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15,133
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(4,157
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)
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Provision for (benefit from) income taxes
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2,207
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(3,370
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)
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5,927
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(2,019
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)
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Minority interest in net income of subsidiary
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|
6
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41
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|
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|
|
|
|
|
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|
|
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Net income (loss)
|
|
$
|
4,377
|
|
$
|
(4,247
|
)
|
|
$
|
9,206
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|
$
|
(2,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic net income (loss) per share
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|
$
|
0.36
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|
$
|
(0.38
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)
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$
|
0.78
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|
$
|
(0.20
|
)
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|
|
|
|
|
|
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|
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|
|
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Diluted net income (loss) per share
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|
$
|
0.34
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|
$
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(0.38
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)
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|
$
|
0.73
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|
$
|
(0.20
|
)
|
|
|
|
|
|
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|
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|
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Basic weighted-average common shares outstanding
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12,281
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|
11,107
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|
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11,863
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|
11,061
|
|
|
|
|
|
|
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|
|
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|
|
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|
Diluted weighted-average common shares outstanding
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12,751
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|
|
11,107
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|
|
|
12,604
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|
|
11,061
|
|
|
|
|
|
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The accompanying notes are an integral part of these consolidated financial statements.
4
Cynosure, Inc.
Consolidated Statements of Cash Flow
(Unaudited, in thousands)
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Nine Months Ended
September 30,
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|
2007
|
|
|
2006
|
|
Operating activities:
|
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|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,206
|
|
|
$
|
(2,179
|
)
|
Reconciliation of net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
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Depreciation and amortization
|
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|
2,029
|
|
|
|
1,725
|
|
Stock-based compensation expense
|
|
|
4,283
|
|
|
|
1,611
|
|
Accretion of discounts on marketable securities
|
|
|
203
|
|
|
|
(601
|
)
|
Deferred income taxes
|
|
|
(137
|
)
|
|
|
(4,036
|
)
|
Minority interest in consolidated subsidiary
|
|
|
|
|
|
|
41
|
|
Gain on sale of investment
|
|
|
|
|
|
|
(118
|
)
|
Impairment of marketable security
|
|
|
190
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,118
|
)
|
|
|
(3,771
|
)
|
Due from related party
|
|
|
319
|
|
|
|
64
|
|
Inventories
|
|
|
(5,135
|
)
|
|
|
(3,542
|
)
|
Net book value of demonstration inventory sold
|
|
|
150
|
|
|
|
144
|
|
Prepaid expenses and other current assets
|
|
|
2,072
|
|
|
|
(2,415
|
)
|
Accounts payable
|
|
|
(1,874
|
)
|
|
|
1,233
|
|
Due to related party
|
|
|
967
|
|
|
|
(706
|
)
|
Accrued expenses
|
|
|
4,111
|
|
|
|
1,094
|
|
Accrued royalty settlement
|
|
|
|
|
|
|
10,000
|
|
Deferred revenue
|
|
|
906
|
|
|
|
(1,113
|
)
|
Other noncurrent liability
|
|
|
38
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
15,210
|
|
|
|
(2,510
|
)
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(3,017
|
)
|
|
|
(1,758
|
)
|
Proceeds from the sales and maturities of marketable securities
|
|
|
51,204
|
|
|
|
119,025
|
|
Purchases of marketable securities
|
|
|
(57,362
|
)
|
|
|
(171,275
|
)
|
Decrease (increase) in other noncurrent assets
|
|
|
4
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(9,171
|
)
|
|
|
(54,021
|
)
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Payment on short term loan
|
|
|
(168
|
)
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
5,211
|
|
|
|
340
|
|
Tax benefits related to stock options
|
|
|
3,582
|
|
|
|
291
|
|
Payments of initial public offering costs
|
|
|
|
|
|
|
(38
|
)
|
Payments on capital lease obligation
|
|
|
(319
|
)
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
8,307
|
|
|
|
318
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(475
|
)
|
|
|
(312
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
13,871
|
|
|
|
(56,525
|
)
|
Cash and cash equivalents, beginning of the period
|
|
|
13,690
|
|
|
|
64,646
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period
|
|
$
|
27,561
|
|
|
$
|
8,121
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
116
|
|
|
$
|
90
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
31
|
|
|
$
|
2,780
|
|
|
|
|
|
|
|
|
|
|
Supplemental noncash investing and financing activities
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
2007
|
|
2006
|
Assets acquired under capital lease
|
|
$
|
103
|
|
$
|
604
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
Cynosure, Inc.
Notes to Consolidated Financial Statements
Note 1 Interim Consolidated Financial Statements
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim information and pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. It is recommended that these financial statements
be read in conjunction with the consolidated financial statements and related notes that appear in the Annual Report of Cynosure, Inc. (Cynosure) as reported on Form 10-K for the year ended December 31, 2006. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations and cash flows as of the dates and for the periods presented have been included. The results of
operations for the three months and nine months ended September 30, 2007 may not be indicative of the results that may be expected for the year ended December 31, 2007, or any other period.
Note 2 Stock-Based Compensation
Cynosure
follows the provisions of Financial Accounting Standards Board (FASB) Statement No. 123(R),
Share-Based Payment
, (SFAS 123(R)). SFAS 123(R) requires companies to utilize an estimated forfeiture rate when calculating the expense for the
period. As a result, Cynosure has applied an estimated annual forfeiture rate of 1.0% in determining the expense recorded in the consolidated statements of income.
The stock-based compensation expense reduced both basic and diluted earnings per share by $0.08 for the three months ended September 30, 2007 and increased both basic and diluted net loss per share by $0.05 for
the three months ended September 30, 2006. Stock-based compensation expense reduced basic and diluted earnings per share by $0.25 and $0.23, respectively, for the nine months ended September 30, 2007 and increased both basic and diluted
loss per share by $0.11 for the nine months ended September 30, 2006. The accompanying financial statements reflect stock-based compensation expense of $1,436,000 and $820,000 and related tax benefits of $457,000 and $234,000 for the three
months ended September 30, 2007 and 2006, respectively. The accompanying financial statements reflect stock-based compensation expense of $4,283,000 and $1,611,000 and related tax benefits of $1,337,000 and $404,000 for the nine months ended
September 30, 2007 and 2006, respectively. Cynosure capitalized $61,000 and $14,000 of stock-based compensation expense as part of inventory as of September 30, 20007 and 2006, respectively. Cash received from option exercises was
$5,211,000 and $340,000 during the nine months ended September 30, 2007 and 2006, respectively. Cynosure recognized $3,582,000 in actual tax benefits from these option exercises during the nine months ended September 30, 2007 and
recognized $291,000 during the nine months ended September 30, 2006. Actual tax benefits are primarily the result of disqualifying dispositions of incentive stock options exercised which result in a reduction of income taxes payable.
Cynosure granted 549,800 and 424,150 stock options during the nine months ended September 30, 2007 and 2006, respectively. Cynosure
uses the Black-Scholes model to determine the weighted-average fair value of options. The weighted-average fair value of the options granted during the nine months ended September 30, 2007 was $18.67 using the following assumptions:
|
|
|
|
|
|
Nine Months Ended
September 30, 2007
|
|
Risk-free interest rate
|
|
4.58% - 4.77
|
%
|
Expected dividend yield
|
|
|
|
Expected lives
|
|
5.8 years
|
|
Expected volatility
|
|
70
|
%
|
Option-pricing models require the input of various subjective assumptions, including the
options expected life and the price volatility of the underlying stock. Due to Cynosures initial public offering in December 2005, Cynosure believes there is not adequate information on the volatility of its own shares. As such,
Cynosures estimated expected stock price volatility is based on a weighted-average of its own historical volatility and of the average volatilities of other guideline companies in the same industry. Cynosure believes this is more reflective
and a better indicator of the expected future volatility than using an average of a comparable market index or of a single comparable company in the same industry. Cynosures expected term of options granted in the nine months ended
September 30, 2007 was derived from the short-cut method described in SECs Staff Accounting Bulletin (SAB) No. 107. 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.
7
Note 3 Royalty Settlement
In various communications that the Company received from Palomar Medical Technologies, Inc. (Palomar) prior to September 30, 2006, Palomar asserted that Cynosure needs a license under specified U.S. and foreign
patents owned or licensed by Palomar with respect to Cynosures hair removal-only systems. In the third quarter of 2006, Cynosure entered into negotiations with Palomar with respect to such a license. On November 6, 2006, Cynosure entered
into a non-exclusive patent license with Palomar. Under the cross-license agreement, Cynosure obtained a non-exclusive license to integrate into its products certain hair removal technology covered by specified U.S. and foreign patents held by
Palomar and Palomar obtained a non-exclusive license under certain U.S. and foreign patents held by Cynosure. In November 2006, Cynosure made a payment to Palomar of $10 million for royalties related to sales prior to October 1, 2006 of hair
removal-only systems including Cynosures Apogee family of products,
PhotoLight
,
Acclaim 7000
, and
PhotoSilk Plus
. Cynosure accrued this amount as of September 30, 2006 in the accompanying consolidated balance sheets
and recorded this amount as a royalty settlement within Cynosures operating expenses for the three and nine months ended September 30, 2006.
In connection with this agreement, Cynosure also agreed to pay royalties to Palomar on Cynosures sales of certain hair removal products. The royalty rate for sales of hair removal products ranges from 3.75% to
7.5% of net sales, depending upon product configuration and the number of energy sources. Cynosures revenue from systems that do not include hair removal capabilities and revenue from service is not subject to any royalties under the Palomar
agreement.
Note 4 Inventories
Cynosure states all inventories at the lower of cost or market, determined on a first-in, first-out method. Inventory includes material, labor and overhead and consists of the following:
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
(in thousands)
|
Raw materials
|
|
$
|
1,477
|
|
$
|
1,848
|
Work in process
|
|
|
645
|
|
|
818
|
Finished goods
|
|
|
21,094
|
|
|
14,958
|
|
|
|
|
|
|
|
|
|
$
|
23,216
|
|
$
|
17,624
|
|
|
|
|
|
|
|
Note 5 Marketable Securities
Cynosure accounts for investments in marketable securities as available-for-sale securities in accordance with Statement of Financial Accounting Standards
No. 115,
Accounting for Certain Investments in Debt and Equity Securities
(SFAS 115). Under SFAS 115, securities purchased to be held for indefinite periods of time and not intended at the time of purchase to be held until maturity are
classified as available-for-sale securities with any unrealized gains and losses reported as a separate component of accumulated other comprehensive loss. Cynosure continually evaluates whether any marketable investments have been impaired and, if
so, whether such impairment is temporary or other than temporary.
Cynosures available-for-sale securities at September 30, 2007
consist of approximately $49.3 million of investments in debt securities consisting of state and municipal bonds and corporate bonds and approximately $80,000 in equity securities. As of September 30, 2007, Cynosures equity security
consisted of 133,511 shares of common stock of a public company with a fair market value of approximately $80,000. These shares were acquired in connection with the sale of Cynosures investment in a private company during 2006 and are
considered available-for-sale securities in accordance with SFAS 115.
As of September 30, 2007, Cynosures marketable securities
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
Corporate bonds
|
|
$
|
823
|
|
$
|
823
|
|
$
|
|
|
$
|
|
State and municipal bonds
|
|
|
48,499
|
|
|
48,483
|
|
|
16
|
|
|
|
Equity security
|
|
|
80
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,402
|
|
$
|
49,576
|
|
$
|
16
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended September 30, 2007, Cynosure concluded that its equity security
investment in shares of common stock of another public company was other than temporarily impaired as of September 30, 2007 due to its consistent decline in value and public notification that the security is at risk of being delisted from the
NASDAQ exchange. As such, Cynosure recorded an impairment charge of approximately $190,000 as an other expense in the accompanying consolidated statements of operations for the three months ended September 30, 2007.
8
As of September 30, 2007, Cynosures debt securities mature as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Maturities
|
|
|
Total
|
|
Less Than One Year
|
|
One to Two Years
|
Corporate bonds
|
|
$
|
823
|
|
$
|
823
|
|
$
|
|
State and municipal bonds
|
|
|
48,499
|
|
|
48,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,322
|
|
$
|
49,322
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
9
Note 6 Warranty Costs
Cynosure typically provides a one-year parts and labor warranty on end-user sales of laser systems. Distributor sales generally include a warranty on parts only. Estimated future costs for initial product warranties
are provided at the time of revenue recognition.
The following table provides the detail of the change in Cynosures product warranty
accrual during the nine months ended September 30, 2007, which is a component of accrued liabilities in the consolidated balance sheet at September 30, 2007:
|
|
|
|
|
|
|
September 30,
2007
|
|
|
|
(in thousands)
|
|
Warranty accrual, beginning of period
|
|
$
|
2,803
|
|
Charged to costs and expenses relating to new sales
|
|
|
2,801
|
|
Costs incurred
|
|
|
(2,658
|
)
|
|
|
|
|
|
Warranty accrual, end of period
|
|
$
|
2,946
|
|
|
|
|
|
|
Note 7 Segment Information
In accordance with Statement of Financial Accounting Standard No. 131,
Disclosures about Segments of an Enterprise and Related Information
(SFAS 131), 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 determining how to
allocate resources and assess performance. Cynosures chief decision-maker, as defined under SFAS 131, 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,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
United States
|
|
$
|
19,161
|
|
$
|
9,152
|
|
$
|
49,437
|
|
$
|
28,355
|
Europe
|
|
|
5,596
|
|
|
4,130
|
|
|
19,683
|
|
|
13,067
|
Asia / Pacific
|
|
|
2,818
|
|
|
3,068
|
|
|
9,032
|
|
|
6,943
|
Other
|
|
|
3,958
|
|
|
2,206
|
|
|
9,590
|
|
|
5,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,533
|
|
$
|
18,556
|
|
$
|
87,742
|
|
$
|
53,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets by geographic area are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
|
December 31,
2006
|
|
|
|
(in thousands)
|
|
United States
|
|
$
|
106,891
|
|
|
$
|
86,815
|
|
Europe
|
|
|
3,470
|
|
|
|
443
|
|
Asia / Pacific
|
|
|
357
|
|
|
|
374
|
|
Eliminations
|
|
|
(2,351
|
)
|
|
|
(1,762
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
108,367
|
|
|
$
|
85,870
|
|
|
|
|
|
|
|
|
|
|
10
Long-lived assets by geographic area are as follows:
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
(in thousands)
|
United States
|
|
$
|
7,267
|
|
$
|
6,435
|
Europe
|
|
|
523
|
|
|
316
|
Asia / Pacific
|
|
|
152
|
|
|
157
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,942
|
|
$
|
6,909
|
|
|
|
|
|
|
|
No individual country within Europe or Asia/Pacific represented greater than 10% of total revenue,
net assets or long-lived assets for any periods presented.
Note 8 Net Income (Loss) Per Share
Basic net income (loss) per share was determined by dividing net income (loss) by the basic weighted-average common shares outstanding during the period.
Diluted net income (loss) per share was determined by dividing net income (loss) by diluted weighted-average shares outstanding. Diluted weighted-average shares reflect the dilutive effect, if any, of common stock options based on the treasury stock
method.
A reconciliation of basic and diluted shares is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Basic weighted-average number of shares outstanding
|
|
12,281
|
|
11,107
|
|
11,863
|
|
11,061
|
Potential common shares pursuant to stock options
|
|
470
|
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average number of shares outstanding
|
|
12,751
|
|
11,107
|
|
12,604
|
|
11,061
|
|
|
|
|
|
|
|
|
|
During the three months ended September 30, 2007 and 2006, approximately, 196,000 and
1,333,000 shares, respectively, were excluded from the calculation of diluted weighted-average shares outstanding as the effect would have been anti-dilutive. During the nine months ended September 30, 2007 and 2006, approximately, 222,000 and
1,277,000 shares, respectively, were excluded from the calculation of diluted weighted-average shares outstanding as the effect would have been anti-dilutive.
Note 9 Comprehensive Income (Loss)
Comprehensive income (loss) is the change in equity of a company during a period
from transactions and other events and circumstances, excluding transactions resulting from investments by owners and distributions to owners. The components of total comprehensive income (loss) for the three and nine months ended September 30,
2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
Cumulative translation adjustment
|
|
$
|
117
|
|
$
|
92
|
|
|
$
|
162
|
|
|
$
|
226
|
|
Unrealized gain on marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on marketable securities
|
|
|
16
|
|
|
36
|
|
|
|
(34
|
)
|
|
|
5
|
|
Add-back: Reclassification adjustment for impairment of marketable security included in net income (loss)
|
|
|
87
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized gain on marketable securities
|
|
|
103
|
|
|
36
|
|
|
|
53
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
220
|
|
|
128
|
|
|
|
215
|
|
|
|
231
|
|
Reported net income (loss)
|
|
|
4,377
|
|
|
(4,247
|
)
|
|
|
9,206
|
|
|
|
(2,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
4,597
|
|
$
|
(4,119
|
)
|
|
$
|
9,421
|
|
|
$
|
(1,948
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Note 10 Litigation
In May 2005, Dr. Ari Weitzner, individually and as putative representative of a purported class, filed a complaint against Cynosure under the federal Telephone Consumer Protection Act, or TCPA, in Massachusetts
Superior Court in Middlesex County seeking monetary damages, injunctive relief, costs and attorneys fees. The complaint alleges that Cynosure violated the TCPA by sending unsolicited advertisements by facsimile to the plaintiff and other recipients
without the prior express invitation or permission of the recipients. Under the TCPA, recipients of unsolicited facsimile advertisements are entitled to damages of up to $500 per facsimile for inadvertent violations and up to $1,500 per facsimile
for knowing or willful violations. Although Cynosure is continuing to investigate the number of facsimiles transmitted during the period for which the plaintiff in the lawsuit seeks class certification and the number of these facsimiles that were
unsolicited within the meaning of the TCPA, Cynosure expects the number of unsolicited facsimiles to be very large. Cynosure is vigorously defending the lawsuit and has filed initial briefs and motions with the court. Cynosure is not
able to estimate the amount or range of loss that could result from an unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.
In December 2005, certain individuals commenced an arbitration against Cynosure along with Sona International Inc. (Sona MedSpa), Carousel Capital, Inc. and various individuals. The arbitration demand alleges fraud,
violations of various state consumer protection laws and other causes of action in connection with the plaintiffs acquisition of franchises from the Sona entities. Cynosure declined to participate in the arbitration because Cynosure had not
agreed contractually to do so, and it has been dismissed from the arbitration by agreement of the parties.
In January 2006, Gentle Laser
Solutions, Inc., Liberty Bell Med Spa, Inc. and Kevin T. Campbell filed suit against Cynosure and one of its former directors, along with Sona International Inc. Sona Lasers Centers, Inc. and various other individuals, in the Superior Court of New
Jersey. The matter was later removed to the United States District Court in the District of New Jersey. The suit alleges fraud, breach of contract and other causes of action in connection with the plaintiffs acquisition of franchises from the
Sona entities. Court-ordered conferences scheduled for December 1, 2006 and January 29, 2007 were postponed due to a pending motion to dismiss by Sona. Cynosure is not able to estimate the amount or range of loss that could result from an
unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.
In June 2006, Baltimore Laser Solutions,
Inc. and Kevin T. Campbell, filed suit against Cynosure and one of its former directors, along with Sona International Inc., Sona Lasers Centers, Inc. and various other individuals, in the United States District Court in the District of Maryland.
The suit alleges fraud, breach of contract and other causes of action in connection with the plaintiffs acquisition of franchises from the Sona entities. Cynosure is not able to estimate the amount or range of loss that could result from an
unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.
In addition to the matters discussed
above, from time to time, Cynosure is subject to various claims, lawsuits, disputes with third parties, investigations and pending actions involving various allegations against Cynosure incident to the operation of its business, principally product
liability. Each of these other matters is subject to various uncertainties, and it is possible that some of these other matters may be resolved unfavorably to Cynosure. Cynosure establishes accruals for losses that management deems to be probable
and subject to reasonable estimate. Cynosure believes that the ultimate outcome of these matters will not have a material adverse impact on its consolidated financial position, results of operations or cash flows.
Note 11 Sona MedSpa
In October 2005, Cynosure
entered into a preferred vendor agreement with Sona MedSpa, a spa franchisor that owns and operates hair removal clinics in the United States. Under the agreement, Cynosure sold certain laser systems to Sona MedSpa for approximately $1.3 million,
which was recorded as deferred revenue as of December 31, 2005 because the fee was not fixed or determinable at the time of sale.
In
March 2006, Sona MedSpa notified Cynosure that Sona MedSpa was uncertain that it had the financial resources to honor its commitments to Cynosure and Cynosure determined that the collectibility of the fee was not probable and, as a result, reversed
the related deferred revenue. Cynosure expensed as cost of goods sold approximately $667,000 of inventory delivered under the agreement. Additionally, Cynosure provided an allowance for doubtful accounts of $463,000 for accounts receivable
associated with services provided prior to the October 2005 preferred vendor agreement. On May 2, 2006, Cynosure sent Sona MedSpa a notice of default with respect to Sona MedSpas failure to pay Cynosure amounts payable under two
agreements between the parties. On June 2, 2006, Cynosure terminated the agreement with Sona MedSpa as the defaults under the agreements were not cured. On June 16, 2006, Cynosure commenced an arbitration with Sona MedSpa.
On November 27, 2006, Cynosure settled the arbitration with Sona MedSpa and each party released its claims against the other in exchange for
consideration of $250,000 in cash. The settlement payment received by Cynosure was in
12
reimbursement for legal expenses and, as such, is reflected as a reduction in general and administrative expenses in the accompanying consolidated statements
of income for the nine months ended September 30, 2007 as the period during which this payment was subject to certain avoidance action by a third-party had lapsed.
Note 12 Related Party Transactions
As of September 30, 2007, El. En. S.p.A. (El.En.)
owned 32% of Cynosures outstanding common stock. Purchases of inventory from El.En. during the three months ended September 30, 2007 and 2006 were approximately $1.4 million and $239,000, respectively. Purchases of inventory from El.En.
during the nine months ended September 30, 2007 and 2006, were approximately $5.1 million and $2.4 million, respectively. As of September 30, 2007 and December 31, 2006, amounts due to related party for these purchases were
approximately $2.0 million and $1.1 million, respectively. Amounts due from El.En. as of September 30, 2007 and December 31, 2006 were approximately $16,000 and $335,000, respectively, which represent services performed by Cynosure.
Note 13 Income Taxes
Cynosure
adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation of FAS 109, Accounting for Income Taxes
, (FIN 48) on January 1, 2007. FIN 48 clarifies the accounting for income
taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
Cynosure generally reports tax positions in its financial statements as they are
reported on tax returns as filed or to be filed. A tax benefit is reflected in the financial statements only if it is more-likely-than-not that Cynosure will be able to sustain the tax position, based on its technical merits. Tax
benefits from uncertain tax positions that reduce current or future income tax liabilities are reported in the financial statements only to the extent each benefit is recognized and measured, in accordance with the provisions of FIN 48. As a result
of adopting FIN 48, Cynosure determined that no material cumulative effect adjustment was necessary to the opening balance of retained earnings as of January 1, 2007. Cynosure further determined, based on its analysis, that there were no
significant unrecognized tax benefits that, if recognized, would affect the effective tax rate for the three months and nine months ended September 30, 2007.
Under FIN 48, a tax return benefit that does not qualify for financial reporting recognition is generally treated as a government loan or incorrect application of a tax law and may result in interest and penalty
charges. Cynosure classifies interest and penalties related to income taxes as interest expense and other expense, respectively, within the statement of income.
Cynosure files income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. With few exceptions, Cynosure is no longer subject to U.S. federal, state and local, or non-U.S.
income tax examinations by tax authorities for years before 2003.
As part of an Internal Revenue Service audit, Cynosure discovered in May
2007 that it erroneously claimed an intercompany bad-debt deduction from its German subsidiary of approximately $1.7 million on its 2003 U.S. federal income tax return. The deduction increased the amount of the U.S. net operating loss (NOL)
carryforward as of December 31, 2003. During 2004 and 2005, the Company utilized this NOL carryforward to reduce taxable income and also recognized the financial statement benefit through a reduction in its tax provision for those two years. In
accordance with SAB No. 99 and SAB No. 108, Cynosure assessed the materiality of this error on Cynosures financial statements for the years ended December 31, 2004, 2005 and 2006 using both the roll-over method and iron-curtain
method as defined in SAB No. 108. Cynosure concluded the effect of this error was not material to Cynosures financial statements for the years ended December 31, 2004, 2005 and 2006 and, as such, these financial statements are not
materially misstated. Cynosure also concluded that providing for the correction of the error in 2007 would not have a material effect on Cynosures financial statements for the year ended December 31, 2007. As such, Cynosure recorded a
provision for income taxes of $702,000 during the six months ended June 30, 2007 for the tax liability and related interest required to correct this error. As of September 30, 2007, Cynosure has accrued $728,000 for this tax liability and
related interest within accrued expenses in the accompanying consolidated balance sheets.
Note 14 Recent Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements
, or SFAS 157. SFAS 157 defines fair value,
establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements; rather, it applies
under other accounting pronouncements that require or permit fair value measurements. The provisions of this Statement are to be applied prospectively as of January 1, 2008, with any transition adjustment recognized as a cumulative-effect
adjustment to the opening balance of retained earnings. Cynosure does not expect that the adoption of SFAS 157 will have a material impact on its financial position or results of operations.
13
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115
(SFAS 159), in order to permit entities to choose to measure many financial instruments and certain other eligible items at fair value at specified election
dates and, thereby, mitigate volatility in reported earnings caused by measuring related assets and liabilities differently. Unrealized gains and losses on items for which the fair value option has been elected shall be reported in earnings. The
provisions of SFAS 159 are to be applied prospectively as of January 1, 2008; however, early adoption is permitted, subject to certain restrictions. SFAS 159 does not affect any existing accounting literature that requires certain assets and
liabilities to be carried at fair value. Cynosure does not expect that the adoption of SFAS 159 will have a material impact on its financial position or results of operations.
14
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements
that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Quarterly Report regarding our strategy, future operations, future financial position, future revenues, projected costs,
prospects, plans, objectives of management and expected market growth are forward-looking statements. The words anticipate, believe, estimate, expect, intend, may,
plan, predict, project, will, would and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
These forward-looking statements include, among other things, statements about:
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our ability to identify and penetrate new markets for our products and technology;
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our ability to innovate, develop and commercialize new products;
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our ability to obtain and maintain regulatory clearances;
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our sales and marketing capabilities and strategy in the United States and internationally;
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our intellectual property portfolio; and
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our estimates regarding expenses, future revenues, capital requirements and needs for additional financing.
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We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on
our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements
included in our Annual Report on Form 10-K for the year ended December 31, 2006, particularly in Part I Item 1A, and in our other public filings with the Securities and Exchange Commission that could cause actual results or events
to differ materially from the forward-looking statements that we make.
You should read this Quarterly Report and the documents that we
have filed as exhibits to the Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. It is routine for internal projections and expectations to change as the year or
each quarter in the year progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations are made as of the date of this Quarterly Report on Form 10-Q and may change prior to
the end of each quarter or the year. While we may elect to update forward-looking statements at some point in the future, we do not undertake any obligation to update any forward-looking statements whether as a result of new information, future
events or otherwise.
The following discussion should be read in conjunction with, and is qualified in its entirety by, the condensed
consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report and the condensed consolidated financial statements and notes thereto and Managements Discussion and Analysis of Financial Condition and
Results of Operations in our Form 10-K filed with the SEC on March 12, 2007. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any
future periods.
Company Overview
We develop and market aesthetic treatment systems that are used by physicians and other practitioners to perform non-invasive procedures to remove hair, treat vascular lesions, rejuvenate skin through the treatment of shallow vascular
lesions and pigmented lesions, temporarily reduce the appearance of cellulite, treat wrinkles, skin texture, skin discoloration and skin tightening, and to perform minimally invasive procedures for LaserBodySculpting and for the removal of unwanted
fat. Our systems incorporate a broad range of laser and other light-based energy sources, including Alexandrite, pulse dye, Nd:Yag and diode lasers, as well as intense pulsed light. We believe that we are one of only a few companies that currently
offer aesthetic treatment systems utilizing Alexandrite and pulse dye lasers, which are particularly well suited for some applications and skin types. We offer single energy source systems as well as workstations that incorporate two or more
different types of lasers or pulsed light technologies. We offer multiple technologies and system alternatives at a variety of price points depending primarily on the number and type of energy sources included in the system. Our newer products are
designed to be easily upgradeable to add additional energy sources and handpieces, which provides our customers with technological flexibility as they expand their practices. As the aesthetic treatment market evolves to include new customers, such
as aesthetic spas and additional physician specialties, we believe that our broad technology base and tailored solutions will provide us with a competitive advantage.
15
We sell over 15 different aesthetic treatment systems and have focused our development and marketing
efforts on offering leading, or flagship, products for each of the major aesthetic procedure categories that we address. Our flagship products are:
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the
Apogee Elite
system for hair removal;
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the
Cynergy
system for the treatment of vascular lesions;
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the
TriActive LaserDermology
system for the temporary reduction of the appearance of cellulite;
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the
Affirm
system for anti-aging, including treatments for wrinkles, skin texture, skin discoloration and skin tightening; and
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the
Smartlipo
system for LaserBodySculpting (SM) and the removal of unwanted fat.
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In addition to their primary applications, the
Apogee Elite
and
Cynergy
systems can each be used by practitioners for a variety of other applications.
We recently expanded our anti-aging aesthetic solution to include the addition of a new 1320 nm wavelength Nd:YAG laser to the
Affirm
workstation. The
Affirm
product family now incorporates three energy sources. The new deep-heating component provided by the new 1320 nm wavelength Nd:YAG laser allows for tissue tightening as a result of tissue coagulation, which
complements the systems 1440 nm Nd:YAG laser for fractional micro-rejuvenation and Xenon Pulsed Light system for discoloration. We began shipping these new upgradeable systems in 2007.
We also recently expanded our
Smartlipo
product family to include a 10-watt
Smartlipo LaserBodySculpting
workstation, which is intended for
high-volume aesthetic laser practices, allowing a physician to complete a typical laser-assisted liposuction procedure in about half the time as the original 6-watt workstation. The 10-watt
Smartlipo
workstation is available as a standalone
unit or as an upgrade to the 6-watt system.
We sell our products through a direct sales force in North America, four European countries,
Japan and China and through international distributors in 44 other countries. As of December 31, 2006, we had sold more than 5,900 aesthetic treatment systems worldwide.
16
Financial Operations Overview
Revenues
We generate revenues primarily from sales of our products and parts and accessories and, to a lesser
extent, from services, including product warranty revenues. During the nine months ended September 30, 2007, we derived approximately 96% of our revenues from sales of our products and 4% of our revenues from service. For the comparable period
in 2006, we derived approximately 95% of our revenues from sales of our products and 5% of our revenues from service. Generally, we recognize revenues from sales of our products upon delivery to our customers, revenues from service contracts and
extended product warranties ratably over the coverage period and revenues from service in the period in which the service occurs.
We sell
our products directly in North America, four European countries, Japan and China and use distributors to sell our products in other countries where we do not have a direct sales force. During the nine months ended September 30, 2007 and 2006,
we derived 34% and 40%, respectively, of our product revenues from sales of our products outside North America. As of September 30, 2007, we had 67 sales employees in North America, 15 sales employees in four European countries, Japan and China
and distributors in 44 countries. The following table provides revenue data by geographic region for the nine months ended September 30, 2007 and 2006:
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Percentage of
Revenues
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Nine Months Ended
September 30,
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2007
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2006
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Region
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North America
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64
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%
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57
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%
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Europe
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22
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24
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Asia/Pacific
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10
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13
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Other
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4
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6
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Total
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100
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%
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100
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%
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See Note 7 to our consolidated financial statements included in this Quarterly Report for revenues and asset data
by geographic region.
Cost of Revenues
Our cost of revenues consists primarily of material, labor and manufacturing overhead expenses and includes the cost of components and subassemblies supplied by third party suppliers. Cost of revenues also includes royalties incurred on
products sold, service and warranty expenses, as well as salaries and personnel-related expenses, including stock-based compensation, for our operations management team, purchasing and quality control.
Sales and Marketing Expenses
Our sales and
marketing expenses consist primarily of salaries, commissions and other personnel-related expenses, including stock-based compensation, for employees engaged in sales, marketing and support of our products, trade show, promotional and public
relations expenses and management and administration expenses in support of sales and marketing. We expect our sales and marketing expenses to increase in absolute dollars, though we do not expect them to increase significantly as a percentage of
revenues, as we expand our sales, marketing and distribution capabilities.
Research and Development Expenses
Our research and development expenses consist of salaries and other personnel-related expenses, including stock-based compensation, for employees
primarily engaged in research, development and engineering activities and materials used and other overhead expenses incurred in connection with the design and development of our products. We expense all of our research and development costs as
incurred. We expect our research and development expenditures to increase in absolute dollars, though we do not expect them to increase significantly as a percentage of revenues, as we continue to devote resources to research and develop new
products and technologies.
17
General and Administrative Expenses
Our general and administrative expenses consist primarily of salaries and other personnel-related expenses, including stock-based compensation, for
executive, accounting and administrative personnel, professional fees and other general corporate expenses. We expect our general and administrative expenses to increase in absolute dollars, though we do not expect them to increase significantly as
a percentage of revenues.
Interest Income, net
Interest income consists primarily of interest earned on our marketable securities portfolio consisting mainly of state and municipal bonds and corporate bonds. Interest expense consists primarily of interest due on
capitalized leases.
Other Income, net
Other income, net consists primarily of foreign currency remeasurement gains and losses.
Provision for Income Taxes
As of December 31, 2006, we had state tax credit carryforwards of approximately $209,000 to offset future tax liability, and state net operating loss
(NOL) carryforwards of approximately $561,000 to offset future taxable income. If not utilized, these credit and operating loss carryforwards will expire at various dates through 2019, and the losses will expire through 2026. We also had foreign net
operating loss carryforwards of approximately $2,067,000 available to reduce future foreign taxable income which will expire at various times through 2024. Foreign net operating loss carryforwards include $1,875,000 in Germany and France, which do
not expire.
18
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
The following table contains selected income statement information, which
serves as the basis of the discussion of our results of operations for the three months ended September 30, 2007 and 2006, respectively (in thousands, except for percentages):
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Three Months Ended
September 30,
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$
Change
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%
Change
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2007
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2006
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Amount
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As a % of
Total
Revenues
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Amount
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As a % of
Total
Revenues
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Revenues
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$
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31,533
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100
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%
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$
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18,556
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100
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%
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$
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12,977
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70
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%
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Cost of revenues
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11,045
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35
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7,442
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40
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3,603
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48
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Gross profit
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20,488
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65
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11,114
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60
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9,374
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84
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Operating expenses
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Sales and marketing
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10,310
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33
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6,372
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34
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3,938
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62
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Research and development
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1,468
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5
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1,207
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7
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261
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22
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General and administrative
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3,143
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10
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2,041
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11
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1,102
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54
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Royalty settlement
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10,000
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54
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(10,000
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-100
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Total operating expenses
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14,921
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47
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19,620
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106
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(4,699
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-24
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Income (loss) from operations
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5,567
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18
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(8,506
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-46
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14,073
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165
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Interest income, net
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661
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2
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680
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4
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(19
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-3
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Other income, net
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356
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1
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215
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1
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141
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66
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Income (loss) before provision for (benefit from) income taxes and minority interest
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6,584
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21
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(7,611
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)
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-41
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14,195
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|
187
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Provision for (benefit from) income taxes
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2,207
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7
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(3,370
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)
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-18
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5,577
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166
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Minority interest in net income of subsidiary
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6
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(6
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)
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-100
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Net income (loss)
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$
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4,377
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14
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%
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$
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(4,247
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)
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-23
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%
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$
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8,624
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203
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%
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Revenues
Revenues in the three months ended September 30, 2007 exceeded revenues in the three months ended September 30, 2006 by $13.0 million or 70%. The increase in revenues was attributable to a number of factors
(in thousands, except for percentages):
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Three Months Ended
September 30,
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$
Change
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%
Change
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2007
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2006
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Product sales in North America
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$
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20,475
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$
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9,430
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$
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11,045
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117
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%
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Product sales outside North America
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7,734
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6,755
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979
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14
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Original equipment manufacturer sales and revenue sharing
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283
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301
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(18
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(6
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)
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Parts, accessories and service sales
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3,041
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2,070
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971
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47
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Total Revenues
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$
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31,533
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$
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18,556
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$
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12,977
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70
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%
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Revenues from the sale of products in North America increased due to an increase in the number of product units sold, a higher average selling price due to a
favorable change in product mix and from the success of our recently introduced products, such as the
Smartlipo
and
Affirm
systems. The increase in North American revenues resulted in part from the continued expansion of our North
American sales organization, including the hiring of 36 additional direct sales employees between December 31, 2005 and September 30, 2007.
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Revenues from sales of products outside of North America increased mainly due to an increase in sales in Europe of $1.1 million, or 32%, over the 2006 period, and
an increase in sales from distributors in the Middle East of $0.1 million, or 18%, over the 2006 period. These increases in sales were partially offset by $0.2 million, which relates to a decrease in the volume of sales from distributors in Asia
Pacific.
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Revenues from the sale of parts, accessories and services increased primarily as a result of the increase in our product sales over the past two years.
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Cost of Revenues
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Three Months Ended
September 30,
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$
Change
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%
Change
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2007
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2006
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Cost of revenues (in thousands)
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$
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11,045
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$
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7,442
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$
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3,603
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48
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%
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Cost of revenues (as a percentage of total revenues)
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35
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%
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40
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%
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The increase in the cost of revenues was primarily attributable to an increase in direct labor,
overhead and material costs associated with increased sales of our products. The improvement in gross margins is primarily the result of higher average selling prices of our products due to a favorable change in product mix as well as increased
direct sales and the introduction of new products, offset by royalties incurred on products sold, which we began incurring in October 2006.
Sales
and Marketing
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Three Months Ended
September 30,
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|
$
Change
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%
Change
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2007
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2006
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Sales and marketing (in thousands)
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$
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10,310
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$
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6,372
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$
|
3,938
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|
62
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%
|
Sales and marketing (as a percentage of total revenues)
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33
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%
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34
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%
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Sales and marketing expenses increased primarily due to an increase of $2.3 million in personnel
costs and travel expenses associated with the expansion of our North American direct sales organization and $0.4 million in personnel costs and travel expenses associated with our international subsidiaries. Promotional costs increased $0.8 million,
primarily due to an increased number of clinical workshops, trade shows and promotional efforts associated with our increase in direct sales employees. Sales and marketing expenses also increased due to an increase in stock-based compensation of
approximately $0.4 million.
Research and Development
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Three Months Ended
September 30,
|
|
|
$
Change
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|
%
Change
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|
|
|
2007
|
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|
2006
|
|
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|
Research and development (in thousands)
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|
$
|
1,468
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|
$
|
1,207
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|
$
|
261
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|
22
|
%
|
Research and development (as a percentage of total revenues)
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|
5
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%
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|
7
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%
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Research and development expenses increased primarily due to an increase of $0.1 million in
personnel costs and $0.2 million in costs incurred related to clinical studies, offset by a decrease in stock-based compensation of $0.1 million.
General and Administrative
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Three Months Ended
September 30,
|
|
|
$
Change
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|
%
Change
|
|
|
|
2007
|
|
|
2006
|
|
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|
General and administrative (in thousands)
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|
$
|
3,143
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|
|
$
|
2,041
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|
$
|
1,102
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|
54
|
%
|
General and administrative (as a percentage of total revenues)
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|
|
10
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%
|
|
|
11
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%
|
|
|
|
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|
General and administrative expenses increased primarily due to an increase of $0.5 million in
personnel costs, an increase in professional fees of $0.2 million, a $0.1 million increase in our international subsidiaries administrative expenses, and an increase in stock-based compensation of $0.3 million.
20
Royalty Settlement
On November 6, 2006, we entered into a patent cross-license agreement with Palomar Medical Technologies, Inc. (Palomar). Under the cross-license agreement, we obtained a non-exclusive license to integrate into
our products certain hair removal technology covered by specified U.S. and foreign patents held by Palomar and Palomar obtained a non-exclusive license under certain U.S. and foreign patents held by us. In November 2006, we made a payment to Palomar
of $10.0 million for royalties related to sales prior to October 1, 2006 of hair removal-only systems including our Apogee family of products,
PhotoLight
,
Acclaim 7000
and the
PhotoSilk Plus
. This was recorded as a royalty
settlement within our operating expenses for the three months ended September 30, 2006.
Interest Income, net and Other Income, net
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|
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|
|
|
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|
|
|
Three Months Ended
September 30,
|
|
$
Change
|
|
|
%
Change
|
|
|
|
2007
|
|
2006
|
|
|
Interest income, net (in thousands)
|
|
$
|
661
|
|
$
|
680
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|
$
|
(19
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)
|
|
(3
|
)%
|
Other income, net (in thousands)
|
|
$
|
356
|
|
$
|
215
|
|
$
|
141
|
|
|
66
|
%
|
The decrease in interest income, net resulted from the shift in our investment portfolio to
tax-exempt securities, which generally generate lower yields, gross of tax, than taxable securities. The increase in other income, net is a result of larger foreign currency remeasurement gains in the third quarter of 2007 compared to the foreign
currency remeasurement gains in the third quarter of 2006, offset by an impairment of marketable security of $0.1 million recorded during the three months ended September 30, 2007.
Provision for (Benefit from) Income Taxes
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
$
Change
|
|
%
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Provision for (benefit from) income taxes (in thousands)
|
|
$
|
2,207
|
|
|
$
|
(3,370
|
)
|
|
$
|
5,577
|
|
166
|
%
|
Provision (benefit) as a % of income (loss) before provision for (benefit from) income taxes and minority interest
|
|
|
34
|
%
|
|
|
44
|
%
|
|
|
|
|
|
|
The increase in our provision for income taxes for the three months ended September 30, 2007
from a benefit position for the three months ended September 30, 2006, is primarily attributable to the $10.0 million royalty settlement with Palomar, which occurred during the three months ended September 30, 2006. The effective tax rates
for the three months ended September 30, 2007 and 2006 were 34% and 44%, respectively. The higher effective tax rate for the three months ended September 30, 2006, was primarily due to the impact of the $10.0 million royalty settlement
expense being accounted for in our benefit from income taxes as a discrete item at our statutory rate of 40%, which differs from our effective tax rate.
21
NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
The following table contains selected income statement information, which serves as the basis of the discussion of our results of operations for the nine
months ended September 30, 2007 and 2006, respectively (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
Amount
|
|
As a % of
Total
Revenues
|
|
|
Amount
|
|
|
As a % of
Total
Revenues
|
|
|
|
Revenues
|
|
$
|
87,742
|
|
100
|
%
|
|
$
|
53,826
|
|
|
100
|
%
|
|
$
|
33,916
|
|
|
63
|
%
|
Cost of revenues
|
|
|
32,035
|
|
37
|
|
|
|
23,015
|
|
|
43
|
|
|
|
9,020
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
55,707
|
|
63
|
|
|
|
30,811
|
|
|
57
|
|
|
|
24,896
|
|
|
81
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
29,447
|
|
34
|
|
|
|
17,979
|
|
|
33
|
|
|
|
11,468
|
|
|
64
|
|
Research and development
|
|
|
4,958
|
|
6
|
|
|
|
3,455
|
|
|
6
|
|
|
|
1,503
|
|
|
44
|
|
General and administrative
|
|
|
8,371
|
|
10
|
|
|
|
6,218
|
|
|
12
|
|
|
|
2,153
|
|
|
35
|
|
Royalty settlement
|
|
|
|
|
|
|
|
|
10,000
|
|
|
19
|
|
|
|
(10,000
|
)
|
|
-100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
42,776
|
|
49
|
|
|
|
37,652
|
|
|
70
|
|
|
|
5,124
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
12,931
|
|
15
|
|
|
|
(6,841
|
)
|
|
-13
|
|
|
|
19,772
|
|
|
289
|
|
Interest income, net
|
|
|
1,762
|
|
2
|
|
|
|
2,063
|
|
|
4
|
|
|
|
(301
|
)
|
|
-15
|
|
Other income, net
|
|
|
440
|
|
1
|
|
|
|
621
|
|
|
1
|
|
|
|
(181
|
)
|
|
-29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for (benefit from) income taxes and minority interest
|
|
|
15,133
|
|
17
|
|
|
|
(4,157
|
)
|
|
-8
|
|
|
|
19,290
|
|
|
464
|
|
Provision for (benefit from) income taxes
|
|
|
5,927
|
|
7
|
|
|
|
(2,019
|
)
|
|
-4
|
|
|
|
7,946
|
|
|
394
|
|
Minority interest in net income of subsidiary
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
(41
|
)
|
|
-100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,206
|
|
10
|
%
|
|
$
|
(2,179
|
)
|
|
-4
|
%
|
|
$
|
11,385
|
|
|
522
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Revenues in the nine months ended September 30, 2007 exceeded revenues in the nine months ended September 30, 2006 by $33.9 million, or 63%. The increase in revenues was attributable to a number of factors
(in thousands, except for percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
$
Change
|
|
|
%
Change
|
|
|
|
2007
|
|
2006
|
|
|
Product sales in North America
|
|
$
|
51,429
|
|
$
|
27,561
|
|
$
|
23,868
|
|
|
87
|
%
|
Product sales outside North America
|
|
|
26,355
|
|
|
18,683
|
|
|
7,672
|
|
|
41
|
|
Original equipment manufacturer sales and revenue sharing
|
|
|
834
|
|
|
875
|
|
|
(41
|
)
|
|
(5
|
)
|
Parts, accessories and service sales
|
|
|
9,124
|
|
|
6,707
|
|
|
2,417
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
87,742
|
|
$
|
53,826
|
|
$
|
33,916
|
|
|
63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from the sale of products in North America increased due to an increase in the number of product units sold, a higher average selling price due to a
favorable change in product mix and from the introduction of new products, such as the
Smartlipo
and
Affirm
systems. The increase in North American revenues resulted in part from the continued expansion of our North American sales
organization, including the hiring of 36 additional direct sales employees between December 31, 2005 and September 30, 2007.
|
|
|
|
Revenues from sales of products outside of North America increased mainly due to an increase in sales in Europe of $5.6 million, or 50%, and an increase in sales in
Asia Pacific of $2.0 million, or 43%, over the 2006 period, resulting from a favorable change in product mix.
|
|
|
|
Revenues from the sale of parts, accessories and services increased primarily as a result of the increase in our product sales over the past two years.
|
22
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
$
Change
|
|
%
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Cost of revenues (in thousands)
|
|
$
|
32,035
|
|
|
$
|
23,015
|
|
|
$
|
9,020
|
|
39
|
%
|
Cost of revenues (as a percentage of total revenues)
|
|
|
37
|
%
|
|
|
43
|
%
|
|
|
|
|
|
|
The increase in the cost of revenues was primarily attributable to an increase in direct labor,
overhead and material costs associated with increased sales of our products. The increase in gross margin is due to higher average selling prices of our products due to a favorable change in product mix, as well as increased direct sales and lower
product costs as a result of streamlining our manufacturing approach, offset by royalties incurred on products sold, which we began incurring in October 2006.
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
$
Change
|
|
%
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Sales and marketing (in thousands)
|
|
$
|
29,447
|
|
|
$
|
17,979
|
|
|
$
|
11,468
|
|
64
|
%
|
Sales and marketing (as a percentage of total revenues)
|
|
|
34
|
%
|
|
|
33
|
%
|
|
|
|
|
|
|
Sales and marketing expenses increased primarily due to an increase of $5.3 million in personnel
costs and travel expenses, as well as an increase in other costs for outside services and freight of approximately $0.4 million, associated with the expansion of our North American direct sales organization and $2.1 million in personnel costs and
travel expenses associated with our international subsidiaries. Promotional costs increased $2.8 million, primarily due to our increased number of clinical workshops, trade shows and promotional efforts as well as costs associated with our
rebranding initiative. Sales and marketing expenses also increased due to an increase in stock-based compensation of approximately $0.9 million.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
$
Change
|
|
%
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Research and development (in thousands)
|
|
$
|
4,958
|
|
|
$
|
3,455
|
|
|
$
|
1,503
|
|
44
|
%
|
Research and development (as a percentage of total revenues)
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
The increase in research and development expenses is primarily due to an increase in stock-based
compensation of $0.6 million, an increase of $0.2 million related to costs incurred for clinical studies and an increase of $0.7 million in personnel costs.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
$
Change
|
|
%
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
|
General and administrative (in thousands)
|
|
$
|
8,371
|
|
|
$
|
6,218
|
|
|
$
|
2,153
|
|
35
|
%
|
General and administrative (as a percentage of total revenues)
|
|
|
10
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
General and administrative expenses increased primarily due to an increase in stock-based
compensation of $0.8 million, an increase of $0.3 million in our international subsidiaries administrative expenses, and an increase of $0.7 million in personnel costs. General and administrative expenses also increased due to an increase of $0.3
million in professional services fees and an increase of $0.1 million in bank charges.
Royalty Settlement
On November 6, 2006, we entered into a patent cross-license agreement with Palomar. Under the cross-license agreement, we obtained a non-exclusive
license to integrate into our products certain hair
23
removal technology covered by specified U.S. and foreign patents held by Palomar and Palomar obtained a non-exclusive license under certain U.S. and foreign
patents held by us. In November 2006, we made a payment to Palomar of $10.0 million for royalties related to sales prior to October 1, 2006 of hair removal-only systems including our Apogee family of products,
PhotoLight
,
Acclaim
7000
and the
PhotoSilk Plus
. This was recorded as a royalty settlement within our operating expenses for the nine months ended September 30, 2006.
Interest Income, net and Other Income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
$
Change
|
|
|
%
Change
|
|
|
|
2007
|
|
2006
|
|
|
Interest income, net (in thousands)
|
|
$
|
1,762
|
|
$
|
2,063
|
|
$
|
(301
|
)
|
|
(15
|
)%
|
Other income, net (in thousands)
|
|
$
|
440
|
|
$
|
621
|
|
$
|
(181
|
)
|
|
(29
|
)%
|
The decrease in interest income, net resulted from the shift in our investment portfolio to
include investments in tax-exempt securities, which generally generate lower yields, gross of tax, than taxable securities. The decrease in other income, net is a result of smaller foreign currency remeasurement gains in 2007 compared to the foreign
currency remeasurement gains in 2006, as well as a net realized loss from marketable securities of $0.1 million recorded during the three months ended September 30, 2007.
Provision for (Benefit from) Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
$
Change
|
|
%
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Provision for (benefit from) income taxes (in thousands)
|
|
$
|
5,927
|
|
|
$
|
(2,019
|
)
|
|
$
|
7,946
|
|
394
|
%
|
Provision (benefit) as a % of income (loss) before provision for (benefit from) income taxes and minority interest
|
|
|
39
|
%
|
|
|
49
|
%
|
|
|
|
|
|
|
The increase in our provision for income taxes for the nine months ended September 30, 2007
from a benefit position for the nine months ended September 30, 2006, is primarily attributable to the $10.0 million royalty settlement with Palomar, which occurred during the nine months ended September 30, 2006. The effective tax rates
for the nine months ended September 30, 2007 and 2006 were 39% and 49%, respectively. The higher effective tax rate for the nine months ended September 30, 2006, was primarily due to the impact of the $10.0 million royalty settlement
expense being accounted for in our benefit from income taxes as a discrete item at our statutory rate of 40%, which differs from our effective tax rate. The provision for income taxes for the six months ended June 30, 2007 includes a provision
for income taxes of $702,000 recorded for an erroneously claimed intercompany bad-debt deduction from our German subsidiary of approximately $1.7 million in our 2003 U.S. federal income tax return which we discovered in May 2007 as part of an
Internal Revenue Service audit. As of September 30, 2007, we have accrued $728,000 for this tax liability and related interest within accrued expenses in the accompanying consolidated balance sheets. The deduction increased the amount of the U.S.
NOL carryforward as of December 31, 2003. During 2004 and 2005, we utilized this NOL carryforward to reduce taxable income and also recognized the financial statement benefit through a reduction in its tax provision for those two years. In
accordance with SAB No. 99 and SAB No. 108, we assessed the materiality of this error on our financial statements for the years ended December 31, 2004, 2005 and 2006 using both the roll-over method and iron-curtain method as defined
in SAB No. 108. We concluded the effect of this error was not material to our financial statements for the years ended December 31, 2004, 2005 and 2006 and, as such, these financial statements are not materially misstated. We also
concluded that providing for the correction of the error in 2007 would not have a material effect on our financial statements for the year ended December 31, 2007.
Liquidity and Capital Resources
We require cash to pay our operating expenses, make capital
expenditures and pay our long-term liabilities. Since our inception, we have funded our operations through private and public placements of equity securities, short-term borrowings and funds generated from our operations. In December 2005, we
completed our initial public offering of 5,750,000 shares of our class A common stock at a price to the public of $15.00 per share. We sold 4,750,000 shares of our class A common stock, including an over-allotment option of 750,000 shares, and
El.En. S.p.A., the selling stockholder in the offering, sold 1,000,000 of the shares. We received aggregate net proceeds of approximately $64.0 million from the sale of our shares, after deducting underwriting discounts and commission of
approximately $5.0 million and expenses of the offering of approximately $2.3 million.
At September 30, 2007, our cash, cash
equivalents and marketable securities were $77.0 million compared to $57.2 million as of December 31, 2006. Our cash and cash equivalents of $27.6 million are highly liquid investments with maturity
24
of 90 days or less at date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions
and United States government obligations. Our marketable securities of $49.4 million consist primarily of investments in various federal and state government obligations and corporate obligations, all of which mature by August 15, 2008.
We expect to continue to generate positive cash flows from operations in the future. Our future capital requirements depend on a number of
factors, including the rate of market acceptance of our current and future products, the resources we devote to developing and supporting our products and continued progress of our research and development of new products. We expect our capital
expenditures over the next 12 months generally to be consistent with our capital expenditures during the prior 12 months.
We believe that
our current cash, cash equivalents and marketable securities, as well as cash generated from operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable future.
Cash Flows
Net cash provided by operating
activities was $15.2 million for the nine months ended September 30, 2007. This resulted primarily from net income for the period of $9.2 million, increased by approximately $6.3 million in depreciation and stock-based compensation expense and
increased by approximately $0.3 million in deferred income tax benefits, accretion of discounts on marketable securities and the realized loss on marketable investments. Net changes in working capital items decreased cash from operating activities
by approximately $0.6 million principally related to an increase in accounts receivable and inventory of $2.1 million and $5.1 million, respectively, a decrease in accounts payable of $1.9 million, offset by a decrease in prepaid expenses and other
assets and an increase in accrued expenses. Net cash used in investing activities was $9.2 million for the nine months ended September 30, 2007, which consisted primarily of the net purchase of $6.2 million of marketable securities and $3.0
million used for fixed asset purchases. Net cash provided by financing activities during the nine months ended September 30, 2007 was $8.3 million, principally relating to proceeds from option exercises and tax benefits related to stock
options.
Net cash used in operating activities was $2.5 million for the nine months ended September 30, 2006. This resulted primarily
from net loss for the period of $2.2 million, increased by approximately $3.3 million in depreciation and stock-based compensation expense and decreased by approximately $4.6 million in deferred income tax benefits and accretion of discounts on
marketable securities. Net changes in working capital items decreased cash from operating activities by approximately $1.0 million principally related to an increase in accrued expenses, which primarily related to the $10.0 million accrual for the
royalty settlement with Palomar, offset by an increase in accounts receivable due to the growth of our revenues from sales of products outside of North America, an increase in inventory manufactured for anticipated future sales and an increase in
prepaid expenses and other current assets. Net cash used in investing activities was $54.0 million for the nine months ended September 30, 2006, which consisted primarily of the net purchase of $52.3 million of marketable securities and $1.8
million used for fixed asset purchases. Net cash provided in financing activities during the nine months ended September 30, 2006 was $0.3 million, principally relating to proceeds from exercises of stock options.
Recent Accounting Pronouncements
In September
2006, the FASB issued Statement No. 157,
Fair Value Measurements
, or SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. This Statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this Statement are
to be applied prospectively as of January 1, 2008, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. We do not expect that the adoption of SFAS 157 will have a material
impact on our financial position or results of operations.
In February 2007, the Financial Accounting Standards Board issued Statement
No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115
(SFAS 159), in order to permit entities to choose to measure many financial instruments and
certain other eligible items at fair value at specified election dates and, thereby, mitigate volatility in reported earnings caused by measuring related assets and liabilities differently. Unrealized gains and losses on items for which the fair
value option has been elected shall be reported in earnings. The provisions of SFAS 159 are to be applied prospectively as of January 1, 2008; however early adoption is permitted, subject to certain restrictions, as defined. SFAS 159 does not
affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. We do not expect that the adoption of SFAS 159 will have a material impact on our financial position or results of operations.
25
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 state and municipal government obligations and corporate obligations. Each security matures by August 15, 2008. These available-for-sale securities are subject to interest rate risk and will decrease in
value if market interest rates increase. We have the ability to hold our fixed income investments until maturity (excluding acquisitions or mergers). Therefore, we do not expect our operating results or cash flows to be significantly affected by any
sudden change in market interest rates on our securities portfolio. The following table provides information about our investment portfolio. For investment securities, the table presents principal cash flows (in thousands) and weighted-average
interest rates by expected maturity dates.
|
|
|
|
|
|
|
Fair Value
at September 30,
2007
|
|
Investments (at fair value)
|
|
$
|
49,322
|
|
Weighted-average interest rate
|
|
|
4.66
|
%
|
Foreign Currency Exchange.
A significant portion of our operations is conducted 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, 2007. Substantially all of the remaining
54% were sales in euros, British pounds, Japanese yen and Chinese yuan. Since we conduct our business in U.S. dollars, our main exposure, if any, results from changes in the exchange rate between these currencies and the U.S. dollar. Our functional
currency is the U.S. dollar. Our policy is to reduce exposure to exchange rate fluctuations by having most of our assets and liabilities, as well as most of our revenues and expenditures, in U.S. dollars, or U.S. dollar linked. Therefore, we believe
that the potential loss that would result from an increase or decrease in the exchange rate is immaterial to our business and net assets.
Item 4.
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Controls and Procedures
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Evaluation of Disclosure Controls and
Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of September 30, 2007. Based on such evaluation, our principal
executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were designed to ensure that information required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms and were effective.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
26
PART II Other Information
Item 1.
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Legal Proceedings
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In May 2005, Dr. Ari
Weitzner, individually and as putative representative of a purported class, filed a complaint against us under the federal Telephone Consumer Protection Act, or TCPA, in Massachusetts Superior Court in Middlesex County seeking monetary damages,
injunctive relief, costs and attorneys fees. The complaint alleges that we violated the TCPA by sending unsolicited advertisements by facsimile to the plaintiff and other recipients without the prior express invitation or permission of the
recipients. Under the TCPA, recipients of unsolicited facsimile advertisements are entitled to damages of up to $500 per facsimile for inadvertent violations and up to $1,500 per facsimile for knowing or willful violations. Although we are
continuing to investigate the number of facsimiles transmitted during the period for which the plaintiff in the lawsuit seeks class certification and the number of these facsimiles that were unsolicited within the meaning of the TCPA, we
expect the number of unsolicited facsimiles to be very large. We are vigorously defending the lawsuit and have filed initial briefs and motions with the court. We are not able to estimate the amount or range of loss that could result from an
unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.
In December 2005, certain individuals
commenced an arbitration against us along with Sona International Inc. (Sona MedSpa), Carousel Capital, Inc. and various individuals. The arbitration demand alleges fraud, violations of various state consumer protection laws and other causes of
action in connection with the plaintiffs acquisition of franchises from the Sona entities. We declined to participate in the arbitration because we had not agreed contractually to do so, and we have been dismissed from the arbitration by
agreement of the parties.
In January 2006, Gentle Laser Solutions, Inc., Liberty Bell Med Spa, Inc. and Kevin T. Campbell filed suit
against us and one of our former directors, along with Sona International Inc., Sona Lasers Centers, Inc. and various other individuals, in the Superior Court of New Jersey. The matter was later removed to the U. S. District Court in the District of
New Jersey. The suit alleges fraud, breach of contract and other causes of action in connection with the plaintiffs acquisition of franchises from the Sona entities. Court-ordered conferences scheduled for December 1, 2006 and
January 29, 2007 were postponed due to a pending motion to dismiss by Sona. We are not able to estimate the amount or range of loss that could result from an unfavorable outcome of the lawsuit as the matter is still in the early stages of the
proceedings.
In June 2006, Baltimore Laser Solutions, Inc. and Kevin T. Campbell, filed suit against us and one of our former directors,
along with Sona International Inc., Sona Lasers Centers, Inc. and various other individuals, in the U. S. District Court in the District of Maryland. The suit alleges fraud, breach of contract and other causes of action in connection with the
plaintiffs acquisition of franchises from the Sona entities. We are not able to estimate the amount or range of loss that could result from an unfavorable outcome of the lawsuit as the matter is still in the early stages of the proceedings.
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.
27
Investing in our common stock
involves a high degree of risk. You should carefully consider the risks and uncertainties described in our annual report on Form 10-K for the year ended December 31, 2006 in addition to the other information included in this quarterly report. If any
of the risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall.
We have not made any material changes to the risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended
December 31, 2006.
Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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On December 13, 2005, we completed an initial public offering of 5,750,000 shares of our class A common stock at a price to the public of $15.00 per share. We sold 4,750,000 shares of the class A common stock, including an
over-allotment option of 750,000 shares, and El.En., the selling stockholder in the offering, sold 1,000,000 of the shares. The offer and sale of all of the shares in the initial public offering were registered under the Securities Act of 1933, as
amended, pursuant to a registration statement on Form S-1 (File No. 333-127463), which was declared effective by the SEC on November 8, 2005. We received aggregate net proceeds of approximately $64.0 million, after deducting underwriting
discounts and commission of approximately $5.0 and expenses of the offering of approximately $2.3 million. None of the underwriting discounts and commissions or offering expenses were incurred or paid to directors or officers of ours or their
associates or to persons owning 10 percent or more of our common stock or to any affiliates of ours. From the effective date of the registration statement through September 30, 2007, we used approximately $5.5 million for general corporate
purposes, with the remaining $58.5 million in proceeds invested in cash and cash equivalents.
28
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Exhibit No.
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Description
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31.1
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Certification of the Principal Executive Officer
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31.2
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Certification of the Principal Financial Officer
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32.1
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Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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32.2
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Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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29
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant certifies that
it has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Cynosure, Inc.
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(Registrant)
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Date: November 8, 2007
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By:
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/s/ Michael R. Davin
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Michael R. Davin
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Chairman, President, Chief Executive Officer
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Date: November 8, 2007
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By:
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/s/ Timothy W. Baker
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Timothy W. Baker
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Executive Vice President, Chief Financial Officer and Treasurer
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30
EXHIBIT INDEX
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Exhibit No.
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Description
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31.1
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Certification of the Principal Executive Officer
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31.2
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Certification of the Principal Financial Officer
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32.1
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Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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|
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32.2
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Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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31
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