Cynosure's CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Cynosure, Inc. (CYNO)

Cynosure, Inc. (NASDAQ:CYNO)

Q2 2013 Earnings Call

July 31, 2013 9:00 AM ET

Executives

Scott Solomon – IR

Michael Davin – Chairman and CEO

Tim Baker – EVP, COO and CFO

Analysts

Rich Newitter – Leerink Swann

Matthew Dodds – Citigroup

Anthony Vendetti – Maxim Group

Jim Sidoti – Sidoti & Company

William Plovanic – Canaccord

Operator

Good day and welcome to Cynosure’s Second Quarter 2013 Conference Call. Today’s call is being recorded. There will be an opportunity for questions at the end of the call.

At this time I would like to turn the call over to Mr. Scott Solomon, Vice President for Sharon Merrill Associates. Please go ahead, sir.

Scott Solomon

Thank you, Kevin, and good morning, everyone. Thank you for joining us today. With me on this morning’s call are Michael Davin, Cynosure’s President and Chief Executive Officer; and Tim Baker, Executive Vice President, Chief Operating Officer and Chief Financial Officer.

Before we begin please note that various remarks management makes on this conference call about future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed in Cynosure’s filings with the Securities and Exchange Commission.

In addition, any forward-looking statements represent the company’s views as of today, July 31, 2013. These statements should not be relied upon as representing the company’s views as of any subsequent days. While Cynosure may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so.

To supplement its consolidated financial statements presented in accordance with GAAP, Cynosure uses non-GAAP gross profit, non-GAAP income from operations, non-GAAP net income and non-GAAP EPS. These metrics are non-GAAP financial measures which the company believes help investors to gain a meaningful understanding of Cynosure’s cooperative results exclusive of acquisition related expenses and can also help investors who wish to make comparisons between Cynosure and other companies on both a GAAP and a non-GAAP basis.

The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures please see the discussion and reconciliation table included in this morning’s earnings release. The table has more details of the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliations between these financial measures.

With that, I’ll turn the call over to Michael Davin.

Michael Davin

Thank you, Scott. Good morning everyone and thank you for joining us. Cynosure sustained a strong momentum in the second quarter generating recorded revenue highlighted by year-over-year gains across of distribution channels. We cap a busy and successful quarter by closing our acquisition of Palomar Medical Technologies on June 24th. We made great progress since then integrating the Cynosure and Palomar sales forces, systems and processes while continuing to advance our growth strategy.

Turning first to our second quarter financial results. Revenue rose 27% to 50.1 million which includes 5.1 million attributed to the acquired Palomar business representing Palomar sales in the last five days of the quarter.

PicoSure, our new flagship workstation for the removal of tattoos and benign pigmented lesions contributed nicely to our top line in its first full quarter of US sales. Demand also remained strong for other products including our lead platform for laser hair removal, our Q-switch MedLite Q6 and MedLite workstations as well as our minimally laser products for cellulite reduction, laser-assisted lipolysis and the sweat gland ablation.

Laser product revenue increased 31% for the quarter to 43 million from 32.9 million for the same period of 2012, with year-over-year double-digit percentage gains in North America, Europe, Asia and our international third-party distribution channel. By territory, North America represented 48% of second quarter laser revenue with our international distribution contributing 52%. Since Q2, was the first full quarter of PicoSure, I’m pleased to say that the launch has gone very well. The product is in the hands of the number of luminaries and key opinion leaders and the feedback about clinical results and the device reliability has been very good. As we mentioned on our Q1 call, we are planning to introduce proprietary CAP lens array technology for PicoSure within the next several months. And we expect that to contribute to our disposables revenues.

Now let me update you on the integration on Palomar. While bringing together two companies the scale of Cynosure and Palomar can be complex. We are confident in the strength of the strategic and cultural fit between our organizations. We’re excited to bring together the complementary aspects of our products, technology and distribution footprint. In the five one weeks since the transaction closed our teams have been busy implementing our integration plan, which will serve as a blue print for maximizing the value of the organization by streamlining functions, blending systems and processes enhancing manufacturing efficiencies and eliminating redundancies.

Through the use of contract manufacturing and cost controls, Cynosure does an excellent job in recent years managing expenses and gaining operating leverage. We plan to sustain the momentum as a combined company and we see ample opportunity to achieve that goal. In the full year 2012 for example, Cynosure’s SG&A expense was 42% of product and service revenues our Palomar’s SG&A and product and service revenues for the same period was 11 points higher at 53%. We see the ability to deliver significant synergies based on increasing scale. Our expectation has not changed and we expect that the acquisition will be accretive in 2014 with the implementation of 8 million to 10 million in synergies. Nearly all of that would come from the cost side, including administrative consolidation, savings and duplicate company expenses, personal cost, facilities and international distribution.

To-date we have competed the integration of our North American sales forces. Product training is well underway and the combined group of more than 70 reps is operating as one team. Integration of our subsidiaries in Europe and Asia is also underway. In Spain and Japan for example we’re on the process of consolidating offices. In Germany our successful direct sales territory for both companies based on geography will remain. In other regions such as France and the UK Palomar had no direct presence, so our direct sales offices will begin selling the Palomar product line. In Australia which was a direct sales territory for Palomar but not Cynosure, the reps are being trained on our product line. We have worked to review, rationalize and package the technology to offer our customers a complete solution for their practice.

Turning to integration process, we have identified reliability issues with Palomar Vectus product, primarily involving the large dip delivery system. We are currently reviewing the shipments to new customers while we address these issues. The demand for the Vectus product remains high and we are working to resolve these issues and support customers in the coming quarters. Our combined team of engineers and scientist will also worked to accelerate product development efforts on our new flagship workstations.

One important decision that has come out of the integration process is that the combined company will remain at our offices here in Westwood, Massachusetts rather than relocating as initially planned to the building that had been owned by Palomar Burlington, Massachusetts. We believe it makes economic sense to monetize the building and further strengthen our balance sheet for future opportunities. We’ve also received an attractive offer from our landmark to extend our existing lease on Westwood and add additional square footage large not available in Burlington to accommodate the new combined company. We are in discussions with real estate broker to offer the Burlington facility to the market we are targeting consolidation and relocation to be completed by the first quarter of 2014.

In closing with PicoSure completing its first full quarter sales in the U.S as was our direct offices in Europe and Palomar acquisition, we believe we are well positioned for a strong second half of the year. Unilever continues to move forward with the commercialization of [illuminaz] with our inaugural home used aesthetic placed device under our core development agreement. The launch is resumes we will continue to differ to them on logistics, timing and related issues. The Palomar acquisition adds complementary customer in products, creates new sources of organic and product revenues, opens cross selling opportunities, enhances our IP position and create substantial cost synergies. I will now turn it over to Tim for the financial results. Tim?

Tim Baker

Thanks Mike and good morning everyone. As Mike mentioned total revenue for the second quarter of 2013 increased to approximately 27% to 50.1 million driven by growth across each of our four distribution channels. The top line includes 5.1 million attributable to the acquired Palomar business which closed on June 24th. For historical reference on a standalone basis Palomar’s revenue for the quarter would have been approximately $23 million compared with 19.7 million in the year earlier period up approximately 17%.

Laser product revenue was up 31% to 43 million which represented 86% of total revenue compared with 32.9 million or 83% of revenue for the 2012 period. Service and parts revenue grew 6% in the second quarter to 7.1 million compared with 6.7 million in the second quarter of 2012. By territory North America laser product revenue increased 26% to 20.7 million from 16.4 million in the second quarter of 2012. International product revenue was 22.3 million up 35% from Q2 of 2012 accounting for 52% of total product revenue compared with 50% in last year’s second quarter. Average selling prices remain strong in the lending environment for aesthetic capital equipment continues to be favorable.

Second quarter 2013 adjusted net income which excludes expect as related to the purchase accounting effects of the Palomar acquisition as well as the integration and severance cost was $5 million or $0.29 per diluted share using effective tax rate of 30%. On a GAAP basis which includes those charges and the impact of assuming Palomar’s tax attributes our net loss for the second quarter of 2013 was $9 million or $0.54 per basic share compared with net income of 2.7 million or $0.20 per diluted share for the same period one year earlier.

The GAAP net loss for the second quarter of 2013 reflect a 5.8 million one-time income tax benefit associated with the purchase accounting effects of the Palomar acquisition.

Please see this morning’s news release for reconciliation of second quarter 2013 non-GAAP results to the most directly comparable GAAP results. Gross margin on an adjusted basis which excludes non-cash charges related to the purchase accounting effects of the Palomar acquisition increased to 58.3% compared with 58.2% for the same period of 2012.

Gross margin on a GAAP basis for the quarter is 55.5%. Factoring purchase accounting adjustments associated with Palomar acquisition we expect gross margin in Q3 on a GAAP basis to be approximately 50%. We expect to return to our historical gross margin cap rate of approximately 58% in Q4. On an adjusted basis excluding the acquisition related cost of Palomar acquisition, total operating expenses for the second quarter of 2013 were 22 million or 44% of revenues. On a GAAP basis including expenses related to the Palomar acquisition total operating expense for the quarter of 42.4 million or 85% of revenue compared with 19.3 million or 49% of revenue for the second quarter of 2012.

Increase in operating expenses exclusive of acquisition cost was primarily due to higher selling and marketing expenses to support sales growth, new products and clinical research development. Looking at expenses in more detail on an adjusted basis. Selling and marketing increased by approximately 23 million in the second quarter to 14.2 million from 11.9 million in the second quarter of 2012. The increase primarily reflects higher selling and marketing expenses to support sales growth and the PicoSure launch.

On a percentage basis selling and marketing expenses accounted for approximately 28% of revenues in Q2 down from 30% of revenues in the same quarter of 2012. Our North American sales force consisted 72 reps and five managers and we expect to add perhaps a half of dozen additional reps by the end of the year.

Research and development expenses totaled 3.5 million in Q2 up approximately $100,000 in the same period last year. Research and development expenses were 7% of revenue as compared to 9% for Q2 of 2012. General and administrative expenses increased $300,000 to 4 million compared to 3.7 million in Q2 of 2012. As a parentage of revenue G&A expenses decreased to 8% of revenue in Q2 of this from 9% for the same period in 2012.

Cynosure concluded the quarter with approximately $106 million in cash short-term investments and marketable securities and we continue to have no long-term debt. Day sales outstanding were consistent at 50 days at the end of the second quarter. Going forward we expect incur acquisition related charges of approximately 125 million per quarter for the next four quarters related to employment agreements and changes in – cost. We also expect to incur approximately $ 1 million in non-cash charges associated with the Palomar acquisition for Q3 and Q4 2013 related to the amortization of intangibles for 2014 we would expect approximately $4 million in non-cash charges related to the amortization of intangibles associates with the Palomar acquisition.

We also expect to incur approximately $500,000 through the balance of 2013 relating to legal and accounting services associated with the Palomar acquisition. As Mike noted we continue to expect the Palomar acquisition to be accretive to sign assure in calendar 2014 with 8 million to 10 million in projected synergies. With that we are ready to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question and answer session. (Operator Instructions). Our first today is coming from Rich Newitter from Leerink Swann. Please proceed with your question.

Rich Newitter – Leerink Swann

Hi, guys thanks for taking the questions. And congrats on a great quarter. Maybe I could just start off on the top line, Palomar kind of growth was a little bit ahead of what we had looked for and the contribution this quarter as well. Can you identify what particularly was driving that strength was it a particular product?

Michael Davin

Richard, we’d say all products as the main core of their technology centers around the Icon, the Starlux and also the Vectus platforms.

Rich Newitter – Leerink Swann

And just on that given that the reliability issues that you were referring on the Vectus can you parse out for us kind of what impact that could either from a P&L expense side or do you expect any meaningful maybe temporary drop off in the next few quarters?

Michael Davin

Yeah, as I mentioned we are certainly on top of it as relates to addressing the reliability issues with the combined engineering teams and we believe that we will get it under control and we don’t see we are hopeful and don’t that will affect the financials going forward.

Rich Newitter – Leerink Swann

Okay. And the EPS number and the operating margin expansion really came in well above our expectations adjusting for cost is there you are done with the North American sales force integration according to your comment were there any synergies I mean at leaked into this quarter or was this just more natural P&L leverage and the synergies are yet to come?

Tim Baker

Hi, Tim, Rich. I think you have to look at five day stub period of the Palomar business where we recognize our 501 million revenue obviously on a (inaudible) basis that’s about 25% of the kind of quarterly revenue rate but obviously from expense side we only picked a week of expenses. So there was some artificial leverage in that five days of revenue from Palomar which obviously you wouldn’t expect going forward. So if you look at that $0.29 adjusted about $0.07 of that is coming from the Palomar five day period.

Rich Newitter – Leerink Swann

Okay. That’s really helpful. And just Tim you gave color on gross margin for 3Q and then some incremental expenses for rest of the year, first on the gross margin you said 50% GAAP for 3Q what’s the non-GAAP estimate there?

Tim Baker

We will expect it to be in our historical run rates around that 58% plus or minus once we need to get through the inventory step up under purchase accounting which we think we will get through by the end of Q3.

Rich Newitter – Leerink Swann

Okay. And then what exactly of all those cost that you listed what exactly gets excluded from your EPS and what is going to be included in ongoing ops?

Tim Baker

Well on a GAAP basis obviously it would all be included in our EPS. What we are trying to breakout for our investors and the analyst are the non-cash charges. So obviously on a go forward basis the amortization of the intangibles will be on a go forward basis of about $4 million a year non-cash and that will go for the foreseeable future the recognition or accrual on the change of control payments is a short term situation that will occur over the next four quarters, basically have a year on those agreements. So that will go away after the next four quarters and that’s a real cash expense.

So I think on a long term basis the $4 million of amortization non-cash will be included in our numbers and again we break that out already on our P&L today. So people understand how much the amortization is and we will continue to do that.

Rich Newitter – Leerink Swann

Okay. And then one last one I will let others jump in on the CAP lens Array can you maybe just give us a little bit more on what exactly do you think that’s going to do for expanding the potential applications for the systems?

Michael Davin

Yeah hey Rich as you know the two indications approved right now are tattoo removal and benign pigmented lesions. But now that we have several systems out there installed and before that at our key clinical sites we were exploring the CAP technology and if you recall that is available on our firm rejuvenation device. We were seeing really impressive results as it relates to treating other indications such as pigmentary issues such as looking at treating scars, such as treating acne scaring or scar revision and skin rejuvenation.

So we do believe as we have always said as we continue to broaden the scope of the indication that this unique technology will address certain be driving this regulatory clearances at it related to the CAP technology is going to play a very important role as a key delivery system to the PicoSure technology.

Rich Newitter – Leerink Swann

And the CAP technology will be introduced ahead of the approval for the indications or they come hand in hand?

Michael Davin

The CAP technology we will be able to utilize for the current indications specially pigment which is a very broad approval. So it will be released prior to more than likely for other indications but we are driving the process right now in the clinical side now the regulatory site to get other indications approved. But we expect the CAP technology to be available either end of Q3 or more likely the very beginning of Q4.

Rich Newitter – Leerink Swann

Okay. Thanks and congrats guys.

Michael Davin

Thanks Rich.

Operator

Thank you. Our next question is coming from Matthew Dodds from Citigroup. Please proceed with your question.

Matthew Dodds – Citigroup

Hey good morning. I thought for a second it was a private call. Just on the revenue you didn’t give the split of Palomar as it impact U.S. OUS, A; Can you give that and B; Even if you kind of estimated it looks like organic growth in the U.S. for your base business did drop again this quarter is that in fact true what do you think is going on is it because you just still have it feel like a pretty strong product cycle launch?

Michael Davin

Yeah Matt two things on the Palomar revenue the 5 million is about 45% domestic 55% international on the break. If you look at the North America business pre Palomar just about 13% year-over-year. The thing we need to look on year-over-year basis is remember Q2 of last year was a big quarter for sale leases upgrade so there has been an anomaly last year in terms of contribution for that upgrade a pent up demand. So on a going forward basis I think that will change but I think as you look on a year-over-year it’s being skewed by the upgrades of last year’s Q2.

Matthew Dodds – Citigroup

Okay, then one more on the service and other I assume that it grew a little bit in part because of Palomar to which we have the base business didn’t grow very much?

Michael Davin

No actually very small those are very small component of that $5 million of Palomar revenue very small piece of service there. So it’s almost all Cynosure business 6%, up 6% yeah.

Matthew Dodds – Citigroup

So when did the disposable streams starts to make more of a difference on that line do you think in the back half we will start to see the line accelerate?

Michael Davin

We are hopeful. I mean we are moving away from a disposable model Matt to a one time use introduction which we hope to roll out the end of Q3 beginning of Q4 and as you know we have in the past or currently are disposable offering allow the position to use it x number of times we are not moving to a single one time model and then certainly with the CAP introduction PicoSure that will to accelerate additional disposable business and obviously moving to the single one time use model should also contribute. So we would anticipate late Q3, Q4 to start to see some pickup there.

Matthew Dodds – Citigroup

Thanks Tim. Thanks Michael.

Michael Davin

Thanks Matt.

Operator

Thank you. Our next question is coming from Anthony Vendetti from Maxim Group. Please proceed with your question.

Anthony Vendetti – Maxim Group

Thanks. First on the Vectus I know it’s a new product for Palomar but can you walk through exactly what the issues are and what you think the resolution is and how soon you think it will be fixed and I just have a couple of follow ups.

Michael Davin

Sure, Anthony, it’s Michael. So as you mentioned the Vectus was launched into some original markets in April, May of ‘12 but really didn’t launch into the U.S. market until the later part of 2012. As I mentioned in my opening comments is that the core issue is centered around the large kip. And we are as I mentioned also very focused on addressing that and we do believe we found the fixes and that we’ll be able to implement those. But we also want to make sure through, true testing and validation that corporate they are weaken truly exemplified that is going to be the case once the modification is going to place and the tip goes out to the field.

As far as base unit itself it’s in good shape, the small tips in good shape a lot of this centers around the majority of the effort centers around the large tip. And once again we feel as that we’ll be able to put the proper corrective actions in placing and get the solutions into the technology and get it out to the field in a reliable fashion that we would expect from our technology.

Anthony Vendetti – Maxim Group

So it doesn’t sound like it’s hampering the sale of the base unit. It’s just for clients that want the large tip they just have to wait until that issue is tested. It sounds like you figured out what the issue is?

Michael Davin

As we look at today that is correct.

Anthony Vendetti – Maxim Group

Okay. And then I wanted to talk little bit about PicoSure clearly you got a couple of things going on there you received the FDA approval early this year if you could have EU approval and you just received Canadian approval. And then you are also if I am correct looking for FDA approval for additional indications. You are looking for striae or red stretch marks and acne scars and I was wondering if you could give us an update on how that process is moving along and where you are in that 510(k) process? And just what I know you’ve only been approved in Canada for short time but what do you think the opportunity is in Canada?

Michael Davin

So Anthony as I mentioned we’re very pleased with the first full quarter, our results with the PicoSure launch. I think what’s very impressive is probably 50% of our installed base is with key opinion leaders and luminaries. And as they get this device installed in their practice and as you can imagine they have a very busy practice in a broad range of tattoos and pigmented lesions and other indications they can treat they are extremely enthusiastic about what the technology is offering them from a clinical end point perspective.

So we’re very excited about that and certainly with putting a number of these devices or selling a number of these devices into these types of practices at a high volume it’s helping us to accelerate our clinical development as well. So we have a number of clinical studies going on probably more than we’ve ever had with the new product launch with high visibility luminaries especially in the United State. And so we’re learning a lot from them and that also is a nice directive for us that how we want to move technology clinically. So yes we are driving additional clinical clearances right now as you mentioned looking at acne scarring, looking at scar revision and looking at skin rejuvenation but we also because of the install base in each where we’re right now with these high profile doctors we’re looking at additional indication.

So I think we’re going to be very busy over the next several years for this technology with the FDA regulatory submissions and clinical development. As it relates to Health Canada we’re very excited to get the clearance which we just received and announced on Monday there was quite a bit of activity as it relates to that country and interest on PicoSure and now we have opened the door to be able to market and sell the product there.

So certainly the magnitude is known when the level of what you see the North American market but we do have a strong presence and the very strong distribution in Canada. And those folks are very excited to build the market and sell the products right now in the Canadian markets.

Anthony Vendetti – Maxim Group

Okay. And then lastly Tim I couldn’t end the call without asking for the stock based comp for the launch items?

Tim Baker

Sure for Q2 sales and marketing was 243, R&D is 150 G&A is 412 and it’s about 40,000 in cogs so totals about 863.

Anthony Vendetti – Maxim Group

Okay. What was – can just give me the G&A and R&D at the end what was that, cogs you gave me at the end, right?

Tim Baker

Cogs is 40

Anthony Vendetti – Maxim Group

And G&A was what, I am sorry I missed that.

Tim Baker

G&A was 412. R&D is 150 and actually the sales margin is 260.

Anthony Vendetti – Maxim Group

260, got it all right perfect thanks.

Michael Davin

Thanks, Anthony.

Operator

Thank you our next question is coming from Jim Sidoti from Sidoti & Company. Please proceed with your question.

Jim Sidoti – Sidoti & Company

Good morning. Can you hear me?

Michael Davin

Yes Jim how are you doing?

Jim Sidoti – Sidoti & Company

Good, good so you did 5 million with Palomar in 5 days you don’t think you can keep that pace up?

Michael Davin

No, we wouldn’t say we keep that pace up. One thing I would comment on which is historical with Palomar’s numbers is they were pretty back-ended on the quarter. As it relates to and we were, our business we would say is much more linear as it relates to the contribution of the course of the quarter while Palomar historically was back ended towards the last few weeks of the quarter.

Jim Sidoti – Sidoti & Company

Right. So I am sorry but can you repeat what were Palomar sales for the first half of the year?

Tim Baker

Yeah the first half of year was about 43 million, I think 19 in Q1 and 23 in Q2.

Jim Sidoti – Sidoti & Company

Okay. And I know you guys don’t give guidance but it seems pretty reasonable I would assume they would add at least that much in the back half of 2013?

Michael Davin

That said, I think that’s your comment, yeah.

Jim Sidoti – Sidoti & Company

Okay. Can you just talk about the sales force integration you said you’ve completed it how is it ‘inaudible], is it instructed by customer type, product type, how does that work?

Michael Davin

So the first move of the integration was to rationalize the territories. And I am very pleased to report that the, all the top performers are positioned very well and we really moved the Palomar distribution in to our model, our profile and as you know we have kind of several tiers of distribution on the Cynosure side. So that has been integrated. The territories have been aligned. We’ve allocated the variety of disciplines whether its core reps whether it’s surgical reps whether it’s junior reps. and so that all been identified and we have now that core foundations in place and product training is going on as we speak.

But as we mentioned in our opening remarks we’re also going to add to that. So right now we should have about 74ish with reps and managers. And I think we’re looking at probably adding an additional six to 10 over the course of the year to get us little north of 80 with managers and sales reps. But we’re very pleased with how it all come together the North American sales management team and both sides have done a phenomenal job in setting up the distribution and we’re in a great position to move forward into the year.

Jim Sidoti – Sidoti & Company

I guess let me ask it another way at this point are the Palomar reps able or being trained to sell Cynosure equipment and vice-versa was your reps your traditional reps will be selling the Palomar equipment the back half of this year?

Michael Davin

Yes.

Jim Sidoti – Sidoti & Company

Okay. All right thank you.

Michael Davin

You are welcome.

Operator

Thank you. Our next question is coming from Bill Plovanic from Canaccord. Please proceed with your question.

William Plovanic – Canaccord

Great, thanks good morning. Just a question on the Pico now that you have that out in the field I think one of the biggest knocks by the competition was the reliability of that system especially as it cut into usage in the field. I was just wondering if there is any commentary that you may have or color you could provide of the feedback from those customers that have the box and the reliability that you are facing today.

Michael Davin

Bill I will be honest with you I am not even aware which you are actually talking about. We haven’t had any issues with reliability that we are aware of. As a matter of fact we’re very pleased as I mentioned with how stable and reliable the product is in the field. So we don’t have that I am not aware of any significant reliability as you said all with the PicoSure.

William Plovanic – Canaccord

Perfect. And then on distribution in Europe and Middle-East if you merge those channels would you expect any disruption to the sales if you bring some of that together or are you expecting that to go pretty smoothly. I mean should we expect some more benefit as you kind of bring it all together?

Michael Davin

Actually once again in line with the North American distribution if you look at Europe we have an excellent plan in place and as speak training is happening with the direct offices and the distribution of synergies as well. So we don’t see any of you there. As it relates to the Far East they were consolidating the office in Japan but we don’t see any interruption at all there. China, we are very strong. It’s our number one sub internationally. Palomar had a distributor we are rationalizing that but China continues to put a very impressive numbers. And in Korea we are direct.

To be honest with you, we really feel great about where the global distribution is in the early stages of the integration and once again the management team that has been brought together as one and Palomar has a very strong international managing team as well are working collectively together like they are in North America to really pull this off. You know at a time it’s nice because it’s summer month so things are a little bit slow so the training has been implemented, and the rationalization has been implemented and we are going to be in a great place you know as we get out of the summer months.

William Plovanic – Canaccord

I guess another way to ask that question is for the stocking distributors you had overseas, I know they don’t tend to carry a lot of inventory but was Palomar or you able to wind down kind of that inventory prior to the merger, so that we won’t see any reversals or anything like that or slow sell through as you build up direct and they burn off inventory.

Michael Davin

Actually we don’t see that as an issue. Keep in mind, just because we are direct in a country does not mean that we don’t use third-party distribution, we do. Japan is a perfect example I mean China is a perfect example, we bought ConBio and Japan is as well. We are direct in Japan but we also work very closely with the very largest distributor J-Mac there that sells a ConBio line while we have a direct office selling the Palomar I mean the Cynosure line and we sell the Palomar line.

If you look at China, we direct in two cities in the country we also work with the very large distributor out of Hong Kong that sells our product line as well. So we have a unique model where even we are directing countries we also use third-party distribution. Palomar has some excellent third-party distributors which we are going to continue to work with as we have continued to work with ConBio third-party distributors when we acquired them in countries where we direct. So we don’t see any issues as it relates to the third-party distribution model.

William Plovanic – Canaccord

Okay, perfect. Thanks. That’s all I had.

Michael Davin

Thanks Bill.

Operator

Thank you. Our next question is coming from Andy Schopick, private investor. Please proceed with your question.

Unidentified Analyst

Thank you very much and good morning. Just a couple of quick financially related questions. You have mentioned that you will not be relocating to Burlington that you hope to monetize that building. Is that building owned or a leased facility currently?

Michael Davin

It’s owned.

Unidentified Analyst

And Tim can you tell me what the current carrying value of that property is on your balance sheet?

Tim Baker

$25 million.

Unidentified Analyst

And would you hope to do a sale on leaseback?

Tim Baker

No, we will look at that and from the long term use of fund and cost of capital that has been more expensive for us and again we don’t need liquidity./ In terms of finance from leasebacks so the best situation for us financially and culturally was to sell the building and relocate to Westwood and expand our lease premises here.

Unidentified Analyst

Do you have any idea of what the current market value that facility might be?

Tim Baker

We don’t obviously. What we are understanding is Burlington is attractive market right now. It’s attractive piece of real estate. As Mike said, we need to entertain brokers and look at the markets.

Unidentified Analyst

Do you believe it’s understated on the balance sheet?

Tim Baker

Well we are not going to comment on that.

Unidentified Analyst

Okay, last thing Tim just for purposes of perhaps transparency going forward. You have given us the amortization of intangibles but I wonder if you would be willing to breakout for me today what the intangibles are versus the goodwill recorded on the balance sheet and my request would be that you just break that out going forward.

Tim Baker

Sure. The goodwill on the balance sheet that we are going to on the Palomar transaction is approximately $91 million.

Unidentified Analyst

91 million?

Tim Baker

Correct, yeah and about $40 million of intangibles.

Unidentified Analyst

For just Palomar?

Tim Baker

Just for Palomar, correct.

Unidentified Analyst

Okay, thank you very much.

Tim Baker

You are welcome. Thanks, Andy.

Operator

Thank you. Our next question is a follow-up from Rich Newitter from Leerink Swann. Please proceed with your question.

Rich Newitter – Leerink Swann

Hi, thanks for the follow-up guys. Mike you know you had a very strong quarter. There is a lot of company specific, new product cycle things going on there but can you give us a sense of what you are seeing more broadly is the broader kind of spending environment, you know is there any change there will help it all by any improvement?

Michael Davin

You know I would say it’s pretty much neutral to what we have seen in the past. Couple of quarters Rich you know as Tim mentioned you know we are not seeing any issues as it relates to credit availability for our physicians. That continues to be positive. Certainly in Europe and we’ve mentioned this in past quarter things are tenuous especially in Spain and in Greece, Portugal but overall our business is stable in Europe. And we are obviously constantly watching things closely.

I think the general tone in North America is a stable economy and I wouldn’t mark it healthy but it’s the new normal and our business seems to be doing well, up 13% year-over-year in North America, internationally. This is record quarter for international as it relates to revenue for the company. But probably the area that we are most sensitive to and watching closely is Europe. But overall I wouldn’t look at this past quarter Q2 being any different than say the last few quarters we’ve reported on.

Rich Newitter – Leerink Swann

Great and then just on PicoSure, can you remind what your ASP is there?

Michael Davin

Yeah, our list price is 295 on the device, 295,000. We are north of 200,000 in the ASP, but keep in mind we have sold as I mentioned several units, not placed but even sold several units to KOLs and thought leaders that are driving clinical sports for a sweat equity exchange for a discount on the device. So even with those devices discounted to the KOLs and thought leaders we assume north of 200,000 ASP.

Rich Newitter – Leerink Swann

Okay, thank you very much, gentlemen.

Michael Davin

You are welcome.

Operator

Thank you. There are no further questions at this time. I will turn the floor back over to Mr. Davin for closing comments.

Michael Davin

Thank you, operator. Thank you for joining us this morning. We look forward to keeping you up to date on our progress. Have a great day.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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