##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington D.C. 20549
 
 Form 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from          to
 Commission File Number 000-51623
 Cynosure, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction
incorporation or organization)
    
    04-3125110(I.R.S. Employer of
Identification No.)5 Carlisle RoadWestford, MA
    
    01886(Address of principal executive offices)
    
    (Zip code)
 (978) 256-4200
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ
  Class
    
    Number of SharesClass A Common Stock, $0.001 par value
    
    5,893,727Class B Common Stock, $0.001 par value
    
    5,141,817




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##### 



Cynosure, Inc.
 Table of Contents
 Page No.PART I  Financial InformationItem 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005
    
    
    1Consolidated
Statements of Income for the Three-Month Periods Ended March 31, 2006 and 2005
    
    
    2Consolidated
Statements of Cash Flows for the Three-Month Periods Ended March 31, 2006 and 2005
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and the Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    21PART II  Other InformationItem 1.
    
    Legal Proceedings
    
    
    22Item 1A.
    
    Risk Factors
    
    
    22Item 6.
    
    Exhibits
    
    
    36SIGNATURES
    
    
    38EX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEOEX-32.2 Section 906 Certification of CFO




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##### 



Cynosure, Inc.
 
 Consolidated Balance Sheets
 (Unaudited, in thousands, except per share data)
 March 31,
    
    December 31,2006
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    10,690
    
    
    $
    64,646Marketable securities
    
    
    53,178
    
    
    
    Accounts receivable, net
    
    
    13,229
    
    
    
    13,552Amounts due from related parties (Note 11)
    
    
    91
    
    
    
    72Inventories
    
    
    15,689
    
    
    
    14,140Prepaid expenses and other current assets
    
    
    843
    
    
    
    737Deferred income taxes
    
    
    2,235
    
    
    
    1,804Total current assets
    
    
    95,955
    
    
    
    94,951Property and equipment, net
    
    
    4,403
    
    
    
    4,424Other noncurrent assets
    
    
    789
    
    
    
    793Total assets
    
    $
    101,147
    
    
    $
    100,168Liabilities and Stockholders EquityCurrent liabilities:Short-term loan
    
    $
    162
    
    
    $
    161Accounts payable
    
    
    4,852
    
    
    
    3,509Amounts due to related party (Note 11)
    
    
    1,485
    
    
    
    960Accrued expenses
    
    
    6,563
    
    
    
    7,173Deferred revenue
    
    
    2,150
    
    
    
    3,626Capital lease obligation
    
    
    314
    
    
    
    295Total current liabilities
    
    
    15,526
    
    
    
    15,724Capital lease obligation, net of current portion
    
    
    855
    
    
    
    814Deferred revenue, net of current portion
    
    
    201
    
    
    
    123Other noncurrent liability
    
    
    63
    
    
    
    42Minority interest in consolidated subsidiary
    
    
    330
    
    
    
    314Commitments and contingencies (Note 9)Stockholders equity:Preferred stock, $0.001 par valueAuthorized - 5,000 sharesIssued  none
    
    
    
    
    
    
    Class A and Class B common stock, $0.001 par valueAuthorized
 70,000 sharesIssued  11,071 and 11,065 shares as of March 31, 2006 and December
31, 2005, respectively
    
    
    11
    
    
    
    11Additional paid-in capital
    
    
    77,948
    
    
    
    79,070Retained earnings
    
    
    7,096
    
    
    
    6,470Deferred stock-based compensation
    
    
    
    
    
    
    (1,426
    )Accumulated other comprehensive loss
    
    
    (596
    )
    
    
    (687
    )Treasury stock, 36 shares, at cost
    
    
    (287
    )
    
    
    (287
    )Total stockholders equity
    
    
    84,172
    
    
    
    83,151Total liabilities and stockholders equity
    
    $
    101,147
    
    
    $
    100,168
  1




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##### 



Cynosure, Inc.
 
 Consolidated Statements of Income
 (Unaudited, in thousands, except per share data)
 Three Months EndedMarch 31,2006
    
    2005Revenues
    
    $
    17,139
    
    
    $
    12,109Cost of revenues (1)
    
    
    8,032
    
    
    
    5,618Gross profit
    
    
    9,107
    
    
    
    6,491Operating expenses (1):Sales and marketing
    
    
    5,458
    
    
    
    3,866Research and development
    
    
    1,209
    
    
    
    863General and administrative
    
    
    2,146
    
    
    
    1,192Total operating expenses
    
    
    8,813
    
    
    
    5,921Income from operations
    
    
    294
    
    
    
    570Interest income (expense), net
    
    
    652
    
    
    
    (11
    )Other income (expense), net
    
    
    130
    
    
    
    (135
    )Income before provision for income taxes and minority interest
    
    
    1,076
    
    
    
    424Provision for income taxes
    
    
    436
    
    
    
    172Minority interest in net income of subsidiary
    
    
    14
    
    
    
    19Net income
    
    $
    626
    
    
    $
    233Basic net income per share
    
    $
    0.06
    
    
    $
    0.04Diluted net income per share
    
    $
    0.05
    
    
    $
    0.03Basic weighted average common shares outstanding
    
    
    11,031
    
    
    
    6,243Diluted weighted average common shares outstanding
    
    
    12,178
    
    
    
    7,034(1) Stock-based compensation is attributable to the
following categories:Cost of revenues
    
    $
    6
    
    
    $
    Sales and marketing
    
    
    74
    
    
    
    Research and development
    
    
    68
    
    
    
    General and administrative
    
    
    150
    
    
    
    Total stock-based compensation
    
    $
    298
    
    
    $
    
  2




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##### 



Cynosure, Inc.
 
 Consolidated Statements of Cash Flow
 (Unaudited, in thousands)
 Three Months EndedMarch 31,2006
    
    2005Operating activities:Net
income    
    $
    626
    
    
    $
    233Reconciliation of net income to net cash (used in) provided by
operating activities:Depreciation and amortization
    
    
    486
    
    
    
    337Stock-based compensation expense
    
    
    298
    
    
    
    Accretion of discounts on marketable securities
    
    
    (155
    )
    
    
    Deferred income taxes
    
    
    (429
    )
    
    
    Minority interest in consolidated subsidiary
    
    
    14
    
    
    
    18Changes in operating assets and liabilities:Accounts receivable
    
    
    399
    
    
    
    (1,394
    )Due from related party
    
    
    (19
    )
    
    
    (223
    )Inventories
    
    
    (1,489
    )
    
    
    (1,147
    )Net book value of demonstration inventory sold
    
    
    41
    
    
    
    Prepaid expenses and other current assets
    
    
    (104
    )
    
    
    (244
    )Accounts payable
    
    
    1,337
    
    
    
    1,256Due to related party
    
    
    525
    
    
    
    299Accrued expenses
    
    
    (505
    )
    
    
    989Deferred revenue
    
    
    (1,411
    )
    
    
    183Other noncurrent liability
    
    
    21
    
    
    
    Net cash (used in) provided by operating activities
    
    
    (365
    )
    
    
    307Investing activities:Purchases of property and equipment
    
    
    (348
    )
    
    
    (737
    )Proceeds from the sales and maturities of marketable securities
    
    
    33,395
    
    
    
    Purchases of marketable securities
    
    
    (86,424
    )
    
    
    Increase in other noncurrent assets
    
    
    (8
    )
    
    
    (200
    )Net cash used in investing activities
    
    
    (53,385
    )
    
    
    (937
    )Financing activities:Proceeds from short term loan
    
    
    
    
    
    
    3Deposit received for purchase of common stock from investors
    
    
    
    
    
    
    1,202Deposit paid for repurchase of common stock
    
    
    
    
    
    
    (315
    )Proceeds from exercise of stock options
    
    
    22
    
    
    
    Initial public offering costs
    
    
    (21
    )
    
    
    Payments on capital lease obligation
    
    
    (84
    )
    
    
    (40
    )Net cash (used in) provided by financing activities
    
    
    (83
    )
    
    
    850Effect of exchange rate changes on cash and cash equivalents
    
    
    (123
    )
    
    
    150Net (decrease) increase in cash and cash equivalents
    
    
    (53,956
    )
    
    
    370Cash and cash equivalents, beginning of the period
    
    
    64,646
    
    
    
    4,028Cash and cash equivalents, end of the period
    
    $
    10,690
    
    
    $
    4,398Supplemental cash flow informationCash paid for interest
    
    $
    25
    
    
    $
    17Cash paid for taxes
    
    $
    536
    
    
    $
    175Supplemental noncash investing and financing activitiesAssets acquired under capital lease
    
    $
    142
    
    
    $
    337
  3




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##### 



Cynosure, Inc.
 
 Notes to Consolidated Financial Statements
 Note 1  Interim Consolidated Financial Statements
  Note 2  Stock-Based Compensation
  Accounting for Stock
Issued to Employees Accounting for
Stock-Based Compensation Share-Based Payment
  Three Months EndedMarch 31, 2006(in thousands)Cost of revenues
    
    $
    6Research and development
    
    
    74Selling and marketing
    
    
    68General and administrative
    
    
    150$
    298
 4




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##### 



Cynosure, Inc.
 Notes to Consolidated Financial Statements
   Three Months EndedMarch
31, 2005in thousandsNet income as reported
    
    $
    233Stock-based employee compensation
determined under the fair value
based method, net of related tax
effects
    
    
    (89
    )Net income  pro forma
    
    $
    144Income per common equivalent share:Basic  as reported
    
    $
    0.04Diluted  as reported
    
    $
    0.03Basic and Diluted  pro forma
    
    $
    0.02
   WeightedAverageWeighted-
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Per Share
    
    
    Average
    
    
    Contractual
    
    
    Intrinsicof Shares
    
    
    Exercise Price
    
    
    Exercise Price
    
    
    Term
    
    
    ValueOutstanding at December 31, 2005
    
    
    1,821
    
    
    $
    3.00 - $15.00
    
    
    $
    3.46Exercised
    
    
    (6
    )
    
    
    3.00 - $3.50
    
    
    
    3.40
    
    
    
    
    
    
    $
    107Forfeited
    
    
    (3
    )
    
    
    3.25 - $4.50
    
    
    
    4.46Outstanding at March 31, 2006
    
    
    1,812
    
    
    $
    3.00 - $15.00
    
    
    $
    3.46
    
    
    
    8.6
    
    
    $
    27,250Exercisable at March 31, 2006
    
    
    640
    
    
    $
    3.00 - $4.50
    
    
    $
    3.07
    
    
    
    5.8
    
    
    $
    9,879Vested and expected to
vest at March 31, 2006(1)
    
    
    1,744
    
    
    $
    3.00 - $15.00
    
    
    $
    3.45
    
    
    
    
    
    
    $
    26,251Available for grant at March 31, 2006
    
    
    559
 
 (1)
    
    This represents the number of vested options as of March 31, 2006 plus the number of unvested
options expected to vest as of March 31, 2006 based on the unvested outstanding options at March
31, 2006 adjusted for the estimated annual forfeiture rate of 1.0%. 5




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##### 



Cynosure, Inc.
 Notes to Consolidated Financial Statements
  Weighted-AverageOptions
    
    Remaining
    
    OptionsOutstanding
    
    Contractual Life
    
    ExercisableExercise Price$3.00
    
    
    1,382
    
    
    
    8.53
    
    
    
    581$3.25
    
    
    30
    
    
    
    4.16
    
    
    
    30$3.50
    
    
    4
    
    
    
    5.59
    
    
    
    4$4.00
    
    
    8
    
    
    
    3.36
    
    
    
    8$4.50
    
    
    365
    
    
    
    9.13
    
    
    
    17$15.00
    
    
    23
    
    
    
    9.69
    
    
    
    01,812
    
    
    
    8.56
    
    
    
    640
 Note 3  Inventories
  March 31,
    
    December 31,2006
    
    2005(in thousands)Raw materials
    
    $
    1,829
    
    
    $
    2,579Work in process
    
    
    1,730
    
    
    
    2,259Finished goods
    
    
    12,130
    
    
    
    9,302$
    15,689
    
    
    $
    14,140
 Note 4  Marketable Securities
 Accounting for Certain Investments in Debt
and Equity Securities
  Market
    
    Amortized
    
    Unrealized
    
    UnrealizedValue
    
    Cost
    
    Losses
    
    GainsState and municipal bonds
    
    $
    27,628
    
    
    $
    27,628
    
    
    $
    
    
    
    $
    Corporate bonds
    
    
    18,723
    
    
    
    18,728
    
    
    
    6
    
    
    
    1Federal agency obligations
    
    
    6,826
    
    
    
    6,827
    
    
    
    1
    
    
    
    $
    53,177
    
    
    $
    53,183
    
    
    $
    7
    
    
    $
    1
 Note 5  Warranty Costs
  6




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##### 



Cynosure, Inc.
 Notes to Consolidated Financial Statements
  March 31,2006(in thousands)Warranty accrual, beginning of period
    
    $
    2,265Charged to costs and expenses relating to new sales
    
    
    909Costs incurred / write-offs
    
    
    (592
    )Warranty accrual, end of period
    
    $
    2,582
 Note 6  Segment Information
 Disclosures about
Segments of an Enterprise and Related Information
  Three Months EndedMarch 31,2006
    
    2005(in thousands)United States
    
    $
    9,578
    
    
    $
    5,848Europe
    
    
    5,001
    
    
    
    2,772Asia / Pacific
    
    
    1,399
    
    
    
    1,571Other
    
    
    1,161
    
    
    
    1,918Total
    
    $
    17,139
    
    
    $
    12,109
  March 31,
    
    December 31,2006
    
    2005(in thousands)United States
    
    $
    86,560
    
    
    $
    86,323Europe
    
    
    (859
    )
    
    
    (1,812
    )Asia / Pacific
    
    
    (220
    )
    
    
    (264
    )Eliminations
    
    
    (1,309
    )
    
    
    (1,096
    )Total
    
    $
    84,172
    
    
    $
    83,151
 7




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##### 



Cynosure, Inc.
 Notes to Consolidated Financial Statements
  March 31,
    
    December 31,2006
    
    2005(in thousands)United States
    
    $
    5,490
    
    
    $
    5,488Europe
    
    
    257
    
    
    
    278Asia / Pacific
    
    
    118
    
    
    
    124Eliminations
    
    
    (673
    )
    
    
    (673
    )Total
    
    $
    5,192
    
    
    $
    5,217
  Note 7  Net Income Per Common Share
   Three Months EndedMarch 31,2006
    
    2005(in thousands)Basic weighted average number of shares outstanding
    
    
    11,031
    
    
    
    6,243Potential common shares pursuant to stock options
    
    
    1,147
    
    
    
    791Diluted weighted average number of shares outstanding
    
    
    12,178
    
    
    
    7,034
  Note 8  Comprehensive Income (Loss)
  Three Months EndedMarch 31,2006
    
    2005(in thousands)Cumulative translation adjustment
    
    $
    62
    
    
    $
    (294
    )Unrealized loss on marketable securities
    
    
    (4
    )
    
    
    Total other comprehensive income (loss)
    
    
    58
    
    
    
    (294
    )Reported net income
    
    
    626
    
    
    
    233Total
comprehensive income (loss)
    
    $
    684
    
    
    $
    (61
    )
 8




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##### 



Cynosure, Inc.
 Notes to Consolidated Financial Statements
 Note 9  Litigation
     Note 10- Sona MedSpa
    9




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##### 



Cynosure, Inc.
 Notes to Consolidated Financial Statements
  Note 11  Related Party Transactions
     10




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##### 



Cynosure, Inc.
 Notes to Consolidated Financial Statements
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-looking statements
  
    
    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.
   The
following discussion should be read in conjunction with, and is
qualified in its entirety by, the condensed consolidated financial
statements and notes thereto included in Item 1 of this
Quarterly Report and the condensed consolidated financial statements
and notes thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations in our Form 10-K
filed with the SEC on March 24, 2006. Historical results and
percentage relationships among any amounts in the financial
statements are not necessarily indicative of trends in operating
results for any future periods.
 Company Overview
   
    
    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
 11




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##### 




    
    enhancing our customer service network.
  
    
    the Apogee Elitesystem, our flagship product for hair removal, in March 2004;
    
    the Cynergysystem, our flagship product for the treatment of vascular lesions, in October 2005;
    
    the TriActive LaserDermologysystem, our flagship product for the temporary reduction
of the appearance of cellulite, in February 2004;
    
    the Affirmsystem, our flagship product for skin rejuvenation, including treatments for
wrinkles, skin texture, skin discoloration and skin tightening, in April 2006; and
    
    the PhotoSilk Plussystem for skin rejuvenation through the treatment of shallow
vascular lesions and pigmented lesions.
   CynosureSpa
 Apogee, Cynergy,
Acclaim VStar
  Financial Operations Overview
 Revenues
   12




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##### 



Percentage of RevenuesThree-MonthsEnded
    
    
    Year EndedMarch 31,
    
    
    December 31,Region
    
    2006
    
    
    2005North America
    
    
    59
    %
    
    
    59
    %Europe
    
    
    29
    
    
    
    23Asia/Pacific
    
    
    8
    
    
    
    12Other
    
    
    4
    
    
    
    6Total
    
    
    100
    %
    
    
    100
    %
  Cost of Revenues
  Sales and Marketing Expenses
  Research and Development Expenses
  General and Administrative Expenses
  Interest Income (Expense), net
  Provision for Income Taxes
  13




---



##### 



Results of operations
  Three Months EndedMarch 31,2006
    
    
    2005As a % of
    
    
    
    
    
    
    As a % ofTotal
    
    
    
    
    
    
    Total
    
    
    $
    
    
    %Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    Change
    
    
    ChangeRevenues
    
    $
    17,139
    
    
    
    100
    %
    
    $
    12,109
    
    
    
    100
    %
    
    $
    5,030
    
    
    
    42
    %Cost of revenues
    
    
    8,032
    
    
    
    47
    
    
    
    5,618
    
    
    
    46
    
    
    
    2,414
    
    
    
    43Gross profit
    
    
    9,107
    
    
    
    53
    
    
    
    6,491
    
    
    
    54
    
    
    
    2,616
    
    
    
    40Operating expensesSales and marketing
    
    
    5,458
    
    
    
    32
    
    
    
    3,866
    
    
    
    32
    
    
    
    1,592
    
    
    
    41Research and development
    
    
    1,209
    
    
    
    7
    
    
    
    863
    
    
    
    7
    
    
    
    346
    
    
    
    40General and administrative
    
    
    2,146
    
    
    
    13
    
    
    
    1,192
    
    
    
    10
    
    
    
    954
    
    
    
    80Total operating expenses
    
    
    8,813
    
    
    
    51
    
    
    
    5,921
    
    
    
    49
    
    
    
    2,892
    
    
    
    49Income from operations
    
    
    294
    
    
    
    2
    
    
    
    570
    
    
    
    5
    
    
    
    (276
    )
    
    
    (48
    )Interest (expense) income, net
    
    
    652
    
    
    
    4
    
    
    
    (11
    )
    
    
    
    
    
    
    663
    
    
    
    6,027Other income (expense), net
    
    
    130
    
    
    
    1
    
    
    
    (135
    )
    
    
    (1
    )
    
    
    265
    
    
    
    196Income before provision for
income taxes and minority
interest
    
    
    1,076
    
    
    
    7
    
    
    
    424
    
    
    
    3
    
    
    
    652
    
    
    
    154Provision for income taxes
    
    
    436
    
    
    
    3
    
    
    
    172
    
    
    
    1
    
    
    
    264
    
    
    
    153Minority interest in net
income of subsidiary
    
    
    14
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    (5
    )
    
    
    (26
    )Net income
    
    $
    626
    
    
    
    4
    %
    
    $
    233
    
    
    
    2
    %
    
    $
    393
    
    
    
    169
    %
 14




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##### 



Revenues
  Three Months EndedMarch 31,
    
    
    $
    
    
    %2006
    
    
    2005
    
    

Change
    
    

ChangeProduct sales in North America
    
    $
    8,855
    
    
    $
    5,267
    
    
    $
    3,588
    
    
    
    68
    %Product sales outside North America
    
    
    5,587
    
    
    
    4,025
    
    
    
    1,562
    
    
    
    39Original equipment manufacturer sales
and revenue sharing
    
    
    274
    
    
    
    1,007
    
    
    
    (733
    )
    
    
    (73
    )Parts, accessories and service sales
    
    
    2,423
    
    
    
    1,810
    
    
    
    613
    
    
    
    34Total Revenues
    
    $
    17,139
    
    
    $
    12,109
    
    
    $
    5,030
    
    
    
    42
    %
 
    
    Revenues from the sale of products in North America increased due to an increase in the
number of product units sold, a higher average selling price due to a favorable change in
product mix and from the introduction of new products. The increase in North American
revenues resulted in part from the continued expansion of our North American sales
organization, including the hiring of 21 additional direct sales employees between December
31, 2004 and March 31, 2006.
    
    Revenues from sales of products outside of North America increased mainly attributable
to an increase in sales in Europe of $2.2 million, or 102%, over
the 2005 period, 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. The
increase also resulted from the introduction of new products. This increase was offset by
a decrease in sales of products to distributors in the Far East of $0.4 million and the
Middle East of $0.2 million in the 2006 period as compared to
the 2005 period.
    
    Revenues from original equipment manufacturer and other relationships and our revenue
sharing arrangement decreased primarily attributable to a
$0.8 million decrease in revenues from our
revenue sharing arrangement with Sona MedSpa.
    
    Revenues from the sale of parts, accessories and services increased primarily as a
result of the increase in our product sales over the past two years.
 Cost of Revenues
 Three Months EndedMarch 31,
    
    $
    
    %2006
    
    2005
    
    Change
    
    ChangeCost of revenues (in thousands)
    
    $
    8,032
    
    
    $
    5,618
    
    
    $
    2,414
    
    
    
    43
    %Cost of revenues (as a
percentage of total
revenues)
    
    
    47
    %
    
    
    46
    %
  15




---



##### 



Sales and Marketing
 Three Months EndedMarch 31,
    
    $
    
    %2006
    
    2005
    
    Change
    
    ChangeSales and marketing (in thousands)
    
    $
    5,458
    
    
    $
    3,866
    
    
    $
    1,592
    
    
    
    41
    %Sales and marketing (as a
percentage of
total revenues)
    
    
    32
    %
    
    
    32
    %
  Research and Development
 Three Months EndedMarch 31,
    
    $
    
    %2006
    
    2005
    
    Change
    
    ChangeResearch and development (in
thousands)
    
    $
    1,209
    
    
    $
    863
    
    
    $
    346
    
    
    
    40
    %Research and development (as a
percentage of total revenues)
    
    
    7
    %
    
    
    7
    %
 Affirm
 General and Administrative
 Three Months EndedMarch 31,
    
    $
    
    %2006
    
    2005
    
    Change
    
    ChangeGeneral and administrative (in
thousands)
    
    $
    2,146
    
    
    $
    1,192
    
    
    $
    954
    
    
    
    80
    %General and administrative (as a
percentage of total revenues)
    
    
    13
    %
    
    
    10
    %
  16




---



##### 



Interest Income (Expense), net and Other Income (Expense), net
 Three Months EndedMarch 31,
    
    $
    
    %2006
    
    2005
    
    Change
    
    ChangeInterest income
(expense), net (in
thousands)
    
    $
    652
    
    
    $
    (11
    )
    
    $
    663
    
    
    
    6027
    %Other income
(expense), net (in
thousands)
    
    $
    130
    
    
    $
    (135
    )
    
    $
    265
    
    
    
    196
    %
  Provision for Income Taxes
 Three Months EndedMarch 31,
    
    $
    
    %2006
    
    2005
    
    Change
    
    ChangeProvision for income taxes (in thousands)
    
    $
    436
    
    
    $
    172
    
    
    $
    264
    
    
    
    153
    %Provision as a % of income before
provision for income taxes and
minority interest
    
    
    41
    %
    
    
    41
    %
  Liquidity and Capital Resources
    17




---



##### 



Cash Flows
   Critical Accounting Policies and Estimates
   Revenue Recognition and Deferred Revenue
 Revenue Recognition in Financial
Statements,
 
    
    delivery has occurred;
    
    there is persuasive evidence of an agreement;
    
    the fee is fixed or determinable; and
    
    collection is reasonably assured.
  18




---



##### 



Revenue Arrangements with Multiple Deliverables
 Accounts Receivable and Concentration of Credit Risk
  Inventories and Allowance for Obsolescence
  Product Warranty Costs and Provisions
  Stock-Based Compensation
  Accounting for Stock
Issued to Employees
 19




---



##### 



Accounting for Stock-Based Compensation Share-Based Payment
  Three MonthsEnded March 31,2006(in thousands)Cost of revenues
    
    $
    6Research and development
    
    
    74Selling and marketing
    
    
    68General and administrative
    
    
    150$
    298
   Income Taxes
 Accounting for Income Taxes
 20




---



##### 



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Interest Rate Sensitivity.
 Foreign Currency Exchange.
 
 Item 4. Controls and Procedures
   21




---



##### 



PART II  Other information
 
 Item 1. Legal proceedings
     Item 1A. Risk Factors
  Risks Related to Our Business and Industry
 We have a history of operating losses, and we may not maintain profitability.
  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.
 22




---



##### 



Apogee SmartCool ® SmartCool SmartCool
 SmartCool SmartCool
 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.
   
    
    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.
   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.
 23




---



##### 




    
    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.
   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.
  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.
 Apogee, Cynergy, Acclaim VStar
 24




---



##### 



We sell our products in numerous international markets. Our operating results may suffer if we are unable to
manage our international operations effectively.
 .
  
    
    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 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.
  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.
  25




---



##### 



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.
  We may incur substantial expenses if our past practices are shown to have violated the Telephone Consumer
Protection Act.
       26




---



##### 



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.
  
    
    continued availability of attractive equipment leasing terms for our customers, which may be negatively
influenced by interest rate increases;
    
    increases in the length of our sales cycle; and
    
    reductions in the efficiency of our manufacturing processes.
 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.
  
    
    patient awareness of procedures and treatments;
    
    the cost, safety and effectiveness of the procedure and of alternative treatments;
    
    the success of our and our customers sales and marketing efforts to purchasers of these procedures; and
    
    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.
    
    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.
 Our business and operations are experiencing rapid growth. If we fail to effectively manage our growth, our
business and operating results could be harmed.
  
    
    implement appropriate operational, financial and management controls, systems and procedures;
    
    expand our manufacturing capacity and scale of production;
    
    expand our sales, marketing and distribution infrastructure and capabilities; and
    
    provide adequate training and supervision to maintain high quality standards.
 We may be unable to attract and retain management and other personnel we need to succeed.
  27




---



##### 



Any acquisitions that we make could disrupt our business and harm our financial condition.
  El.En. has substantial control over us. In addition, El.En. and our executive officers and directors have
the ability to control all matters submitted to stockholders for approval.
  Provisions in our corporate charter documents and under Delaware law may delay or prevent attempts by our
stockholders to change our management and hinder efforts to acquire a controlling interest in us.
  
 
 
 
 
 
  28




---



##### 



Our stock price may be volatile.
  
    
    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.
 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.
  Risks Related to Our Relationship with El.En.
 El.En. has substantial control over us and could delay or prevent a change of control.
  
    
    to elect a majority of the members of our board of directors;
    
    to approve amendments to our bylaws adopted by our class A and class B stockholders, voting as a single
class; and
    
    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.
  29




---



##### 



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.
 Cynergy PL, PhotoLight, PhotoSilk
Plus TriActive LaserDermology Cynergy PL PhotoLight, PhotoSilk TriActive LaserDermology PhotoLight,
PhotoSilk Plus, Cynergy PL TriActive LaserDermology PhotoLight, PhotoSilk Plus TriActive LaserDermology
 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.
 PhotoLight, PhotoSilk Plus TriActive LaserDermology
 Conflicts of interest may arise between us and El.En., and these conflicts might ultimately be resolved in a
manner unfavorable to us.
  
    
    the nature, timing, marketing, distribution and price of our products and El.En.s products that compete
with each other;
 30




---



##### 




    
    intellectual property matters; and
    
    business opportunities that may be attractive to both El.En. and us.
  Our class A share price may decline because of future sales of our shares by El.En.
  
    
    up to 33% of the shares of our common stock that it beneficially owned on December 8, 2005, the date of
the prospectus relating to our initial public offering, until June 9, 2007; and
    
    up to an additional 33% of the shares of our common stock that it beneficially owned on December 8, 2005
during the period between June 9, 2007 and December 9, 2007.
    
    Consequently, El.En. may not maintain its ownership of our common stock. Sales by El.En. of substantial
amounts of our common stock in the public market could adversely affect prevailing market prices for our
class A common stock.
 If El.En. sells the shares of our stock held by it and no longer has control over us, our commercial
relationship with El.En. may be adversely affected.
   Risks Related to Intellectual Property
 If we infringe or are alleged to infringe intellectual property rights of third parties, our business could
be adversely affected.
  31




---



##### 



A third party has asserted that we need a license to its patents in order for us to continue selling many of
our products.
 Apogee Elite, Apogee 5500 PhotoLight Acclaim 7000 SmartEpil II PhotoSilk, PhotoSilk Plus, Cynergy, Cynergy PL Cynergy III
  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.
  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.
 32




---



##### 



Risks Related to Government Regulation
 If we fail to obtain and maintain necessary U.S. Food and Drug Administration clearances for our products
and indications or if clearances for future products and indications are delayed or not issued, our business
would be harmed.
   
    
    FDA, other regulatory authorities or an institutional review board may place a clinical trial on hold;
    
    patients may not enroll in clinical trials, or patient follow-up may not occur, at the rate we expect;
    
    patients may not comply with trial protocols;
    
    institutional review boards and third party clinical investigators may delay or reject our trial
protocol;
    
    third party clinical investigators may decline to participate in a trial or may not perform a trial on
our anticipated schedule or consistent with the clinical trial protocol, good clinical practices, or other
FDA requirements;
    
    third party organizations may not perform data collection and analysis in a timely or accurate manner;
    
    regulatory inspections of our clinical trials or manufacturing facilities may, among other things,
require us to undertake corrective action or suspend or terminate our clinical trials, or invalidate our
clinical trials;
    
    changes in governmental regulations or administrative actions; and
    
    the interim or final results of the clinical trials may be inconclusive or unfavorable as to safety or
effectiveness.
  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.
 33




---



##### 




    
    untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
    
    repair, replacement, refunds, recall or seizure of our products;
    
    operating restrictions or partial suspension or total shutdown of production;
    
    refusing or delaying our requests for 510(k) clearance or premarket approval of new products or new
intended uses;
    
    withdrawing 510(k) clearance or premarket approvals that have already been granted; and
    
    criminal prosecution.
  Federal regulatory reforms may adversely affect our ability to sell our products profitably.
  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.
  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.
  34




---



##### 



If we fail to comply with state laws and regulations, or if state laws or regulations change, our business
could suffer.
  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.
    New regulations may limit our ability to sell to non-physicians, which could harm our business.
  35




---



##### 



Item 6. Exhibits
  Exhibit No.
    
    Description31.1
    
    Certification of the Principal Executive Officer31.2
    
    Certification of the Principal Financial Officer32.1
    
    Certification of the Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 200232.2
    
    Certification of the Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
 36




---



##### 



Signatures
  Cynosure,
Inc.(Registrant)Date: May 11, 2006
    
    By:
    
    /s/ Michael R. Davin

Michael R. DavinChairman, President, Chief Executive OfficerDate: May 11, 2006
    
    By:
    
    /s/ Timothy W. Baker

Timothy W. BakerExecutive Vice President, Chief Financial Officer
and Treasurer
 37




---



##### 



EXHIBIT
INDEX
 Exhibit No.
    
    
    Description31.1
    
    
    Certification of the Principal Executive Officer31.2
    
    
    Certification of the Principal Financial Officer32.1
    
    
    Certification of the Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 200232.2
    
    
    Certification of the Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
 38