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Filed On 8/11/05 5:26pm ET · SEC File 333-127463 · Accession Number 950135-5-4681
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
8/11/05 Cynosure Inc S-1 17:397 950135
Document/Exhibit Description Pages Size
1: S-1 Cynosure, Inc. Form S-1 HTML 1,146K
2: EX-3.1 EX-3.1 Certificate of Incorporation of the 21 65K
Registrant, as Amended
3: EX-3.2 EX-3.2 Form of Restated Certificate of 19 84K
Incorporation of the Registrant
4: EX-3.3 EX-3.3 Bylaws of the Registrant 16 58K
5: EX-3.4 EX-3.4 Form of Amended and Restated Bylaws of the 21 108K
Registrant
6: EX-10.1 EX-10.1 1992 Stock Option Plan 12 48K
7: EX-10.2 EX-10.2 2004 Stock Option Plan, as Amended 11 62K
8: EX-10.3 EX-10.3 2005 Stock Incentive Plan 13 72K
9: EX-10.4 EX-10.4 Employment Agreement, Dated September 2003 11 47K
10: EX-10.5 EX-10.5 Employment Agreement, Dated January 1, 9 44K
2003
11: EX-10.6 EX-10.6 Employment Agreement, Dated September 2003 10 45K
12: EX-10.7 EX-10.7 Exclusive Distribution Agreement 14 53K
13: EX-10.8 EX-10.8 Exclusive Distribution Agreement 16 57K
14: EX-10.9 EX-10.9 Promissory Note, Dated October 1, 2004 3 23K
15: EX-10.10 EX-10.10 Lease, Dated January 31, 2005 46 263K
16: EX-21.1 EX-21.1 Subsidiaries of the Registrant 1 6K
17: EX-23.1 EX-23.1 Consent of Ernst & Young Llp 1 7K
This is an EDGAR HTML document rendered as filed. [ Alternative Formats ]
Registration
No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CYNOSURE, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware |
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04-3125110 |
(State or Other Jurisdiction of
Incorporation or Organization) |
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(Primary Standard Industrial
Classification Code No.) |
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(I.R.S. Employer Identification No.) |
5 Carlisle Road
(Address, including zip code, and telephone number,
including
area code, of registrant’s principal executive
offices)
President and Chief Executive Officer
Cynosure, Inc.
5 Carlisle Road
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this Registration
Statement is declared effective.
If any of the securities being registered on this form are
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended (the
“Securities Act”) please check the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box. o
CALCULATION OF REGISTRATION FEE
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| Each Class of |
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Proposed Maximum Aggregate |
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Amount of |
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Offering Price(1) |
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Registration Fee(2) |
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Class A Common Stock, par value $0.001 per share
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$75,000,000 |
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$8,828 |
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Estimated solely for the purpose of computing the registration
fee in accordance with Rule 457(o) under the Securities Act
of 1933, as amended. |
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Calculated pursuant to Rule 457(o) based on an estimate of
the proposed maximum aggregate offering price. |
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant
to Section 8(a), may determine.
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The information in
this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is
not soliciting offers to buy these securities in any state where
the offer or sale is not permitted.
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PROSPECTUS
Shares
Class A Common Stock
$ per
share
We are
selling shares
of our class A common stock, and El.En. S.p.A., as selling
stockholder, is
selling shares
of our class A common stock. We will not receive any
proceeds from the sale of the shares by El.En. We have granted
the underwriters an option to purchase up
to additional
shares of class A common stock to cover over-allotments.
This is the initial public offering of our class A common
stock. We currently expect the initial public offering price to
be between
$ and
$ per
share. We have applied to have our class A common stock
included for quotation on The Nasdaq National Market under the
symbol “CYNO.”
Investing in our class A common stock involves risks.
See “Risk Factors” beginning on page 8.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Public Offering Price
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Underwriting Discounts
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Proceeds to Cynosure (before expenses)
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Proceeds to El.En. (before expenses)
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The underwriters expect to deliver the shares to purchasers on
or
about ,
2005.
Citigroup
UBS Investment Bank
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Jefferies & Company, Inc. |
,
2005
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
different or additional information. We are not making an offer
of these securities in any state where an offer is not
permitted. You should not assume that the information contained
in this prospectus is accurate as of any date other than the
date on the front of this prospectus, regardless of the time of
delivery of this prospectus or any sale of our class A
common stock.
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F-1 |
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| Ex-3.1 Certificate of Incorporation of the Registrant, as amended |
| Ex-3.2 Form of Restated Certificate of Incorporation of the Registrant |
| Ex-3.3 Bylaws of the Registrant |
| Ex-3.4 Form of Amended and Restated Bylaws of the Registrant |
| Ex-10.1 1992 Stock Option Plan |
| Ex-10.2 2004 Stock Option Plan, as amended |
| Ex-10.3 2005 Stock Incentive Plan |
| Ex-10.4 Employment Agreement, dated September 2003 |
| Ex-10.5 Employment Agreement, dated January 1, 2003 |
| Ex-10.6 Employment Agreement, dated September 2003 |
| Ex-10.7 Exclusive Distribution Agreement |
| Ex-10.8 Exclusive Distribution Agreement |
| Ex-10.9 Promissory Note, dated October 1, 2004 |
| Ex-10.10 Lease, dated January 31, 2005 |
| Ex-21.1 Subsidiaries of the Registrant |
| Ex-23.1 Consent of Ernst & Young LLP |
Through and
including ,
2005 (25 days after the date of this prospectus), all
dealers that buy, sell or trade our class A common stock,
whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the
dealers’ obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments and
subscriptions.
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SUMMARY
This summary highlights information contained elsewhere in
this prospectus. This summary may not contain all of the
information that is important to you. Before investing in our
class A common stock, you should read this prospectus
carefully in its entirety, especially the description of risks
of investing in our class A common stock set forth under
“Risk Factors,” and our consolidated financial
statements and related notes beginning on page F-1.
Cynosure, Inc.
We develop and market aesthetic treatment systems that are used
by physicians and other practitioners to perform non-invasive
procedures to remove hair, treat vascular lesions, rejuvenate
skin through the treatment of shallow vascular lesions and
pigmented lesions and temporarily reduce the appearance of
cellulite. Our systems incorporate a broad range of laser and
other light-based energy sources, including Alexandrite, pulse
dye, Nd:Yag and diode lasers, as well as intense pulsed light.
We believe that we are one of only a few companies that
currently offer aesthetic treatment systems utilizing
Alexandrite and pulse dye lasers, which are particularly well
suited for some applications and skin types. We offer single
energy source systems as well as workstations that incorporate
two or more different types of lasers or pulsed light
technologies. We offer multiple technologies and system
alternatives at a variety of price points depending primarily on
the number and type of energy sources included in the system.
Our newer products are designed to be easily upgradeable to add
additional energy sources and handpieces as our customers expand
their practices. As the aesthetic treatment market evolves to
include new customers, such as aesthetic spas and additional
physician specialties, we believe that our broad technology base
and tailored solutions will provide us with a competitive
advantage.
We sell over 14 different aesthetic treatment systems and
have focused our development and marketing efforts on offering
leading, or flagship, products for each of the major aesthetic
procedure categories that we address. Our flagship products are:
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the Apogee®
Elitetm
system for hair removal; |
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the
Cynergytm
system for the treatment of vascular lesions; |
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the PhotoSilk
Plustm
system for skin rejuvenation through the treatment of shallow
vascular lesions and pigmented lesions; and |
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the TriActive®
LaserDermologysm
system for the temporary reduction of the appearance of
cellulite. |
We sell our products through a direct sales force in North
America, four European countries, Japan and China and through
international distributors in 31 other countries. In
January 2005, we launched a separate
CynosureSpatm
brand with product offerings, tailored marketing and sales
personnel focused exclusively on the aesthetic spa market. As of
June 30, 2005, we had sold more than 4,500 aesthetic
treatment systems worldwide.
Our company was founded in 1991. El.En. S.p.A., an Italian
company listed on the techSTAR segment of the Italian stock
market, Borsa Italiana, that itself and through
subsidiaries
develops and markets laser systems for medical and industrial
applications, acquired a majority of our capital stock in 2002.
In September 2003, we recruited a new management team that has
implemented a comprehensive reorganization of
our company. Our
revenues have increased from $23.0 million in 2002 to
$41.6 million in 2004, a compound annual growth rate of
35%. Our revenues for the six months ended
June 30, 2005
increased 31% to $25.1 million, compared to
$19.2 million for the first six months of 2004. Our gross
profit margin improved from 43% in 2002 to 51% in 2004, and we
achieved profitability in 2004.
Aesthetic Market Opportunity
Michael Moretti/Medical Insight, Inc., an aesthetic treatment
market research firm, estimates that the number of non-invasive
aesthetic treatment procedures worldwide using laser and other
light-based
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technologies will grow from nearly 20 million in 2003 to
over 53 million in 2008, representing a compound annual
growth rate of over 20%. We estimate that the worldwide market
for aesthetic treatment systems based on laser and other
light-based technologies will exceed $550 million in 2005.
We base this estimate on published market research reports,
revenue figures for public companies and our conversations with
the managements of private companies that compete in the
aesthetic treatment equipment market.
Key factors contributing to growth in the markets for aesthetic
treatment procedures and aesthetic laser equipment include:
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the aging population of industrialized countries and the rising
discretionary income of the “baby boomer” demographic
segment; |
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the desire of many individuals to improve their appearance; |
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the development of technology that allows for safe and effective
aesthetic treatment procedures; |
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the impact of managed care and reimbursement on physician
economics, which has motivated physicians to establish or expand
their elective aesthetic practices with procedures that are paid
for directly by patients; and |
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reductions in cost per procedure, which has attracted a broader
base of clients and patients for aesthetic treatment procedures. |
Aesthetic treatment procedures that use lasers and other
light-based equipment have traditionally been performed by
dermatologists and plastic surgeons, of whom there are more than
18,000 in the United States, based on published membership
information from professional medical organizations. More
recently, a broader group of physicians in the United States,
including primary care physicians, obstetricians, gynecologists,
ophthalmologists and ear, nose and throat specialists, have
incorporated aesthetic treatment procedures into their
practices. We believe that there are approximately 200,000 of
these potential customers in the United States and Canada,
representing a significant market opportunity that is only
beginning to be addressed by suppliers of lasers and other
light-based aesthetic equipment. An aesthetic spa market is also
rapidly developing, with approximately 12,000 aesthetic
spas in North America in 2004, an increase of approximately 26%
from 2002 according to the International Spa Association. In
addition to conventional massage and cosmetic treatments,
aesthetic spas are beginning to offer non-invasive light-based
procedures.
We believe that non-traditional physician customers and spa
customers currently represent at least one-half of the North
American laser and other light-based aesthetic treatment systems
market. We also believe that as aesthetic spas and
non-traditional physician customers play increasingly important
roles as purchasers of aesthetic treatment systems, the market
for these products will become even more diverse. Specifically,
we expect that owners of different types of aesthetic treatment
practices will place different emphases on various system
attributes, such as breadth of treatment applications, return on
investment, upgradeability and price. Accordingly, we believe
that there is significant market opportunity for a company that
tailors its product offerings to meet the needs of a wide range
of market segments.
Our Solution
We offer tailored customer solutions to address the market for
non-invasive light-based aesthetic treatment applications,
including hair removal, treatment of vascular lesions, skin
rejuvenation through the treatment of shallow vascular lesions
and pigmented lesions and temporary reduction of the appearance
of cellulite. We believe our laser and other light-based systems
are reliable, user friendly and easily incorporated into both
physician practices and spas. We complement our product
offerings with comprehensive and responsive service offerings,
including assistance with training, aesthetic practice
development consultation and product maintenance.
2
We believe that the following factors enhance our market
position:
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Broad Technology Base. Our products are based on a broad
range of technology and incorporate different types of lasers,
such as Alexandrite, pulse dye, Nd:Yag and diode, as well as
intense pulsed light devices. |
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Expansive Portfolio of Aesthetic Treatment Systems. Our
product portfolio of over 14 aesthetic treatment systems
includes single energy source systems as well as workstations
that incorporate two or more different types of lasers or
light-based technologies. By offering multiple technologies and
system alternatives at a variety of price points, we seek to
provide customers with tailored solutions that meet the specific
needs of their practices while providing significant flexibility
in their level of investment. |
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Upgrade Paths Within Product Families. We have designed
our new products to facilitate upgrading within product
families. For example, our Cynergy system and our
redesigned Apogee Elite system are multiple energy source
workstations that can be upgraded from our single energy source
systems. We began shipping these new upgradeable systems in
mid-2005. |
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Global Presence. We have offered our products in
international markets for over 14 years, with approximately
45% of our revenue generated from international markets in 2004.
We target international markets through a direct sales force in
four European countries, Japan and China and through
international distributors in 31 other countries. |
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Strong Reputation Established Over 14-Year History. We
have been in the business of developing and marketing aesthetic
treatment systems for over 14 years. As a result of this
history, we believe the Cynosure brand name is associated with a
tradition of technological leadership. |
Our Business Strategy
Our goal is to become the worldwide leader in providing
non-invasive aesthetic treatment systems. The key elements of
our business strategy to achieve this goal are to:
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Offer a Full Range of Tailored Aesthetic Solutions. Our
product portfolio incorporates a variety of laser and light
sources at various price points across many aesthetic
applications to address the needs of the traditional physician
customer market as well as the growing non-traditional physician
customer market. |
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Launch Innovative New Products and Technologies for Emerging
Non-Invasive Aesthetic Applications. Since 2002, we have
introduced 11 new products. We introduced two of our
flagship products, the Apogee Elite and TriActive
LaserDermology systems, in 2004 and two of our flagship
products, the Cynergy and the PhotoSilk Plus
systems, in 2005. We are also working on new technologies for
emerging aesthetic applications, such as tattoo removal and acne. |
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Pursue Spa Market with Dedicated Organization. In January
2005, we launched our separate CynosureSpa brand with
tailored marketing and sales personnel focused exclusively on
penetrating the aesthetic spa market. We have also introduced
products specifically designed for the aesthetic spa market,
such as the TriActive LaserDermology system and the
PhotoLighttm
system. |
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Provide Comprehensive, Ongoing Customer Service. We
support our customers with a worldwide service organization to
provide product installation and ongoing maintenance services.
Most of our new products are modular in design to enable quick
and efficient service and support. We offer our North American
customers additional training, business development and
marketing services through a third party consulting firm. |
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Generate Additional Revenue from Existing Customer Base.
We believe that there are opportunities for us to generate
additional revenue from existing customers who are already
familiar |
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with our products through additional sales of standalone
systems, upgrades to our new modular products and increasing the
percentage of our customers that enter into service contracts. |
Relationship with El.En. S.p.A.
Upon completion of this offering, El.En. S.p.A. will
own %
of our outstanding class B common stock,
representing %
of the aggregate number of shares of our class A and
class B common stock outstanding. El.En. has agreed with
the underwriters for this offering that, without the prior
written consent of Citigroup Global Markets Inc., the
lead-managing underwriter of this offering, it will not sell or
otherwise dispose of any shares of our common stock for a period
of 24 months after the date of this prospectus, other than:
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up to 33% of the shares of our common stock that it beneficially
owned on the date of this prospectus during the period between
12 and 18 months after the date of this prospectus; and |
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up to an additional 33% of the shares of our common stock that
it beneficially owned on the date of this prospectus during the
period between 18 and 24 months after the date of this
prospectus. |
We are party to distribution agreements with El.En. under which
we distribute products manufactured by El.En., including our
Cynergy
PLTM,
PhotoLight, PhotoSilk Plus and TriActive LaserDermology
products. These agreements provide us with exclusive
worldwide distribution rights for the Cynergy PL product
and exclusive distribution rights in the United States and
Canada for the PhotoLight, PhotoSilk Plus and
TriActive LaserDermology products. Each of the
distribution agreements has an initial term that expires in
January 2012, and each will automatically renew for additional
one-year terms unless either party provides notice of
termination within a specified period prior to the expiration of
the initial term or any subsequent renewal term.
Prior to the closing of this offering, we and El.En. intend to
enter into an agreement providing that, to the extent El.En. is
required to make any indemnity payments to the underwriters
pursuant to the
underwriting agreement relating to this
offering, and such indemnity payments relate to matters as to
which El.En., after reasonable inquiry, had no knowledge, we
will reimburse El.En. for such indemnity payments. This
agreement will not affect the respective liability of us and
El.En. to the underwriters pursuant to the underwriting
agreement. See
“ Underwriting.”
See “Risk Factors — Risks Related to Our
Relationship with El.En.,” “Business —
El.En. Commercial Relationship,” “Certain
Relationships and Related Party Transactions” and
“Underwriting.”
Our Dual Class Capital Structure
Prior to the completion of this offering, we will restate our
certificate of incorporation to, among other things, create a
dual class capital structure by authorizing class A and
class B common stock and reclassifying all of our
outstanding shares of previously existing common stock into
shares of class B common stock. In addition, upon our
filing of the restated
certificate of incorporation, each
outstanding option to purchase shares of our common stock will
automatically convert into an option to purchase an equal number
of shares of our class B common stock, with no other
changes to the terms of the option. We and El.En. are selling
shares of class A common stock in this offering, and the
only shares of our class A common stock to be outstanding
immediately following this offering will be the shares being
sold in this offering.
The holders of class A common stock and class B common
stock have identical rights and will be entitled to one vote per
share with respect to each matter presented to our stockholders
on which the holders of common stock are entitled to vote,
except as discussed below. Until El.En. beneficially owns less
than 20% of the aggregate number of shares of our class A
common stock and class B common stock
4
outstanding, or less than 50% of the number of shares of our
class B common stock outstanding, the holders of shares of
our class B common stock will have the right to:
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elect a majority of our board of directors; |
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approve amendments to our bylaws adopted by our stockholders; and |
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approve amendments to any provision of our certificate of
incorporation relating to the rights of holders of common stock,
the powers, election and classification of the board of
directors, corporate opportunities and the rights of holders of
class A common stock and class B common stock to elect
and remove directors, act by written consent and call special
meetings of stockholders. |
In addition, the holders of shares of our class B common
stock will vote with our class A stockholders in the
election of the remaining directors.
Shares of class B common stock will convert automatically
into class A common stock upon any transfer of such shares,
whether or not for value. Shares of class B common stock
are also convertible into class A common stock upon the
occurrence of events specified in our restated certificate of
incorporation.
See “Description of Capital Stock — Common
Stock.”
Risks Associated with Our Business
Our business is subject to numerous risks, as more fully
described in the section entitled “Risk Factors”
immediately following this prospectus summary. We have a history
of operating losses, and we may not maintain profitability. We
rely on third party suppliers, including some sole source
suppliers, for the components and subassemblies of many of our
products. We compete against companies that have longer
operating histories, more established products and greater
resources than we do. We rely on third party distributors to
market, sell and service a significant portion of our products.
El.En. will continue to have substantial control over us after
this offering. We depend on El.En. for several of the products
that we market and sell. El.En. markets and sells products that
compete with our products.
Our Corporate Information
We were incorporated under the laws of the State of Delaware in
July 1991. Our principal executive offices are located at
5 Carlisle Road,
Westford,
Massachusetts 01886, and our
telephone number is (
978) 256-4200. Our
website address is
www.cynosurelaser.com. The information on our
website is
not a part of this prospectus.
Except for our financial statements included in this prospectus,
the capitalization table set forth under
“Capitalization” or where otherwise expressly
indicated, this prospectus assumes for all purposes that our
restated
certificate of incorporation has been filed and become
effective and that our previously existing shares of and options
to purchase common stock have been converted into and
reclassified as shares of and options to purchase class B
common stock. In this prospectus, we refer to our to be
authorized class A common stock and class B common
stock collectively as our common stock.
Cynosure®, Apogee®,
PhotoGenica® and SmartCool® are our
registered trademarks. We also have the following trademarks and
servicemarks:
Acclaimtm,
Affinitytm,
Apogee
Elitetm,
Cynergytm,
CynosureSpatm,
LaserDermologysm,
Photolighttm,
PhotoSilktm,
PhotoSilk
Plustm
and
VStartm.
TriActive® is the registered trademark of El.En.
S.p.A. Each of the other trademarks, trade names or service
marks appearing in this prospectus belongs to its respective
holder.
5
The Offering
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Class A common stock offered by: |
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Us |
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El.En. |
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Common stock to be outstanding after this offering: |
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Class B |
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Total |
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shares |
| |
|
Common stock to be held by El.En. immediately after this
offering: |
|
|
| |
|
Class B |
|
shares,
which El.En. has agreed not to sell for 12 to 24 months
following this offering, as described under “Shares
Eligible for Future Sale — Lock-up Agreements.” |
| |
|
Voting Rights |
|
One vote for each share of class A common stock and one
vote for each share of class B common stock on all matters
on which stockholders are entitled to vote, except holders of
class B common stock will have the right separately
(1) to elect and remove a majority of the members of our
board of directors, (2) to approve amendments to our bylaws
adopted by our stockholders and (3) to approve amendments
to specified provisions of our certificate of incorporation. See
“Description of Capital Stock — Common
Stock.” |
| |
|
Use of Proceeds |
|
We expect to use our net proceeds from this offering to expand
our sales, marketing and distribution capabilities, to fund our
research and development activities and for general corporate
purposes, including potential acquisitions of complementary
products, technologies or businesses. |
| |
|
|
|
We will not receive any proceeds from the sale of shares of
class A common stock by El.En. |
| |
|
Risk Factors |
|
See “Risk Factors” and other information included in
this prospectus for a discussion of factors you should consider
carefully before deciding to invest in shares of our
class A common stock. |
| |
|
Proposed Nasdaq National Market symbol |
|
CYNO |
The number of shares of our class A common stock and
class B common stock to be outstanding after this offering
is based on no shares of class A common stock and
6,242,877 shares of class B common stock outstanding
as of
June 30, 2005. The number of shares to be outstanding
after this offering excludes:
|
|
|
| |
• |
1,862,642 shares of class B common stock issuable upon
the exercise of stock options outstanding as of June 30,
2005 at a weighted average exercise price of $3.31 per
share; and |
| |
| |
• |
541,342 shares of class A common stock reserved for
future issuance under our equity compensation plans as of the
date of this prospectus. |
Unless otherwise noted, the information in this prospectus
assumes that the underwriters do not exercise their
over-allotment option.
6
Summary Consolidated Financial Data
The following summary consolidated financial data for the years
ended
December 31, 2002,
2003 and
2004 have been derived
from our audited financial statements. The summary consolidated
financial data as of
June 30, 2005 and for the six month
periods ended
June 30, 2004 and
2005 have been derived from
our unaudited financial statements. The unaudited summary
consolidated financial statement data includes, in our opinion,
all adjustments, consisting only of normal recurring
adjustments, that are necessary for a fair presentation of our
financial position and results of operations for these periods.
Operating results for the six months ended
June 30, 2005
are not necessarily indicative of the results that may be
expected for the year ending
December 31, 2005. You should
read this data together with our consolidated financial
statements and the related notes appearing at the end of this
prospectus and the
“Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
section of this prospectus.
The as adjusted consolidated balance sheet data gives effect to
the sale by us
of shares
of class A common stock in this offering at an assumed
initial public offering price of
$ per
share, after deducting underwriting discounts and commissions
and estimated offering expenses payable by us.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Six Months Ended | |
| |
|
Year Ended December 31, | |
|
June 30, | |
| |
|
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
22,962 |
|
|
$ |
27,125 |
|
|
$ |
41,633 |
|
|
$ |
19,171 |
|
|
$ |
25,080 |
|
|
Cost of revenues
|
|
|
13,198 |
|
|
|
14,207 |
|
|
|
20,465 |
|
|
|
9,721 |
|
|
|
11,632 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,764 |
|
|
|
12,918 |
|
|
|
21,168 |
|
|
|
9,450 |
|
|
|
13,448 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing
|
|
|
5,777 |
|
|
|
8,720 |
|
|
|
12,590 |
|
|
|
5,762 |
|
|
|
8,048 |
|
| |
Research and development
|
|
|
2,379 |
|
|
|
2,481 |
|
|
|
3,139 |
|
|
|
1,406 |
|
|
|
1,523 |
|
| |
General and administrative
|
|
|
3,979 |
|
|
|
3,766 |
|
|
|
4,092 |
|
|
|
1,899 |
|
|
|
2,364 |
|
| |
Stock-based compensation
|
|
|
— |
|
|
|
76 |
|
|
|
136 |
|
|
|
89 |
|
|
|
245 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,135 |
|
|
|
15,043 |
|
|
|
19,957 |
|
|
|
9,156 |
|
|
|
12,180 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(2,371 |
) |
|
|
(2,125 |
) |
|
|
1,211 |
|
|
|
294 |
|
|
|
1,268 |
|
|
Interest expense, net
|
|
|
(25 |
) |
|
|
(62 |
) |
|
|
(122 |
) |
|
|
(71 |
) |
|
|
(45 |
) |
|
Gain on sale of investment
|
|
|
— |
|
|
|
— |
|
|
|
3,019 |
|
|
|
3,019 |
|
|
|
— |
|
|
Other income (expense), net
|
|
|
298 |
|
|
|
1,822 |
|
|
|
976 |
|
|
|
493 |
|
|
|
(281 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before (benefit) provision for income taxes and
minority interest
|
|
|
(2,098 |
) |
|
|
(365 |
) |
|
|
5,084 |
|
|
|
3,735 |
|
|
|
942 |
|
|
(Benefit) provision for income taxes
|
|
|
(301 |
) |
|
|
72 |
|
|
|
(276 |
) |
|
|
97 |
|
|
|
383 |
|
|
Minority interest in net income of subsidiary
|
|
|
70 |
|
|
|
63 |
|
|
|
64 |
|
|
|
27 |
|
|
|
35 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(1,867 |
) |
|
$ |
(500 |
) |
|
$ |
5,296 |
|
|
$ |
3,611 |
|
|
$ |
524 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
$ |
(0.35 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.93 |
|
|
$ |
0.65 |
|
|
$ |
0.08 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share
|
|
$ |
(0.35 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.92 |
|
|
$ |
0.65 |
|
|
$ |
0.07 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
5,272 |
|
|
|
5,530 |
|
|
|
5,700 |
|
|
|
5,530 |
|
|
|
6,226 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
5,272 |
|
|
|
5,530 |
|
|
|
5,773 |
|
|
|
5,530 |
|
|
|
7,234 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
As of June 30, 2005 | |
| |
|
| |
| |
|
Actual | |
|
As adjusted | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
3,198 |
|
|
$ |
|
|
|
Working capital
|
|
|
11,416 |
|
|
|
|
|
|
Total assets
|
|
|
30,649 |
|
|
|
|
|
|
Capital lease obligation, net of current portion
|
|
|
761 |
|
|
|
|
|
|
Retained earnings
|
|
|
2,834 |
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
15,273 |
|
|
|
|
|
7
RISK FACTORS
Investing in our class A common stock involves a high
degree of risk. You should carefully consider the risks and
uncertainties described below together with all of the other
information included in this prospectus, including the financial
statements and related notes appearing at the end of this
prospectus, before deciding to invest in our class A common
stock. If any of the following risks actually occurs, our
business, prospects, financial condition and results of
operations may be materially harmed. In this event, the market
price of our class A common stock could decline and you
could lose part or all of your investment.
Risks Related to Our Business and Industry
|
|
|
We have a history of operating losses, and we may not
maintain profitability. |
Although we were profitable in 2004 and for the first six months
of 2005, we incurred operating losses for three of the last five
years. Our net losses were approximately $6.0 million in
2001, $1.9 million in 2002 and $0.5 million in 2003.
We may not be able to sustain or increase profitability on a
quarterly or annual basis. If we are unable to maintain
profitability, the market value of our stock will decline, and
you could lose all or a part of your investment.
|
|
|
If we fail to obtain Alexandrite rods or our air cooling
system from our sole suppliers, our ability to manufacture and
sell our products and components would be impaired. |
We use Alexandrite rods to manufacture the lasers for our
Apogee products. We depend exclusively on Northrop
Grumman SYNOPTICS to supply Alexandrite rods to us, and we are
aware of no alternative supplier 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. Both Alexandrite lasers and our
SmartCool systems are important to our business.
We do not have long-term arrangements with Northrop Grumman
SYNOPTICS or Zimmer Elektromedizin for the supply of Alexandrite
rods or SmartCool systems, but instead purchase from them
on a purchase order basis. Northrop Grumman SYNOPTICS and Zimmer
Elektromedizin are not required, and may not be able or willing,
to meet our future requirements at current prices, or at all.
Any extended interruption in our supplies of Alexandrite rods or
our SmartCool treatment cooling systems could materially
harm our business.
|
|
|
We compete against companies that have longer operating
histories, more established products and greater resources than
we do, which may prevent us from achieving further market
penetration or improving operating results. |
Competition in the aesthetic laser industry is intense. Our
products compete against products offered by public companies,
such as Candela Corporation, Cutera, Inc., Laserscope, Lumenis
Ltd., Palomar Medical Technologies, Inc. and Syneron Medical
Ltd., as well as several smaller specialized private companies,
such as Radiancy, Inc. and Thermage, Inc. Some of these
competitors have significantly greater financial and human
resources than we do and have established reputations, as well
as worldwide distribution channels and sales and marketing
capabilities that are larger and more established than ours.
Additional competitors may enter the market, and we are likely
to compete with new companies in the future. We also face
competition from medical products, such as BOTOX® and
collagen injections, and surgical and non-surgical aesthetic
procedures, such as face lifts, sclerotherapy, electrolysis,
microdermabrasion and chemical peels. 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.
8
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 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. |
Some of our competitors have more established products and
customer relationships than we do, which could inhibit our
further market penetration efforts. For example, we have
encountered, and expect to continue to encounter, situations
where, due to pre-existing relationships, potential customers
determine to purchase additional products from our competitors.
If we are unable to compete effectively, our business and
operating results will be harmed.
In addition, some of our current and potential competitors have
significantly greater financial, research and development,
manufacturing and sales and marketing resources than we have.
Our competitors could utilize their greater financial resources
to acquire other companies to gain enhanced name recognition and
market share, as well as to acquire new technologies or products
that could effectively compete with our product lines.
|
|
|
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 be innovative in the
development of 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 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 and identify new markets for our
products and technology, our products and technology 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 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; and |
| |
| |
• |
maintain effective sales and marketing strategies. |
|
|
|
If our new products do not gain market acceptance, our
revenues and operating results could 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
9
the long term. If the products we develop do not gain market
acceptance, 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.
|
|
|
If demand for our aesthetic treatment systems by
non-traditional physician customers and spas does not develop as
we expect, our revenues will suffer and our business will be
harmed. |
Our revenues from non-traditional physician customers and spa
purchasers of our products have increased significantly since
January 1, 2004. We believe, and our growth expectations
assume, that we and other companies selling lasers and other
light-based aesthetic treatment systems have only begun to
penetrate these markets and that our revenues from selling to
these markets will continue to increase. 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 rely upon third party suppliers for the components and
subassemblies of many of our products, making us vulnerable to
supply shortages and price fluctuations, which could harm our
business. |
Many of the components and subassemblies that comprise our
aesthetic treatment systems are currently manufactured for us by
a limited number of suppliers. In addition, one third party
supplier assembles and tests many of the components and
subassemblies for our
Apogee, Cynergy, Acclaim and
VStar product families. We do not have long-term
contracts with any of these third parties, including the third
party supplier that assembles many of our components and
subassemblies, for the supply of parts or services. Any
interruption in the supply of components or subassemblies, or
our inability to obtain substitute components or subassemblies
from alternate sources at acceptable prices in a timely manner,
or our inability to obtain assembly and testing services, could
impair our ability to meet the demand of our customers, which
would have an adverse effect on our business and operating
results.
|
|
|
We sell our products in numerous international markets.
Our operating results may suffer if we are unable to manage our
international operations effectively. |
We sell our products in 48 foreign countries, and we therefore
are subject to risks associated with having international
operations. International sales accounted for 58% of our revenue
for 2003, 45% of our revenue for 2004 and 43% of our revenue for
the first six months of 2005.
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. |
|
|
|
Revenue from our international sales could be adversely
affected by fluctuations in currency exchange rates, which would
cause our operating results to suffer. |
We face risks associated with changes in foreign currency
exchange rates. Revenues from our international operations that
were recorded in U.S. dollars represented approximately 45%
of our total 2004 international revenues. Substantially all of
the remaining 55% of our total 2004 revenues from international
operations were sales in euros, British pounds and Japanese yen.
Since we report our financial position and results of operations
in U.S. dollars, our reported results of operations may be
adversely affected by changes in the exchange rate between these
currencies and the U.S. dollar. We have not historically
engaged in hedging activities relating to our
non-U.S. dollar operations. We may incur negative foreign
currency translation charges as a result of changes in currency
exchange rates, which could cause our operating results to
suffer.
10
|
|
|
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 North America, the United Kingdom, Germany, Spain, France,
Japan and China, 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 21% of
our revenue in 2003, 13% of our revenue in 2004 and 20% of our
revenue in the first six months of 2005. We do not control these
distributors, and they may not be successful in marketing our
products. Third party distributors may terminate their
relationships with us, or 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 only nine of our 19 third party distributors.
The third party distributors with which we do not have written
distributor agreements 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 do not
perform adequately, or if we fail to maintain our existing
relationships with these distributors 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.
|
|
|
Because we do not require training for users of our
products, and sell our products to non-physicians, there exists
an increased potential for misuse of our 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 do 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 products to attend training
sessions. The lack of required training and the purchase and use
of our 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.
|
|
|
Product liability suits could be brought against us due to
a 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 damage to the eyes, skin or other
tissue. We are routinely involved in claims related to the use
of our products. Product 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 be sufficient to cover these
claims. 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 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 product losses in excess of our insurance coverage out of
cash reserves, harming our financial condition and adversely
affecting our operating results.
11
|
|
|
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 expectations. Any of
these events could cause our stock price to fall. Each of the
risk factors listed in this “Risk Factors” section,
and the following factors, may adversely affect our financial
results:
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continued availability of attractive equipment leasing terms for
our customers, which may be negatively influenced by interest
rate increases; |
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increases in the length of our sales cycle; and |
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reductions in the efficiency of our manufacturing processes. |
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If there is not sufficient demand for the procedures
performed with our products, practitioner demand for our
products could decline, which would adversely affect our
operating results. |
Most procedures performed using our aesthetic treatment systems
are elective procedures that are not reimbursable through
government or private health insurance. The cost of these
elective procedures must be borne by the patient. As a result,
the decision to undergo a procedure that utilizes our products
may be influenced by a number of factors, including:
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patient awareness of procedures and treatments; |
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the cost, safety and effectiveness of the procedure and of
alternative treatments; |
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the success of our and our customers’ sales and marketing
efforts to purchasers of these procedures; and |
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consumer confidence, which may be affected by economic and other
conditions. |
If there is not sufficient demand for the procedures performed
with our products, practitioner demand for our products would be
reduced, which would adversely affect our operating results.
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The expense and potential unavailability of liability
insurance coverage for our customers could adversely affect our
ability to sell our products and our financial condition. |
Some of our customers and prospective customers have had
difficulty in procuring or maintaining liability insurance to
cover their operation and use of our products. Medical
malpractice carriers are withdrawing coverage in some states or
substantially increasing premiums. If this trend continues or
worsens, our customers may discontinue using our products, and
potential customers may elect not to purchase laser and other
light-based products.
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Our business and operations are experiencing rapid growth.
If we fail to effectively manage our growth, our business and
operating results could be harmed. |
We have experienced significant growth in the scope of our
operations and the number of our employees. For example, our
revenue increased from $23.0 million in 2002 to
$41.6 million in 2004, and the number of our employees
increased from 138 at the beginning of 2003 to 178 as of
June 30, 2005. This growth has placed significant demands
on our management, as well as our financial and operational
resources. If we do not effectively manage our growth, the
efficiency of our operations and the quality of our products
could suffer, which could adversely affect our business and
operating results. To effectively manage this growth, we will
need to continue to:
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implement appropriate operational, financial and management
controls, systems and procedures; |
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expand our manufacturing capacity and scale of production; |
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expand our sales, marketing and distribution infrastructure and
capabilities; and |
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provide adequate training and supervision to maintain high
quality standards. |
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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 president
and chief executive officer, to be key to our efforts to
develop, sell and market our products and remain competitive. We
have entered into an employment agreement with Mr. Davin;
however, the employment agreement is terminable by him on short
notice and may not ensure his continued service with our
company. Our future success will depend in large part upon our
ability to attract, retain and motivate highly skilled
employees. We cannot be certain that we will be able to do so.
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Any acquisitions that we make could disrupt our business
and harm our financial condition. |
From time to time, we evaluate potential strategic acquisitions
of complementary businesses, products or technologies, as well
as consider joint ventures and other collaborative projects. We
may not be able to identify appropriate acquisition candidates
or strategic partners, or successfully negotiate, finance or
integrate any businesses, products or technologies that we
acquire. We do not have any experience with acquiring companies
or products. Any acquisition we pursue could diminish the
proceeds from this offering available to us for other uses or be
dilutive to our stockholders, and could divert management’s
time and resources from our core operations.
Risks Related to Our Relationship with El.En.
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El.En. will continue to have substantial control over us
after this offering and could delay or prevent a change of
control. |
Even after this offering, El.En., our largest stockholder, will
be able to control the election of a majority of the members of
our board of directors. Immediately prior to this offering,
El.En. held 78% of our outstanding common stock. Immediately
following this offering, El.En. will
own %
of our outstanding class B common stock, which will
comprise %
of our aggregate outstanding common stock,
or %
of our aggregate outstanding common stock if the underwriters
exercise their over-allotment right in full. Until El.En.
beneficially owns less than 20% of the aggregate number of
shares of our class A common stock and class B common
stock outstanding or less than 50% of the number of shares of
our class B common stock outstanding, El.En., as holder of
a majority of the shares of our class B common stock, will
have the right:
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to elect a majority of the members of our board of directors; |
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to approve amendments to our bylaws adopted by our
stockholders; and |
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to approve amendments to any provisions of our restated
certificate of incorporation relating to the rights of holders
of common stock, the powers, election and classification of the
board of directors, corporate opportunities and the rights of
holders of class A common stock and class B common
stock to elect and remove directors, act by written consent and
call special meetings of stockholders. |
In addition, the holders of shares of our class B common
stock will vote with our class A stockholders for the
election of the remaining directors. Because El.En. will be able
to control the election of a majority of our board, and because
of its substantial holdings of our capital stock, El.En. will
likely have the ability to delay or prevent a change of control
of
our company that may be favored by other directors or
stockholders and otherwise exercise substantial control over all
corporate actions requiring board or stockholder approval.
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We currently depend on El.En. for our Cynergy PL,
PhotoLight, PhotoSilk Plus and TriActive LaserDermology
products. If our distribution agreements with El.En. terminate,
we will no longer be able to sell these products, and our
business will be harmed. |
El.En. manufactures and owns the intellectual property rights to
the
Cynergy PL, PhotoLight, PhotoSilk Plus and
TriActive LaserDermology products. We distribute these
products pursuant to distribution agreements we have with El.En.
These agreements provide us with exclusive worldwide
distribution rights for our
Cynergy PL product, and
exclusive North American distribution rights for our
PhotoLight, PhotoSilk and
TriActive LaserDermology
products. For the six months ended
June 30, 2005, we
derived 6% of our revenues from our distribution relationship
with El.En., and for the year ended
December 31, 2004, we
derived 4% of our revenues from this relationship. Although we
have distribution rights for the
PhotoLight, PhotoSilk Plus,
Cynergy PL and
TriActive LaserDermology products
during the terms of the agreements, El.En. may discontinue
production of these products at any time and must make
reasonable efforts to provide one year’s notice to us prior
to such discontinuation. Additionally, El.En. may not be able or
willing to provide these products to us after the expiration of
those agreements. El.En. may change the prices that we pay for
these products on 30 days’ notice to us. Additionally,
El.En. may terminate the distribution agreement for the
PhotoLight, PhotoSilk Plus and
TriActive
LaserDermology systems if we do not meet annual minimum
purchase obligations specified in the agreements. If El.En.
ceases production of these products, is unable or unwilling to
sell these products to us after the expiration of the
distribution agreements, terminates the agreements or increases
the prices that we pay for the products, we may not be able to
replace them with similar products in a timely manner or on
comparable terms, and our business could be adversely affected.
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El.En. and its subsidiaries market and sell products that
compete with our products, and any competition by 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.
Although we have exclusive North American distribution rights
for our
PhotoLight, PhotoSilk Plus and
TriActive
LaserDermology products, El.En. may compete with us in North
America with its other products. In the event that our
distribution agreements with El.En. terminate, El.En. may
compete with us in North America with these products. El.En.
markets, sells, promotes and licenses products that compete with
our products outside of North America. El.En. has significantly
greater financial, technical and human resources than we have
and is better equipped to research, develop, manufacture and
commercialize products. In addition, El.En. has more extensive
experience in light-based technologies. Our business could be
materially and adversely affected by competition from El.En.
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Conflicts of interest may arise between us and El.En., and
these conflicts might ultimately be resolved in a manner
unfavorable to us. |
For financial reporting purposes, our financial results are
included in El.En.’s consolidated financial statements. Two
of our directors,
Andrea Cangioli and
Gabriele Clementi, and the
spouse of one of our directors,
Leonardo Masotti, are also
officers or directors of El.En. These three directors own or
have an interest in substantial amounts of El.En. stock.
Ownership interests of our directors in El.En. stock, or service
as a director of
our company while at the same time serving as,
or being the spouse of, a director or officer of El.En., could
give rise to conflicts of interest when a director or officer is
faced with a decision that could have different implications for
the two companies. Conflicts may arise with respect to possible
future distribution and research and development arrangements
with El.En. or another El.En. affiliated company in which the
terms and conditions of the arrangements are subject to
negotiation between us and El.En. or such other El.En.
affiliated company. These potential conflicts could also arise,
for example, over matters such as:
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the nature, timing, marketing, distribution and price of our
products and El.En.’s products that compete with each other; |
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intellectual property matters; and |
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business opportunities that may be attractive to both El.En. and
us. |
In order to address potential conflicts of interest between us
and El.En., upon completion of this offering, our restated
certificate of incorporation will contain provisions regulating
and defining the conduct of our affairs as they may involve
El.En. and El.En. affiliated companies and El.En.’s
officers and directors who serve as our directors. These
provisions recognize that we and El.En. and El.En. affiliated
companies engage and may continue to engage in the same or
similar business activities and lines of business and will
continue to have contractual and business relations with each
other. These provisions expressly permit El.En. and its
affiliated companies to compete against us and narrowly limit
corporate opportunities that El.En. or its directors or officers
who serve as our directors must make available to us.
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Our class A share price may decline because of future
sales of our shares by El.En. |
After completion of this offering, El.En. may sell all or part
of the shares of our class B common stock that it owns, at
which time those shares would automatically convert into shares
of our class A common stock. El.En. is not subject to any
contractual obligation to maintain its ownership position in our
shares, except that it has agreed with the underwriters for this
offering that, without the prior written consent of Citigroup
Global Markets Inc., the lead-managing underwriter of this
offering, it will not sell or otherwise dispose of any shares of
our common stock for a period of 24 months after the date
of this prospectus, other than:
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up to 33% of the shares of our common stock that it beneficially
owned on the date of this prospectus during the period between
12 and 18 months after the date of this prospectus; and |
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up to an additional 33% of the shares of our common stock that
it beneficially owned on the date of this prospectus during the
period between 18 and 24 months after the date of this
prospectus. |
Consequently, El.En. may not maintain its ownership of our
common stock following this offering. Sales by El.En. of
substantial amounts of our common stock in the public market
could adversely affect prevailing market prices for our
class A common stock.
Risks Related to Intellectual Property
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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. These 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 interference proceedings declared by the
United States 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
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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.
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A third party has asserted that we need a license to its
patents in order for us to continue selling many of our
products. |
On
July 2, 2004, Palomar Medical Technologies, Inc. sent us
a letter proposing to enter into negotiations with us regarding
the grant of a nonexclusive license under specified United
States and
foreign patents owned or licensed by Palomar with
respect to our
Apogee Elite, Apogee 5500,
PhotoLight and
Acclaim 7000 products, and
also with respect to our
SmartEpil II product, which
we no longer offer. In subsequent letters from Palomar dated
September 14, 2004 and
March 24, 2005, Palomar
reiterated its willingness to negotiate a license under these
patents and, in its
March 24, 2005 letter, stated that it
continues to believe that we need a license under these patents
for each of the products listed in the
July 2, 2004 letter,
as well as for our
PhotoSilk, PhotoSilk Plus, Cynergy,
Cynergy PL and
Cynergy III systems. We have not
entered into negotiations with Palomar with respect to such a
license.
In February 2002, Palomar filed a lawsuit against one of our
competitors, Cutera, Inc., alleging that by making, using,
selling or offering for sale its hair removal products, Cutera
willfully and deliberately infringed one of the patents that
Palomar has asserted against us in its letters to us. This
litigation between Palomar and Cutera is ongoing. Palomar may
also bring suit against us claiming that some or all of our
products violate patents owned or licensed by Palomar.
Litigation is unpredictable, and we may not prevail in
successfully defending or asserting our position. If Palomar
takes legal action against us, and if we do not prevail, we may
be ordered to pay substantial damages for past sales and an
ongoing royalty for future sales of products found to infringe
Palomar’s patents or we could be ordered to stop selling
any products that are found to infringe Palomar’s patents.
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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 a variety of patents and
patent applications in the United States and corresponding
patents and patent applications in many foreign jurisdictions.
To date, however, our patent estate has not stopped other
companies from competing against us, and we do not know how
successful we would be should we choose to assert 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 will be advantageous to us. Even if issued,
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.
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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, particularly
with respect to our Alexandrite and pulse dye lasers. 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
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If we fail to obtain and maintain necessary U.S. Food
and Drug Administration clearances for our products and
indications or if clearances for future products and indications
are delayed or not issued, our business would be harmed. |
Our products are classified as medical devices and are subject
to extensive regulation in the United States by the Food and
Drug Administration, or FDA, and other federal, state and local
authorities. These regulations relate to manufacturing,
labeling, sale, promotion, distribution, importing and exporting
and shipping of our products. In the United States, before we
can market a new medical device, or a new use of, or claim for,
an existing product, we must first receive either 510(k)
clearance or premarket approval from the FDA, unless an
exemption applies. Both of these processes can be expensive and
lengthy and entail significant user fees, unless exempt. The
FDA’s 510(k) clearance process usually takes from three to
12 months, but it can last longer. The process of obtaining
premarket approval is much more costly and uncertain than the
510(k) clearance process. It generally takes from one to three
years, or even longer, from the time the premarket approval
application is submitted to the FDA until an approval is
obtained.
In order to obtain premarket approval and, in some cases, a
510(k) clearance, a product sponsor must conduct well controlled
clinical trials designed to test the safety and effectiveness of
the product. Conducting clinical trials generally entails a
long, expensive and uncertain process that is subject to delays
and failure at any stage. The data obtained from clinical trials
may be inadequate to support approval or clearance of a
submission. In addition, the occurrence of unexpected findings
in connection with clinical trials may prevent or delay
obtaining approval or clearance. If we conduct clinical trials,
they may be delayed or halted, or be inadequate to support
approval or clearance, for numerous reasons, including:
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FDA, other regulatory authorities or an institutional review
board may place a clinical trial on hold; |
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patients may not enroll in clinical trials, or patient follow-up
may not occur, at the rate we expect; |
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patients may not comply with trial protocols; |
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institutional review boards and third party clinical
investigators may delay or reject our trial protocol; |
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third party clinical investigators may decline to participate in
a trial or may not perform a trial on our anticipated schedule
or consistent with the clinical trial protocol, good clinical
practices, or other FDA requirements; |
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third party organizations may not perform data collection and
analysis in a timely or accurate manner; |
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regulatory inspections of our clinical trials or manufacturing
facilities may, among other things, require us to undertake
corrective action or suspend or terminate our clinical trials,
or invalidate our clinical trials; |
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changes in governmental regulations or administrative
actions; and |
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the interim or final results of the clinical trials may be
inconclusive or unfavorable as to safety or effectiveness. |
Medical devices may be marketed only for the indications for
which they are approved or cleared. The FDA may not approve or
clear indications that are necessary or desirable for successful
commercialization. Indeed, the FDA may refuse our requests for
510(k) clearance or premarket approval of new products, new
intended uses or modifications to existing products. Our
clearances can be revoked if safety or effectiveness problems
develop.
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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, our business could suffer. |
Even after clearance or approval of a product, we are subject to
continuing regulation by the FDA, including the requirements
that our facility be registered and our devices listed with the
agency. We are subject to Medical Device Reporting regulations,
which require us to report to the FDA if our products
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may have caused or contributed to a death or serious injury or
malfunction in a way that would likely cause or contribute to a
death or serious injury if the malfunction were to recur. We
must report corrections and removals to the FDA where the
correction or removal was initiated to reduce a risk to health
posed by the device or to remedy a violation of the Federal
Food, Drug, and Cosmetic Act caused by the device that may
present a risk to health, and maintain records of other
corrections or removals. The FDA closely regulates promotion and
advertising and our promotional and advertising activities could
come under scrutiny. Since 1994, we have received five untitled
letters from the FDA regarding alleged violations caused by our
promotional activities. We have responded to these letters and
the FDA has found our responses acceptable. If the FDA objects
to our promotional and advertising activities or finds that we
failed to submit reports under the Medical Device Reporting
regulations, for example, the FDA may allege our activities
resulted in violations.
The FDA and state authorities have broad enforcement powers. Our
failure to comply with applicable regulatory requirements could
result in enforcement action by the FDA or state agencies, which
may include any of the following sanctions:
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untitled letters, warning letters, fines, injunctions, consent
decrees and civil penalties; |
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repair, replacement, refunds, recall or seizure of our products; |
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operating restrictions or partial suspension or total shutdown
of production; |
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refusing or delaying our requests for 510(k) clearance or
premarket approval of new products or new intended uses; |
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withdrawing 510(k) clearance or premarket approvals that have
already been granted; and |
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criminal prosecution. |
If any of these events were to occur, they could harm our
business.
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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. It is
impossible to predict whether legislative changes will be
enacted or FDA regulations, guidance or interpretations changed,
and what the impact of such changes, if any, may be.
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We have modified some of our products without FDA
clearance. The FDA could retroactively determine that the
modifications were improper and require us to stop marketing and
recall the modified products. |
Any modifications to one of our FDA-cleared devices that could
significantly affect its safety or effectiveness, or that would
constitute a major change in its intended use, requires a new
510(k) clearance or a premarket approval. We may be required to
submit extensive pre-clinical and clinical data depending on the
nature of the changes. We may not be able to obtain additional
510(k) clearances or premarket approvals for modifications to,
or additional indications for, our existing products in a timely
fashion, or at all. Delays in obtaining future clearances or
approvals would adversely affect our ability to introduce new or
enhanced products in a timely manner, which in turn would harm
our revenue and operating results. We have made modifications to
our devices in the past and may make additional modifications in
the future that we believe do not or will not require additional
clearances or approvals. If the FDA disagrees, and requires new
clearances or approvals for the modifications, we may be
required to recall and to stop marketing the modified devices,
which could harm our operating results and require us to
redesign our products.
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If we fail to comply with the FDA’s Quality System
Regulation and laser performance standards, our manufacturing
operations could be halted, and our business would
suffer. |
We are currently required to demonstrate and maintain compliance
with the FDA’s Quality System Regulation, or QSR. The QSR
is a complex regulatory scheme that covers the methods and
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documentation of the design, testing, control, manufacturing,
labeling, quality assurance, packaging, storage and shipping of
our products. Because our products involve the use of lasers,
our products also are covered by a performance standard for
lasers set forth in FDA regulations. The laser performance
standard imposes specific record keeping, reporting, product
testing and product labeling requirements. These requirements
include affixing warning labels to laser products as well as
incorporating certain safety features in the design of laser
products. The FDA enforces the QSR and laser performance
standards through periodic unannounced inspections. We have
been, and anticipate in the future being, subject to such
inspections. Our failure to comply with the QSR or to take
satisfactory corrective action in response to an adverse QSR
inspection or our failure to comply with applicable laser
performance standards could result in enforcement actions,
including a public warning letter, a shutdown of or restrictions
on our manufacturing operations, delays in approving or clearing
a product, refusal to permit the import or export of our
products, a recall or seizure of our products, fines,
injunctions, civil or criminal penalties, or other sanctions,
such as those described in the preceding paragraphs, any of
which could cause our business and operating results to suffer.
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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 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, which is defined on a state-by-state basis. As a result,
some states permit non-physicians to legally 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. Our failure to comply with
state laws or regulations and changes in state laws or
regulations may adversely affect our business.
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We or our distributors may be unable to obtain or maintain
international regulatory qualifications or approvals for our
current or future products and indications, which could harm our
business. |
Sales of our products outside the United States are subject to
foreign regulatory requirements that vary widely from country to
country. In many countries, our third party distributors are
responsible for obtaining and maintaining regulatory approvals
for our products. We do not control our third party
distributors, and they may not be successful in obtaining or
maintaining these regulatory approvals. In addition, the FDA
regulates exports of medical devices from the United States.
Complying with international regulatory requirements can be an
expensive and time consuming process, and approval is not
certain. The time required to obtain foreign clearances or
approvals may be longer than that required for FDA clearance or
approval, and requirements for such clearances or approvals may
differ significantly from FDA requirements. Foreign regulatory
authorities may not clear or approve our products for the same
indications cleared or approved by the FDA. The foreign
regulatory approval process may include all of the risks
associated with obtaining FDA clearance or approval in addition
to other risks. Although we or our distributors have obtained
regulatory approvals in the European Union and other countries
outside the United States for many of our products, we or our
distributors may be unable to maintain regulatory
qualifications, clearances or approvals in these countries or
obtain qualifications, clearances or approvals in other
countries. For example, we are in the process of seeking
regulatory approvals from the Japanese Ministry of Health,
Labour and Welfare for the direct sale of our products into that
country. If we are not successful in doing so, our business will
be harmed. We may also incur significant costs in attempting to
obtain and in maintaining foreign regulatory clearances,
approvals or qualifications.
Foreign regulatory agencies, as well as the FDA, periodically
inspect manufacturing facilities both in the United States and
abroad. If we experience delays in receiving necessary
qualifications, clearances or approvals to market our products
outside the United States, or if we fail to receive those
qualifications, clearances or approvals, or if we fail to comply
with other foreign regulatory requirements, we and our
19
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.
|
|
|
New regulations may limit our ability to sell to
non-physicians, which could harm our business. |
Currently, we sell our products primarily to physicians and,
outside the United States, to aestheticians. In addition, we
recently began marketing our products to the growing aesthetic
spa market, where non-physicians under physician supervision
perform aesthetic procedures at dedicated facilities. However,
federal, state and international regulations could change at any
time, disallowing sales of our products to aestheticians, and
limiting the ability of aestheticians and non-physicians to
operate our products. Any limitations on our ability to sell our
products to non-physicians or on the ability of aestheticians
and non-physicians to operate our products could cause our
business and operating results to suffer.
Risks Related to the Offering
|
|
|
After this offering, El.En. will continue to have
substantial control over us. In addition, El.En. and our
executive officers and directors will maintain the ability to
control all matters submitted to stockholders for
approval. |
In addition to the factors discussed above regarding
El.En.’s ability to control the election of a majority of
the members of our board of directors, when this offering is
completed El.En. and our executive officers and directors will,
in the aggregate, beneficially own shares representing
approximately %
of our common stock. As a result, if these stockholders were to
act together, they would be able to control all matters
submitted to our stockholders for approval. For example, these
persons could control any amendment of our certificate of
incorporation and
bylaws and approval of any merger,
consolidation or sale of all or substantially all of our assets.
This concentration of voting power could delay or prevent an
acquisition of
our company on terms that other stockholders may
desire. Please also see the discussion under
“— Risks Related to Our Relationship with
El.En. — El.En. will continue to have substantial
control over us after this offering and could delay or prevent a
change of control.”
|
|
|
Provisions in our corporate charter documents and under
Delaware law may prevent or frustrate attempts by our
stockholders to change our management and hinder efforts to
acquire a controlling interest in us. |
Provisions of our
certificate of incorporation and
bylaws may
discourage, delay or prevent a merger, acquisition or other
change in control that stockholders may consider favorable,
including transactions in which you might otherwise receive a
premium for your shares. These provisions may also prevent or
frustrate attempts by our stockholders to replace or remove our
management. These provisions include:
|
|
|
| |
• |
a dual class capital structure that allows El.En. to control the
election of a majority of the members of our board of directors; |
| |
| |
• |
the classification of the members of our directors who are
elected by holders of our class A common stock and
class B common stock, voting together as a single class; |
| |
| |
• |
limitations on the removal of directors who are elected by
holders of our class A common stock and class B common
stock, voting together as a single class; |
| |
| |
• |
advance notice requirements for stockholder proposals and
nominations; |
| |
| |
• |
the inability of class A 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, and the right of the holders of shares of our
class B common stock to elect a majority of the members of
our board of directors may not be modified without the approval
of the holders of at least a majority of the shares of
20
our class B common stock outstanding. 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 and the affirmative vote of holders of at least
a majority of the shares of class B common stock
outstanding.
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.
|
|
|
If you purchase shares of our class A common stock in
this offering, you will suffer immediate and substantial
dilution of your investment. |
We expect the initial public offering price of our class A
common stock to be substantially higher than the net tangible
book value per share of our class A common stock.
Therefore, if you purchase shares of our class A common
stock in this offering, you will pay a price per share that
substantially exceeds our net tangible book value per share
after this offering. See “Dilution.”
|
|
|
An active trading market for our class A common stock
may not develop. |
Prior to this offering, there has been no public market for any
shares of our common stock. The initial public offering price
for our class A common stock will be determined through
negotiations with the underwriters. Although we have applied to
have our class A common stock quoted on The Nasdaq National
Market, an active trading market for our shares may never
develop or be sustained following this offering. If an active
market for our class A common stock does not develop, it
may be difficult to sell shares you purchase in this offering
without depressing the market price for the shares or at all.
|
|
|
Our stock price is likely to be volatile, and purchasers
of our class A common stock could incur substantial
losses. |
Our class A common stock price is likely to be volatile.
The stock market in general has experienced extreme volatility
that has often been unrelated to the operating performance of
particular companies. As a result of this volatility, investors
may not be able to sell their class A common stock at or
above the initial public offering price. 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; |
| |
| |
• |
market conditions in the our industry and issuance of new or
changed securities analysts’ reports or
recommendations; and |
| |
| |
• |
general economic, industry and market conditions. |
|
|
|
We have broad discretion in the use of our net proceeds
from this offering and may not use them effectively. |
Our management will have broad discretion in the application of
our net proceeds from this offering and could spend the proceeds
in ways that do not improve our operating results or enhance the
value of our class A common stock. The failure by our
management to apply these funds effectively could result in
financial losses that could have a material adverse effect on
our business, cause the price of our class A common stock
to decline and delay the development of our product candidates.
Pending their use, we may invest our net proceeds from this
offering in a manner that does not produce income or that loses
value.
21
|
|
|
We have never paid cash dividends on our capital stock,
and we do not anticipate paying any cash dividends in the
foreseeable future. |
We have paid no cash dividends on our capital stock to date. We
currently intend to retain our future earnings, if any, to fund
the development and growth of our business. In addition, the
terms of existing or any future debt agreements may preclude us
from paying dividends. As a result, capital appreciation, if
any, of our class A common stock will be your sole source
of gain for the foreseeable future.
|
|
|
A significant portion of our total outstanding shares are
restricted from immediate resale but may be sold into the market
in the near future. This could cause the market price of our
class A common stock to drop significantly, even if our
business is doing well. |
Sales of a substantial number of shares of our class A
common stock, including shares of our class B common stock
that have been converted into shares of our class A common
stock, in the public market could occur at any time. These
sales, or the perception in the market that the holders of a
large number of shares intend to sell shares, could reduce the
market price of our class A common stock. We also intend to
register all shares of our class A common stock that we may
issue under our employee benefit plans. Once we register these
shares, they can be freely sold in the public market upon
issuance, subject to the lock-up agreements described in
“Underwriting.”
22
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. All statements, other than
statements of historical facts, included in this prospectus
regarding our strategy, future operations, future financial
position, future revenues, projected costs, prospects, plans,
objectives of management and expected market growth are
forward-looking statements. The words “anticipate,”
“believe,” “estimate,” “expect,”
“intend,” “may,” “plan,”
“predict,” “project,” “will,”
“would” and similar expressions are intended to
identify forward-looking statements, although not all
forward-looking statements contain these identifying words.
These forward-looking statements include, among other things,
statements about:
|
|
|
| |
• |
our ability to identify and penetrate new markets for our
products and technology; |
| |
| |
• |
our ability to innovate, develop and commercialize new products; |
| |
| |
• |
our ability to obtain and maintain regulatory clearances; |
| |
| |
• |
our sales and marketing capabilities and strategy in the United
States and internationally; |
| |
| |
• |
our intellectual property portfolio; and |
| |
| |
• |
our estimates regarding expenses, future revenues, capital
requirements and needs for additional financing. |
We may not actually achieve the plans, intentions or
expectations disclosed in our forward-looking statements, and
you should not place undue reliance on our forward-looking
statements. Actual results or events could differ materially
from the plans, intentions and expectations disclosed in the
forward-looking statements we make. We have included important
factors in the cautionary statements included in this
prospectus, particularly in the “Risk Factors”
section, that could cause actual results or events to differ
materially from the forward-looking statements that we make.
You should read this prospectus and the documents that we have
filed as exhibits to the registration statement, of which this
prospectus is a part, completely and with the understanding that
our actual future results may be materially different from what
we expect. We do not assume any obligation to update any
forward-looking statements.
23
USE OF PROCEEDS
We estimate that we will receive approximately
$ million
in net proceeds from this offering, or approximately
$ million
if the underwriters exercise their over-allotment option in
full, based upon an assumed initial public offering price of
$ per
share, after deducting underwriting discounts and commissions
and estimated offering expenses payable by us.
We estimate that we will use:
|
|
|
| |
• |
approximately
$ million
of our net proceeds to expand our sales, marketing and
distribution capabilities; and |
| |
| |
• |
approximately
$ million
of our net proceeds to fund our research and development
activities. |
We intend to use the remainder of our net proceeds for general
corporate purposes. We may use a portion of our net proceeds to
acquire complementary products, technologies or businesses. We
currently have no agreements or commitments to complete any such
transactions. The amounts and timing of our actual expenditures
may vary significantly depending upon numerous factors,
including our future revenues and cash generated by operations.
Accordingly, we will retain broad discretion in the allocation
of our net proceeds of this offering.
Pending use of our net proceeds from this offering, we intend to
invest the proceeds in a variety of capital preservation
investments, including short-term, investment-grade,
interest-bearing instruments.
We will not receive any proceeds from the sale of shares of
class A common stock offered by El.En.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital
stock. We currently intend to retain all of our future earnings
to finance the growth and development of our business. We do not
anticipate paying cash dividends to our stockholders in the
foreseeable future.
24
CAPITALIZATION
The following table sets forth our capitalization as of
June 30, 2005:
|
|
|
| |
• |
on an actual basis; and |
| |
| |
• |
on an as adjusted basis to give effect to: |
|
|
|
| |
• |
the filing of our restated certificate of incorporation prior to
the completion of this offering; |
| |
| |
• |
the reclassification and conversion of our outstanding shares of
common stock into shares of class B common stock on a one
for one basis; and |
| |
| |
• |
the sale
of shares
of class A common stock in this offering at an assumed
initial public offering price of
$ per
share, after deducting underwriting discounts and commissions
and estimated offering expenses payable by us. |
You should read this table together with our financial
statements and the related notes appearing at the end of this
prospectus and the “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
section of this prospectus.
| |
|
|
|
|
|
|
|
|
|
|
| |
|
As of June 30, 2005 | |
| |
|
| |
| |
|
Actual | |
|
As Adjusted | |
| |
|
| |
|
| |
| |
|
(In thousands, except | |
| |
|
share data) | |
| |
|
(Unaudited) | |
|
Cash and cash equivalents
|
|
$ |
3,198 |
|
|
$ |
|
|
| |
|
|
|
|
|
|
|
Capital lease obligation, net of current portion
|
|
|
761 |
|
|
|
761 |
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
| |
Common stock, par value $0.01 per share;
15,000,000 shares authorized actual and no shares
authorized as adjusted; 6,242,877 shares outstanding actual
and no shares outstanding as adjusted
|
|
|
63 |
|
|
|
— |
|
| |
Class A common stock, par value $0.001 per share; no
shares authorized actual, 61,500,000 shares authorized as
adjusted; no shares outstanding actual
and shares
outstanding as adjusted
|
|
|
— |
|
|
|
|
|
| |
Class B common stock, par value $0.001 per share; no
shares authorized actual, 8,500,000 shares authorized as
adjusted; no shares outstanding actual
and shares
outstanding as adjusted
|
|
|
— |
|
|
|
|
|
| |
Preferred stock, par value $0.001 per share; no shares
authorized actual, 5,000,000 shares authorized as adjusted;
no shares outstanding actual and no shares outstanding as
adjusted
|
|
|
— |
|
|
|
— |
|
|
Additional paid-in capital
|
|
|
14,885 |
|
|
|
|
|
|
Retained earnings
|
|
|
2,834 |
|
|
|
2,834 |
|
|
Deferred stock-based compensation
|
|
|
(1,637 |
) |
|
|
(1,637 |
) |
|
Accumulated other comprehensive loss
|
|
|
(585 |
) |
|
|
(585 |
) |
|
Treasury stock, 36,136 shares, at cost
|
|
|
(287 |
) |
|
|
(287 |
) |
| |
|
|
|
|
|
|
| |
|
Total stockholders’ equity
|
|
|
15,273 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
16,034 |
|
|
$ |
|
|
| |
|
|
|
|
|
|
The number of shares in the table above excludes:
|
|
|
| |
• |
1,862,642 shares of class B common stock issuable upon
the exercise of stock options outstanding as of June 30,
2005 at a weighted average exercise price of $3.31 per
share; and |
| |
| |
• |
541,342 shares of class A common stock reserved for
future issuance under our equity compensation plans as of the
date of this prospectus. |
25
DILUTION
If you invest in our class A common stock, your interest
will be diluted immediately to the extent of the difference
between the initial public offering price per share of our
class A common stock and the net tangible book value per
share of our class A and class B common stock after
this offering.
Our actual net tangible book value as of
June 30, 2005 was
$15.0 million, or $2.40 per share of class A and
class B common stock. Net tangible book value per share
represents the amount of our total tangible assets less total
liabilities, divided by the number of shares of class A and
class B common stock outstanding.
After giving effect to the issuance and sale by us of
the shares
of class A common stock in this offering, at an assumed
initial public offering price of
$ per
share, less the underwriting discounts and commissions and
estimated offering expenses payable by us, our net tangible book
value as of
June 30, 2005 would have been
$ ,
or
$ per
share of class A and class B common stock. This
represents an immediate increase in net tangible book value per
share of
$ to
existing stockholders and immediate dilution of
$ per
share to new investors purchasing shares in this offering.
Dilution per share to new investors is determined by subtracting
the net tangible book value per share after this offering from
the initial public offering price per share paid by a new
investor. The following table illustrates the per share dilution
without giving effect to the over-allotment option granted to
the underwriters:
| |
|
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share of class A
common stock
|
|
|
|
|
|
$ |
|
|
| |
|
|
$ |
2.40 |
|
|
|
|
|
| |
Increase in net tangible book value per share attributable to
new investors
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Adjusted net tangible book value per share after the offering
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$ |
|
|
| |
|
|
|
|
|
|
If the underwriters exercise their over-allotment option in
full, our net tangible book value will increase to
$ per
share, representing an immediate increase to existing
stockholders of
$ per
share and an immediate dilution of
$ per
share to new investors. If any shares are issued in connection
with outstanding options, you will experience further dilution.
The following table summarizes as of
June 30, 2005 the
number of shares of class A common stock purchased or to be
purchased from us, the total consideration paid or to be paid
and the average price per share paid by El.En., other existing
stockholders and by new investors in this offering, before
deducting underwriting discounts and commissions and estimated
offering expenses payable by us.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total Shares | |
|
Total Consideration | |
|
Average Price | |
| |
|
| |
|
| |
|
| |
| |
|
Number | |
|
% | |
|
Amount | |
|
% | |
|
Per Share | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
El.En.(1)
|
|
|
612,959 |
|
|
|
|
% |
|
$ |
1,793,920 |
|
|
|
|
% |
|
$ |
2.93 |
|
|
Other existing stockholders(2)
|
|
|
5,629,918 |
|
|
|
|
|
|
|
10,516,447 |
|
|
|
|
|
|
|
1.87 |
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Totals
|
|
|
|
|
|
|
100 |
% |
|
|
|
|
|
|
100 |
% |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Excludes an aggregate of 4,275,669 shares purchased
by El.En. from other stockholders at a weighted-average purchase
price of $3.29 per share. El.En. currently holds, including
shares purchased directly from us and shares purchased from
other stockholders, a total of 4,888,628 at a weighted-average
purchase price of $3.25 per share. |
| |
| (2) |
Includes 4,275,669 shares purchased from us by other
stockholders and sold to El.En. by other stockholders as
described in Note 1 above. |
The table above is based on shares outstanding as of
June 30, 2005 and excludes:
|
|
|
| |
• |
1,862,642 shares of class B common stock issuable upon
the exercise of stock options outstanding as of June 30,
2005 at a weighted average exercise price of $3.31 per
share; and |
26
|
|
|
| |
• |
541,342 shares of class A common stock reserved for
future issuance under our equity compensation plans as of the
date of this prospectus. |
If the underwriters’ over-allotment option is exercised in
full, the following will occur:
|
|
|
| |
• |
the percentage of shares of class A and class B common
stock held by existing stockholders will decrease to
approximately % of the total
number of shares of our class A and class B common
stock outstanding after this offering; and |
| |
| |
• |
the number of shares held by new investors will increase
to ,
or
approximately %,
of the total number of shares of our class A and
class B common stock outstanding after this offering. |
27
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial
data in conjunction with our consolidated financial statements
and the related notes appearing at the end of this prospectus
and the
“Management’s Discussion and Analysis of
Financial Condition and Results of Operations” section of
this prospectus. We have derived the consolidated statement of
operations data for the years ended
December 31, 2002,
2003
and
2004 and the consolidated balance sheet data as of
December 31, 2003 and
2004 from our audited consolidated
financial statements, which are included elsewhere in this
prospectus. We have derived the consolidated statement of
operations data for the years ended
December 31, 2000 and
2001 and the consolidated balance sheet data as of
December 31, 2000,
2001 and
2002 from our audited
consolidated financial statements, which are not included in
this prospectus. We have derived the unaudited consolidated
statement of operations data for the six months ended
June 30, 2004 and
2005 and the unaudited consolidated
balance sheet data as of
June 30, 2005 from our unaudited
consolidated financial statements, which are included in this
prospectus. The unaudited selected consolidated financial
statement data include, in our opinion, all adjustments,
consisting only of normal recurring adjustments, that are
necessary for a fair presentation of our financial position and
results of operations for these periods. Our historical results
for any prior period are not necessarily indicative of results
to be expected for any future period.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Six Months Ended | |
| |
|
Year Ended December 31, | |
|
June 30, | |
| |
|
| |
|
| |
| |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
23,602 |
|
|
$ |
22,389 |
|
|
$ |
21,678 |
|
|
$ |
25,525 |
|
|
$ |
40,364 |
|
|
$ |
17,902 |
|
|
$ |
25,080 |
|
|
Revenues from related party
|
|
|
193 |
|
|
|
677 |
|
|
|
1,284 |
|
|
|
1,600 |
|
|
|
1,269 |
|
|
|
1,269 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total revenues
|
|
|
23,795 |
|
|
|
23,066 |
|
|
|
22,962 |
|
|
|
27,125 |
|
|
|
41,633 |
|
|
|
19,171 |
|
|
|
25,080 |
|
|
Cost of revenues
|
|
|
10,989 |
|
|
|
12,158 |
|
|
|
13,198 |
|
|
|
14,207 |
|
|
|
20,465 |
|
|
|
9,721 |
|
|
|
11,632 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,806 |
|
|
|
10,908 |
|
|
|
9,764 |
|
|
|
12,918 |
|
|
|
21,168 |
|
|
|
9,450 |
|
|
|
13,448 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing
|
|
|
6,446 |
|
|
|
7,007 |
|
|
|
5,777 |
|
|
|
8,720 |
|
|
|
12,590 |
|
|
|
5,762 |
|
|
|
8,048 |
|
| |
Research and development
|
|
|
3,179 |
|
|
|
3,216 |
|
|
|
2,379 |
|
|
|
2,481 |
|
|
|
3,139 |
|
|
|
1,406 |
|
|
|
1,523 |
|
| |
General and administrative
|
|
|
2,888 |
|
|
|
4,496 |
|
|
|
3,979 |
|
|
|
3,766 |
|
|
|
4,092 |
|
|
|
1,899 |
|
|
|
2,364 |
|
| |
Stock-based compensation
|
|
|
19 |
|
|
|
— |
|
|
|
— |
|
|
|
76 |
|
|
|
136 |
|
|
|
89 |
|
|
|
245 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,532 |
|
|
|
14,719 |
|
|
|
12,135 |
|
|
|
15,043 |
|
|
|
19,957 |
|
|
|
9,156 |
|
|
|
12,180 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
274 |
|
|
|
(3,811 |
) |
|
|
(2,371 |
) |
|
|
(2,125 |
) |
|
|
1,211 |
|
|
|
294 |
|
|
|
1,268 |
|
|
Interest income (expense), net
|
|
|
149 |
|
|
|
40 |
|
|
|
(25 |
) |
|
|
(62 |
) |
|
|
(122 |
) |
|
|
(71 |
) |
|
|
(45 |
) |
|
Gain on sale of investment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,019 |
|
|
|
3,019 |
|
|
|
— |
|
|
Other (expense) income, net
|
|
|
(644 |
) |
|
|
(1,417 |
) |
|
|
298 |
|
|
|
1,822 |
|
|
|
976 |
|
|
|
493 |
|
|
|
(281 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before (benefit) provision for income taxes and
minority interest
|
|
|
(221 |
) |
|
|
(5,188 |
) |
|
|
(2,098 |
) |
|
|
(365 |
) |
|
|
5,084 |
|
|
|
3,735 |
|
|
|
942 |
|
|
(Benefit) provision for income taxes
|
|
|
(13 |
) |
|
|
779 |
|
|
|
(301 |
) |
|
|
72 |
|
|
|
(276 |
) |
|
|
97 |
|
|
|
383 |
|
|
Minority interest in net income of subsidiary
|
|
|
— |
|
|
|
48 |
|
|
|
70 |
|
|
|
63 |
|
|
|
64 |
|
|
|
27 |
|
|
|
35 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(208 |
) |
|
$ |
(6,015 |
) |
|
$ |
(1,867 |
) |
|
$ |
(500 |
) |
|
$ |
5,296 |
|
|
$ |
3,611 |
|
|
$ |
524 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
$ |
(0.04 |
) |
|
$ |
(1.25 |
) |
|
$ |
(0.35 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.93 |
|
|
$ |
0.65 |
|
|
$ |
0.08 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share
|
|
$ |
(0.04 |
) |
|
$ |
(1.25 |
) |
|
$ |
(0.35 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.92 |
|
|
$ |
0.65 |
|
|
$ |
0.07 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
4,802 |
|
|
|
4,808 |
|
|
|
5,272 |
|
|
|
5,530 |
|
|
|
5,700 |
|
|
|
5,530 |
|
|
|
6,226 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
4,802 |
|
|
|
4,808 |
|
|
|
5,272 |
|
|
|
5,530 |
|
|
|
5,773 |
|
|
|
5,530 |
|
|
|
7,234 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, | |
|
|
| |
|
| |
|
As of June 30, | |
| |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
1,854 |
|
|
$ |
473 |
|
|
$ |
3,290 |
|
|
$ |
2,111 |
|
|
$ |
4,028 |
|
|
$ |
3,198 |
|
|
Working capital
|
|
|
11,128 |
|
|
|
5,439 |
|
|
|
6,262 |
|
|
|
4,572 |
|
|
|
10,678 |
|
|
|
11,416 |
|
|
Total assets
|
|
|
18,379 |
|
|
|
14,548 |
|
|
|
15,979 |
|
|
|
18,228 |
|
|
|
28,001 |
|
|
|
30,649 |
|
|
Capital lease obligation, net of current portion
|
|
|
63 |
|
|
|
328 |
|
|
|
123 |
|
|
|
81 |
|
|
|
476 |
|
|
|
761 |
|
|
Retained earnings (deficit)
|
|
|
5,007 |
|
|
|
(619 |
) |
|
|
(2,486 |
) |
|
|
(2,986 |
) |
|
|
2,310 |
|
|
|
2,834 |
|
|
Total stockholders’ equity
|
|
|
13,200 |
|
|
|
7,679 |
|
|
|
7,890 |
|
|
|
7,288 |
|
|
|
14,640 |
|
|
|
15,273 |
|
29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our
financial condition and results of operations together with our
financial statements and the related notes and other financial
data included elsewhere in this prospectus. Some of the
information contained in this discussion and analysis or set
forth elsewhere in this prospectus, including information with
respect to our plans and strategy for our business, includes
forward-looking statements that involve risks and uncertainties.
You should review the “Risk Factors” section of this
prospectus for a discussion of important factors that could
cause actual results to differ materially from the results
described in or implied by the forward-looking statements
contained in the following discussion and analysis.
Company Overview
We develop and market aesthetic treatment systems used by
physicians and other practitioners that incorporate laser and
light-based energy sources. As of
June 30, 2005, we had
sold more than 4,500 aesthetic treatment systems worldwide.
We were incorporated in July 1991. In 2002, El.En. S.p.A., an
Italian company that itself and through
subsidiaries develops
and markets laser systems for medical and industrial
applications, acquired a majority of our capital stock. In
September 2003, we recruited a new management team that has
implemented a comprehensive reorganization of
our company,
including:
|
|
|
| |
• |
redesigning many of our existing products; |
| |
| |
• |
introducing innovative new products and technologies; |
| |
| |
• |
streamlining and rationalizing our manufacturing processes; |
| |
| |
• |
reorganizing and expanding our research and development, sales
and marketing and distribution capabilities; and |
| |
| |
• |
enhancing our customer service network. |
Since the beginning of 2004, we have introduced 10 new aesthetic
treatment systems, including our four flagship products:
|
|
|
| |
• |
the Apogee Elite system, our flagship product for hair
removal, in March 2004; |
| |
| |
• |
the Cynergy system, our flagship product for the
treatment of vascular lesions, in February 2005; |
| |
| |
• |
the PhotoSilk Plus system, our flagship product for skin
rejuvenation through the treatment of shallow vascular lesions
and pigmented lesions, in February 2005; and |
| |
| |
• |
the TriActive LaserDermology system, our flagship product
for the temporary reduction of the appearance of cellulite, in
February 2004. |
As a result of our product development efforts, we incurred
increased research and development expenses in absolute dollars,
although not as a percentage of revenues, during each of 2003
and 2004.
We have expanded our direct sales and marketing organization
from 22 employees as of
September 30, 2003 to
53 employees as of
June 30, 2005. In addition, we have
expanded our distribution relationships and had
19 distributors covering 31 countries as of
June 30, 2005. In January 2005, we launched a separate
CynosureSpa brand with product offerings, tailored
marketing and sales personnel focused exclusively on the
aesthetic spa market. As a result of these activities, we
incurred increased sales and marketing expenses in absolute
dollars, although not as a percentage of revenues, during each
of 2003 and 2004.
We recently redesigned or introduced a number of our products,
including our Apogee, Cynergy, Acclaim and VStar
product families, so that they are built in a modular
fashion using fewer components. We began shipping these
redesigned products in the second quarter of 2005. We believe
that this new
30
approach allows our platform technology to be easily
upgradeable, increases the scalability and efficiency of our
production process and facilitates improvements in field service
diagnosis and repair. We expect that the new modular design of
these products will reduce our direct labor and inventory costs
and result in lower cost of revenues as a percentage of revenues.
In November 2000, we purchased a 20% equity interest, which we
subsequently increased to 40%, in Sona MedSpa, an operator and
franchisor of spa franchises. Also in November 2000, we entered
into a supply and revenue sharing arrangement with Sona MedSpa
pursuant to which we provided our aesthetic treatment systems to
Sona MedSpa and its franchisees and received a share of their
revenues from procedures using our products. We also guaranteed
the lease obligations for two facilities operated by Sona
MedSpa. In May 2004, we sold our equity interest in Sona MedSpa
to third parties and also sold to Sona MedSpa a portion of the
aesthetic treatment systems previously provided by us under the
supply and revenue sharing arrangement. We recognized a gain of
$3.0 million from the sale of our equity interest and an
additional $1.2 million in revenue from the sale of the
systems to Sona MedSpa in connection with the transaction. Also
in May 2004, we entered into an amended supply and revenue
sharing arrangement with Sona MedSpa pursuant to which we
continue to sell systems to Sona MedSpa and its franchisees and
receive a share of their revenues from procedures using our
systems. During the period in which we held our equity interest
in Sona MedSpa, we accounted for our investment using the equity
method of accounting and recognized our share of Sona
MedSpa’s income or loss as a component of other income
(expense). We recognized other expense of $0.2 million in
2002 for our share of Sona MedSpa’s loss and recognized
other income of $0.7 million in 2003 and $0.2 million
in 2004 for our share of Sona MedSpa’s income.
We also sell our lasers on an original equipment manufacturer
basis to third parties with whom we collaborate in connection
with surgical uses of our laser products. In addition, until
2004, we had a distributor relationship with El.En. pursuant to
which we sold a veterinary laser product in the United States
supplied by El.En.
Financial Operations Overview
Revenues
We generate revenues primarily from sales of our products and
parts and accessories and, to a lesser extent, from services,
including product warranty revenues, and from our revenue
sharing arrangement with Sona MedSpa. In 2004, we derived
approximately 87% of our revenues from sales of our products, 6%
of our revenues from service and 7% of our revenues from our
revenue sharing arrangement. For the six months ended
June 30, 2005, we derived approximately 90% of our revenues
from sales of our products, 6% of our revenues from service and
4% of our revenues from our revenue sharing arrangement.
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, revenues from service in the period in which the service
occurs and revenues from our revenue sharing arrangement in the
period the procedures are performed.
We sell our products directly in North America, four European
countries, Japan and China and use distributors to sell our
products in other countries where we do not have a direct
presence. For the year ended
December 31, 2004, we derived
45%, and for the six months ended
June 30, 2005 we derived
43%, of our revenues from sales of our products outside North
America. As of
June 30, 2005, we had 27 sales
employees in North America, 11 sales employees in four
European countries, Japan and China and
31
distributors in 31 countries. The following table provides
revenue data by geographical region for the year ended
December 31, 2004 and the six months ended
June 30,
2005:
| |
|
|
|
|
|
|
|
|
|
| |
|
Percentage of Revenues | |
| |
|
| |
| |
|
Year Ended | |
|
Six Months Ended | |
| Region |
|
December 31, 2004 | |
|
June 30, 2005 | |
| |
|
| |
|
| |
|
North America
|
|
|
55 |
% |
|
|
57 |
% |
|
Europe
|
|
|
24 |
|
|
|
24 |
|
|
Asia/ Pacific
|
|
|
16 |
|
|
|
13 |
|
|
Other
|
|
|
5 |
|
|
|
6 |
|
| |
|
|
|
|
|
|
| |
Total
|
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
|
|
|
|
See Note 3 to our consolidated financial statements
included in this prospectus for revenues and asset data by
geographic region.
Our cost of revenues consists primarily of material, labor and
manufacturing overhead expenses and includes the cost of
components and subassemblies supplied by third party suppliers.
Cost of revenues also includes service and warranty expenses, as
well as salaries and personnel-related expenses for our
operations management team, purchasing and quality control.
|
|
|
Sales and Marketing Expenses |
Our sales and marketing expenses consist primarily of salaries,
commissions and other personnel-related expenses for employees
engaged in sales, marketing and support of our products, trade
show, promotional and public relations expenses and management
and administration expenses in support of sales and marketing.
We expect our sales and marketing expenses to increase in
absolute dollars, though we do not expect them to increase
significantly as a percentage of revenues, as we expand our
sales, marketing and distribution capabilities.
|
|
|
Research and Development Expenses |
Our research and development expenses consist of salaries and
other personnel-related expenses for employees primarily engaged
in research, development and engineering activities and
materials used and other overhead expenses incurred in
connection with the design and development of our products. We
expense all of our research and development costs as incurred.
We expect our research and development expenditures to increase
in absolute dollars, though we do not expect them to increase
significantly as a percentage of revenues, as we continue to
devote resources to research and develop new products and
technologies.
|
|
|
General and Administrative Expenses |
Our general and administrative expenses consist primarily of
salaries and other personnel-related expenses for executive,
accounting and administrative personnel, professional fees and
other general corporate expenses. We expect our general and
administrative expenses to increase in absolute dollars and as a
percentage of revenues as a result of our becoming a public
company.
Our stock-based compensation consists of expenses related to
stock-based awards to employees and non-employees. We currently
account for our stock-based awards to employees using the
intrinsic-value method. Under the intrinsic-value method,
compensation expense is measured on the date of grant as the
difference between the deemed fair market value of our common
stock for accounting purposes and the option exercise price
multiplied by the number of options granted. In May 2005, we
recorded $1.7 million
32
of deferred stock-based compensation in connection with options
granted at that time, which we are amortizing over the vesting
periods of the options. Stock-based awards to non-employees are
currently expensed under the fair value method using the
Black-Scholes option pricing model. We expect to adopt
SFAS 123(R) in the first quarter of fiscal 2006, which will
require us to expense all stock-based awards under the fair
value method.
Interest expense consists primarily of interest due on
short-term indebtedness owed to El.En. and with respect to
capitalized leases.
|
|
|
Provision for Income Taxes |
As of
December 31, 2004, we had federal tax credits of
$0.4 million and state tax credits of $0.5 million to
offset future tax liability and state net operating losses of
approximately $3.1 million to offset future taxable income.
If not utilized, these credit carryforwards will expire at
various dates through 2019, and the net operating losses will
expire at various dates through 2024. In addition, the future
utilization of our net operating loss carryforwards may be
limited based upon changes in ownership pursuant to regulations
promulgated under the Internal Revenue Code. We also had foreign
net operating losses of approximately $2.6 million
available to reduce future foreign income taxes, which will
expire at various times beginning in 2005.
Results of Operations
The following table contains selected unaudited statement of
operations data, which serves as the basis of the discussion of
our results of operations for the six months ended
June 30,
2004 and
2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Change | |
| |
|
Six Months Ended | |
|
Six Months Ended | |
|
2004 Period to | |
| |
|
June 30, 2004 | |
|
June 30, 2005 | |
|
2005 Period | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
As a % of | |
|
|
|
As a % of | |
|
$ | |
|
% | |
| |
|
Amount | |
|
Revenues | |
|
Amount | |
|
Revenues | |
|
Change | |
|
Change | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except for percentages) | |
|
Revenues
|
|
$ |
19,171 |
|
|
|
100 |
% |
|
$ |
25,080 |
|
|
|
100 |
% |
|
$ |
5,909 |
|
|
|
31 |
% |
|
Cost of revenues
|
|
|
9,721 |
|
|
|
51 |
|
|
|
11,632 |
|
|
|
46 |
|
|
|
1,911 |
|
|
|
20 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,450 |
|
|
|
49 |
|
|
|
13,448 |
|
|
|
54 |
|
|
|
3,998 |
|
|
|
42 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing
|
|
|
5,762 |
|
|
|
30 |
|
|
|
8,048 |
|
|
|
32 |
|
|
|
2,286 |
|
|
|
40 |
|
| |
Research and development
|
|
|
1,406 |
|
|
|
7 |
|
|
|
1,523 |
|
|
|
6 |
|
|
|
117 |
|
|
|
8 |
|
| |
General and administrative
|
|
|
1,899 |
|
|
|
10 |
|
|
|
2,364 |
|
|
|
9 |
|
|
|
465 |
|
|
|
24 |
|
| |
Stock-based compensation
|
|
|
89 |
|
|
|
— |
|
|
|
245 |
|
|
|
1 |
|
|
|
156 |
|
|
|
175 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,156 |
|
|
|
48 |
|
|
|
12,180 |
|
|
|
48 |
|
|
|
3,024 |
|
|
|
33 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
294 |
|
|
|
2 |
|
|
|
1,268 |
|
|
|
5 |
|
|
|
974 |
|
|
|
331 |
|
|
Interest expense, net
|
|
|
(71 |
) |
|
|
— |
|
|
|
(45 |
) |
|
|
— |
|
|
|
(26 |
) |
|
|
(37 |
) |
|
Gain on sale of investment
|
|
|
3,019 |
|
|
|
16 |
|
|
|
— |
|
|
|
— |
|
|
|
(3,019 |
) |
|
|
(100 |
) |
|
Other income (expense), net
|
|
|
493 |
|
|
|
3 |
|
|
|
(281 |
) |
|
|
(1 |
) |
|
|
(774 |
) |
|
|
(157 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes and minority interest
|
|
|
3,735 |
|
|
|
20 |
|
|
|
942 |
|
|
|
4 |
|
|
|
(2,793 |
) |
|
|
(75 |
) |
|
Provision for income taxes
|
|
|
97 |
|
|
|
1 |
|
|
|
383 |
|
|
|
2 |
|
|
|
286 |
|
|
|
294 |
|
|
Minority interest in net income of subsidiary
|
|
|
27 |
|
|
|
— |
|
|
|
35 |
|
|
|
— |
|
|
|
8 |
|
|
|
30 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
3,611 |
|
|
|
19 |
% |
|
$ |
524 |
|
|
|
2 |
% |
|
$ |
(3,087 |
) |
|
|
(85 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Total revenues for the six months ended
June 30, 2004
included $1.3 million of revenues from related party. For
purposes of the following discussion, we refer to revenues and
revenues from related party on a combined basis. Revenues in the
six months ended
June 30, 2005 exceeded revenues in the
same period of 2004 by $5.9 million, or 31%. The increase
in revenues was attributable to a number of factors:
|
|
|
| |
• |
Revenues from the sale of products in North America increased
$5.8 million, or 105%, to $11.3 million in the first
six months of 2005 as compared to $5.5 million in the first
six months of 2004. The increase was attributable to an increase
in the number of product units sold and a higher average selling
price due to a favorable change in product mix. The increase in
North American revenues resulted in part from the reorganization
and expansion of our North American sales organization,
including the hiring of 12 additional direct sales employees
between June 30, 2004 and 2005. The increase also resulted
from the introduction of new products, particularly our
Apogee Elite system at the end of the first quarter of
2004. Revenues from sales of products introduced in 2004 totaled
$9.8 million, or 87%, of total North American product
revenues in the first six months of 2005. |
| |
| |
• |
Revenues from sales of products outside of North America
increased $2.0 million, or 32%, to $8.2 million in the
first six months of 2005 as compared to $6.2 million in the
same period in 2004. The increase was mainly attributable to an
increase in sales in Europe of $1.8 million, or 54%, over
the same period in 2004, resulting from a favorable change in
product mix and our increased focus on direct selling, for which
we receive higher average selling prices as compared to sales
through distributors, including the opening of our direct sales
office in Spain in the second half of 2004. |
| |
| |
• |
Revenues from original equipment manufacturer and other
relationships and our revenue sharing arrangement decreased
$2.1 million, or 50%, to $2.1 million in the first six
months of 2005 as compared to $4.2 million in the same
period in 2004. The decrease was mainly attributable to
non-recurring revenues of $1.2 million from the purchase of
aesthetic treatment systems by Sona MedSpa in May 2004 in
connection with the sale of our equity interest in Sona MedSpa,
and a $0.7 million decrease in sales of a product we
distributed that was supplied by El.En. in 2004 but that we did
not distribute in 2005. |
| |
| |
• |
Revenues from the sale of parts and accessories and services
increased $0.1 million, or 3%, to $3.4 million in the
first six months of 2005 as compared to $3.3 million in the
first six months of 2004. The increase was primarily
attributable to an increase of revenues generated from service
contracts. |
Cost of revenues increased $1.9 million, or 20%, to
$11.6 million in the first six months of 2005, as compared
to $9.7 million in the same period in 2004. The increase in
the cost of revenues was primarily attributable to an increase
in direct labor, overhead and material costs associated with
increased sales of our products. Our cost of revenues decreased
as a percentage of revenues to 46% in the first six months of
2005 from 51% in the first six months of 2004, resulting in an
increase in our gross margin of 5% between the two periods. The
improved margin resulted from higher average selling prices of
our products due to a favorable change in product mix, in part
as a result of the introduction of our
Apogee Elite
system in the first quarter of 2004, as well as increased
direct sales in North America and increased direct sales in
Europe, for which we receive higher average selling prices as
compared to sales through distributors. In the first six months
of 2005, we derived 57% of our international product revenues
from direct sales by us or our
subsidiaries compared to 50% of
our international product revenues in the same period in 2004.
We derived all of our North American product revenues from
direct sales.
34
Sales and marketing expenses increased $2.3 million, or
40%, to $8.0 million in the first six months of 2005, as
compared to $5.8 million in the same period in 2004. The
increase was primarily attributable to an increase of
$1.4 million in personnel costs and travel expenses
associated with the expansion of our North American direct sales
organization and $0.2 million in personnel costs and travel
expenses associated with our international
subsidiaries.
Promotional costs increased $0.3 million, primarily due to
our increased number of clinical workshops, trade shows and
promotional efforts. As a percentage of revenues, sales and
marketing expenses increased to 32% for the first six months of
2005 from 30% in the same period in 2004.
Research and development expenses remained relatively flat,
increasing by $0.1 million, or 8%, to $1.5 million in
the first six months of 2005, as compared to $1.4 million
in the same period in 2004. In the first six months of 2005, our
research and development expenses were attributable to project
research costs and product engineering expenses related to the
introduction of our new Cynergy system in the first
quarter of 2005 and ongoing development of new products. In the
first six months of 2004, our research and development expenses
were attributable to project research costs and product
engineering expenses related to the introduction of our new
Apogee Elite, Apogee 5500 NL and Acclaim 7000 NL
products in the first quarter of 2004 and our ongoing
development of new products. As a percentage of revenues,
research and development expenses decreased to 6% in the first
six months of 2005 from 7% in the same period in 2004.
|
|
|
General and Administrative |
General and administrative expenses increased $0.5 million,
or 24%, to $2.4 million in the first six months of 2005
from $1.9 million in the same period in 2004. The increase
was primarily attributable to a $0.2 million increase in
our international
subsidiaries’ administrative expenses in
connection with our opening an office in Spain in the second
half of 2004, as well as a $0.1 million increase in legal
expenses associated with patent filing costs. As a percentage of
revenues, general and administrative expenses decreased to 9% in
the first six months of 2005 from 10% in the same period in 2004.
Stock-based compensation related to employee stock-based awards
was $53,000 in the first six months of 2005 compared to $89,000
in the first six months of 2004. We expect amortization of
deferred stock-based compensation to be approximately
$0.2 million for the remainder of 2005. Stock-based
compensation related to non-employee option grants was
$0.2 million in the first six months of 2005.
|
|
|
Interest Expense, net; Gain on Sale of Investment and
Other Income (Expense), net |
Interest expense decreased to $45,000 in the first six months of
2005 from $71,000 in the same period in 2004. The decrease
resulted from a reduction in short-term notes payable for the
2005 period. In the first six months of 2004, we recorded a gain
of $3.0 million on the sale of our 40% equity interest in
Sona MedSpa. We had no similar gain in the 2005 period. Other
income (expense) decreased to $0.3 million in expense in
the first six months of 2005 from $0.5 million in income in
the same period in 2004. The decrease was partially attributable
to an increase in foreign currency transaction losses of
$0.5 million and to a $0.2 million decrease in our
equity interest in Sona MedSpa for the first six months of 2005
as compared to the same period in 2004 as a result of the sale
of such interest partially offset by $0.3 million that we
realized in the first six months of 2004 in connection with a
settlement with an insurer.
|
|
|
(Benefit) Provision for Income Taxes |
In the first six months of 2005, we recorded an income tax
provision of $0.4 million, reflecting an effective tax rate
of 41%. In the first six months of 2004, we recorded an income
tax provision of $97,000,
35
reflecting an effective tax rate of 3%. The increase in our
effective income tax rate was primarily due to a reduction in
our valuation allowance in 2004 on our U.S. federal net
operating loss carryforwards. In 2004, we utilized all of our
available U.S. federal net operating loss carryforwards. As
a result, we had no U.S. federal net operating loss
carryforwards available to utilize against our 2005 taxable
income, which resulted in a higher effective tax rate in 2005.
The following table contains selected statement of operations
data, which serves as the basis of the discussion of our results
of operations for the years ended
December 31, 2003 and
2004 (in thousands, except for percentages):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
|
Change | |
| |
|
December 31, 2003 | |
|
December 31, 2004 | |
|
2003 to 2004 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
As a % of | |
|
|
|
As a % of | |
|
$ | |
|
% | |
| |
|
Amount | |
|
Revenues | |
|
Amount | |
|
Revenues | |
|
Change | |
|
Change | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
$ |
27,125 |
|
|
|
100 |
% |
|
$ |
41,633 |
|
|
|
100 |
% |
|
$ |
14,508 |
|
|
|
53 |
% |
|
Cost of revenues
|
|
|
14,207 |
|
|
|
52 |
|
|
|
20,465 |
|
|
|
49 |
|
|
|
6,258 |
|
|
|
44 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,918 |
|
|
|
48 |
|
|
|
21,168 |
|
|
|
51 |
|
|
|
8,250 |
|
|
|
64 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing
|
|
|
8,720 |
|
|
|
32 |
|
|
|
12,590 |
|
|
|
30 |
|
|
|
3,870 |
|
|
|
44 |
|
| |
Research and development
|
|
|
2,481 |
|
|
|
9 |
|
|
|
3,139 |
|
|
|
8 |
|
|
|
658 |
|
|
|
27 |
|
| |
General and administrative
|
|
|
3,766 |
|
|
|
14 |
|
|
|
4,092 |
|
|
|
10 |
|
|
|
326 |
|
|
|
9 |
|
| |
Stock-based compensation
|
|
|
76 |
|
|
|
— |
|
|
|
136 |
|
|
|
— |
|
|
|
60 |
|
|
|
79 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
15,043 |
|
|
|
55 |
|
|
|
19,957 |
|
|
|
48 |
|
|
|
4,914 |
|
|
|
33 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(2,125 |
) |
|
|
(8 |
) |
|
|
1,211 |
|
|
|
3 |
|
|
|
3,336 |
|
|
|
157 |
|
|
Interest expense, net
|
|
|
(62 |
) |
|
|
— |
|
|
|
(122 |
) |
|
|
— |
|
|
|
(60 |
) |
|
|
(97 |
) |
|
Gain on sale of investment
|
|
|
— |
|
|
|
— |
|
|
|
3,019 |
|
|
|
7 |
|
|
|
3,019 |
|
|
|
— |
|
|
Other income, net
|
|
|
1,822 |
|
|
|
7 |
|
|
|
976 |
|
|
|
2 |
|
|
|
(846 |
) |
|
|
(46 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision (benefit) for income taxes and
minority interest
|
|
|
(365 |
) |
|
|
(1 |
) |
|
|
5,084 |
|
|
|
12 |
|
|
|
5,449 |
|
|
|
1,493 |
|
|
Provision (benefit) for income taxes
|
|
|
72 |
|
|
|
— |
|
|
|
(276 |
) |
|
|
(1 |
) |
|
|
(348 |
) |
|
|
(483 |
) |
|
Minority interest in net income of subsidiary
|
|
|
63 |
|
|
|
— |
|
|
|
64 |
|
|
|
— |
|
|
|
1 |
|
|
|
2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(500 |
) |
|
|
(2 |
)% |
|
$ |
5,296 |
|
|
|
13 |
% |
|
$ |
5,796 |
|
|
|
1,159 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for the year ended
December 31, 2003
included $1.6 million, and for the year ended
December 31, 2004 included $1.3 million, of revenues
from related party. For purposes of the following discussion, we
refer to revenues and revenues from related party on a combined
basis. Revenues in 2004 exceeded revenues in 2003 by
$14.5 million, or 53%. The increase in revenues was
attributable to a number of factors:
|
|
|
| |
• |
Revenues from the sale of products in North America increased
$6.2 million, or 86%, to $13.4 million in 2004 as
compared to $7.2 million in 2003. The increase was
attributable to an increase in the number of products sold and a
higher average selling price due to a favorable change in
product mix. The increase in North American revenues resulted in
part from the reorganization and expansion of our North American
sales organization, including the hiring of new sales management
and 10 additional direct sales employees between November 2003
and the end of 2004. The increase also resulted from the
introduction of new products, particularly our Apogee |
36
|
|
|
| |
|
Elite system at the end of the first quarter of 2004.
Revenues from sales of products introduced in 2004 totaled
$9.8 million, or 74%, of total North American product
revenues in 2004. |
| |
| |
• |
Revenues from sales of products outside of North America
increased $2.4 million, or 20.7%, to $14.0 million in
2004 as compared to $11.6 million in 2003. The increase was
primarily attributable to an increase in sales in Europe of
$3.3 million, or 65%, over 2003, resulting from our
introduction of new products and our increased focus on direct
selling in 2004, for which we receive higher average selling
prices as compared to sales through distributors, partially
offset by a $1.0 million decrease in revenues from product
sales in the Asia/ Pacific region, which was primarily
attributable to the discontinuation of a product distributed in
the region. |
| |
| |
• |
Revenues from original equipment manufacturer and other
relationships and our revenue sharing arrangement increased
$4.8 million, or 200%, to $7.2 million in 2004 as
compared to $2.4 million in 2003. The increase was mainly
attributable to a $3.6 million increase in revenues from
our revenue sharing arrangement with Sona MedSpa, reflecting
growth in Sona MedSpa’s business, a different revenue
sharing formula in the amended supply and revenue sharing
arrangement entered into in May 2004 and non-recurring
revenues of $1.2 million from the purchase of aesthetic
treatment systems by Sona MedSpa in May 2004 in connection
with the sale of our equity interest in Sona MedSpa, and a
$0.9 million increase in sales of a product we formerly
distributed supplied by El.En. in 2003 and 2004. |
| |
| |
• |
Revenues from the sale of parts and accessories and services
increased $1.1 million, or 20%, to $6.7 million in
2004 as compared to $5.6 million in 2003. The increase was
primarily attributable to an increase in revenues generated from
service contracts, reflecting increased service contract
marketing efforts by us. |
Cost of Revenues
Cost of revenues increased $6.3 million in 2004, or 44%, to
$20.5 million as compared to $14.2 million in 2003.
The increase in cost of revenues was primarily attributable to
an increase in direct labor, overhead and material costs
associated with increased sales of our products. Our cost of
revenues decreased as a percentage of revenues to 49% in 2004
from 52% in 2003, resulting in an increase in our gross margin
of 3% between the two periods. The improved margin resulted from
higher average selling prices of our products due to a favorable
change in product mix, in part as a result of the introduction
of our
Apogee Elite system in the first quarter of 2004,
as well as increased direct sales in North America and Europe,
from which we receive higher average selling prices as compared
to sales through distributors. In 2004, we derived 63% of our
international product revenues from direct sales by us or our
subsidiaries compared to 52% of our international product
revenues in the same period in 2003. We derived all of our North
American product revenues from direct sales.
Sales and Marketing
Sales and marketing expenses increased $3.9 million, or
44%, to $12.6 million in 2004, as compared to
$8.7 million in 2003. The increase was attributable to an
increase of $1.9 million in personnel costs and travel
expenses associated with the expansion of our North American
direct sales organization, an increase of $0.9 million in
personnel costs and travel expenses associated with our
international
subsidiaries and an increase of $0.5 million
in clinical research expenses. Promotional costs increased
$0.7 million, primarily due to our increased number of
clinical workshops, trade shows and promotional efforts,
including product launch expenses incurred in connection with
the introduction of our
Apogee Elite,
Apogee 5500 NL, Acclaim 7000 NL and
TriActive LaserDermology systems in early 2004. As a
percentage of revenues, sales and marketing expenses decreased
to 30% in 2004 from 32% in 2003.
Research and
Development
Research and development expenses increased $0.7 million,
or 27%, to $3.1 million in 2004 as compared to
$2.5 million in 2003. The increase was primarily
attributable to expenses related to the
37
development and introduction of our Apogee Elite,
Apogee 5500 NL and
Acclaim 7000 NL systems in 2004 and the
development of our Cynergy and Cynergy III
systems that were introduced in 2005. In 2003, our research and
development expenses were attributable to project research costs
and product engineering expenses related to the introduction of
our Apogee 5500 and Acclaim 7000
products that were introduced in 2003 and the development of our
Apogee Elite, Apogee 5500 NL and Acclaim
7000 NL products which were introduced in 2004. As a
percentage of revenues, research and development expenses
decreased to 8% in 2004 from 9% in 2003.
General and
Administrative
General and administrative expenses increased $0.3 million,
or 9%, to $4.1 million in 2004 as compared to
$3.8 million in 2003. The increase was attributable to a
$0.2 million increase in audit expenses and a
$0.1 million increase in consulting expenses relating to
our reorganization by the new management team. As a percentage
of revenues, general and administrative expenses decreased to
10% in 2004 from 14% in 2003.
Stock-Based
Compensation
In connection with employee stock purchase rights granted under
our 2003 Stock Compensation Plan, we recorded stock-based
compensation of $0.1 million in 2004 and $76,000 in 2003.
The 2003 Stock Compensation Plan terminated on
December 31,
2004 and we do not expect any additional stock-based
compensation related to this plan.
Interest Expense, net; Gain
on Sale of Investment and Other Income (Expense), net
Interest expense increased to $0.1 million in 2004 from
$62,000 in 2003. The increase resulted from an increase in
short-term notes payable for the 2004 period. Gain on sale of
investment was $3.0 million in 2004; we did not record a
similar gain in 2003. The gain on sale of investment in 2004
resulted from the non-recurring sale of our equity interest in
Sona MedSpa. Other income, net decreased to $1.0 million in
income in 2004 from $1.8 million in income in 2003. The
decrease is attributable to the $0.6 million decrease in
our equity interest in Sona MedSpa in 2004 as compared to 2003,
reflecting the sale of such interest in May 2004, combined
with a $0.5 million decrease in foreign currency
transaction gains, partially offset by $0.3 million
realized in connection with a settlement with an insurer.
(Benefit) Provision for
Income Taxes
During 2004, we recorded an income tax benefit of
$0.3 million compared to an income tax provision of $72,000
recorded in 2003. The increase in our income tax benefit was due
to the receipt of $0.5 million of refund claims in the
second half of 2004, which was recorded as an income tax
benefit, partially offset by an increase in the proportion of
our taxable income from foreign locations for which we did not
have available loss carryforwards in 2004 as compared to 2003.
We did not apply for or receive any refund claims in 2003.
38
The following table contains selected statement of operations
data, which serves as the basis of the discussion of our results
of operations for the years ended
December 31, 2002 and
2003 (in thousands, except for percentages):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
Year Ended | |
|
Change | |
| |
|
December 31, 2002 | |
|
December 31, 2003 | |
|
2002 to 2003 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
As a % of | |
|
|
|
As a % of | |
|
$ | |
|
% | |
| |
|
Amount | |
|
Revenues | |
|
Amount | |
|
Revenues | |
|
Change | |
|
Change | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
$ |
22,962 |
|
|
|
100 |
% |
|
$ |
27,125 |
|
|
|
100 |
% |
|
$ |
4,163 |
|
|
|
18 |
% |
|
Cost of revenues
|
|
|
13,198 |
|
|
|
57 |
|
|
|
14,207 |
|
|
|
52 |
|
|
|
1,009 |
|
|
|
8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,764 |
|
|
|
43 |
|
|
|
12,918 |
|
|
|
48 |
|
|
|
3,154 |
|
|
|
32 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales and marketing
|
|
|
5,777 |
|
|
|
25 |
|
|
|
8,720 |
|
|
|
32 |
|
|
|
2,943 |
|
|
|
51 |
|
| |
Research and development
|
|
|
2,379 |
|
|
|
11 |
|
|
|
2,481 |
|
|
|
9 |
|
|
|
102 |
|
|
|
4 |
|
| |
General and administrative
|
|
|
3,979 |
|
|
|
17 |
|
|
|
3,766 |
|
|
|
14 |
|
|
|
(213 |
) |
|
|
(5 |
) |
| |
Stock-based compensation
|
|
|
— |
|
|
|
— |
|
|
|
76 |
|
|
|
— |
|
|
|
76 |
|
|
|
100 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,135 |
|
|
|
53 |
|
|
|
15,043 |
|
|
|
55 |
|
|
|
2,908 |
|
|
|
24 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,371 |
) |
|
|
(10 |
) |
|
|
(2,125 |
) |
|
|
(8 |
) |
|
|
246 |
|
|
|
10 |
|
|
Interest expense, net
|
|
|
(25 |
) |
|
|
— |
|
|
|
(62 |
) |
|
|
— |
|
|
|
(37 |
) |
|
|
(148 |
) |
|
Other income, net
|
|
|
298 |
|
|
|
1 |
|
|
|
1,822 |
|
|
|
7 |
|
|
|
1,524 |
|
|
|
511 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before (benefit) provision for income taxes and minority
interest
|
|
|
(2,098 |
) |
|
|
(9 |
) |
|
|
(365 |
) |
|
|
(1 |
) |
|
|
1,733 |
|
|
|
83 |
|
|
(Benefit) provision for income taxes
|
|
|
(301 |
) |
|
|
(1 |
) |
|
|
72 |
|
|
|
— |
|
|
|
373 |
|
|
|
(124 |
) |
|
Minority interest in net income of subsidiary
|
|
|
70 |
|
|
|
— |
|
|
|
63 |
|
|
|
— |
|
|
|
(7 |
) |
|
|
(10 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(1,867 |
) |
|
|
(8 |
)% |
|
$ |
(500 |
) |
|
|
(2 |
)% |
|
$ |
1,367 |
|
|
|
73 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for the year ended
December 31, 2002
included $1.3 million, and for the year ended
December 31, 2003 included $1.6 million, of revenues
from related party. For purposes of the following discussion, we
refer to revenues and revenues from related party on a combined
basis. Revenues in 2003 exceeded revenues in 2002 by
$4.2 million, or 18%. The increase in revenues was
attributable to a number of factors:
|
|
|
| |
• |
Revenues from the sale of products in North America increased
$1.9 million, or 36%, to $7.2 million in 2003 as
compared to $5.3 million in 2002. The increase was
primarily attributable to an increase in sales of new products
introduced in 2003 of $1.3 million, including our
Photolight, Apogee 5500 and Acclaim 7000
systems. The increase also resulted from the hiring of eight
additional direct sales employees in North America in the second
half of 2003. |
| |
| |
• |
Revenues from sales of products outside of North America
increased $1.6 million, or 16%, to $11.9 million in
2003 as compared to $10.3 million in 2002. The increase was
primarily attributable to an increase in sales in Europe of
$2.0 million, or 64%, over 2002, resulting from our
increased focus on direct selling in 2003, for which we receive
higher average selling prices as compared to sales through
distributors, partially offset by a $0.8 million decrease
in revenues from product sales in the Asia/ Pacific region
resulting from the termination of a distributor relationship in
the region. |
| |
| |
• |
Revenues from original equipment manufacturer and other
relationships and our revenue sharing arrangement increased
$0.7 million, or 41%, to $2.4 million in 2003 as
compared to $1.7 million in |
39
|
|
|
| |
|
2002. The increase was attributable to a $0.3 million
increase in revenues attributable to our revenue sharing
arrangement with Sona MedSpa and a $0.3 million increase in
sales of a product we formerly distributed supplied by El.En. in
2002 and 2003. |
| |
| |
• |
Revenues from the sale of parts and accessories and services
increased $0.3 million, or 6%, to $5.6 million in 2003
as compared to $5.3 million in 2002. The increase was
attributable to an increase of $0.9 million in revenues
generated from parts sales, partially offset by a
$0.6 million decrease in revenues generated from service
contracts. |
Cost of revenues increased $1.0 million in 2003, or 8%, to
$14.2 million as compared to $13.2 million in 2002.
The increase in the cost of revenues was primarily attributable
to an increase in direct labor, overhead and material costs
associated with increased sales of our products. Our cost of
revenues decreased as a percentage of revenues to 52% in 2003
from 57% in 2002, resulting in an increase in our gross margin
of 5% between the two periods. The improved margin resulted from
higher average selling prices of our products due to a favorable
change in product mix, in part as a result of the introduction
of our
Photolight, Apogee 5500 and
Acclaim 7000 systems in 2003, an increased gross
profit contribution resulting from an increase in parts sales in
2003 as well as increased direct sales in North America, from
which we receive a higher average selling price as compared to
sales through distributors. In 2003, we derived 52% of our
international product revenues derived from direct sales by us
or our
subsidiaries compared to 43% of our international product
revenues in 2002. We derived all of our North American product
revenues from direct sales.
Sales and marketing expenses increased $2.9 million, or
51%, to $8.7 million in 2003, as compared to
$5.8 million in 2002. Of the increase, $1.6 million
was attributable to the expansion of our international sales,
marketing and customer service organization and
$0.7 million was attributable to an increase in personnel
costs and travel expenses in North America. Promotional costs
increased $0.3 million, primarily due to our increased
number of clinical workshops and trade shows. As a percentage of
revenues, sales and marketing expenses increased to 32% in 2003
from 25% in 2002.
Research and development expenses remained relatively flat,
increasing by $0.1 million, or 4%, to $2.5 million in
2003 as compared to $2.4 million in 2002. In 2003, our
research and development expenses were attributable to project
research costs and product engineering expenses related to the
introduction of our Apogee 5500 and
Acclaim 7000 systems and the development of our
Apogee Elite, Apogee 5500 NL and
Acclaim 7000 NL systems that were introduced in
2004. In 2002, our research and development expenses were
attributable to project research costs and product engineering
expenses related to the development of our
Apogee 5500 and Acclaim 7000 systems
that were introduced in 2003. As a percentage of revenues,
research and development expenses decreased to 9% in 2003 from
11% in 2002.
|
|
|
General and Administrative |
General and administrative expenses decreased $0.2 million,
or 5%, to $3.8 million in 2003 as compared to
$4.0 million in 2002. The decrease was primarily
attributable to costs incurred in 2002 related to El.En.’s
purchase of a majority of our outstanding common stock. As a
percentage of revenues, general and administrative expenses
decreased to 14% in 2003 from 17% in 2002.
In 2003, we recorded stock-based compensation of $76,000 in
connection with employee stock purchase rights granted under the
2003 Stock Compensation Plan. The 2003 Stock Compensation Plan
40
terminated on
December 31, 2004 and we do not expect any
additional stock-based compensation related to this plan. We did
not record any stock-based compensation charges in 2002.
|
|
|
Interest Expense, net and Other Income (Expense),
net |
Interest expense increased to $62,000 in 2003 from $25,000 in
2002. The increase resulted from an increase in short-term notes
payable for the 2003 period. Other income increased by
$1.5 million, or 511%, to $1.8 million in 2003 as
compared to $0.3 million in 2002. The increase was
attributable to the $0.9 million increase in our equity
interest in Sona MedSpa in 2003 as compared to 2002, combined
with a $0.6 million increase in foreign currency
transaction gains.
|
|
|
(Benefit) Provision for Income Taxes |
During 2003, we recorded an income tax provision of $72,000.
During 2002, we recorded an income tax benefit of
$0.3 million. The decrease in provision for income taxes is
primarily due to the receipt of $0.4 million of carryback
claims from a refund in 2002.
Liquidity and Capital Resources
We require cash to pay our operating expenses, make capital
expenditures and pay our long-term liabilities. Since our
inception, we have funded our operations through private
placements of equity securities, short-term borrowings and funds
generated from our operations. From inception through
June 30, 2005, we had received net proceeds of
$12.3 million from the issuance of shares of common stock.
At
June 30, 2005, our cash and cash equivalents were
$3.2 million as compared to $4.0 million at
December 31, 2004 and $2.1 million at
December 31, 2003. Our cash and cash equivalents are highly
liquid investments with maturity of 90 days or less at date
of purchase and consist of time deposits and investments in
money market funds with commercial banks and financial
institutions and United States government obligations.
Net cash used in operating activities was $57,000 for the six
months ended
June 30, 2005. This resulted primarily from
net income for the period of $0.5 million, increased by
approximately $1.1 million in depreciation and stock-based
compensation expense. Net changes in working capital items
decreased cash from operating activities by approximately
$1.7 million principally related to an increase in
inventory for anticipated future sales and in preparation for
our transition to modular assembly and
contract manufacturing.
Net cash used in investing activities was $1.2 million for
the six months ended
June 30, 2005, which consisted
primarily of $1.2 million used for fixed asset purchases
and the payment of a $0.2 million security deposit relating
to the lease for our new corporate headquarters offset by the
receipt of $0.3 million released from escrow as part of the
sale of our investment in Sona MedSpa. Net cash used in
financing activities during the six months ended
June 30,
2005 was $0.1 million, principally relating to payments on
our capital lease obligations.
Net cash provided by operating activities was $1.3 million
for the year ended
December 31, 2004. This resulted
primarily from net income of $5.3 million increased by
$1.3 million in depreciation and amortization, reduced by a
$3.0 million gain from the sale of our equity interest in
Sona MedSpa and a $2.3 million decrease in working capital
primarily attributable to an increase in accounts receivables
from increased sales and inventory for anticipated future sales.
Net cash provided by investing activities was $0.3 million
for the year ended
December 31, 2004 resulting primarily
from $3.1 million in net proceeds from the sale of our
investment in Sona MedSpa, offset in large part by
$2.8 million in capital expenditures. Net cash provided by
financing activities was $0.1 million for the year ended
December 31, 2004 resulting primarily from proceeds of
$2.1 million from the sale of common stock and
$0.5 million of proceeds from a note payable to El.En.,
offset by payments of $2.0 million on short-terms loans and
payments of $0.2 million on capital lease obligations.
41
Net cash used in operating activities was $0.3 million for
the year ended
December 31, 2003. This primarily resulted
from net loss of $0.5 million and a $0.4 million
decrease in working capital primarily attributable to an
increase in accounts receivables from increased sales and
inventory for anticipated future sales, partially offset by
$1.3 million in depreciation and amortization. Net cash
used in investing activities was $1.2 million for the year
ended
December 31, 2003 and consisted of $0.9 million
in capital expenditures and $0.2 million relating to an
equity investment. Net cash provided in financing activities was
$0.7 million for the year ended
December 31, 2003 and
resulted primarily from proceeds of $1.4 million from the
sale of common stock to El.En. and $0.7 million in proceeds
from notes payable to El.En., offset by $1.3 million for
the repurchase of common stock from several minority
stockholders and payments of $0.3 million on capital lease
obligations.
We expect to generate positive cash flows from operations in the
future. Our future capital requirements depend on a number of
factors, including the rate of market acceptance of our current
and future products, the resources we devote to developing and
supporting our products and continued progress of our research
and development of new products. We expect our capital
expenditures over the next 12 months generally to be
consistent with our capital expenditures during the prior
12 months.
We believe that our net proceeds from this offering, together
with our current cash and cash equivalents and cash generated
from operations, will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures at least
through 2006. If existing cash and cash generated from
operations are insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt
securities or obtain a credit facility. The sale of additional
equity or convertible securities could result in dilution to our
stockholders. If additional funds are raised through the
issuance of debt securities, these securities could have rights
senior to those associated with our class A or class B
common stock and could contain covenants that would restrict our
operations. Any financing may not be available in amounts or on
terms acceptable to us. If we are unable to obtain required
financing, we may be required to reduce the scope of our planned
product development and marketing efforts, which could harm our
financial condition and operating results.
Our major outstanding contractual obligations relate to our
capital leases from equipment financings and our facilities
leases. In addition, we guaranteed the lease obligations for two
facilities that are operated by Sona MedSpa and will be
obligated to pay these leases if Sona MedSpa can not or does not
make the required lease payments. We have summarized in the
table below our fixed contractual cash obligations as of
June 30, 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period | |
| |
|
| |
| |
|
|
|
Less Than | |
|
One to Three | |
|
Three to | |
|
More Than | |
| |
|
Total | |
|
One Year | |
|
Years | |
|
Five Years | |
|
Five Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Capital lease obligations, including interest
|
|
$ |
1,153 |
|
|
$ |
298 |
|
|
$ |
553 |
|
|
$ |
302 |
|
|
$ |
— |
|
|
Operating leases
|
|
|
5,701 |
|
|
|
817 |
|
|
|
1,591 |
|
|
|
1,591 |
|
|
|
1,702 |
|
|
Short-term indebtedness, including interest
|
|
|
310 |
|
|
|
310 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Lease guarantees
|
|
|
386 |
|
|
|
91 |
|
|
|
165 |
|
|
|
90 |
|
|
|
40 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$ |
7,550 |
|
|
$ |
1,516 |
|
|
$ |
2,309 |
|
|
$ |
1,983 |
|
|
$ |
1,742 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off Balance Sheet Arrangements
Since inception, we have not engaged in any off balance sheet
financing activities.
Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is currently confined to our cash
and cash equivalents that have maturities of less than
90 days. We currently do not hedge interest rate exposure.
We have not used
42
derivative financial instruments for speculation or trading
purposes. Because of the short-term maturities of our cash and
cash equivalents, we do not believe that an increase in market
rates would have any significant impact on the realized value of
our investments.
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 45% of our total
international revenues for the year ended
December 31,
2004. Substantially all of the remaining 55% were sales in
euros, British pounds and Japanese yen. Since we conduct our
business in U.S. dollars, our main exposure, if any,
results from changes in the exchange rate between these
currencies and the U.S. dollar. Our functional currency is
the U.S. dollar. Our policy is to reduce exposure to
exchange rate fluctuations by having most of our assets and
liabilities, as well as most of our revenues and expenditures,
in U.S. dollars, or U.S. dollar linked. Therefore, we
believe that the potential loss that would result from an
increase or decrease in the exchange rate is immaterial to our
business and net assets.
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 below. 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.
We believe the following critical accounting policies require
significant judgment and estimates by us in the preparation of
our financial statements.
|
|
|
Revenue Recognition and Deferred Revenue |
In accordance with Staff Accounting
Bulletin No. 104, Revenue Recognition in Financial
Statements, we recognize revenue from sales of aesthetic
treatment systems and accessories when each of the following
four criteria are met:
|
|
|
| |
• |
delivery has occurred; |
| |
| |
• |
there is persuasive evidence of an agreement; |
| |
| |
• |
the fee is fixed or determinable; and |
| |
| |
• |
collection is reasonably assured. |
Revenue from the sale of service
contracts is deferred and
recognized on a straight-line basis over the
contract period as
services are provided. We are party to a revenue sharing
arrangement with an operator and franchisor of spa franchises
and recognize revenue from this arrangement in the period in
which the procedures are performed.
We defer until earned payments that we receive in advance of
product delivery or performance of services. When we enter into
arrangements with multiple elements, which may include sales of
products together with service
contracts and warranties, we
allocate revenue among the elements based on each element’s
fair value in accordance with the principles of Emerging Issues
Task Force Issue Number 00-21,
Revenue Arrangements with
Multiple Deliverables. This allocation requires us to make
estimates of fair value for each element.
43
|
|
|
Accounts Receivable and Concentration of Credit
Risk |
Our accounts receivable balance, net of allowance for doubtful
accounts, was $8.4 million as of
December 31, 2004,
compared with $5.6 million as of
December 31, 2003.
The allowance for doubtful accounts as of
December 31, 2004
and
2003 was $0.5 million. We maintain an allowance, or
reserve, for doubtful accounts based upon the aging of our
receivable balances, known collectibility issues and our
historical experience with losses. While our credit losses have
historically been within our expectations and the allowances
established, we may not continue to experience the same credit
losses that we have in the past, which could cause our
provisions for doubtful accounts to increase. We work to
mitigate bad debt exposure through our credit evaluation
policies, reasonably short payment terms and geographical
dispersion of sales. Our revenues include export sales to
foreign companies located principally in Europe, the
Asia/Pacific region and the Middle East. We obtain letters of
credit for foreign sales that we consider to be at risk.
|
|
|
Inventories and Allowance for Obsolescence |
We state all inventories at the lower of cost or market value,
determined on a first-in, first-out method. We monitor standard
costs on a monthly basis and update them annually and as
necessary to reflect changes in raw material costs and labor and
overhead rates. Our inventory balance was $9.9 million as
of
December 31, 2004, compared with $6.7 million as of
December 31, 2003. Our inventory allowances as of
December 31, 2004 and
2003 were $0.8 million. We
provide inventory allowances when conditions indicate that the
selling price could be less than cost due to physical
deterioration, usage, obsolescence, reductions in estimated
future demand and reductions in selling prices. We balance the
need to maintain strategic inventory levels with the risk of
obsolescence due to changing technology and customer demand
levels. Unfavorable changes in market conditions may result in a
need for additional inventory reserves that could adversely
impact our gross margins. Conversely, favorable changes in
demand could result in higher gross margins when we sell
products.
|
|
|
Product Warranty Costs and Provisions |
We provide a one-year parts and labor warranty on end-user sales
of our aesthetic treatment systems. Distributor sales generally
include a warranty on parts only. We estimate and provide for
future costs for initial product warranties at the time revenue
is recognized. We base product warranty costs on related
material costs, technical support labor costs and overhead. We
provide for the estimated cost of product warranties by
considering historical material, labor and overhead expenses and
applying the experience rates to the outstanding warranty period
for products sold. As we sell new products to our customers, we
must exercise considerable judgment in estimating the expected
failure rates and warranty costs. If actual product failure
rates, material usage, service delivery costs or overhead costs
differ from our estimates, we would be required to revise our
estimated warranty liability. The following table sets forth
activity in the accrued warranty account for each of the two
years ended
December 31, 2003 and
2004.
| |
|
|
|
|
|
|
|
|
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance at beginning of year
|
|
$ |
863 |
|
|
$ |
1,252 |
|
|
Charged to expense
|
|
|
1,317 |
|
|
|
1,606 |
|
|
Costs incurred
|
|
|
(928 |
) |
|
|
(1,248 |
) |
| |
|
|
|
|
|
|
|
Balance at end of year
|
|
$ |
1,252 |
|
|
$ |
1,610 |
|
| |
|
|
|
|
|
|
We have elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, or
APB 25, and related interpretations, in accounting for our
stock-based compensation plans, rather than the alternative fair
value method provided for under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation, or SFAS No. 123. In 2005, some grants of
44
stock options were made at exercise prices less than the deemed
fair value of our common stock for accounting purposes and, as a
result, we recorded deferred stock-based compensation. This
deferred stock-based compensation will be amortized to expense
over the vesting period of the stock options. In the notes to
our financial statements, we provide pro forma disclosures in
accordance with SFAS No. 123 that reflect the effect
on net (loss) income as if we had applied the fair value
provisions of SFAS No. 123. We account for
transactions in which services are received from non-employees
in exchange for equity instruments based on the fair value of
such services received or of the equity instruments issued,
whichever is more reliably measured, in accordance with
SFAS No. 123 and the Emerging Issues Task Force Issue
No. 96-18, Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services, or EITF Issue
No. 96-18.
Accounting for equity instruments granted or sold by us under
APB 25, SFAS No. 123 and EITF Issue
No. 96-18 requires fair value estimates of the equity
instrument granted or sold. If our estimates of the fair value
of these equity instruments for accounting purposes are too high
or too low, our expenses may be overstated or understated. We
estimated the fair value of the equity instruments for
accounting purposes based upon consideration of factors we
deemed to be relevant at the time. Because shares of our common
stock have not been publicly traded, market factors historically
considered in valuing stock and stock option grants include
comparative values of public companies discounted for the risk
of limited liquidity provided for in the shares we are issuing,
pricing of private sales of our common stock between unrelated
parties and the effect of certain events that have occurred
between the time of such private sales and such grants.
The fair value of our common stock for accounting purposes is
determined by our management and board of directors. In making
that determination, our management and the board of directors
draw on the knowledge of our officers and directors who have
experience with companies in the medical device sector. For
options granted in May 2005, our management and board of
directors used hindsight, the valuation implied in the sale of
our common stock to accredited investors during October and
November 2004 and our estimate of the value of our stock in a
liquid trading market to determine that the deemed fair value of
our common stock for accounting purposes was higher than the
exercise price. Because the accredited investors who purchased
shares in October and November 2004 had not previously purchased
shares of our common stock, we considered the pricing of these
sales to be a strong indicator of the fair value of our common
stock. In addition, during October and November 2004, we did not
consider an initial public offering or other liquidity event to
be likely to occur during the ensuing three to four months. This
retrospective valuation for accounting purposes, performed in
August 2005, caused us to record deferred stock-based
compensation of approximately $1.7 million during the six
months ended
June 30, 2005. We recognized $53,000 of
amortization of deferred stock-based compensation during the six
months ended
June 30, 2005. We expect to record
amortization of this deferred stock-based compensation of
$0.2 million during the remainder of 2005,
$0.4 million in each of 2006, 2007 and 2008 and
$0.2 million in 2009, subject to employee terminations.
We use the Black-Scholes option pricing model to determine the
fair value of each option grant to non-employees. The
Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, this
option pricing model requires the use of highly subjective
assumptions, including expected stock price volatility. These
assumptions reflect our best estimates, but these items involve
inherent uncertainties based on market conditions that are
generally outside of our control. If other assumptions had been
used in the current period, stock-based compensation expense
could have been materially affected. Furthermore, if we use
different assumptions in future periods, stock-based
compensation expense could be materially affected in future
years.
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes.
Under this method, we determine deferred tax assets and
liabilities based upon the differences between the financial
statement carrying amounts and the tax bases of assets and
liabilities using enacted tax rates in
45
effect for the year in which the differences are expected to
affect taxable income. The tax consequences of most events
recognized in the current year’s financial statements are
included in determining income taxes currently payable. However,
because tax laws and financial accounting standards differ in
their recognition and measurement of assets, liabilities,
equity, revenues, expenses, gains and losses, differences arise
between the amount of taxable income and pretax financial income
for a year and between the tax bases of assets or liabilities
and their reported amounts in the financial statements. Because
we assume that the reported amounts of assets and liabilities
will be recovered and settled, respectively, a difference
between the tax basis of an asset or a liability and its
reported amount in the balance sheet will result in a taxable or
a deductible amount in some future years when the related
liabilities are settled or the reported amounts of the assets
are recovered, giving rise to a deferred tax asset. We then
assess the likelihood that our deferred tax assets will be
recovered from future taxable income and, to the extent we
believe that recovery is not likely, we establish a valuation
allowance.
|
|
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Recent Accounting Pronouncements |
In December 2004, the Financial Accounting Standards Board
issued SFAS Statement No. 123 (revised 2004),
Share-Based Payment, or SFAS 123(R), which is a
revision of FASB Statement No. 123,
Accounting for
Stock-Based Compensation. SFAS 123(R) supersedes
APB 25 and amends FASB Statement No. 95,
Statement
of Cash Flows. SFAS 123(R) requires companies to
measure compensation costs for share-based payments to
employees, including stock options, at fair value and expense
such compensation over the service period beginning with the
first interim or annual period after
December 15, 2005. The
pro forma disclosures previously permitted under SFAS 123
will no longer be an alternative to financial statement
recognition. We expect to adopt SFAS 123(R) in the first
quarter of fiscal 2006. Under SFAS 123(R), companies must
determine the appropriate fair value model to be used for
valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at the
date of adoption. The transition methods include prospective and
retroactive adoption options. Management is evaluating the
requirements of SFAS 123(R) and cannot currently estimate
the future effects of adopting this new guidance.
In November 2004, the Financial Accounting Standards Board
issued SFAS Statement No. 151,
Inventory Costs, an
Amendment of Accounting Principles Board Opinion No. 43,
Chapter 4, or SFAS 151. SFAS 151 requires
that items such as idle facility expense, freight, handling
costs and wasted materials be recognized as current-period
charges rather than being included in inventory regardless of
whether the costs meet the criterion of abnormal as defined in
Accounting Principles Board Opinion No. 43. SFAS 151
is applicable for inventory costs incurred during fiscal years
beginning after
June 15, 2005. We will adopt this
pronouncement on
January 1, 2006 and we do not expect the
adoption with have a material impact on our financial condition
or results of operation.
46
BUSINESS
Overview
We develop and market aesthetic treatment systems that are used
by physicians and other practitioners to perform non-invasive
procedures to remove hair, treat vascular lesions, rejuvenate
skin through the treatment of shallow vascular lesions and
pigmented lesions and temporarily reduce the appearance of
cellulite. Our systems incorporate a broad range of laser and
other light-based energy sources, including Alexandrite, pulse
dye, Nd:Yag and diode lasers, as well as intense pulsed light.
We believe that we are one of only a few companies that
currently offer aesthetic treatment systems utilizing
Alexandrite and pulse dye lasers, which are particularly well
suited for some applications and skin types. We offer single
energy source systems as well as workstations that incorporate
two or more different types of lasers or pulsed light
technologies. We offer multiple technologies and system
alternatives at a variety of price points depending primarily on
the number and type of energy sources included in the system.
Our newer products are designed to be easily upgradeable to add
additional energy sources and handpieces, which provides our
customers with technological flexibility as they expand their
practices. As the aesthetic treatment market evolves to include
new customers, such as aesthetic spas and additional physician
specialties, we believe that our broad technology base and
tailored solutions will provide us with a competitive advantage.
We sell over 14 different aesthetic treatment systems and have
focused our development and marketing efforts on offering
leading, or flagship, products for each of the major aesthetic
procedure categories that we address. Our flagship products are:
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• |
the Apogee Elite system for hair removal; |
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• |
the Cynergy system for the treatment of vascular lesions; |
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• |
the PhotoSilk Plus system for skin rejuvenation through
the treatment of shallow vascular lesions and pigmented
lesions; and |
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• |
the TriActive LaserDermology system for the temporary
reduction of the appearance of cellulite. |
In addition to their primary applications, the Apogee Elite,
Cynergy and PhotoSilk Plus systems can each be used
by practitioners for a variety of other applications.
We sell our products through a direct sales force in North
America, four European countries, Japan and China and through
international distributors in 31 other countries. In January
2005, we launched a separate
CynosureSpa brand with
product offerings, tailored marketing and sales personnel
focused exclusively on the aesthetic spa market. As of
June 30, 2005, we had sold more than 4,500 aesthetic
treatment systems worldwide.
Our company was founded in 1991. El.En. S.p.A., an Italian
company listed on the techSTAR segment of the Italian stock
market, Borsa Italiana, that itself and through
subsidiaries
develops and markets laser systems for medical and industrial
applications, acquired a majority of our capital stock in 2002.
In September 2003, we recruited a new management team that has
implemented a comprehensive reorganization of
our company. Our
revenues have increased from $23.0 million in 2002 to
$41.6 million in 2004, a compound annual growth rate of
35%. Our revenues for the six months ended
June 30, 2005
increased 31% to $25.1 million, compared to
$19.2 million for the first six months of 2004. Our gross
profit margin improved from 43% in 2002 to 51% in 2004, and we
achieved profitability in 2004.
Industry
|
|
|
Aesthetic Market Opportunity |
Michael Moretti/Medical Insight, Inc., an aesthetic treatment
market research firm, estimates that the number of non-invasive
aesthetic treatment procedures worldwide using laser and other
light-based technologies will grow from nearly 20 million
in 2003 to over 53 million in 2008, representing a compound
47
annual growth rate of over 20%. We estimate that the worldwide
market for aesthetic treatment systems based on laser and other
light-based technologies will exceed $550 million in 2005.
We base this estimate on published market research reports,
revenue figures for public companies and our conversations with
the managements of private companies that compete in the
aesthetic treatment equipment market.
Key factors contributing to growth in the markets for aesthetic
treatment procedures and aesthetic laser equipment include:
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• |
the aging population of industrialized countries and the rising
discretionary income of the “baby boomer” demographic
segment; |
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• |
the desire of many individuals to improve their appearance; |
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• |
the development of technology that allows for safe and effective
aesthetic treatment procedures; |
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• |
the impact of managed care and reimbursement on physician
economics, which has motivated physicians to establish or expand
their elective aesthetic practices with procedures that are paid
for directly by patients; and |
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• |
reductions in cost per procedure, which has attracted a broader
base of clients and patients for aesthetic treatment procedures. |
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Expansion Into Non-Traditional Physician Customer and Spa
Markets |
Aesthetic treatment procedures that use lasers and other
light-based equipment have traditionally been performed by
dermatologists and plastic surgeons. Based on published
membership information from professional medical organizations,
there are more than 18,000 dermatologists and plastic surgeons
in the United States. More recently, a broader group of
physicians in the United States, including primary care
physicians, obstetricians, gynecologists, ophthalmologists and
ear, nose and throat specialists, have incorporated aesthetic
treatment procedures into their practices. These non-traditional
physician customers are largely motivated to offer aesthetic
procedures by the potential for a reliable revenue stream that
is unaffected by managed care and government payor reimbursement
economics. We believe that there are approximately 200,000 of
these potential customers in the United States and Canada,
representing a significant market opportunity that is only
beginning to be addressed by suppliers of lasers and other
light-based aesthetic equipment. Some physicians are electing to
open medical spas, often adjacent to their conventional office
space, where they perform aesthetic procedures in an environment
designed to feel less like a health care facility. The
International Spa Association, known as ISPA, estimates that
there were approximately 600 of these medical spas in North
America in 2004 and that the number of medical spas more than
doubled between 2002 and 2004.
An aesthetic spa market is also rapidly developing and growing
in the United States at dedicated day spa facilities and hotels
and resorts. In addition to conventional massage and cosmetic
treatments, aesthetic spas are also beginning to offer
non-invasive light-based procedures performed by spa technicians
and other non-medical professionals. ISPA estimates that there
were approximately 12,000 aesthetic spas in North America in
2004, an increase of approximately 26% from 2002. We believe
that non-traditional physician customers and spa customers
currently represent at least one-half of the North American
laser and other light-based aesthetic treatment systems market.
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The Structure of Skin and Conditions that Affect
Appearance |
The human skin consists of several layers. The epidermis is the
outer layer and contains the cells that determine pigmentation,
or skin color. The dermis is a thicker inner layer that contains
hair follicles and large and small blood vessels. Beneath the
dermis is a layer that contains subdermal fat and collagen,
which provides strength and flexibility to the skin.
48
The appearance of the skin may change over time due to a variety
of factors, including age, sun damage, circulatory changes,
deterioration of collagen and the human body’s diminished
ability to repair and renew itself. These changes include:
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• |
unwanted hair growth; |
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• |
uneven pigmentation; |
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• |
wrinkles; |
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blood vessels and veins that are visible at the skin’s
surface; and |
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• |
the appearance of cellulite. |
Changes to the skin caused by pigmentation are called pigmented
lesions and are the result of the accumulation of excess
melanin, the substance that gives skin its color. Pigmented
lesions are characterized by the brown color of melanin and
include freckles, solar lentigines, also known as sun spots or
age spots, and café au lait birthmarks. Changes to the skin
caused by abnormally large or numerous blood vessels located
under the surface of the skin are called vascular lesions.
Vascular lesions are characterized by blood vessels that are
visible through the skin or that result in a red appearance of
the skin. Vascular lesions may be superficial and shallow in the
skin or deep in the skin. Shallow vascular lesions include small
spider veins, port wine birthmarks, facial veins and rosacea, a
chronic skin condition that causes rosy coloration and acne-like
pimples on the face. Deep vascular lesions include large spider
veins and leg veins.
People with undesirable skin conditions or unwanted hair growth
often seek aesthetic treatments, including treatments using
non-invasive laser and light-based technologies.
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Non-Invasive Laser and Light-Based Aesthetic
Treatments |
A laser is a device that creates and amplifies a narrow, intense
beam of light. Lasers have been used for medical and aesthetic
applications since the 1960s. Intense pulsed light technology
was introduced in the 1990s and uses flashlamps, rather than
lasers, to generate multiple wavelengths of light with varying
pulse durations, or time intervals, over which the energy is
delivered.
By producing intense bursts of highly focused light, lasers and
other light-based technologies selectively target hair
follicles, veins or collagen in or below the dermis, as well as
cells responsible for pigmentation in the epidermis. When the
target absorbs sufficient energy, it is destroyed. The degree to
which energy is absorbed in the skin depends upon the skin
structure targeted — e.g., hair follicle or blood
vessel — and the skin type — e.g., light or
dark. Different types of lasers and other light-based
technologies are needed to effectively treat the entire spectrum
of skin types and conditions. As a result, an active aesthetic
practice may require multiple laser or other light-based systems
in order to offer treatments to its entire client base.
Different types of lasers are currently used for a wide range of
aesthetic treatments. Each type of laser operates at its own
wavelength, measured in nanometers, which corresponds to a
particular emission and color in the light spectrum. The most
common lasers used for non-invasive aesthetic treatments are:
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Pulse dye lasers — produce a yellow light that
functions at a shallow penetration depth. |
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• |
Alexandrite lasers — produce a near infrared
invisible light that functions with high power at a deep
penetration depth. |
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• |
Diode lasers — produce a near infrared
invisible light that functions at a deep penetration depth. |
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• |
Nd:Yag lasers — produce a near infrared
invisible light that functions over a wide range of penetration
depths. |
49
In addition to selecting the appropriate wavelength for a
particular application, laser and other light-based treatments
require an appropriate balance among three other parameters to
optimize safety and effectiveness for aesthetic treatments:
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• |
energy level — the amount of light emitted to heat the
target; |
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pulse duration — the time interval over which the
energy is delivered; and |
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• |
spot size — the diameter of the energy beam. |
As a result of the wide spectrum of aesthetic applications,
patient skin types and users of technology, customer purchasing
objectives for aesthetic treatment systems are diverse. We
believe that as aesthetic spas and non-traditional physician
customers play increasingly important roles as purchasers of
aesthetic treatment systems, the market for these products will
become even more diverse. Specifically, we expect that owners of
different types of aesthetic treatment practices will place
different emphases on various system attributes, such as breadth
of treatment applications, return on investment, upgradeability
and price. Accordingly, we believe that there is significant
market opportunity for a company that tailors its product
offerings to meet the needs of a wide range of market segments.
Our Solution
We offer tailored customer solutions to address the market for
non-invasive light-based aesthetic treatment applications,
including hair removal, treatment of vascular lesions, skin
rejuvenation through the treatment of shallow vascular lesions
and pigmented lesions and temporary reduction of the appearance
of cellulite. We believe our laser and other light-based systems
are reliable, user friendly and easily incorporated into both
physician practices and spas. We complement our product
offerings with comprehensive and responsive service offerings,
including assistance with training, aesthetic practice
development consultation and product maintenance. As of
June 30, 2005, we had sold more than 4,500 aesthetic
treatment systems.
We believe that the following factors enhance our market
position:
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• |
Broad Technology Base. Our products are based on a
broad range of technology and incorporate different types of
lasers, such as Alexandrite, pulse dye, Nd:Yag and diode, as
well as intense pulsed light devices. We believe we are one of a
few companies that currently offer aesthetic treatment systems
using Alexandrite and pulse dye lasers, which are particularly
well suited for some applications and skin types. The following
table provides information regarding the principal energy
sources used in laser and other light-based aesthetic treatments
that we offer and the primary application of each of these
energy sources. The table also indicates how many of the six
largest competitors in our industry we believe also offer
products using this energy source. See
“— Competition” below. We base our belief as
to the six largest competitors in our industry and their product
offerings on public company filings and information available on
company websites. |
50
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Competitive Offerings |
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Six Largest |
| Energy Source |
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Type of Light/Wavelength |
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Principal Applications |
|
Cynosure |
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Competitors |
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Pulse Dye Laser |
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Visible light (Yellow)
(585/595 nm) |
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Vascular lesions, including shallow and deep lesions
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ü |
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1 of 6 |
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Alexandrite Laser |
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Near infrared invisible light (755 nm) |
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Hair removal, particularly for light skin types
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ü |
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1 of 6 |
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Diode Laser |
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Near infrared invisible light (805/940/980 nm) |
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Hair removal, particularly for light skin types
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ü |
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3 of 6 |
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Vascular lesions, particularly shallow lesions
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Temporary reduction in the appearance of cellulite
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Nd:Yag Laser |
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Near infrared invisible light (1064 nm) |
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Hair removal, particularly for medium and dark skin types
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ü |
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5 of 6 |
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Vascular lesions, particularly deep lesions
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Intense Pulsed Light |
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Visible/Near infrared |
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Hair removal, all skin types
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ü |
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5 of 6 |
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invisible light
(400-950 nm) |
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Vascular lesions, particularly shallow lesions
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Pigmented lesions
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Temporary reduction in the appearance of cellulite
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Multiple Energy
Source Workstations
(incorporating two
or more energy
sources) |
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Multiple |
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Multiple
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ü |
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3 of 6 |
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• |
Expansive Portfolio of Aesthetic Treatment
Systems. We sell over 14 different aesthetic treatment
systems so that customers can select the product best suited to
their practice or business. Our product portfolio includes
single energy source systems as well as workstations that
incorporate two or more different types of lasers or light-based
technologies. By offering multiple technologies and system
alternatives at a variety of price points, we seek to provide
customers with tailored solutions that meet the specific needs
of their practices while providing significant flexibility in
their level of investment. |
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• |
Upgrade Paths Within Product Families. We have
designed our new products to facilitate upgrading within product
families. For example, our redesigned single energy source
Acclaim 7000 NL and Apogee 5500 NL laser systems
are each upgradeable to our Apogee Elite workstation,
which includes a combination of these two laser systems.
Similarly, our two laser Cynergy system, which is a
combination of our VStar and Acclaim 7000 NL laser
systems, is upgradeable to our Cynergy III
multi-energy source workstation through the addition of an
intense pulsed light module. We began shipping these new
upgradeable systems in mid-2005. |
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• |
Global Presence. We have offered our products in
international markets for over 14 years, with approximately
45% of our revenue generated from international markets in 2004.
We target international markets through a direct sales force in
four European countries, Japan and China and through
international distributors in 31 other countries. |
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• |
Strong Reputation Established Over 14-Year
History. We have been in the business of developing and
marketing aesthetic treatment systems for over 14 years. As
a result of this history, we believe the Cynosure brand name is
associated with a tradition of technological leadership. |
51
Our Business Strategy
Our goal is to become the worldwide leader in providing
non-invasive aesthetic treatment systems. The key elements of
our business strategy to achieve this goal are to:
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Offer a Full Range of Tailored Aesthetic
Solutions. We believe that we have one of the broadest
product portfolios in the industry, with multiple product
offerings incorporating a range of laser and light sources at
various price points across many aesthetic applications. Our
approach is designed to allow our customers to select products
that best suit their client base, practice size and the types of
treatments that they wish to offer. This allows us to address
the needs of the traditional physician customer market as well
as the growing non-traditional physician customer market. Many
of our newer products can be upgraded to systems with greater
functionality as our customers’ practices expand. |
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• |
Launch Innovative New Products and Technologies for
Emerging Non-Invasive Aesthetic Applications. Our
research and development team builds on our broad range of laser
and light-based technologies to target unmet needs in
significant aesthetic treatment markets. Since 2002, we have
introduced 11 new products. We launched the Apogee Elite
system, our flagship product for hair removal, in March 2004,
and the Cynergy system, our flagship product for the
treatment of vascular lesions, in February 2005. In addition, we
began to distribute the TriActive LaserDermology system,
our flagship product for the temporary reduction of the
appearance of cellulite, in North America in February 2004, and
the PhotoSilk Plus system, our flagship product for skin
rejuvenation through the treatment of shallow vascular lesions
and pigmented lesions, in North America in February 2005. We are
also working on new technologies for other emerging aesthetic
applications, such as tattoo removal and acne. |
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• |
Pursue Spa Market with Dedicated Organization. We
believe that the aesthetic spa market’s emergence and
growth presents a significant sales opportunity for us. In
January 2005, we launched our separate CynosureSpa brand
with tailored marketing and sales personnel focused exclusively
on penetrating the aesthetic spa market. We have also introduced
products specifically designed for the aesthetic spa market,
such as the TriActive LaserDermology system for the
temporary reduction of the appearance of cellulite and the
PhotoLight system for hair removal, skin rejuvenation
through the treatment of shallow vascular lesions and pigmented
lesions and the treatment of vascular and pigmented lesions. We
are establishing relationships with aesthetic spa distributors
and operators to augment our efforts to sell and market our
products to this growing market. |
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Provide Comprehensive, Ongoing Customer Service.
We support our customers with a worldwide service organization
that includes 18 field service engineers in North America
and 43 international field service engineers working
directly for us or our international distributors. The field
service engineers install our products and respond rapidly to
service calls to minimize disruption to our customers’
businesses. Most of our new products are modular in design to
enable quick and efficient service and support. In addition, we
have engaged a third party consulting firm to assist our North
American customers with training and the development of business
and marketing plans to establish and grow their aesthetic
treatment businesses. We plan to bolster our existing service
infrastructure by establishing new training and inventory hubs
in Europe and the Asia/Pacific region. |
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• |
Generate Additional Revenue from Existing Customer
Base. We believe that there are opportunities for us to
generate additional revenue from existing customers who are
already familiar with our products. Many of our existing
traditional and non-traditional customers may be purchasers of
additional aesthetic treatment systems to address increasing
treatment volumes or new treatment applications. We also expect
that customers purchasing our new modular products will be
candidates for technology upgrades to enhance the capabilities
of their systems. In addition, as we continue to grow our
service organization, we are seeking to increase the |
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percentage of our customers that enters into service contracts,
which would provide additional recurring customer revenue. |
Products
We offer a broad portfolio of aesthetic treatment systems that
address a wide variety of applications. From our entry-level,
standalone pulsed light products that cost as little as
approximately $30,000, to our multi-laser, multi-application
workstations that we sell for over $100,000, we can address a
wide range of markets and applications.
The following table provides information concerning our products
and their applications. We use the flagship designation for our
products that are our leading products for a particular
application.
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Application |
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Temporary |
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Reduction of |
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Year |
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Hair |
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Vascular |
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Skin |
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Pigmented |
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Appearance of |
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Tattoo |
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Laser/Light Source |
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Introduced |
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Removal |
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Lesions |
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Rejuvenation(1) |
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Lesions |
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Cellulite |
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Acne |
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Removal |
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Principal Products:
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Apogee Elite
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Alexandrite Nd:Yag |
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2004 |
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Flagship |
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ü
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ü
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ü
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Apogee 5500 NL
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Alexandrite |
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2004 |
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ü
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ü
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Acclaim 7000 NL
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Nd:Yag |
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2004 |
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ü
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ü
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ü
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ü
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Cynergy III
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Pulse Dye Nd:Yag
Pulsed Light |
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2005 |
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ü
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ü
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ü
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ü
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Cynergy
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Pulse Dye Nd:Yag |
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2005 |
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ü
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Flagship |
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ü
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ü
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VStar
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Pulse Dye |
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2000 |
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ü
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ü
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Acclaim 7000 NL
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Nd:Yag |
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2004 |
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ü
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ü
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ü
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Cynergy PL(2)
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Pulsed Light |
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2005 |
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ü
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ü
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ü
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ü
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TriActive LaserDermology(3)
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Diode Laser |
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2004 |
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Flagship |
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PhotoSilk Plus(3)
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Pulsed Light |
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2005 |
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ü
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ü
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Flagship |
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ü
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Other Products:
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Affinity QS(4)
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Q-Switch
1064/532
Nd:Yag |
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2005 |
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ü
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ü
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Apogee 9300
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Alexandrite |
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2000 |
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ü
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Acclaim 9300
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Nd:Yag |
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2004 |
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ü
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ü
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ü
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ü
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PhotoLight(3)
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Pulsed Light |
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2003 |
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ü
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ü
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ü
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ü
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PhotoGenica MiniV
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Pulse Dye |
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2001 |
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ü
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| (1) |
We consider skin rejuvenation to be the treatment of shallow
vascular lesions and pigmented lesions to rejuvenate the
skin’s appearance. |
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We distribute the Cynergy PL product worldwide pursuant
to a distribution agreement with El.En. |
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| (3) |
We distribute the PhotoLight, PhotoSilk Plus and
TriActive LaserDermology systems in North America
pursuant to a distribution agreement with El.En. |
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| (4) |
We currently offer the Affinity QS system outside of the
United States only and are seeking regulatory clearance for this
product in the United States. |
53
Each of our systems consists of a control console and one or
more handpieces. Our control consoles are each comprised of a
graphical user interface, a laser or other light source, control
system software and high voltage electronics. The graphical user
interface allows the practitioner to set the appropriate laser
or flashlamp parameters to meet the requirements of a particular
application and patient. The laser or other light source
consists of electronics, a visible aiming beam, a focusing lens
and a laser or flashlamp. Using the graphical user interface,
the practitioner can independently adjust the system’s
power level and pulse duration to optimize the desired
treatment’s safety and effectiveness. The graphical user
interface on our multiple energy workstations also allows the
practitioner to change energy sources with the press of a
button. The graphical user interfaces on our intense pulsed
light systems offer practitioners a choice between using
programmed preset treatment settings that address a variety of
skin types and treatment options or manually adjusting the
energy level and pulse duration settings. The control system
software communicates the operator’s instructions from the
graphical user interface to the system’s components and
manages system performance and calibration.
The handpieces on our laser systems deliver the laser energy
through a maneuverable optical fiber to the treatment area.
These handpieces weigh approximately eight ounces and are
ergonomically designed to allow the practitioner to use the
system with one hand and without becoming fatigued. Other
features of our laser system handpieces include:
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interchangeable components that permit the practitioner to
easily adjust the spot size; and |
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an integrated aiming beam of harmless visible light that allows
the practitioner to verify the treatment area, thereby reducing
the risk of unintended skin damage and potentially reducing
treatment time. |
The handpieces for our intense pulsed light systems consist of
the flashlamp, a wavelength filter and, on some models, an
integrated flashlamp cooling system. These handpieces weigh
approximately two pounds and also are ergonomically designed to
be operated with one hand.
Practitioners generally use our laser systems in combination
with a cooling system. We offer our customers our
SmartCool treatment cooling system, which we purchase
from a third party supplier and sell as a private label product
under the Cynosure SmartCool brand. Our SmartCool
product has six variable settings and allows the practitioner to
provide a continuous flow of chilled air before, during and
after treatment to cool and comfort the patient’s skin. The
SmartCool handpiece, which is specially designed for use
with our laser systems, interlocks with the laser handpiece. In
contrast to some competitive cooling systems, there are no
disposable supplies required to use our SmartCool system.
In North America, our SmartCool system is generally
packaged and sold with our laser aesthetic treatment systems,
and nearly all of our North American customers purchase a
SmartCool system when they purchase one of our laser
aesthetic treatment systems. Outside of North America, our
customers either purchase our SmartCool system when they
purchase one of our aesthetic treatment systems or they purchase
another cooling system from a third party supplier. Our
PhotoSilk Plus system provides contact cooling for
patient comfort. Practitioners generally do not use our other
intense pulsed light systems in combination with cooling systems
or treatments.
Applications
Practitioners use our products to perform a variety of
non-invasive procedures to remove hair, treat vascular and
pigmented lesions, rejuvenate skin through the treatment of
shallow vascular lesions and pigmented lesions and temporarily
reduce the appearance of cellulite. These applications of our
products are described below.
Hair Removal. In a typical laser or pulsed light
hair removal treatment, the target area is first cleaned and
shaved. The practitioner then selects appropriate laser or
pulsed light parameters based on the patient’s skin and
hair types and pre-cools the treatment area. The practitioner
next applies the handpiece to the target area and delivers laser
or pulsed light energy to the selected area. The laser or pulsed
light
54
removes hair by directing energy to the target melanin pigment
of the hair follicle, destroying the hair follicle without
harming the surrounding skin. This procedure can last from a few
minutes to one hour depending on the size of the treatment area
and laser or pulsed light spot size. Chilled air is applied to
the treatment area on a continuous basis to cool and comfort the
patient’s skin. Generally, for permanent reduction, hair
removal requires three to six treatments spaced four to six
weeks apart.
Our Apogee Elite workstation is our flagship product for
hair removal. It is a two-in-one laser system that contains both
an Alexandrite laser, which is best suited for hair removal for
patients with light skin types, and an Nd:Yag laser, which is
best suited for hair removal for patients with medium and dark
skin types or tanned skin. The practitioner can switch between
these two energy sources simply by pressing a button on the
system console. Features of the Apogee Elite system
include:
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A wide range of separately adjustable power and pulse duration
settings. This allows the practitioner to select the best
settings for safe and efficient hair removal depending on the
patient’s skin and hair type. Some competitive systems do
not permit pulse duration adjustment, which we believe may
reduce the effectiveness of the treatment, particularly for
thicker hair. |
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A large, 15 millimeter spot size and a laser beam that
distributes energy evenly over the entire treatment area. This
allows the practitioner to treat a targeted area in an efficient
manner. Some competitive systems have smaller spot sizes or
beams that concentrate the energy in the middle of the treatment
area of each pulse of light, which requires more overlap of the
treatment areas of the individual pulses of light to achieve an
effective result. |
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A rapid pulse rate. This permits the practitioner to cover the
treatment area quickly, which is particularly important when
removing hair from large areas, such as backs and legs. |
In addition to the Apogee Elite system, each of our
Apogee 5500 NL, Acclaim 7000 NL, Cynergy III,
Cynergy, Cynergy PL, PhotoSilk Plus, Apogee 9300,
Acclaim 9300 and PhotoLight systems can be used
for hair removal.
Treatment of Vascular Lesions. To treat vascular
lesions the practitioner generally first pre-cools the target
area and then applies the system handpiece to deliver laser
energy to the treatment area. Depending on the size of the
treatment area, procedures last between 20 and 30 minutes. In
some cases, a topical anesthetic is applied to the treatment
area to minimize pain. For spider veins, redness and rosacea,
patients generally receive between two and four treatments
spaced over two to three weeks. For port wine birthmarks,
patients may receive ten or more treatments.
Our Cynergy workstation is our flagship product for the
treatment of vascular lesions. The Cynergy system
combines a pulse dye laser, which is best suited for treating
shallow vascular lesions, such as port wine birthmarks, facial
veins and rosacea, and an Nd:Yag laser, which is best suited for
treating large or deep veins, such as leg veins. The
practitioner can switch between these two energy sources simply
by pressing a button on the system console. Other features of
the Cynergy system include:
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A wide range of separately adjustable power and pulse duration
settings. This allows the practitioner to select the best
settings for safe and efficient treatment depending on the
particular type and depth of the vascular lesion to be treated. |
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One of the most powerful pulse dye lasers currently available in
the aesthetic treatment system market. The power of this laser
allows a practitioner to provide treatment with a spot size that
is larger than would be effective with a less powerful laser,
thereby enhancing treatment efficiency. |
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• |
SixPulsetm
technology in the pulse dye laser, which distributes the power
of one long pulse of energy into six micro pulses. This allows
the practitioner to deliver more energy with less patient
discomfort. |
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A choice of five different spot sizes that are easily selected
through the use of interchangeable headpiece components. This
allows the practitioner to select the appropriate spot size for
the |
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particular vascular lesion to be treated. For example, a large
spot size is generally used for a large leg vein, while a small
spot size is normally used for facial veins. |
We recently obtained FDA clearance for our innovative
Multiplextm
energy delivery system that we plan to make available on the
Cynergy system. Our Multiplex system mixes the
energy from the two lasers included in Cynergy system by
quickly following a pulse of energy from the pulse dye laser
with a pulse of energy from the Nd:Yag laser. We are studying
whether Multiplex delivery allows for more efficient
treatment of vascular lesions by reducing the amount of laser
power required and allowing the laser energy to penetrate deeper
into the target.
In addition to the Cynergy system, each of our Apogee
Elite, Acclaim 7000 NL, Cynergy III, VStar, Cynergy PL,
PhotoSilk Plus, Acclaim 9300, PhotoLight and PhotoGenica
MiniV systems can be used for the treatment of vascular
lesions.
Skin Rejuvenation. Skin rejuvenation involves the
treatment of shallow vascular lesions and pigmented lesions to
rejuvenate the skin’s appearance. In a skin rejuvenation
procedure, the practitioner applies the system handpiece to the
target area and delivers laser or pulsed light energy. The
energy destroys the shallow vascular lesions and pigmented
lesions and rejuvenates the skin’s appearance without
damage to the treated or surrounding area through the
improvement in skin texture and reduction or elimination of skin
irregularities. Cooling is generally not required. Patients
typically receive between four to six treatments of
approximately 30 minutes each. Treatments are spaced two to four
weeks apart.
Our PhotoSilk Plus system is our flagship product for
skin rejuvenation. The PhotoSilk Plus system is a
high-powered pulsed light system that delivers energy over a
broad spectrum of wavelengths that are best suited for treatment
of shallow vascular lesions and pigmented lesions. Features of
the PhotoSilk Plus system include:
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A wide range of separately adjustable power and pulse duration
settings. This allows the practitioner to select the best
settings for safe and efficient skin rejuvenation depending on
the patient’s skin type and the treatment desired. |
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U-shaped design, with the flashlamp located close to the
treatment area. In contrast with some competitive products that
locate the flashlamp further away from the treatment area, we
believe that our design enhances patient safety and comfort by
reducing the heat produced in the procedure. In addition, this
design reduces the energy required for effective treatment. |
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A number of preprogrammed settings for a variety of skin types
and different types of treatments. This permits the practitioner
to quickly adjust the system for use in typical applications,
such as treatment of vascular lesions, pigmented lesions or both. |
We offer the PhotoSilk Plus system with a variety of
handpieces that have different wavelength filters and spot
sizes. We offer three different wavelength filters and three
different spot sizes. The range of available wavelength filters
allows the practitioner to select the handpiece best suited for
the type of treatment to be performed. For example, treatments
with a short wavelength filter are best suited for pigmented
lesions, while treatment with long wavelength filters are best
suited for vascular lesions. A medium wavelength filter may be
used to treat both vascular lesions and pigmented lesions. The
range of available spot sizes allows the practitioner to select
the handpiece best suited for the treatment area. For example,
treatments on some areas of the face may require a small spot
size, while other treatments may be more efficient with a large
spot size. Up to two handpieces may be connected to the
PhotoSilk Plus system at one time, which reduces delays
in switching between treatments with handpieces. This feature
enables a practitioner to easily switch between handpieces to
address varying treatment needs for an individual patient, as
well as allowing for quick turnaround times between different
patients.
In addition to the PhotoSilk Plus system, each of our
Apogee Elite, Acclaim 7000 NL, Cynergy III,
Cynergy, Cynergy PL, Acclaim 9300 and
PhotoLight systems can be used for skin rejuvenation
through the treatment of shallow vascular lesions and pigmented
lesions.
56
Temporary Reduction of Appearance of Cellulite.
Cellulite is a deposit of fat that causes a dimple or
other uneven appearance of the skin on women, typically around
the thighs, hips and buttocks. According to published reports,
an estimated 80% of women have some degree of cellulite. In a
treatment for the temporary reduction of the appearance of
cellulite, the practitioner applies the multifunction handpiece
to deliver diode laser energy, as well as suction and
manipulation therapy, to the treatment area. The laser energy
and suction and manipulation therapy enhance micro-circulation
in the area of the cellulite. Treatment for the temporary
reduction in the appearance of cellulite requires a series of
treatments of approximately 30 to 45 minutes each, depending on
the treatment area and patient response.
Our TriActive LaserDermology system is our flagship
product for temporarily reducing the appearance of cellulite.
The TriActive system contains six low-energy diode
lasers, mechanical massage and suction features and localized
cooling. The TriActive system is one of only two
light-based systems, and the only laser-based system, cleared by
the FDA for use for the temporary reduction in the appearance of
cellulite. In addition, the FDA has cleared TriActive
system as an over-the-counter device, for sale and use
without physician supervision, because its diode lasers are
sealed and do not pose a risk of exposure to operators’
eyes. We believe that TriActive system is the only
light-based system for this application that has been so cleared
by the FDA, which significantly facilitates our marketing of
TriActive system to the growing aesthetic spa market.
Other Aesthetic Applications. We are developing
flagship products based on laser technologies in two other areas:
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tattoo removal, which we consider a large and growing market
opportunity as a result of the increasing popularity of tattoos
and the limitations on effectiveness of current laser
treatments; and |
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acne, for which we believe laser treatment may be seen as an
attractive alternative to Accutane because of safety issues with
this drug. |
Currently, our VStar product is used for the treatment of
acne and our Affinity QS system, which has not
received regulatory clearance in the United States, is used for
tattoo removal.
Original Equipment
Manufacturing and Other Relationships
We are collaborating with third parties in connection with
surgical uses of our laser products. Specifically:
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In 2004, we began supplying our surgical pulse dye lasers on an
original equipment manufacturer basis to PENTAX Medical Company,
which sells these lasers for use with its endoscopic video
imaging system in North America and South America for use in
treating recurrent respiratory papilloma and glottal dysplasia.
Recurrent respiratory papilloma is a disease characterized by
tumor growth in the larynx, vocal cords and trachea. Glottal
dysplasia is a disease characterized by abnormal changes in the
cells that line the glottis, or middle part of the larynx,
caused by damage to the lining of the larynx. In these
treatments, the PENTAX endoscope is inserted through the nose to
access the larynx. A disposable, flexible optical fiber is then
passed through the endoscope. Our system is used to deliver
laser energy through the optical fiber to target and destroy the
tumors or abnormal cells. The FDA has cleared the use of our
laser for these indications. |
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• |
In 2004, we began supplying our lasers on an original equipment
manufacturer basis to Solx, Inc., which is using the lasers with
its systems for the treatment of glaucoma. Glaucoma is an eye
disease associated with the degeneration of the retinal cells
responsible for transmitting images from the eye to the brain.
This treatment involves the implantation of the Solx system in
the eye and the use of laser energy to activate the system to
reduce intraocular pressure associated with some types of
glaucoma. Solx is marketing our lasers in Europe, where their
use in this procedure has been approved. Clinical trials of our
lasers for this procedure are ongoing in the United States. |
57
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We are supplying our VStar pulse dye lasers to DUSA
Pharmaceuticals, Inc., which is using these lasers in a
phase II clinical trial of photodynamic therapy for the
treatment of acne and sun damage. |
Sales and Marketing
We sell our aesthetic treatment systems to the traditional
physician customer base of dermatologists and plastic surgeons
as well as to the increasing number of non-traditional physician
customers who are providing aesthetic services using laser and
light-based technology. Non-traditional physician customers
include primary care physicians, obstetricians, gynecologists,
ophthalmologists and ear, nose and throat specialists. In early
2005, we created our CynosureSpa brand, which is focused
on the emerging market of approximately 12,000 aesthetic spas in
North America.
We target potential customers through office visits, trade shows
and trade journals. We also conduct clinical workshops featuring
recognized expert panelists and opinion leaders to promote
existing and new treatment techniques using our products. We
believe that these workshops enhance customer loyalty and
provide us with new sales opportunities. We plan to increase the
number of workshops that we conduct from 40 in 2004
to 90 in 2005. We also use direct mail programs to target
specific segments of the market that we seek to access, such as
members of medical societies and attendees at meetings sponsored
by medical societies or associations. In addition, we have
recently implemented a public relations program that has
resulted in treatments based on our products being featured in
magazines such as Elle, Harper’s Bazaar
and Redbook.
Physician Sales
We sell our products to physicians in North America through a
direct sales force. Outside of North America, we sell our
products to physicians through a direct sales force in four
European countries, Japan and China and through independent
distributors in 31 other countries.
We conduct our own international sales and service operations
through wholly-owned
subsidiaries in the United Kingdom, France,
Germany, Spain and Japan and through a majority-owned joint
venture in China. We seek distributors in international markets
where we do not believe that a direct sales presence is
warranted or feasible. In those markets, we select distributors
that have extensive knowledge of our industry and their local
markets. Our distributors sell, install and service our
products. We require our distributors to invest in service
training and equipment, to stock and supply maintenance and
service parts for our systems, to attend exhibitions and
industry meetings and, in some instances, to commit to minimum
sales amounts to gain or retain exclusivity. Currently, we have
written distribution agreements with nine of our 19 third party
distributors. Generally, the written agreements with our
distributors have terms of between one and two years.
Spa Sales
We have implemented a tailored marketing program, including
focused product offerings, for the aesthetic spa market. In
North America, we maintain a separate sales organization for our
CynosureSpa brand. In addition, we are working with
several aesthetic spa distributors and operators to address this
growing market. For example, in April 2005 we entered into a
distribution agreement with Universal Companies, which has over
40,000 spa customers worldwide, to include our PhotoLight
and TriActive LaserDermology systems in its product
catalog. In addition, we are a party to an agreement with Sona
MedSpa, in which we formerly held an equity interest and which
operates or franchises 36 spa locations across the United
States, to provide our laser aesthetic treatment systems to its
facilities in exchange for a share of the facilities’
revenues. In 2004, we derived 13% of our revenues from Sona
MedSpa. Our existing direct sales force and independent
distributors sell to the spa market outside of North America.
58
Service and Support
We support our customers with a range of services, including
installation and product training, business and practice
development consulting and product service and maintenance. In
North America, our field service organization has 18 field
service engineers. Outside of North America, our sales and
service
subsidiaries and our trained distributors employ
43 field service engineers.
In connection with direct sales of our aesthetic treatment
systems, we arrange for the installation of the system and
initial product training. Generally, installation and initial
training take less than three hours. The installation is
conducted by our field service engineers. We have engaged a
third party consulting firm to provide advice to North American
purchasers of our systems on the development of their aesthetic
treatment businesses and marketing plans. We have found that
this service is particularly appealing to the non-traditional
physician customer and aesthetic spa segments of the market,
which have less familiarity with the business aspects of laser
and light-based aesthetic treatments than dermatologists and
cosmetic surgeons. The cost of installation, initial training
and, for North American purchasers, the basic consulting package
of this third party consultant are all included in the purchase
price of our systems. We also offer for an additional charge a
more comprehensive package of services from the third party
consultant.
We strive to respond to all service calls within 24 hours
to minimize disruption of our customers’ businesses. We
have designed our new products in a modular fashion to enable
quick and efficient service and support. Specifically, we build
these products with several separate components that can easily
be removed and replaced when the product is being serviced. We
provide initial warranties on our products to cover parts and
service, and we offer extended warranty packages that vary by
type of product and level of service desired. Our base warranty
covers parts and service for one year. We offer extended
warranty arrangements through service plans. We believe that we
have a significant opportunity to increase our recurring
customer revenues by increasing the percentage of our customers
that enter into service
contracts for our systems.
Research and Development
Our research and development team consists of 19 employees
with a broad base of experience in lasers and optoelectronics.
Our research and development team works closely with opinion
leaders and customers, both individually and through our
sponsored seminars, to understand unmet needs and emerging
applications in the field of aesthetic skin treatments and to
develop new products and improvements to our existing products.
They also conduct and coordinate clinical trials of our
products. Our research and development team builds on the
significant base of patented and proprietary intellectual
property that we have developed in the fields of laser and other
light-based technologies since our inception in 1991.
Our research and development expenses were approximately
$2.4 million in 2002, $2.5 million in 2003 and
$3.1 million in 2004, none of which was customer sponsored.
We expect our research and development expenditures to increase
as we continue to devote resources to research and develop new
products and technologies.
Manufacturing and Raw Materials
We manufacture all of our products, other than the
Cynergy PL, PhotoLight, PhotoSilk Plus and
TriActive LaserDermology systems, which are manufactured
by El.En. and which we sell and market under our distribution
agreement with El.En. We manufacture our products with
components and subassemblies purchased from third party
suppliers. Accordingly, our manufacturing operations consist
principally of assembly and testing of our systems and
integration of our proprietary software.
We recently redesigned a number of our products, including our
Apogee, Cynergy, Acclaim and VStar product
families, so that they are built in a modular fashion using
fewer components. We began shipping
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these redesigned products in the second quarter of 2005. This
new approach enables us to manufacture our products more
efficiently. Specifically, we have:
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reduced our assembly part counts and our direct labor costs; |
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reduced our service parts inventories; and |
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increased our ability to test our products during the
manufacturing process. |
We purchase many of our components and subassemblies from third
party manufacturers on an outsourced basis. We use one third
party to assemble and test many of the components and
subassemblies for our Apogee, Cynergy, Acclaim and
VStar product families. We also depend exclusively on
sole source suppliers for Alexandrite rods, which we use in the
manufacture of our Apogee products, and for our
SmartCool treatment cooling systems.
We do not have long-term
contracts with our third party
manufacturers or sole source suppliers. We generally purchase
components and subassemblies as well as our other supplies on a
purchase order basis. If for any reason, our third party
manufacturers or sole source suppliers are not willing or able
to provide us with components, subassemblies or supplies in a
timely fashion, or at all, our ability to manufacture and sell
many of our products could be impaired. To date, we have been
able to obtain adequate outsourced manufacturing services and
supplies of Alexandrite rods and air cooling systems from our
third party manufacturers and suppliers in a timely manner. We
believe that over time alternative component and subassembly
manufacturers and suppliers can be identified if our current
third party manufacturers and suppliers fail to fulfill our
requirements.
El.En. Commercial Relationship
The Cynergy PL, PhotoLight, PhotoSilk Plus and
TriActive LaserDermology systems sold by us were
developed, and associated intellectual property rights are
owned, by El.En. El.En. manufactures, and we distribute, these
products pursuant to distribution agreements between us and
El.En. These agreements provide us with exclusive worldwide
distribution rights for the Cynergy PL system and
exclusive distribution rights in the United States and Canada
for the PhotoLight, PhotoSilk Plus and TriActive
LaserDermology systems. The transfer prices for products
that we currently distribute under the agreements are specified
in the agreement; however, they may be changed by El.En. at its
discretion upon 30 days’ notice.
El.En. is required to provide us with training, marketing and
other sales support for the products we distribute under these
agreements. We are required to use best efforts to sell and
promote these products, and we are responsible for obtaining and
maintaining regulatory approvals for them. If El.En. wishes to
discontinue producing products that we distribute, it must make
reasonable efforts to provide us with one year’s notice of
its plan to do so.
Each of the distribution agreements has an initial term that
expires in January 2012. The distribution agreement relating to
the PhotoLight, PhotoSilk Plus and TriActive
LaserDermology systems will automatically renew for
additional one-year terms unless either party provides notice of
termination at least six months prior to the expiration of the
initial term or any subsequent renewal term. The distribution
agreement relating to the Cynergy system will
automatically renew for additional one year terms unless either
party provides notice of termination at least one year prior to
the expiration of the initial term or any subsequent renewal
term. We or El.En. may terminate the distribution agreements at
any time based upon material uncured breaches by, or the
insolvency of, the other party. In addition, El.En. may
terminate the distribution agreement for the PhotoLight,
PhotoSilk Plus and TriActive LaserDermology
systems if we do not meet annual minimum purchase obligations
specified in the agreements.
Patents, Proprietary Technology and Trademarks
Our success depends in part on our ability to obtain and
maintain proprietary protection for our products, technology and
know-how, to operate without infringing the proprietary rights
of others and to
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prevent others from infringing our proprietary rights. Our
policy is to seek to protect our proprietary position by, among
other methods, filing United States and
foreign patent
applications related to our proprietary technology, inventions
and improvements that are important to the development of our
business. We also rely on trade secrets, know-how, continuing
technological innovation and in-licensing opportunities to
develop and maintain our proprietary position.
As of
June 30, 2005, we owned a total of 38 United States
patents and six United States patent applications, as well as
foreign counterparts to 17 of these patents and four of these
patent applications. Our patent portfolio includes patents and
patent applications with claims directed to:
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the design and method of use and operation of our pulse dye
laser systems; |
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the design and method of use and operation of our Alexandrite
laser systems for hair removal; |
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our Multiplex energy delivery system for our pulse dye
lasers; and |
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the design of endoscopic laser and light delivery systems. |
The expiration dates for our issued United States patents range
from 2013 to 2022. Additionally, El.En. has applied for a patent
covering the methods of use and operation of the TriActive
LaserDermology system. We do not consider any single patent
or patent application that we hold to be material to our
business.
The patent positions of companies like ours are generally
uncertain and involve complex legal and factual questions. Our
ability to maintain and solidify our proprietary position for
our technology will depend on our success in obtaining effective
patent claims and enforcing those claims once granted. We do not
know whether any of our patent applications or those patent
applications that we license will result in the issuance of any
patents. Our issued patents and those that may issue in the
future, or those licensed to us, may be challenged, invalidated
or circumvented, which could limit our ability to stop
competitors from marketing related products or shorten the term
of patent protection that we may have for our products. In
addition, the rights granted under any issued patents may not
provide us with competitive advantages against competitors with
similar technology. Furthermore, our competitors may
independently develop similar technologies or duplicate any
technology developed by us. Because of the extensive time
required for development, testing and regulatory review of a
potential product, it is possible that, before any of our
products under development can be commercialized, any related
patent may expire or remain in force for only a short period
following commercialization, thereby reducing any advantage of
the patent.
On
July 2, 2004, Palomar Medical Technologies, Inc. sent us
a letter proposing to enter into negotiations with us regarding
the grant of a nonexclusive license under specified United
States and
foreign patents owned or licensed by Palomar with
respect to our
Apogee Elite, Apogee 5500, PhotoLight and
Acclaim 7000 products, and also with respect to our
SmartEpil II product, which we no longer offer. In
subsequent letters from Palomar dated <
