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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark one)

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

For the quarterly period ended March 31, 2016

OR

 

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

For the transition period from                      to                     

Commission File Number 000-51623

 

 

Cynosure, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   04-3125110

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5 Carlisle Road

Westford, MA

  01886
(Address of principal executive offices)   (Zip code)

(978) 256-4200

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

The number of shares outstanding of the registrant’s Class A common stock as of May 2, 2016:

 

Class

 

Number of Shares

Class A Common Stock, $0.001 par value   23,522,695

 

 

 


Table of Contents

Cynosure, Inc.

Table of Contents

 

         Page No.  

PART I

 

Financial Information

  
Item 1.  

Financial Statements (Unaudited)

  
 

Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

     1   
 

Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015

     2   
 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2016 and 2015

     3   
 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015

     4   
 

Notes to Consolidated Financial Statements (Unaudited)

     5   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     13   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     20   
Item 4.  

Controls and Procedures

     21   

PART II

 

Other Information

  
Item 1.  

Legal Proceedings

     21   
Item 1A.  

Risk Factors

     22   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     34   
Item 6.  

Exhibits

     35   

SIGNATURES

     36   

EXHIBIT INDEX

     37   

EX-10.4 Seventh Amendment to the Lease, dated April 29, 2016, between the Company and Curo Westford, LLC

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

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

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

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

EX-101 The following materials from the Cynosure, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015, (ii) Consolidated Balance Sheets at March 31, 2016 and December 31, 2015, (iii) Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2016 and 2015, (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015, and (v) Notes to Consolidated Financial Statements.


Table of Contents

PART I — Financial Information

 

Item 1. Financial Statements

Cynosure, Inc.

Consolidated Balance Sheets

(in thousands, except par value data)

 

     (Unaudited)
March 31,
2016
    December 31,
2015
 
Assets     

Current assets:

    

Cash and cash equivalents

   $ 93,464      $ 108,587   

Short-term marketable securities

     46,469        35,412   

Accounts receivable, net

     38,517        42,012   

Inventories

     85,648        79,768   

Prepaid expenses and other current assets

     16,084        21,356   
  

 

 

   

 

 

 

Total current assets

     280,182        287,135   

Property and equipment, net

     43,220        39,706   

Long-term marketable securities

     38,226        38,761   

Goodwill

     105,845        105,807   

Intangibles, net

     42,158        44,317   

Deferred tax asset

     18,261        17,882   

Other assets

     1,025        1,002   
  

 

 

   

 

 

 

Total assets

   $ 528,917      $ 534,610   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 25,931      $ 33,885   

Accrued expenses

     41,574        45,616   

Deferred revenue

     24,012        24,803   

Capital lease obligation

     904        741   
  

 

 

   

 

 

 

Total current liabilities

     92,421        105,045   
  

 

 

   

 

 

 

Capital lease obligation, net of current portion

     17,369        17,372   

Deferred revenue, net of current portion

     991        903   

Other noncurrent liabilities

     6,507        6,888   

Commitments and contingencies (Note 12)

    

Stockholders’ equity:

    

Preferred stock, $0.001 par value

    

Authorized — 5,000 shares

    

Issued — none

     —         —    

Class A and Class B common stock, $0.001 par value

    

Authorized — 70,000 shares

    

Issued — 24,411 Class A shares and no Class B shares at March 31, 2016

    

Issued — 24,327 Class A shares and no Class B shares at December 31, 2015

     24        24   

Additional paid-in capital

     390,770        387,161   

Retained earnings

     58,628        55,781   

Accumulated other comprehensive loss

     (4,689     (5,460

Treasury stock, 1,628 Class A shares, at cost

     (33,104     (33,104
  

 

 

   

 

 

 

Total stockholders’ equity

     411,629        404,402   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 528,917      $ 534,610   
  

 

 

   

 

 

 

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

 

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Table of Contents

Cynosure, Inc.

Consolidated Statements of Operations

(Unaudited, in thousands, except per share data)

 

     Three Months Ended
March 31,
 
     2016     2015  

Product revenues

   $ 77,056      $ 56,502   

Parts, accessories, service and royalty revenues

     17,608        18,410   
  

 

 

   

 

 

 

Total revenues

     94,664        74,912   

Cost of revenues

     39,244        32,139   
  

 

 

   

 

 

 

Gross profit

     55,420        42,773   

Operating expenses:

    

Sales and marketing

     35,591        25,696   

Research and development

     7,113        5,958   

Amortization of intangible assets acquired

     689        736   

General and administrative

     7,576        8,330   
  

 

 

   

 

 

 

Total operating expenses

     50,969        40,720   
  

 

 

   

 

 

 

Income from operations

     4,451        2,053   

Interest expense, net

     (412     (402

Other income (expense), net

     660        (1,663
  

 

 

   

 

 

 

Income (loss) before provision for income taxes

     4,699        (12

Provision (benefit) for income taxes

     1,852        (4
  

 

 

   

 

 

 

Net income (loss)

   $ 2,847      $ (8
  

 

 

   

 

 

 

Basic net income (loss) per share

   $ 0.13      $ (0.00
  

 

 

   

 

 

 

Diluted net income (loss) per share

   $ 0.12      $ (0.00
  

 

 

   

 

 

 

Basic weighted average common shares outstanding

     22,736        21,664   
  

 

 

   

 

 

 

Diluted weighted average common shares outstanding

     23,154        21,664   
  

 

 

   

 

 

 

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

 

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Table of Contents

Cynosure, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited, in thousands)

 

     Three Months Ended
March 31,
 
     2016      2015  

Net income (loss)

   $ 2,847       $ (8
  

 

 

    

 

 

 

Other comprehensive income (loss) components:

     

Cumulative translation adjustment

     756         (1,379

Unrealized gain on marketable securities, net of taxes

     15         13   
  

 

 

    

 

 

 

Total other comprehensive income (loss)

     771         (1,366
  

 

 

    

 

 

 

Comprehensive income (loss)

   $ 3,618       $ (1,374
  

 

 

    

 

 

 

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

 

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Cynosure, Inc.

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

     Three Months Ended
March 31,
 
     2016     2015  

Operating activities:

    

Net income (loss)

   $ 2,847      $ (8

Reconciliation of net income (loss) to net cash from operating activities:

    

Depreciation and amortization

     5,011        4,686   

Stock-based compensation expense

     2,126        1,820   

Loss on disposal of fixed assets

     14        5   

Noncash interest expense on capital lease obligations

     469        395   

Noncash interest expense on license transfer agreement

     47        51   

Deferred income taxes

     (239     21   

Net accretion of marketable securities

     668        514   

Tax benefit from the exercise of stock options

     (551     (27

Changes in operating assets and liabilities:

    

Accounts receivable

     3,899        (3,698

Inventories

     (7,347     (10,963

Net book value of demonstration inventory sold

     222        94   

Prepaid expenses and other current assets

     5,974        (1,290

Accounts payable

     (7,996     6,321   

Accrued expenses

     (4,331     (3,056

Deferred revenue

     (778     779   

Other noncurrent liabilities

     (381     (402
  

 

 

   

 

 

 

Net cash from operating activities

     (346     (4,758

Investing activities:

    

Purchases of property and equipment

     (4,316     (2,814

Proceeds from the sales and maturities of marketable securities

     9,055        13,150   

Purchases of marketable securities

     (20,221     (10,081

Increase (decrease) in other noncurrent assets

     2        (19
  

 

 

   

 

 

 

Net cash from investing activities

     (15,480     236   

Financing activities:

    

Excess tax benefit on options exercised

     551        27   

Proceeds from stock option exercises

     927        901   

Payments on capital lease obligation

     (347     (73
  

 

 

   

 

 

 

Net cash from financing activities

     1,131        855   

Effect of exchange rate changes on cash and cash equivalents

     (428     450   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (15,123     (3,217

Cash and cash equivalents, beginning of the period

     108,587        75,131   
  

 

 

   

 

 

 

Cash and cash equivalents, end of the period

   $ 93,464      $ 71,914   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid for interest

   $ 5      $ 5   
  

 

 

   

 

 

 

Cash paid for income taxes

   $ 1,689      $ 515   
  

 

 

   

 

 

 

Supplemental noncash investing and financing activities:

    

Transfer of demonstration equipment from inventory to fixed assets

   $ 2,080      $ 2,108   
  

 

 

   

 

 

 

Assets acquired under capital lease

   $ 30      $ 151   
  

 

 

   

 

 

 

Net effect of acquisition-related opening balance sheet adjustments

   $ —       $ 140   
  

 

 

   

 

 

 

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

 

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Table of Contents

Cynosure, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 1 — Interim Consolidated Financial Statements

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim information and pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. It is recommended that these financial statements be read in conjunction with the consolidated financial statements and related notes that appear in the Annual Report on Form 10-K of Cynosure, Inc. (Cynosure) for the year ended December 31, 2015. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations, and cash flows as of the dates and for the periods presented have been included. The results of operations for the three months ended March 31, 2016 may not be indicative of the results that may be expected for the year ending December 31, 2016, or any other period.

Note 2 — Stock-Based Compensation

Cynosure recorded stock-based compensation expense of $2.1 million and $1.8 million for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016 and 2015, respectively, Cynosure had $33,000 and $26,000 of stock-based compensation expense capitalized as a part of inventory.

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

 

     Three Months
Ended

March 31,
 
     2016      2015  
     (in thousands)  

Cost of revenues

   $ 111       $ 68   

Sales and marketing

     592         475   

Research and development

     343         257   

General and administrative

     1,080         1,020   
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 2,126       $ 1,820   
  

 

 

    

 

 

 

Cash received from option exercises was $0.9 million during each of the three months ended March 31, 2016 and 2015.

Cynosure has been increasingly using restricted stock units as an equity incentive award for employees. Cynosure granted 153,863 and 86,618 restricted stock units to employees during the three months ended March 31, 2016 and 2015, respectively, at the fair market value of its common stock on the date of grant and which vest annually over a three-year period. Fair market value was determined using the closing price of Cynosure’s common stock on the date of grant. Cynosure is recognizing related compensation expense, net of estimated forfeitures, on a straight-line basis over the three-year period.

Cynosure implemented a performance-based equity compensation program in 2016. Cynosure granted 58,981 performance-based stock units during the three months ended March 31, 2016 to employees at the fair market value of its common stock on the date of grant and which vest annually over a three-year period based on continued performance of services and the achievement of performance goals. If Cynosure’s consolidated cumulative revenue and EBITDA exceeds defined thresholds for the one, two and three-year periods beginning on January 1, 2016 and ending December 31, 2016, December 31, 2017 and December 31, 2018, respectively, the performance-based stock units will vest on the date which is the earlier of (i) the financial earnings release for the year following the year in which the performance period ended or (ii) a determination by the audit committee of the board of directors that the performance target has been achieved. Cynosure will recognize compensation expense for performance targets when the probability of achieving such targets is considered probable. As Cynosure believes that as of March 31, 2016, it is probable that the 2016 performance target will be achieved, Cynosure is recognizing related compensation expense on a straight-line basis over the period from the date of grant through the expected vest date. If, at any point in time, Cynosure believes that achieving the 2016 performance goal is not probable, it will stop recognizing the related compensation expense and will adjust the previously recognized related compensation expense accordingly. Cynosure will evaluate the probability of achieving the 2017 and 2018 performance targets in the respective periods.

 

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Table of Contents

Cynosure did not grant any stock options during the three months ended March 31, 2016. Cynosure granted options to purchase 319,509 shares of common stock during the three months ended March 31, 2015. 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 three months ended March 31, 2015 was $11.78, using the following assumptions:

 

     Three Months Ended
March 31, 2015

Risk-free interest rate

   1.39% -1.53%

Expected dividend yield

   —  

Expected term

   4.8 years

Expected volatility

   43%

Estimated forfeiture rate

   5%

Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Cynosure’s estimated expected stock price volatility is based on its own historical volatility. Cynosure’s expected term of options represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and Cynosure’s historical exercise patterns. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield of zero is based on the fact that Cynosure has never paid cash dividends and has no present intention to pay cash dividends.

Note 3 — Inventories

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

 

     March 31,
2016
     December 31,
2015
 
     (in thousands)  

Raw materials

   $ 22,181       $ 22,569   

Work in process

     3,231         3,317   

Finished goods

     60,236         53,882   
  

 

 

    

 

 

 
   $ 85,648       $ 79,768   
  

 

 

    

 

 

 

Note 4 — Fair Value

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

 

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

 

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

 

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

 

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Table of Contents

The following table represents Cynosure’s fair value hierarchy for its financial assets (cash equivalents and marketable securities) measured at fair value as of March 31, 2016 (in thousands):

 

     Level 1      Level 2      Level 3      Total  

Money market funds(1)

   $ 5,430       $ —        $ —        $ 5,430   

State and municipal bonds

     —           60,882         —           60,882   

Treasuries and government agencies

     —           23,813         —           23,813   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,430       $ 84,695       $ —        $ 90,125   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table represents Cynosure’s fair value hierarchy for its financial assets (cash equivalents and marketable securities) measured at fair value as of December 31, 2015 (in thousands):

 

     Level 1      Level 2      Level 3      Total  

Money market funds(1)

   $ 5,785       $ —        $ —        $ 5,785   

State and municipal bonds

     —           59,786         —           59,786   

Treasuries and government agencies

     —           14,387         —           14,387   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,785       $ 74,173       $ —        $ 79,958   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Included in cash and cash equivalents at March 31, 2016 and December 31, 2015.

During the three months ended March 31, 2016, there were no significant transfers in or out of Level 1 or Level 2. Cynosure did not have any Level 3 financial assets at March 31, 2016 or December 31, 2015.

Note 5 — Short and Long-Term Marketable Securities

Cynosure’s available-for-sale securities at March 31, 2016 consist of approximately $84.7 million of investments in debt securities consisting of state and municipal bonds, treasuries and government agencies. All investments in available-for-sale securities are recorded at fair market value, with any unrealized gains and losses reported as a separate component of accumulated other comprehensive loss.

As of March 31, 2016, Cynosure’s marketable securities consist of the following (in thousands):

 

     Market
Value
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
 

Available-for-Sale Securities:

           

Short-term marketable securities:

           

State and municipal bonds

   $ 38,681       $ 38,698       $ 2       $ (19

Treasuries and government agencies

     7,788         7,790         1         (3 )
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term marketable securities

   $ 46,469       $ 46,488       $ 3       $ (22
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-term marketable securities:

           

State and municipal bonds

   $ 22,201       $ 22,229       $ 2       $ (30

Treasuries and government agencies

     16,025         16,034         2         (11
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term marketable securities

   $ 38,226       $ 38,263       $ 4       $ (41
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 84,695       $ 84,751       $ 7       $ (63
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable securities

   $ 84,695            
  

 

 

          

 

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Table of Contents

As of December 31, 2015, Cynosure’s marketable securities consist of the following (in thousands):

 

     Market
Value
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
 

Available-for-Sale Securities:

           

Short-term marketable securities:

           

State and municipal bonds

   $ 33,914       $ 33,923       $ —        $ (9 )

Treasuries and government agencies

     1,498         1,500         —          (2 )
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term marketable securities

   $ 35,412       $ 35,423       $ —        $ (11
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-term marketable securities:

           

State and municipal bonds

   $ 25,872       $ 25,916       $ 1       $ (45 )

Treasuries and government agencies

     12,889         12,914         —          (25 )
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term marketable securities

   $ 38,761       $ 38,830       $ 1       $ (70
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 74,173       $ 74,253       $ 1       $ (81
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable securities

   $ 74,173            
  

 

 

          

As of March 31, 2016, Cynosure’s available-for-sale debt securities mature as follows (in thousands):

 

            Maturities  
     Total      Less
Than
One
Year
     One to
Five
Years
     More
than
Five
Years
 

State and municipal bonds

   $ 60,882       $ 38,681       $ 22,201       $ —    

Treasuries and government agencies

     23,813         7,788         16,025         —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale debt securities

   $ 84,695       $ 46,469       $ 38,226       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 6 — Goodwill and Other Intangible Assets

Changes to goodwill during the three months ended March 31, 2016 were as follows (in thousands):

 

Balance – December 31, 2015

   $ 105,807   

Translation adjustment

     38   
  

 

 

 

Balance – March 31, 2016

   $ 105,845   
  

 

 

 

Other intangible assets consisted of the following at March 31, 2016 and December 31, 2015 (in thousands):

 

     Developed
Technology
& Patents
    Business
Licenses
    Customer
Relationships
    Trade
Names
    Other     Total  

March 31, 2016

            

Cost

   $ 29,240      $ 384      $ 19,718      $ 18,390      $ 1,353      $ 69,085   

Translation adjustment

     —         —         (31     —         —         (31

Accumulated amortization

     (15,517     (236     (8,213     (2,745     (185     (26,896
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2016

   $ 13,723      $ 148      $ 11,474      $ 15,645      $ 1,168      $ 42,158   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2015

            

Cost

   $ 29,240      $ 384      $ 19,718      $ 18,390      $ 1,353      $ 69,085   

Translation adjustment

     —         —         (42     —         —         (42

Accumulated amortization

     (14,055     (232     (7,799     (2,518     (122     (24,726
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2015

   $ 15,185      $ 152      $ 11,877      $ 15,872      $ 1,231      $ 44,317   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Amortization expense for each of the three months ended March 31, 2016 and 2015 was $2.2 million. Cynosure has approximately $56,000 of indefinite-life intangible assets that are included in other intangible assets in the table above. As of March 31, 2016, amortization expense on existing intangible assets for the next five years and beyond is as follows (in thousands):

 

Remainder of 2016

   $ 6,448   

2017

     6,625   

2018

     5,110   

2019

     3,373   

2020

     2,923   

2021 and thereafter

     17,623   
  

 

 

 

Total

   $ 42,102   
  

 

 

 

Note 7 — Warranty Costs

Cynosure typically provides a one-year system and labor warranty on end-user sales of lasers. Distributor sales of lasers generally include a one-year warranty on systems only. Estimated future costs for initial product warranties are provided for at the time of revenue recognition and recorded as cost of revenues within Cynosure’s consolidated statement of operations. The following table provides the detail of the change in Cynosure’s product warranty accrual during the three months ended March 31, 2016, which is a component of accrued expenses in the consolidated balance sheets (in thousands):

 

Balance – December 31, 2015

   $ 8,841   

Warranty provision related to new sales

     4,554   

Costs incurred

     (4,149
  

 

 

 

Balance – March 31, 2016

   $ 9,246   
  

 

 

 

Note 8 — Segment Information

In accordance with Accounting Standards Codification (ASC) 280, Segment Reporting Topic, operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. Cynosure’s chief decision-maker, as defined under ASC 280, is a combination of the Chief Executive Officer and the Chief Financial Officer. Cynosure views its operations and manages its business as one segment, aesthetic treatment products and services.

The following table represents total revenue by geographic area:

 

     Three Months Ended
March 31,
 
     2016      2015  
     (in thousands)  

United States

   $ 65,265       $ 41,451   

Europe

     8,970         10,657   

Asia / Pacific

     15,018         16,814   

Other

     5,411         5,990   
  

 

 

    

 

 

 

Total

   $ 94,664       $ 74,912   
  

 

 

    

 

 

 

 

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Total assets by geographic area are as follows:

 

     March 31,
2016
     December 31,
2015
 
     (in thousands)  

United States

   $ 491,578       $ 497,007   

Europe

     21,803         22,204   

Asia / Pacific

     21,870         21,139   

Eliminations

     (6,334      (5,740
  

 

 

    

 

 

 

Total

   $ 528,917       $ 534,610   
  

 

 

    

 

 

 

Long-lived assets (property and equipment only) by geographic area are as follows:

 

     March 31,
2016
     December 31,
2015
 
     (in thousands)  

United States

   $ 38,266       $ 35,185   

Europe

     1,941         1,641   

Asia / Pacific

     3,013         2,880   
  

 

 

    

 

 

 

Total

   $ 43,220       $ 39,706   
  

 

 

    

 

 

 

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

Note 9 — Net Income (Loss) Per Common Share

Basic net income (loss) per share is determined by dividing net income (loss) by the weighted average common shares outstanding during the period. Diluted net income (loss) per share is determined by dividing net income (loss) by the diluted weighted average shares outstanding during the period. Diluted weighted average shares reflect the dilutive effect, if any, of common stock options and restricted stock units based on the treasury stock method.

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

 

     Three Months Ended
March 31,
 
     2016      2015  

Net income (loss)

   $ 2,847       $ (8
  

 

 

    

 

 

 

Basic weighted average common shares outstanding

     22,736         21,664   

Weighted average common equivalent shares

     418         —    
  

 

 

    

 

 

 

Diluted weighted average common shares outstanding

     23,154         21,664   
  

 

 

    

 

 

 

Basic net income (loss) per share

   $ 0.13       $ (0.00
  

 

 

    

 

 

 

Diluted net income (loss) per share

   $ 0.12       $ (0.00
  

 

 

    

 

 

 

For the three months ended March 31, 2016, approximately 0.1 million shares of Cynosure’s Class A common stock issuable pursuant to stock options were excluded from the calculation of diluted weighted average shares outstanding as their effect was antidilutive.

For the three months ended March 31, 2015, the number of basic and diluted weighted average shares outstanding was the same because any increase in the number of shares of common stock equivalents for that period would be antidilutive based on the net loss for the period. During the three months ended March 31, 2015, outstanding options and restricted stock units to purchase 1.7 million shares were excluded from the computation of diluted earnings per share because their inclusion would have been antidilutive.

 

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Note 10 — Accumulated Other Comprehensive Loss

Changes to accumulated other comprehensive loss during the three months ended March 31, 2016 were as follows (in thousands):

 

     Unrealized
Loss on
Marketable
Securities, net
of taxes
     Translation
Adjustment
     Accumulated
Other
Comprehensive
Loss
 

Balance — December 31, 2015

   $ (49    $ (5,411    $ (5,460

Current period other comprehensive gain

     15         756         771   
  

 

 

    

 

 

    

 

 

 

Balance — March 31, 2016

   $ (34    $ (4,655    $ (4,689
  

 

 

    

 

 

    

 

 

 

Note 11 — Income Taxes

During the three months ended March 31, 2016, Cynosure recorded an income tax provision of $1.9 million, representing an effective tax rate of 39%. The income tax provision for the three months ended March 31, 2016 was primarily attributable to applying Cynosure’s estimated annual effective tax rate to its year-to-date consolidated income before provision for income taxes, and includes a $0.2 million discrete provision related to the impact of tax law changes enacted during the quarter and certain foreign audit settlements. Other factors resulting in the difference between the U.S. federal statutory tax rate and the effective tax rate are the jurisdictional mix of worldwide earnings, non-deductible expenses, the domestic manufacturing deduction, and federal research credits.

During the three months ended March 31, 2015, Cynosure recorded an income tax benefit of $4,000, representing an effective tax rate of 35%. The income tax benefit for the three months ended March 31, 2015 was primarily attributable to applying Cynosure’s estimated annual effective tax rate to its year-to-date consolidated loss before provision for income taxes.

At March 31, 2016 and December 31, 2015, Cynosure had gross tax-effected unrecognized tax benefits of $0.8 million of which the entire amount, if recognized, would favorably impact the effective tax rate. Cynosure classifies interest and penalties related to income taxes as a component of its provision for income taxes. Cynosure does not expect any material changes in the amounts of unrecognized tax benefits over the next 12 months.

Cynosure files income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. Cynosure is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2012. With few exceptions, Cynosure is no longer subject to U.S. state tax examinations for years before 2011. Additionally, certain non-U.S. jurisdictions are no longer subject to income tax examinations by tax authorities for years before 2011.

Note 12 — Commitments and Contingencies

Lease Commitments

Cynosure leases the land portion of its U.S. operating facility and certain foreign facilities under non-cancellable operating lease agreements expiring through May 2027. These leases are non-cancellable and typically contain renewal options. Certain leases contain rent escalation clauses for which Cynosure recognizes the expense on a straight-line basis. Rent expense for each of the three months ended March 31, 2016 and 2015 was approximately $0.5 million.

Cynosure leases the buildings portion of its U.S. operating facility and certain vehicles under capital lease agreements with payments due through May 2027. Commitments under Cynosure’s lease arrangements are as follows as of March 31, 2016 (in thousands):

 

     Operating
Leases
     Capital
Leases
 

Remainder of 2016

   $ 1,644       $ 2,097   

2017

     1,962         2,803   

2018

     1,747         2,697   

2019

     1,452         2,633   

2020

     594         2,620   

Thereafter

     2,248         18,338   
  

 

 

    

 

 

 

Total minimum lease payments

   $ 9,647       $ 31,188   
  

 

 

    

 

 

 

Less amount representing interest

        (12,915
     

 

 

 

Present value of obligations under capital leases

      $ 18,273   

Current portion of capital lease obligations

        904   
     

 

 

 

Capital lease obligations, net of current portion

      $ 17,369   
     

 

 

 

In April 2016, Cynosure executed an amendment on its U.S. operating facility lease. Subject to the achievement of certain criteria by the landlord, this amendment could extend the lease period for an additional year and could require additional base rent.

 

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Table of Contents

Contractual Obligations

Cynosure’s significant outstanding contractual obligations relate to its capital leases from its facilities leases, including the buildings portion of its U.S. operating facility, and equipment financings. Cynosure’s leases are non-cancellable and typically contain renewal options. Certain leases contain rent escalation clauses for which Cynosure recognizes the expense on a straight-line basis. Cynosure has summarized in the table below its fixed contractual cash obligations as of March 31, 2016.

 

     Total      Less Than
One Year
     One to
Three Years
     Three to
Five Years
     More than
Five Years
 
     (in thousands)  

Capital lease obligations, including interest

   $ 31,188       $ 2,797       $ 5,458       $ 5,246       $ 17,687   

Operating leases

     9,647         2,135         3,581         1,763         2,168   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 40,835       $ 4,932       $ 9,039       $ 7,009       $ 19,855   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Contingencies

Cynosure continually assesses litigation to determine if an unfavorable outcome would lead to a probable loss or reasonably possible loss, which could be estimated. In accordance with the Financial Accounting Standards Board’s (FASB) guidance on accounting for contingencies, Cynosure accrues for all direct costs associated with the estimated resolution of contingencies at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. If the estimate of a probable loss is a range and no amount within the range is more likely, Cynosure accrues the minimum amount of the range. In cases where Cynosure believes that a reasonably possible loss exists, Cynosure discloses the facts and circumstances of the litigation, including an estimable range, if possible. In management’s opinion, Cynosure is not currently involved in any legal proceedings, which, individually or in the aggregate, could have a material effect on Cynosure’s financial statements. Cynosure believes that contingent losses associated with any current litigation were remote as of March 31, 2016 and at the time of the filing of this Quarterly Report on Form 10-Q, and as such, Cynosure has not recorded or disclosed any material loss contingencies.

Note 13 — Recent Accounting Pronouncements

In May 2014, the FASB issued guidance codified in ASC 606, Revenue Recognition — Revenue from Contracts with Customers, which amends the guidance in ASC 605, Revenue Recognition. This new revenue standard creates a single source of revenue guidance for all companies in all industries and is more principles-based than the current revenue guidance. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. ASC 606 was originally scheduled to be effective for interim and annual periods beginning after December 15, 2016. In August 2015, the Financial Accounting Standards Board deferred the effective date for ASC 606. The standard will be effective for public entities for interim and annual reporting periods beginning after December 15, 2017. Cynosure is currently evaluating the impact of the provisions of ASC 606.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern, which requires management of public and private companies to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The new standard is effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. Cynosure has concluded that if this standard had been adopted as of March 31, 2016, substantial doubt about its ability to continue as a going concern does not exist.

 

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In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. ASU 2015-11 simplifies the subsequent measurement of inventory by replacing the lower of cost or market test with a lower of cost and net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method. The guidance will be effective for public business entities for fiscal years beginning after December 15, 2016. Cynosure is currently evaluating the impact of the provisions of ASU 2015-11.

In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes. ASU 2015-17 requires that deferred tax assets and liabilities be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for fiscal years beginning after December 15, 2016 (and interim periods within those fiscal years) with early adoption permitted. ASU 2015-17 may be either applied prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. Cynosure elected to early adopt ASU 2015-17 retrospectively in the fourth quarter of 2015. As a result, the Company has presented all deferred tax assets and liabilities as net noncurrent assets in its consolidated balance sheets as of March 31, 2016 and December 31, 2015.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. Cynosure is currently evaluating the impact of this new standard on its consolidated financial statements.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q, which we refer to as this Quarterly Report, contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Quarterly Report regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

 

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

 

    our strategy of growing through acquisitions;

 

    our ability to innovate, develop and commercialize new products;

 

    our ability to obtain and maintain regulatory clearances;

 

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

 

    our intellectual property portfolio; and

 

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

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report, particularly in Part II, Item 1A of this Quarterly Report, 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 and may change prior to the end of each quarter or the year. While we may elect to update forward-looking statements at some point in the future, we do not undertake any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

 

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The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 29, 2016. 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, manufacture, and market aesthetic treatment systems that enable plastic surgeons, dermatologists and other medical practitioners to perform non-invasive and minimally invasive procedures to remove hair, treat vascular and benign pigmented lesions, remove multi-colored tattoos, revitalize the skin, reduce fat through laser lipolysis, reduce cellulite, clear nails infected by toe fungus, ablate sweat glands and improve gynecologic health. We also market radiofrequency, or RF, energy-sourced medical devices for precision surgical applications such as facial plastic and general surgery, gynecology, ear, nose, and throat procedures, ophthalmology, oral and maxillofacial surgery, podiatry and proctology.

Our product portfolio is composed of a broad range of energy sources including Alexandrite, diode, Nd: YAG, picosecond, pulse dye, Q-switched lasers, intense pulsed light and RF technology. We sell our products globally under the Cynosure, Palomar, ConBio and Ellman brand names through a direct sales force in the United States, Canada, France, Morocco, Germany, Spain, the United Kingdom, Australia, China, Japan and Korea, and through international distributors in approximately 120 other countries.

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

 

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

 

    our SmartLipo product line for LaserBodySculpting for the minimally invasive removal of unwanted fat;

 

    our Cellulaze product line for the treatment of cellulite;

 

    our Cynergy product line for the treatment of vascular lesions;

 

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

 

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

 

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

 

    our Vectus diode laser for high volume hair removal;

 

    our MonaLisa Touch laser for gynecologic health;

 

    our SculpSure hyperthermic laser treatment for LaserBodySculpting for non-invasive fat reduction;

 

    our Surgitron radiowave platform technology line of RF surgical generators;

 

    our Pelleve wrinkle reduction system for skin tightening and non-ablative skin rejuvenation; and

 

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

A key element of our business strategy is to launch innovative new products and technologies into high-growth aesthetic applications. Our research and development team builds on our existing broad range of laser, light-based technologies and other energies to develop new solutions and products to target unmet needs in significant aesthetic treatment markets. Innovation continues to be a strong contributor to our strength.

We have developed SculpSure, a hyperthermic laser treatment for non-invasive lipolysis of the flanks and abdomen. SculpSure is designed to reduce fat non-invasively by disrupting subcutaneous fat cells. In 2015, we received U.S. Food and Drug Administration, or FDA, clearance to market SculpSure for non-invasive lipolysis of the flanks and the abdomen. In September 2015, we received European Medical Device Directive certification from the European Notified Body for SculpSure allowing the “CE” Mark to be placed on the device for distribution in the European Union and its member states. We launched SculpSure in September 2015.

In November 2014, we signed an exclusive agreement with El.En. S.p.A., or El.En., to market and distribute in North America the MonaLisa Touch, a CO2 laser for the treatment of gynecologic health. We launched the product in the United States in the first quarter of 2015. In October 2015, we received a medical device license from Health Canada to market MonaLisa Touch in Canada for the treatment of symptoms related to Genitourinary Syndrome of Menopause. In the fourth quarter of 2015, we and El.En. agreed to market and distribute the MonaLisa Touch laser under separate distribution agreements with our respective wholly owned subsidiaries in the United Kingdom, Germany, and Spain.

 

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Table of Contents

In 2013, we commenced commercialization of our PicoSure system, our picosecond laser technology platform for the treatment of tattoos and benign pigmented lesions. We received FDA clearance to market the PicoSure laser in November 2012. In October 2013, we launched the PicoSure FOCUS Lens Array which microscopically concentrates the PicoSure laser pulse to a precise depth and exposes less than 10% of the skin to areas of high fluence while the surrounding skin is exposed to a low background fluence. We received marketing authorization for our PicoSure system in Canada in July 2013, in Australia in November 2013, and in Korea and Taiwan in January 2014. In July 2014, we received FDA clearance to market PicoSure for the treatment of acne scars. In September 2014, we received FDA clearance to market PicoSure with PicoSure FOCUS Lens Array for the treatment of wrinkles. In February 2015, we received FDA clearance to market the 532 nm wavelength for PicoSure designed to more effectively treat red, yellow and orange tattoo ink colors, which we offer as an upgrade to our current PicoSure customer base. In September 2015, we received Chinese Food and Drug Administration approval to market the PicoSure 755nm wavelength for tattoo removal.

Revenues

We generate revenues primarily from sales of our products and parts and accessories and from services, including product warranty revenues, and royalty payments received from our licensees. During the three months ended March 31, 2016, we derived approximately 81% of our revenues from sales of our products and 19% of our revenues from parts, accessories, service and royalty revenues. During the three months ended March 31, 2015, we derived approximately 75% of our revenues from sales of our products and 25% of our revenues from parts, accessories, service and royalty revenues. Generally, we recognize revenues from the sales of our products upon delivery to our customers, revenues from service contracts and extended product warranties ratably over the coverage period and revenues from service in the period in which the service occurs.

We recognize royalty revenues when we can reliably estimate such amounts and collectability is reasonably assured. As such, we recognize royalty revenues in the quarter reported to us by our licensees, which is generally one quarter following the quarter in which sales by our licensees occurred. Royalty revenues also include amounts due from settlements with licensees for back-owed royalties from prior periods. These settlement amounts are considered revenue, when collectability is reasonably assured, because they constitute our ongoing major or central operations.

In 2013, we completed a comprehensive settlement agreement with Tria Beauty, Inc., or Tria, which ended the patent infringement litigation between Tria and Palomar Medical Technologies, Inc., or Palomar. Under the agreement, we were entitled to receive $10.0 million plus future royalty payments. We paid approximately $2.0 million of this revenue to Massachusetts General Hospital, or MGH, under an exclusive license agreement between Palomar and MGH, which was recorded as cost of revenues within our consolidated statement of operations. We recognized the final $3.0 million of this revenue in the first quarter of 2015, which was recorded as royalty revenues within our consolidated statement of operations.

We sell our products globally under the Cynosure, Palomar, ConBio and Ellman brand names through a direct sales force in the United States, Canada, France, Morocco, Germany, Spain, the United Kingdom, Australia, China, Japan and Korea, and use distributors to sell our products in other countries where we do not have a direct presence. During the three months ended March 31, 2016 and 2015, we derived 29% and 43% of our total revenues, respectively, from sales outside North America. As of March 31, 2016, we had 162 sales employees covering North America and 62 sales employees in France, Morocco, Germany, Spain, the United Kingdom, Australia, China, Japan and Korea. We use a global distribution network covering approximately 120 countries.

The following table provides revenue data by geographical region for the three months ended March 31, 2016 and 2015:

 

     Percentage of Revenues  
     Three Months Ended
March 31,
 

Region

   2016     2015  

North America

     71     57

Europe

     9        14   

Asia/Pacific

     16        22   

Other

     4        7   
  

 

 

   

 

 

 

Total

     100     100
  

 

 

   

 

 

 

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

 

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Table of Contents

Results of Operations

THREE MONTHS ENDED MARCH 31, 2016 AND 2015

The following table contains selected statement of operations data, which serve as the basis of the discussion of our results of operations for the three months ended March 31, 2016 and 2015, respectively (in thousands, except for percentages):

 

     Three Months Ended
March 31,
             
     2016     2015              
     Amount     As a % of
Total
Revenues
    Amount     As a % of
Total
Revenues
    $
Change
    %
Change
 

Product revenues

   $ 77,056        81   $ 56,502        75   $ 20,554        36

Parts, accessories, service and royalty revenues

     17,608        19        18,410        25        (802     (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     94,664        100        74,912        100        19,752        26   

Cost of revenues

     39,244        41        32,139        43        7,105        22   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     55,420        59        42,773        57        12,647        30   

Operating expenses

            

Sales and marketing

     35,591        37        25,696        34        9,895        39   

Research and development

     7,113        8        5,958        8        1,155        19   

Amortization of intangible assets acquired

     689        1        736        1        (47     (6

General and administrative

     7,576        8        8,330        11        (754     (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     50,969        54        40,720        54        10,249        25   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     4,451        5        2,053        3        2,398        117   

Interest expense, net

     (412     (1     (402     (1     (10     (2

Other income (expense), net

     660        1        (1,663     (2     2,323        140   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision (benefit) for income taxes

     4,699        5        (12     —          4,711        39,258   

Provision (benefit) for income taxes

     1,852        2        (4     —          1,856        46,400   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 2,847        3   $ (8     —     $ 2,855        35,688
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

Total revenues for the three months ended March 31, 2016 increased by $19.8 million, or 26%, to $94.7 million, as compared to $74.9 million for the three months ended March 31, 2015 (in thousands, except for percentages):

 

     Three Months Ended
March 31,
     $      %  
     2016      2015      Change      Change  

Product sales in North America

   $ 55,178       $ 31,278       $ 23,900         76

Product sales outside North America

     21,878         25,224         (3,346      (13

Global parts, accessories, service and royalty sales

     17,608         18,410         (802      (4
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 94,664       $ 74,912       $ 19,752         26
  

 

 

    

 

 

    

 

 

    

 

 

 

The change in total revenues was attributable to a number of factors:

 

    Revenues from the sale of products in North America increased by approximately $23.9 million, or 76%, from the 2015 period, primarily due to the full launch of SculpSure in the United States during the 2016 period as well as strong sales of MonaLisa Touch, PicoSure and Icon.

 

    Revenues from the sale of products outside of North America decreased by approximately $3.3 million, or 13%, from the 2015 period, primarily due to unfavorable exchange rates impacting our European subsidiaries and a lower number of units sold by our international distributors due to economic instability in Europe and the Middle East. This was partially offset by increased sales from our Asia Pacific subsidiaries.

 

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    Revenues from the sale of parts, accessories, services and royalties decreased by approximately $0.8 million, or 4%, from the 2015 period, primarily due to the final $3.0 million settlement payment received from Tria in the 2015 period, partially offset by the inclusion of SculpSure Patented Applicators for Contouring, PicoSure FOCUS Lens Array and Ellman accessories in the 2016 period.

Cost of Revenues

 

     Three Months Ended
March 31,
    $      %  
     2016     2015     Change      Change  

Cost of revenues (dollars in thousands)

   $ 39,244      $ 32,139      $ 7,105         22

Cost of revenues (as a percentage of total revenues)

     41     43     

Total cost of revenues increased $7.1 million, or 22%, to $39.2 million for the 2016 period, as compared to $32.1 million for the 2015 period. The increase was primarily associated with our 26% increase in total revenues in the 2016 period as compared to the 2015 period. Total cost of revenues as a percentage of total revenues decreased for the 2016 period as compared to the 2015 period due to a higher percentage of laser revenue from our North American distribution, where average selling prices tend to be higher.

Sales and Marketing

 

     Three Months Ended
March 31,
    $      %  
     2016     2015     Change      Change  

Sales and marketing (dollars in thousands)

   $ 35,591      $ 25,696      $ 9,895         39

Sales and marketing (as a percentage of total revenues)

     37     34     

Sales and marketing expenses increased $9.9 million, or 39%, to $35.6 million for the 2016 period, as compared to $25.7 million for the 2015 period. The increase was primarily due to an increase in payroll and payroll related expenses of $3.7 million as we expanded our direct sales force in connection with the launch of new products, an increase in commission expense of $2.6 million from increased revenues and an increase of $2.3 million due to increased workshops, trade shows and other promotional efforts. Our total sales and marketing expenses for the 2016 period increased as a percentage of total revenues to 37% as compared to the 2015 period, primarily due to the additional sales and marketing costs associated with the launch of SculpSure.

Research and Development

 

     Three Months Ended
March 31,
    $      %  
     2016     2015     Change      Change  

Research and development (dollars in thousands)

   $ 7,113      $ 5,958      $ 1,155         19

Research and development (as a percentage of total revenues)

     8     8     

Research and development expenses increased $1.2 million, or 19%, to $7.1 million for the 2016 period, as compared to $6.0 million for the 2015 period. The increase was primarily due to increases in professional services and research and development project expenses in the 2016 period as compared to the 2015 period. Our total research and development expenses as a percentage of total revenues remained consistent for the 2016 and 2015 periods.

 

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Amortization of Intangible Assets Acquired

 

     Three Months Ended
March 31,
    $      %  
     2016     2015     Change      Change  

Amortization of intangible assets acquired (dollars in thousands)

   $ 689      $ 736      $ (47      (6 )% 

Amortization of intangible assets acquired (as a percentage of total revenues)

     1     1     

Amortization of intangible assets acquired decreased $47,000, or 6%, for the 2016 period as compared to the 2015 period. Amortization of intangible assets acquired as a percentage of total revenues remained consistent for the 2016 and 2015 periods.

General and Administrative

 

     Three Months Ended
March 31,
    $      %  
     2016     2015     Change      Change  

General and administrative (dollars in thousands)

   $ 7,576      $ 8,330      $ (754      (9 )% 

General and administrative (as a percentage of total revenues)

     8     11     

General and administrative expenses decreased $0.8 million, or 9%, to $7.6 million for the 2016 period, as compared to $8.3 million for the 2015 period. The decrease is primarily due to a $0.8 million decrease in costs associated with acquisitions during the 2016 period, as compared to the 2015 period. Excluding acquisition costs, our total general and administrative expenses as a percentage of total revenues decreased in the 2016 period as compared to the 2015 period due to improved operating leverage.

Interest Expense, net

 

     Three Months Ended
March 31,
     $      %  
     2016      2015      Change      Change  

Interest expense, net (dollars in thousands)

   $ (412    $ (402    $ (10      (2 )% 

The increase in interest expense, net was primarily due to an increase in interest expense associated with the capital lease of our U.S. operating facility in Westford, Massachusetts.

Other Income (Expense), net

 

     Three Months Ended
March 31,
     $      %  
     2016      2015      Change      Change  

Other income (expense), net (dollars in thousands)

   $ 660       $ (1,663    $ 2,323         140

The change in other income (expense), net was primarily a result of net foreign currency remeasurement gains in the 2016 period, as compared to net foreign currency remeasurement losses in the 2015 period.

 

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Provision (Benefit) for Income Taxes

 

     Three Months Ended
March 31,
    $      %  
     2016     2015     Change      Change  

Provision (benefit) for income taxes (dollars in thousands)

   $ 1,852      $ (4   $ 1,856         46,400

Effective tax rate

     39     35     

The provision (benefit) for income taxes results from a combination of the activities of our U.S. entities and foreign subsidiaries. In the three months ended March 31, 2016, we recorded an income tax provision of $1.9 million representing an effective tax rate of 39%. The difference between the U.S. federal statutory tax rate and the effective tax rate was primarily attributable to the discrete tax provision of $0.2 million recorded during the quarter related to the impact of tax law changes enacted during the quarter and certain foreign audit settlements. Other factors resulting in the difference between the U.S. federal statutory tax rate and the effective tax rate are the jurisdictional mix of worldwide earnings, non-deductible expenses, the domestic manufacturing deduction, and federal research credits. In the three months ended March 31, 2015, we recorded an income tax benefit of $4,000, representing an effective tax rate of 35%. The income tax benefit for the 2015 period was primarily attributable to applying our estimated annual effective tax rate to our year-to-date worldwide loss.

Liquidity and Capital Resources

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

At March 31, 2016, our cash, cash equivalents and short and long-term marketable securities were $178.2 million. Our cash and cash equivalents of $93.5 million are highly liquid investments with maturities of 90 days or less at date of purchase and consist of cash in operating accounts and investments in money market funds. Our short-term marketable securities of $46.5 million consist of investments in various state and municipal governments, and U.S. government agencies and treasuries, all of which mature by March 15, 2017. Our long-term marketable securities of $38.2 million consist of investments in various state and municipal governments, and U.S. government agencies and treasuries, all of which mature by March 1, 2018.

Our future capital requirements depend on a number of factors, including the rate of market acceptance of our current and future products, the resources we devote to developing and supporting our products and continued progress of our research and development of new products. During the three months ended March 31, 2016 and 2015, we purchased $4.3 million and $2.8 million, respectively, of property and equipment. During each of the three months ended March 31, 2016 and 2015, we transferred $2.1 million of demonstration equipment to fixed assets. We expect that our capital expenditures during the remainder of 2016 will increase compared to the 2015 period.

In February 2016, we announced that our board of directors had authorized the repurchase of up to $35 million of our Class A common stock, from time to time, on the open market or in privately negotiated transactions under a new stock repurchase program. This program will terminate on February 1, 2018. During the three months ended March 31, 2016, we did not repurchase any shares of our common stock under this program.

We believe that our current cash, cash equivalents and short and long-term marketable securities, as well as cash generated from operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

Cash Flows

Net cash used in operating activities was $0.3 million for the three months ended March 31, 2016. This resulted primarily from net changes in working capital items decreasing cash from operating activities by approximately $10.7 million driven by an increase in inventory as well as decreases in accounts payable and accrued expenses due to the timing of year end accruals. Net cash used in operating activities was partially offset by $2.8 million in net income for the period and approximately $7.1 million in depreciation, amortization and stock-based compensation expense. Net cash used in investing activities was $15.5 million for the three months ended March 31, 2016, which consisted primarily of purchases of marketable securities of $20.2 million as well as purchases of property and equipment of $4.3 million offset by net proceeds from the sale and maturities of marketable securities of $9.1 million. Net cash from financing activities during the three months ended March 31, 2016 was $1.1 million, primarily relating to proceeds from stock option exercises.

 

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Net cash used in operating activities was $4.8 million for the three months ended March 31, 2015. This resulted primarily from net changes in working capital items decreasing cash from operating activities by approximately $12.2 million driven by increases in inventory and accounts receivable and decreases in accrued expenses. This was partially offset by approximately $6.5 million in depreciation, amortization and stock-based compensation expense. Net cash provided by investing activities was $0.2 million for the three months ended March 31, 2015, which consisted primarily of net proceeds from the sales and maturities of marketable securities of $13.2 million partially offset by purchases of marketable securities of $10.1 million and purchases of property and equipment of $2.8 million. Net cash provided by financing activities during the three months ended March 31, 2015 was $0.9 million, primarily relating to proceeds from stock option exercises.

Contractual Obligations

As of March 31, 2016, there were no material changes, outside of the ordinary course of business, in our outstanding contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Off-Balance Sheet Arrangements

Since inception, we have not engaged in any off-balance sheet financing activities.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations set forth above are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those described in our Annual Report on Form 10-K for the year ended December 31, 2015. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities, and the reported amounts of revenues and expenses, that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A discussion of our critical accounting policies and the related judgments and estimates affecting the preparation of our consolidated financial statements is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. There have been no material changes to our critical accounting policies as of March 31, 2016.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments.

Interest Rate Sensitivity. We maintain an investment portfolio consisting mainly of money market funds, state and municipal government obligations, and U.S. government agencies and treasuries. The securities, other than money market funds and certain U.S. government agencies and treasuries, are classified as available-for-sale and consequently are recorded on the balance sheet at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive loss. All investments mature by March 1, 2018. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase, which could result in a realized loss if we are forced to sell an investment before its scheduled maturity. We currently have the ability and intent to hold our fixed income investments until maturity. We do not use derivative financial instruments to manage our interest rate risks.

 

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

 

    March 31, 2016     Future Maturities
in 2016
    Future Maturities
in 2017
    Future Maturities
in 2018
 

Investments (at fair value)

  $ 84,695      $ 30,570      $ 44,234      $ 9,891   

Weighted average interest rate

    0.53     0.34     0.64     0.62

Foreign Currency Exchange. A significant portion of our operations is conducted through operations in countries other than the United States. Revenues from our international operations that were recorded in U.S. dollars represented approximately 38% of our total international revenues during the three months ended March 31, 2016. Substantially all of the remaining 62% were sales in euros, British pounds, Moroccan dirham, Japanese yen, Chinese yuan, South Korean won and Australian dollars. Since we conduct our business in U.S. dollars, our main exposure, if any, results from changes in the exchange rate between these currencies and the U.S. dollar. Our functional currency is the U.S. dollar. Our policy is to reduce exposure to exchange rate fluctuations by having most of our assets and liabilities, as well as most of our revenues and expenditures, in U.S. dollars, or U.S. dollar linked. We have not historically engaged in hedging activities relating to our non-U.S. dollar operations. We sell inventory to our subsidiaries in U.S. dollars. These amounts are recorded at our local subsidiaries in local currency rates in effect on the transaction date. Therefore, we may be exposed to exchange rate fluctuations that occur while the debt is outstanding which we recognize as unrealized gains and losses in our statements of operations. Upon settlement of these debts, we may record realized foreign exchange gains and losses in our statements of operations. We may incur negative foreign currency translation charges as a result of changes in currency exchange rates.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer (our principal executive and principal financial officers, respectively), evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2016, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

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 first quarter of the year ending December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — Other Information

 

Item 1. Legal Proceedings

PicoSure Litigation

On June 26, 2015, a plaintiff, LDGP, LLC d/b/a Hartsough Dermatology, individually and on behalf of a putative class, filed a complaint against us in the U.S. District Court for the Northern District of Illinois - Western Division seeking monetary damages, injunctive relief, costs and attorneys’ fees. The plaintiff filed an amended complaint on November 9, 2015, which added three new plaintiffs. The amended complaint alleges that we falsely represented that the PicoSure laser removes and eliminates tattoos and difficult colors, and alleges violations of several state consumer fraud laws, breach of warranty, common law fraud and negligent misrepresentation. It seeks to assert claims on behalf of all entities in the United States who purchased a PicoSure laser, except those

 

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located in Louisiana. On December 7, 2015, we filed our answer and motion for partial judgment on the pleadings regarding several counts in the amended complaint. No hearing or ruling date has been scheduled by the court. Completion of discovery regarding class certification is scheduled for May 31, 2016. We believe that the claims are without merit and that we have meritorious defenses.

In addition to the matter 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 other matters will not have a material adverse impact on our consolidated financial position, results of operations or cash flows.

 

Item 1A. Risk Factors

The following important factors, among others, could cause our business, financial condition, results of operations and cash flows to be materially adversely affected. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements beginning on page 13. We have not made any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.

Risks Related to Our Business and Industry

We have incurred net losses in prior periods.

Although we were profitable in the first quarter of 2016 and for the full years of 2015 and 2014, we incurred losses in the first quarter of 2015 and in 2013. If we are unable to maintain profitability, the market value of our stock may decline, and an investor could lose all or a part of their investment.

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

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

Consumer demand, and therefore our business, is sensitive to a number of factors that affect consumer spending, including political and macroeconomic conditions, health of credit markets, disposable consumer income levels, consumer debt levels, interest rates, consumer confidence and other factors. For example, consumer demand for the procedures performed with our products, and practitioner demand for our products, decreased dramatically during 2009 as a result of turmoil in the financial markets, which contributed to a significant decrease in our total product revenues during that year. If there is not sufficient consumer demand for the procedures performed with our products, practitioner demand for our products would decline, and our business would suffer.

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

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

 

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

 

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

 

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

 

    increases in the length of our sales cycle; and

 

    reductions in the efficiency of our manufacturing processes.

 

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

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

Competition in the aesthetic device industry is intense. Our products compete against products offered by public companies, such as Cutera, Syneron Medical, and ZELTIQ Aesthetics, as well as several smaller specialized private companies, such as Alma Lasers (acquired in May 2013 by Shanghai Fosun Pharmaceutical) and Lumenis. Additional competitors may enter the market, and we are likely to compete with new companies in the future.

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

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

 

    product performance, reliability and design;

 

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

 

    quality of customer support;

 

    product pricing;

 

    product safety;

 

    sales, marketing and distribution capabilities;

 

    success and timing of new product development and introductions; and

 

    intellectual property protection.

We face exposure to credit risk of customers.

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

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

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

To remain competitive, we must:

 

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

 

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

 

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

 

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

 

    preserve goodwill and brand value with customers; and

 

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    maintain effective sales and marketing strategies.

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

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

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

As we introduce new technologies to the market, our earlier generation product sales could suffer, which may result in write-offs of those earlier generation products.

If demand for our aesthetic treatment systems by physician customers does not increase, our revenues will suffer and our business will be harmed.

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

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

We sell our products and services through subsidiaries and distributors in approximately 120 foreign countries, and we therefore are subject to risks associated with having international operations. We derived 28% of our product revenues from sales outside North America for the three months ended March 31, 2016. We derived 39%, 48%, and 48% of our product revenues from sales outside North America for the years ended December 31, 2015, 2014, and 2013, respectively.

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

 

    foreign certification and regulatory requirements;

 

    difficulties in staffing and managing our foreign operations;

 

    import and export controls; and

 

    political and economic instability.

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

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

The U.S. dollar is our functional currency. Although we sell our products and services through subsidiaries and distributors in approximately 120 foreign countries, approximately 38% of our revenues outside of North America for the months ended March 31, 2016 and 46% of our revenues outside of North America for the year ended December 31, 2015 were denominated in or linked to the U.S. dollar. Substantially all of our remaining revenues and all of our operating costs outside of North America are recognized in euros, British pounds, Moroccan dirham, Japanese yen, Chinese yuan, South Korean won and Australian dollars. We have not historically engaged in hedging activities relating to our non-U.S. dollar operations. Fluctuations in exchange rates between the currencies in which such revenues are realized or costs are incurred and the U.S. dollar may have a material adverse effect on our results of operations and financial condition. We incurred a loss on foreign currency of $1.8 million in 2015, which was recorded as other expense, net within our consolidated statement of operations. This was primarily due to the strengthening of the U.S. dollar against the euro, British pound, Japanese yen, Australian dollar and Chinese yuan.

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

Investment in product development often involves a long payback cycle and risks associated with new technology. For example, our SculpSure laser system, which we launched in the second half of 2015, was in development for five years. Our PicoSure laser system, which we launched in 2013, was in development for several years. We have made and expect to continue making significant

 

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investments in research and development and related product opportunities. Accelerated product introductions and short product life cycles require high levels of expenditures for research and development that could adversely affect our operating results if not offset by revenue increases. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we may not generate anticipated revenues from these investments for several years, if at all.

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

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

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

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

We may seek to acquire companies or technologies that could disrupt our ongoing business, divert the attention of our management and employees and adversely affect our results of operations.

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

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

Our Class A common stock price has fluctuated substantially in recent years, and we expect it will continue to do so. From January 1, 2012 through May 2, 2016, our Class A common stock has traded as high as $51.59 per share and as low as $11.64 per share. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our Class A common stock may be influenced by many factors, including:

 

    the success of competitive products or technologies;

 

    regulatory developments in the United States and foreign countries;

 

    developments or disputes concerning patents or other proprietary rights;

 

    the recruitment or departure of key personnel;

 

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

 

    activism by any single large stockholder or combination of stockholders;

 

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

 

    purchases or sales of our stock by our officers and directors;

 

    repurchases of shares of our Class A common stock; and

 

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    general economic, industry and market conditions.

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

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

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

We may not be able to successfully continue collecting licensing royalties.

Since 2013, portions of our revenues have consisted of royalties from sub-licensing patents, including patents licensed to us on an exclusive basis by MGH. These patents expired in the United States on February 1, 2015 and their foreign counterparts expired in several foreign jurisdictions on January 31, 2016. Though we receive royalty revenues on other patents, our revenues have decreased as a result of the expiration of the MGH patents because we will no longer receive any royalties from such patents, and such license revenues may not be replaced.

We face risks associated with product warranties.

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

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

We rely on information technology networks and systems, including the Internet, to process and transmit sensitive electronic information and to manage or support a variety of business processes and activities, including procurement and supply chain, manufacturing, distribution, and invoicing and collection of payments for our products. We use enterprise information technology systems to record, process, and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal, and tax requirements. Our information technology systems, some of which are managed by third parties, are susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors or catastrophic events. If our information technology systems suffer severe damage, disruption or shutdown and we are unable to effectively resolve the issues in a timely manner, our reputation, business and operating results may suffer.

Risks Related to Our Reliance on Third Parties

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

We depend on sole or limited suppliers of certain components and systems that are critical to the products that we manufacture and sell, and to which the significant majority of our revenues are attributable. We depend on a single contract manufacturer in the United States for the subassembly of certain products that we manufacture and sell, and for the manufacturing of certain products that we sell, and to which a significant portion of our revenues are attributable to these products. We depend on El.En. for the SLT II laser system that we integrate with our own proprietary software and delivery systems into our SmartLipo Triplex, Cellulaze, and PrecisionTx systems. We also depend on El.En. for the MonaLisa Touch laser system. For further information regarding our distribution agreements with El.En. please see the discussion on page 19 of our Annual Report on Form 10-K for the year ended December 31, 2015. We use Alexandrite rods to manufacture the lasers for our Elite and PicoSure products and Nd:YAG rods to manufacture the lasers for our RevLite / MedLite C6 products. We depend exclusively on Northrop Grumman SYNOPTICS to supply both the Alexandrite and Nd:YAG rods to us, and we are aware of no alternative supplier of Alexandrite rods meeting our quality standards. We offer our SmartCool treatment cooling systems for use with our laser aesthetic treatment systems, and we depend exclusively on Zimmer Elektromedizin GmbH to supply SmartCool systems to us. In addition, one third party supplier assembles and tests many of the components and subassemblies for our Elite and Cynergy product families. We use diode laser bars from Coherent to manufacture our Vectus Laser, and we use diode laser modules from Dilas to manufacture our SculpSure laser system. Although alternative suppliers exist for the diode laser subassemblies and diode laser bars, they could take months to qualify and implement.

 

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

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

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

In the United States, Canada, France, Morocco, Germany, Spain, the United Kingdom, Australia, China, Japan and Korea, we sell our products through our internal sales organization. Outside of these markets, we sell our products through third party distributors. Our sales and marketing success in these other markets depends on these distributors, in particular their sales and service expertise and relationships with the customers in the marketplace. Sales of our aesthetic treatment systems by third party distributors represented 10% of our product revenue for the three months ended March 31, 2016. Sales of our aesthetic treatment systems by third party distributors represented 17%, 21% and 25% of our product revenue for 2015, 2014 and 2013, respectively.

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

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

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

El.En. is a leading laser manufacturer in Europe and a leading light-based medical device manufacturer worldwide. El.En. and its subsidiaries develop and produce laser systems with scientific, industrial, commercial and medical applications. Under exclusive distribution agreements with El.En., we purchase from El.En. its proprietary SmartLipo MPX system and its SLT II laser system. The SLT II laser system is an essential component of our SmartLipo Triplex and Cellulaze systems, which also incorporate our proprietary software and delivery systems. We also depend on El.En. for the MonaLisa Touch laser system. For further information regarding our distribution agreements with El.En. please see the discussion on page 19 of our Annual Report on Form 10-K for the year ended December 31, 2015.

El.En. markets, sells, promotes and licenses other products that compete with our products, both in North America and elsewhere throughout the world and our agreements with El.En. do not prevent El.En. from competing with us by selling products that we purchased in the past from El.En., including earlier generation SmartLipo systems. Our business could be materially and adversely affected by increased competition from El.En.

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

Although we have proposed to our stockholders to eliminate certain of them at our upcoming annual meeting of stockholders, several provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

 

    the classification of the members of our board of directors;

 

    limitations on the removal of our directors;

 

    advance notice requirements for stockholder proposals and nominations;

 

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

 

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

The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our certificate of incorporation. In addition, absent approval of our board of directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least 75% of the voting power of our shares of capital stock entitled to vote.

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

Risks Related to Intellectual Property

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

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

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

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

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

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

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

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

 

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Risks Related to Government Regulation and Other Legal Compliance Matters

If we fail to obtain and maintain necessary FDA clearances and approvals for our products and indications or if clearances and approvals for future products and indications are delayed or not issued, our business would be harmed.

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

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

 

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

 

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

 

    patients may not comply with trial protocols;

 

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

 

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

 

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

 

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

 

    changes in governmental regulations or administrative actions; and

 

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

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

In addition, if the FDA requires us to go through a lengthier, more rigorous examination for products or modifications to products than we expect, or at a particular time in the future had expected, our product introductions or modifications could be delayed or canceled, which could negatively affect our ability to generate sales, or cause sales at such time to decline. For example, the FDA could demand that we obtain a PMA prior to marketing certain of our products in cases in which we did not expect to have to obtain a PMA. If we were to determine that a product we plan to market is subject to an exemption from premarket review, the FDA could disagree with our determination and could require us to submit a 510(k) or PMA in order to continue marketing the product.

Finally, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions that may prevent or delay approval or clearance of products we are developing or impact our ability to modify any of our products for which we receive regulatory clearance or approval in the future on a timely basis. Any change in the laws or regulations that govern the clearance and approval processes relating to the products we are developing could make it more difficult and costly to obtain clearance or approval for such products, or to produce, market and distribute products for which we receive regulatory approval or clearance in the future.

 

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

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

Violations of the FDCA and other laws and regulations to which we are subject may lead to investigations by the FDA, Department of Justice, or DOJ, and state Attorneys General. In addition, later discovery of previously unknown adverse events or other problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

 

    restrictions on such products, manufacturers or manufacturing processes;

 

    restrictions on the labeling or marketing of a product;

 

    restrictions on product distribution or use of a product;

 

    requirements to conduct post-marketing studies or clinical trials;

 

    warning letters or untitled letters;

 

    withdrawal of the products from the market;

 

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

 

    fines, restitution or disgorgement of profits or revenues;

 

    suspension or withdrawal of marketing approvals;

 

    operating restrictions or partial suspension or total shutdown of production;

 

    refusal to permit the import or export of our products;

 

    repair, replacement, refunds, recalls or seizure or detention of our products;

 

    consent decrees;

 

    injunctions or the imposition of civil or criminal penalties;

 

    damage to relationships with any potential contributors;

 

    unfavorable press coverage and damage to our reputation; or

 

    litigation involving patients using our products.

Non-compliance with European Union requirements can also result in significant financial penalties.

We may be subject to enforcement action if we engage in improper marketing or promotion of any of our products for which we receive regulatory clearance or approval. Any such enforcement action could result in significant fines, costs and penalties and could result in damage to our reputation.

        Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition of the promotion of unapproved use. Use of a device outside its cleared or approved diseases or conditions is known as “off-label” use. Despite our efforts to comply with such laws and regulations, physicians may use our products for which we receive regulatory clearance or approval off-label, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. If the FDA determines that our promotional materials or other product labeling constitute promotion of an unapproved, or off-label, use, it could request that we modify our materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, recall, injunction, seizure, civil fine or criminal penalties.

        Other federal, state and foreign regulatory agencies, including the U.S. Federal Trade Commission, have issued guidelines and regulations that govern how we will be required to promote products for which we receive regulatory clearance or approval, including how we may use endorsements and testimonials. If our promotional materials are inconsistent with these guidelines or regulations, we could be subject to enforcement actions, which could result in significant fines, costs and penalties. Our reputation could also be damaged and the adoption of our products could be impaired. In addition, the off-label use of our products may increase the risk of product liability claims. Product liability claims are expensive to defend and could divert our management’s attention, result in substantial damage awards against us and harm our reputation.

 

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In the EU, our medical devices may be promoted only for the intended purpose for which the devices have been CE marked. Failure to comply with this requirement could lead to the imposition of penalties by the competent authorities of the EU Member States. The penalties could include warnings, orders to discontinue the promotion of the medical device, seizure of the promotional materials and fines. The promotional materials related to any of our products that may be CE marked in the future must also comply with various laws and codes of conduct developed by medical device industry bodies in the EU governing promotional claims, comparative advertising, advertising of medical devices reimbursed by the national health insurance systems and advertising to the general public. If we do not comply with these laws and industry codes, we could be subject to penalties which could include significant fines. Our reputation could also be damaged and the adoption of our products after receipt of a CE mark could be impaired.

We have modified some of our products without FDA clearance. Modifications to any FDA-cleared or approved products may require new regulatory clearances or approvals or require us to recall or cease marketing such products until clearances or approvals are obtained.

We have made modifications to our devices in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. Any modification to one of our 510(k)-cleared products that would constitute a major change in its intended use or any change that could significantly affect the safety or effectiveness of the device would require us to obtain a new 510(k) marketing clearance and may even, in some circumstances, require the submission of a PMA, if the change raises complex or novel scientific issues or the product has a new intended use. We may be required to submit extensive pre-clinical and clinical data depending on the nature of the changes. We may not be able to obtain additional 510(k) clearances or premarket approvals for modifications to, or additional diseases or conditions for, any products for which we receive regulatory clearance or approval in a timely fashion, or at all. Delays in obtaining future clearances or approvals would adversely affect our ability to introduce enhanced products in a timely manner, which in turn would harm our revenue and operating results.

The FDA requires every manufacturer to make the determination regarding the need for a new 510(k) submission in the first instance, but the FDA may review any manufacturer’s decision. If the FDA disagrees with our determination and requires us to seek new 510(k) clearances or PMA approval for modifications to our previously-cleared products for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or distribution of the products or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties.

Furthermore, potential changes to the 510(k) program may make it more difficult for us to make modifications to any of our then-previously-cleared products, by either imposing more strict requirements on when a new 510(k) clearance for a modification to a previously-cleared product must be submitted or applying more onerous review criteria to such submissions. In July and December 2011, respectively, the FDA issued draft guidance documents addressing when to submit a new 510(k) clearance due to modifications to 510(k)-cleared products and the criteria for evaluating substantial equivalence. The July 2011 draft guidance document was ultimately withdrawn as the result of the Food and Drug Administration Safety and Innovation Act. As a result, the FDA’s original guidance document regarding 510(k) modifications, which dates back to 1997, remains in place. However, the FDA may seek to issue new guidance on product modifications. Any efforts to do so could result in a more rigorous review process and make it more difficult to obtain clearance for device modifications.

If we or our contract manufacturers fail to comply with ongoing FDA and EU or other foreign regulatory authority requirements concerning manufacturing operations and laser performance standards, our products could be subject to additional restrictions and withdrawal from the market, which would harm our business.

We are currently required to demonstrate and maintain compliance with the FDA’s Quality System Regulation, or QSR. The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. Because our products involve the use of lasers, our products also are covered by a performance standard for lasers set forth in FDA regulations. The laser performance standard imposes specific record keeping, reporting, product testing and product labeling requirements. These requirements include affixing warning labels to laser products as well as incorporating certain safety features in the design of laser products. In the EU countries, compliance with harmonized standards is also recommended as this is interpreted as a presumption of conformity with the relevant Essential Requirements. The FDA enforces the QSR and laser performance standards through periodic unannounced inspections. We have been, and anticipate in the future being, subject to such inspections.

These FDA regulations and EU standards cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of any products for which we may obtain regulatory clearance or approval. Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through periodic inspections by the FDA. Compliance with harmonized standards in the EU is also subject to regular review through the conduct of inspection by Notified Bodies or other certification bodies. If we, or our contract manufacturers, fail to adhere to QSR

 

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requirements in the United States or other harmonized standards in the EU, this could delay production of our products and lead to fines, difficulties in obtaining regulatory clearances or CE Certificates of Conformity, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, which could, in turn, have a material adverse effect on our financial condition or results of operations.

The FDA audits compliance with the QSR through periodic announced and unannounced inspections of manufacturing and other facilities. The failure by us or any of our contract manufacturers to comply with applicable statutes and regulations administered by the FDA, or harmonized standards in the EU, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in various enforcement actions, including a public warning letter, a shutdown of or restrictions on our manufacturing operations, delays in approving or clearing a product, refusal to permit the import or export of our products, a recall or seizure of our products, fines, injunctions, civil or criminal penalties, or other sanctions, such as those described in the preceding paragraphs, any of which could cause our business and operating results to suffer.

If any of our products for which we receive regulatory clearance or approval cause or contribute to a death or a serious injury, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions, which could harm our business.

Under the FDA medical device reporting, or MDR, regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or a similar device of such manufacturer were to recur. The decision to file an MDR involves a judgment by us as the manufacturer. If and when we make such decisions in the future, the FDA may not agree with our decisions. If we fail to report MDRs to the FDA within the required timeframes, or at all, or if the FDA disagrees with any of our determinations regarding the reportability of certain events, the FDA could take enforcement actions against us, which could have an adverse impact on our reputation and financial results.

Additionally, all manufacturers placing medical devices in the market in the EU are legally bound to report any serious or potentially serious incidents involving devices they produce or sell to the competent authority in whose jurisdiction the incident occurred. In the EU, we must comply with the EU Medical Device Vigilance System. Under this system, incidents must be reported to the relevant authorities of the EU countries, and manufacturers are required to take Field Safety Corrective Actions, or FSCAs, to reduce a risk of death or serious deterioration in the state of health associated with the use of a medical device that is already placed on the market. An incident is defined as any malfunction or deterioration if the characteristics or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, might lead to or might have led to the death of a patient or user or of other persons or to a serious deterioration in their state of health. An FSCA may include the recall, modification, exchange, destruction or retrofitting of the device. FSCAs must be communicated by the manufacturer or its European Authorized Representative to its customers and to the end users of the device through Field Safety Notices.

Any such safety issues involving our products could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, distract management from operating our business and may harm our reputation and financial results.

Any of the products for which we receive regulatory clearance or approval may be subject to product recalls. A recall of such products, either voluntarily or at the direction of the FDA or another governmental authority, or the discovery of serious safety issues with our future products, could have a significant adverse impact on our business.

The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. The authority to require a recall must be based on an FDA finding that there is reasonable probability that the device would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. A government-mandated or voluntary recall by us, or any distributor we may have in the future, could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing errors, design or labeling defects or other deficiencies and issues.

We are also required to follow detailed recordkeeping requirements for all company-initiated medical device corrections and removals and to report such corrective and removal actions to the FDA if they are carried out in response to a risk to health and have not otherwise been reported under the MDR regulations. We may initiate voluntary recalls involving our products for which we receive regulatory clearance or approval in the future that we determine do not require notification to the FDA. If the FDA disagrees with our determinations, the FDA could require us to report those actions as recalls. Recalls of any of our products for which we receive regulatory clearance or approval in the future would divert managerial and financial resources and have an adverse effect on our reputation, results of operations and financial condition, which could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’ demands. We may also be subject to enforcement actions, liability claims, be required to bear other costs, or take other actions that may have a negative impact on our future sales and our ability to generate profits.

 

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

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

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

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

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

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

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

In addition, most of the products and systems that we sell became subject in 2013 to an excise tax on sales of certain medical devices in the United States after December 31, 2012 by the manufacturer, producer or importer in an amount equal to 2.3% of the sale price. Under the law, additional charges, including warranties, may be deemed to be included in the sale price for purposes of determining the amount of the excise tax. Although this excise tax has been suspended for 2016 and 2017, we believe this excise tax could harm our sales and reduce our profitability.

The Patient Protection and Affordable Care Act includes reporting and disclosure requirements, commonly referred to as the “Sunshine Act”, for “applicable manufacturers” of drugs, biological, medical devices and medical supplies with regard to payments or other transfers of value made to certain physicians and teaching hospitals. The final rules implementing the Sunshine Act are complex, ambiguous, and broad in scope. Sales related to the Ellman surgical product line are subject to the reporting requirements under the Sunshine Act. We believe that sales related to our aesthetic product lines fall under a reporting exception under this law and, accordingly, reporting related to those sales is not required.

 

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There are a number of federal and state laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services promulgated patient privacy rules under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. These privacy rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of their own health information and limiting most use and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose. If we or any of our service providers are found to be in violation of the promulgated patient privacy rules under HIPAA, we could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation and have a material adverse effect on our business, financial condition and operating results. Similarly, failure to comply with the European Union’s requirements regarding the protection of personal information can also lead to significant penalties and sanctions.

Our compliance with applicable legal and regulatory requirements is, and will continue to be, costly and time consuming. It is impossible to predict whether other legislative changes will be enacted or government regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. If we are found to be in violation of any of this or any other law, we may be subject to penalties, including fines.

Risks Related to Litigation

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

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

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

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

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In February 2016, we announced that our board of directors had authorized the repurchase of up to $35 million of our Class A common stock, from time to time, on the open market or in privately negotiated transactions under a new stock repurchase program. This program will terminate on February 1, 2018. During the three months ended March 31, 2016, we did not repurchase any shares of our common stock under this program.

 

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Item 6. Exhibits

 

Exhibit

No.

  

Description

  10.1    Amended and Restated By-laws of the Company (Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed February 5, 2016)
  10.2    Non-Equity Incentive Plan (Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed February 5, 2016)
  10.3    Form of Performance-Based Stock Unit Award under 2005 Stock Incentive Plan (Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed February 5, 2016)
  10.4    Seventh Amendment to the Lease, dated April 29, 2016, between the Company and Curo Westford, LLC
  31.1    Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
  31.2    Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
  32.1    Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2    Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    The following materials from the Cynosure, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015, (ii) Consolidated Balance Sheets at March 31, 2016 and December 31, 2015, (iii) Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2016 and 2015, (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015, and (v) Notes to Consolidated Financial Statements.

 

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Signatures

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

 

   

Cynosure, Inc.

(Registrant)

Date: May 10, 2016       By:  

/s/    MICHAEL R. DAVIN        

        Michael R. Davin
        Chairman and Chief Executive Officer
Date: May 10, 2016       By:  

/s/    TIMOTHY W. BAKER        

        Timothy W. Baker
        President, Chief Operating Officer and Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit

No.

  

Description

  10.1    Amended and Restated By-laws of the Company (Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed February 5, 2016)
  10.2    Non-Equity Incentive Plan (Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed February 5, 2016)
  10.3    Form of Performance-Based Stock Unit Award under 2005 Stock Incentive Plan (Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed February 5, 2016)
  10.4    Seventh Amendment to the Lease, dated April 29, 2016, between the Company and Curo Westford, LLC
  31.1    Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
  31.2    Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
  32.1    Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2    Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    The following materials from the Cynosure, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015, (ii) Consolidated Balance Sheets at March 31, 2016 and December 31, 2015, (iii) Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2016 and 2015, (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015, and (v) Notes to Consolidated Financial Statements.

 

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