SOLITON, INC. You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with the financial statements and the
related notes appearing elsewhere in this Form 10-Q. This discussion contains
forward-looking statements reflecting our current expectations that involve
risks and uncertainties. See our Annual Report on Form 10-K for the year ended
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements under the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and in other sections
of this Form 10-Q. In some cases, you can identify these statements by
forward-looking words such as "may," "might," "should," "would," "could,"
"expect," "plan," "anticipate," "intend," "believe," "estimate," "predict,"
"potential" or "continue," and the negative of these terms and other comparable
terminology. These forward-looking statements, which are subject to known and
unknown risks, uncertainties and assumptions about us, may include projections
of our future financial performance based on our growth strategies and
anticipated trends in our business. These statements are only predictions based
on our current expectations and projections about future events. There are
important factors that could cause our actual results, level of activity,
performance or achievements to differ materially from the results, level of
activity, performance or achievements expressed or implied by the
forward-looking statements. In particular, you should consider the numerous
risks and uncertainties described under "Risk Factors" as discussed in our 2020
Annual Report on Form 10-K and in other filings made by us from time to time
with the SEC .
While we believe we have identified material risks, these risks and
uncertainties are not exhaustive. Other sections of this Form 10-Q may describe
additional factors that could adversely impact our business and financial
performance. Moreover, we operate in a very competitive and rapidly changing
environment. New risks and uncertainties emerge from time to time, and it is not
possible to predict all risks and uncertainties, nor can we assess the impact of
all factors on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
Although we believe the expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee future results, level of activity,
performance or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy or completeness of any of these forward-looking
statements. You should not rely upon forward-looking statements as predictions
of future events. We are under no duty to update any of these forward-looking
statements after the date of this Form 10-Q to conform our prior statements to
actual results or revised expectations, and we do not intend to do so.
Forward-looking statements include, but are not limited to, statements about:
•our ability to obtain additional funding to commercialize our Rapid Acoustic
Pulse ("RAP") device for tattoo removal and cellulite reduction, to develop the
RAP device for other indications and develop our dermatological technologies;
•the potential to need to obtain an additional approval when we modify the
Generation 2.2 RAP device to become our Generation 2.3 device before our
national roll-out;
•the timing of our commercial launch, which we expect to occur in the second
quarter of 2021 and which is subject to the aesthetic market stabilizing in
response to COVID-19;
•the success of our future clinical trials;
•compliance with obligations under our intellectual property license with The
University of Texas M.D. Anderson Cancer Center ("MD Anderson");
•market acceptance of the RAP device;
•competition from existing products or new products that may emerge;
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Table of Contents •potential product liability claims; •our dependency on third-party manufacturers to supply or manufacture our products; •our ability to obtain all parts required to manufacture the RAP device, handpiece and cartridge; •our ability to establish or maintain collaborations, licensing or other arrangements; •our ability and third parties' abilities to protect intellectual property rights; •our ability to adequately support future growth; •our ability to attract and retain key personnel to manage our business effectively; •risks associated with our identification of material weaknesses in our control over financial reporting; •natural disasters affecting us, our primary manufacturer or our suppliers; •our ability to establish relationships with health care professionals and organizations; •market and economic uncertainty caused by the COVID-19 outbreak; •general economic uncertainty that adversely affects spending on cosmetic procedures; •volatility in the market price of our stock; •potential dilution to current stockholders from the issuance of equity awards; and •risks associated with theMay 8, 2021 Agreement and Plan of Merger (the "Merger Agreement") with AbbVie Inc. ("AbbVie") andScout Merger Sub, Inc. , a wholly owned subsidiary of AbbVie ("Merger Sub"), under which Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and a wholly-owned subsidiary of AbbVie (the "Merger"), including: • the risk that the proposed Merger may not be completed in a timely manner or at all; • the failure to satisfy any of the conditions to the consummation of the proposed Merger, including the receipt of certain governmental and regulatory approvals; • the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement; and • the outcome of any legal proceedings that have been or may be instituted against the Company related to the Merger Agreement or the proposed Merger. We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this Form 10-Q in the case of forward-looking statements contained in this Form 10-Q. You should not rely upon forward-looking statements as predictions of future events. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Therefore, you should not rely on any of the forward-looking statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Overview
We are a medical technology company focused on developing and commercializing products utilizing our proprietary designed acoustic shockwave technology platform referred to as RAP. We are a pre-revenue stage company with our first product preparing for launch for the removal of tattoos and the reduction of cellulite. Our RAP device uses rapid pulses of designed acoustic shockwaves to disrupt cellular structures in the dermal and subdermal tissue. The uniqueness of our designed shockwave allows us to target the differential in stiffness between cellular structures and generate a shearing effect that we believe represents a platform technology potentially useful in tattoo removal, cellulite treatment, fibrotic scar treatment and
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Table of Contents other indications. We believe the high repetition rate, rapid rise and fall of the wave, and significant peak pressure delivered in a non-focused manner make our shockwave significantly different from other available shockwave technologies. Importantly, our technology allows the disruption of targeted structures within the skin with only minimal discomfort and without additional treatment-related downtime for tattoo removal or any downtime for cellulite treatment.
We received clearance for our initial device from the
We plan to launch our RAP device for tattoo removal and cellulite reduction in the second quarter of 2021 initiating the first shipments into approximately 25 select cosmetic dermatology and plastic surgery offices. We expect to generate revenue from both the initial sale of the device and from the recurring sales of disposable cartridges that are required by the device to deliver the various therapies. We refer to this as our "razor and blade" recurring revenue model. Cartridges are designed to be specific to the intended indication (for example, tattoo cartridges are different from cellulite cartridges) and each treatment session requires one or more cartridges. We expect that one tattoo cartridge will facilitate up to four standard laser treatment passes in a single office visit for the average-sized tattoo (about the size of a deck of playing cards). Therefore, a patient with an average-sized tattoo that requires three office visits will require the use of three cartridges. One cellulite cartridge will treat one leg and buttocks area in a single session for an average patient. As such, most cellulite patients will require two cartridges for their initial treatment of both legs and buttocks. We anticipate that patients may benefit from a second maintenance treatment using a single cartridge across the full treatment area, but have not yet demonstrated this in clinical trials.
We also have ongoing clinical programs in several indications, which, if successful, will allow us to expand commercialization of our products into additional markets. As a stand-alone device, we believe RAP has the potential to reduce the effects of fibrosis and stimulate beneficial fibroblast behavior. This capability enables the targeting of fibrotic (keloid and hypertrophic) scars, as well as smoothing and tightening skin. Importantly, we are planning to initiate additional proof-of-concept clinical trials of our RAP device in the treatment of keloid and hypertrophic scars as well as the improvement of skin laxity in 2021. We also intend to pursue regulatory approval in international markets and we are currently developing a regulatory strategy for these additional markets. We recently announced results from a study in mice demonstrating the ability of RAP to significantly reduce liver fibrosis, further validating the scientific basis for RAP's mechanism of action and potentially widening the range of indications for which RAP may be suitable. Our technology has not been cleared by the FDA for the treatment of scars or fibrosis.
Commercial upgrades to our Generation 2.0 device to improve usability were
subsequently approved through a Special 510(k) in
Our ongoing research and development activities are primarily focused on finalizing the commercial device and cartridge design for tattoo removal and cellulite reduction and then developing our system and treatment head for additional indications. In addition to these development activities, we are exploring additional uses of RAP technology for the dermatology, plastic surgery and aesthetic markets.
The medical technology and aesthetic product markets are highly competitive and dynamic and are characterized by rapid and substantial technological development and product innovations. We will compete with many other technologies for consumer demand. Further, the aesthetic industry in which we will operate is particularly vulnerable to economic trends. The decision to undergo a procedure from our systems will be driven by consumer demand. Procedures performed using our systems will be elective procedures, the cost of which must be borne by the patient and are not reimbursable through government or private health insurance. In times of economic uncertainty or recession, individuals often reduce the amount of money that they spend on discretionary items, including aesthetic procedures. The general economic difficulties being experienced and the lack of availability of consumer credit for some of our customers' patients could adversely affect the markets in which we will operate.
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Table of Contents
Recent Developments
On
On
On
On
On
Agreement and Plan of Merger
On
Upon the closing of the Merger, each outstanding share of Company common stock,
other than shares owned by the Company, AbbVie or Merger Sub (which will be
cancelled) and shares with respect to which appraisal rights are properly
exercised and not withdrawn under
Each stock option outstanding and unexercised immediately prior to the effective time of the Merger (the "Effective Time") will be converted into the right to receive a cash payment, without interest, in an amount equal to the excess of the Merger Consideration over the per share exercise price that would be due in cash upon exercise of such stock option. Each restricted stock unit award outstanding immediately prior to the Effective Time will be converted into the right to receive a cash payment, without interest, in an amount equal to the Merger Consideration. Each warrant to purchase Company common stock outstanding and unexercised immediately prior to the Effective Time will be converted into the right to receive a cash payment, without interest, in an amount equal to the excess of (i) the number of shares of common stock subject to the warrant, multiplied by the Merger Consideration over (ii) the number of shares of common stock subject to the warrant, multiplied by the per share exercise price of such warrant.
The consummation of the Merger is subject to certain customary closing conditions, including (i) the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of the Company's common stock (the "Stockholder Approval"), (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and (iii) that no judgment or law is in effect that enjoins, makes illegal or otherwise prohibits the consummation of the Merger. Moreover, each party's obligations to consummate the Merger are subject to certain other conditions, including (a) the accuracy of the other party's representations and warranties (subject to certain materiality exceptions), (b) the other party's compliance in all material respects with its obligations under the Merger Agreement, and (c) in the case of AbbVie and Merger Sub only, (i) the absence of any pending claim, proceeding or other action by a governmental authority that seeks to prevent, prohibit or make illegal the consummation of the Merger or materially limit AbbVie's ability to own, control, direct, manage or operate the Company and (ii) the absence of any effect, change, event, development or occurrence that, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect (as defined in the Merger Agreement) that is continuing. Subject to the satisfaction of the closing conditions, closing of the Merger is expected to occur in the second half of 2021.
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Table of Contents The Merger Agreement contains representations and warranties and covenants of the parties customary for a transaction of this nature. Until the earlier of the termination of the Merger Agreement and the Effective Time, the Company has agreed to operate its business in the ordinary course of business in all material respects and has agreed to certain other operating covenants and to not take certain specified actions prior to the consummation of the Merger, as set forth more fully in the Merger Agreement. The Company has also agreed to convene and hold a meeting of its stockholders for the purpose of obtaining the Stockholder Approval. In addition, the Merger Agreement requires that, subject to certain exceptions, the Board recommend that the Company's stockholders approve the Merger Agreement.
The Merger Agreement contains certain termination rights for the Company and
AbbVie, including, among others, the right of (1) the Company to terminate the
Merger Agreement in order to enter into an agreement providing for a Superior
Proposal (subject to the Company's compliance with certain obligations under the
Merger Agreement related to such Superior Proposal and such termination) and (2)
AbbVie to terminate the Merger Agreement if the Board changes its recommendation
with respect to the Merger Agreement. The Merger Agreement also provides that
under specified circumstances, including in the event of termination as
described in (1) or (2) above, the Company will be required to pay AbbVie a
termination fee of
In connection with a termination of the Merger Agreement under specified
circumstances involving failure to obtain clearance under the HSR Act to
consummate the Merger (or failure to remove certain legal restraints, or to
resolve certain pending claims or proceedings, arising under antitrust laws with
respect to the Merger) within six months from the date of the Merger Agreement,
subject to two extensions of three months each (provided other closing
conditions are satisfied), or involving a non-appealable legal restraint of the
Merger arising under antitrust laws, AbbVie may be required to pay the Company a
reverse termination fee of up to
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Table of Contents
Results of Operations for the Three Months Ended
Below is a summary of the results of operations (in thousands):
Three Months Ended March 31,
Change %
2021 2020 ($) Change
Operating expenses
Research and development $ 1,456 $ 1,142 $ 314 27.50 %
Sales and marketing 711 51 660 1,294.12 %
Depreciation 91 71 20 28.17 %
General and administrative 2,972 2,011 961 47.79 %
Total operating expenses $ 5,230 $ 3,275 $ 1,955 59.69 %
Research and development. Research and development expenses increased by $0.3
million compared to the same period in 2020, mainly due to increases in expenses
for salaries and related costs of $0.2 million and engineering related costs of
$0.1 million .
Sales and marketing. Sales and marketing expenses increased by $0.7 million
compared to the same period in 2020, largely attributed to increases in expenses
for salaries and related costs of $0.3 million , social media development of $0.2
million , stock-based compensation of $0.1 million , and other expenses totaling
$0.1 million .
General and administrative. General and administrative expenses increased by
$1.0 million compared to the same period in 2020. This increase was primarily
due to increases in expenses for salaries and related costs of $0.3 million ,
board related fees of $0.2 million , legal expenses of $0.2 million , stock-based
compensation of $0.2 million , and information technology of $0.1 million .
Liquidity and Capital Resources
On March 31, 2021 , we had $26.1 million of cash and cash equivalents and $0.2
million in restricted cash representing a letter of credit benefiting our
contract manufacturer.
We will not generate revenue until we have completed the commercialization of
our RAP units and initiated sales of the units. We expect to continue to invest
in our research and development efforts to support our current initiatives.
We estimate our current cash, cash equivalents and restricted cash resources of
The COVID-19 global pandemic has resulted in travel restrictions and temporary
shut-downs of non-essential businesses in many states in
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