NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands of dollars, except share and per share amounts)
NOTE 1 THE COMPANY
Background
Solta Medical, Inc. (the Company) develops, manufactures, and markets aesthetic energy devices to address a range of issues, including skin resurfacing and skin rejuvenation, skin tightening
and body contouring, and acne reduction. The Company was incorporated in California on January 11, 1996 as Thermage, Inc. and reincorporated in Delaware on September 10, 2001. The Company commercially launched its first products in October
2002.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, which are
wholly owned. All intercompany balances and transactions have been eliminated. The Company has established various international subsidiaries in several countries and the functional currency of these foreign subsidiaries is the U.S. dollar.
Use of Estimates
The preparation of the accompanying financial statements in conformity with accounting principles generally accepted in
the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
To maintain comparability among the periods presented, the Company reclassified certain prior period amounts to a
separate line item that was not included in the prior period presentation. The Company made the following reclassifications to conform with the current period presentation. Within the Consolidated Statement of Operations for the years ended
December 31, 2011 and 2010, the Company reclassified amounts that were recorded within general and administrative to remeasurement of contingent consideration liability. The reclassification had no impact on the total loss before income taxes
in the periods presented.
Fair Value of Financial Instruments
Fair value is a market-based measurement that is determined based on assumptions that market participants would use in
pricing an asset or liability. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. A fair value hierarchy prioritizes the inputs used in
measuring fair value as follows:
|
|
|
Level 1- Observable inputs, such as quoted prices in active markets for identical assets and liabilities.
|
|
|
|
Level 2- Inputs other than the quoted prices in active markets that are observable either directly or indirectly at the measurement date and for the
duration of the instruments anticipated life.
|
85
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
|
|
|
Level 3- Unobservable inputs in which there is little or no market data and that are significant to the fair value of the assets and liabilities and
which reflect the Companys best estimate of what market participants would use in pricing the asset or liability at the measurement date.
|
The Company considers all highly liquid investments with an original maturity of three months or less at the time of
purchase to be cash equivalents. The Companys cash equivalents, which are money market funds and other instruments that mature in three months or less at the time of purchase, are classified within Level 1 of the fair value hierarchy because
they are valued using quoted market prices for identical assets that the Company has the ability to assess at the measurement date. On a recurring basis, the Company measures its cash equivalents at fair value.
Carrying amounts of the Companys other financial instruments approximate their fair values due to their short
maturities. The carrying amounts of other assets and liabilities approximate their fair values based upon their nature and size.
The carrying value of the Companys term loans under the credit facility and the subordinated debt facility approximates fair value.
The Companys contingent consideration liability is classified within Level 3 of the fair value hierarchy because it
is valued using unobservable inputs in which the Company developed its own assumptions at December 31, 2012. At the end of each reporting period, the Company remeasures its contingent consideration liability at fair value.
The unobservable inputs at
December 31, 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Measurement
|
|
Fair Value at
December 31, 2012
|
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Input %
|
|
Contingent consideration liability
|
|
$
|
59,900
|
|
|
Discounted cash flow
|
|
Weighted average cost of capital
|
|
|
25.2
|
%
|
|
|
|
|
|
|
|
|
Long term discount rate
|
|
|
25.0
|
%
|
The unobservable inputs at December 31, 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Measurement
|
|
Fair Value at
December 31, 2011
|
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Input %
|
|
Contingent consideration liability
|
|
$
|
27,800
|
|
|
Discounted cash flow
|
|
Weighted average cost of capital
|
|
|
25.1
|
%
|
|
|
|
|
|
|
|
|
Long term discount rate
|
|
|
30.0
|
%
|
The significant unobservable inputs used in the fair value measurement of the Companys contingent
consideration liability are weighted average cost of capital and long term discount rate. Significant increases or decreases in any of these inputs in isolation would result in a significantly higher or lower fair value measurement. Generally, a
change in the assumption used for the weighted average cost of capital is accompanied by a directionally similar change in the assumption used for the long term discount rate.
86
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
The change in the value of
the contingent consideration liability is summarized below:
|
|
|
|
|
Fair value at December 31, 2011
|
|
$
|
27,800
|
|
Change in fair value of the contingent consideration liability recorded as an expense
|
|
|
32,100
|
|
|
|
|
|
|
Fair value at December 31, 2012
|
|
$
|
59,900
|
|
|
|
|
|
|
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to concentrations of risk consist
principally of cash and cash equivalents and accounts receivable. The Companys cash and cash equivalents are primarily invested in deposits, certificates of deposit and money market accounts with two major banking institutions in the United
States. Deposits in these institutions may exceed the amount of insurance provided on such deposits, if any. Management believes that these financial institutions are financially sound and, accordingly, minimal credit risk exists. The Company has
not experienced any losses on its deposits of cash and cash equivalents.
Concentration of credit risk with
respect to trade accounts receivable is considered to be limited due to the diversity of the Companys customer base and geographic sales areas. The Company performs ongoing credit evaluations of its customers and maintains reserves for
potential accounts receivable write-offs.
One customer accounted for more than 10% of accounts receivable as
of December 31, 2012 and no one customer accounted for more than 10% of accounts receivable as of December 31, 2011. No customers accounted for more than 10% of net revenues for the years ended December 31, 2012, 2011 and 2010. The
Companys customer base continues to have a significant number of international customers which may increase the Companys credit risk profile.
The Company is subject to risks common to companies in the medical device industry including, but not limited to, new technological innovations, dependence on key personnel, dependence on key suppliers,
protection of proprietary technology, product liability and compliance with government regulations. To achieve sustained profitable operations, the Company must successfully design, develop, manufacture and market its products. There can be no
assurance that current products will continue to be accepted in the marketplace. Nor can there be any assurance that any future products can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that
such products will be successfully marketed, if at all. These factors could have a material effect on the Companys future financial results, financial position and cash flows.
Future products developed by the Company may require clearances from the U.S. Food and Drug Administration or other
international regulatory agencies prior to commercial sales. There can be no assurance that the Companys products will continue to meet the necessary regulatory requirements. If the Company was denied such clearances or such clearances were
delayed, it may have a material impact on the Company.
Accounts Receivable
Accounts receivable are typically unsecured and derived from revenues earned from customers. The Company performs ongoing
credit evaluations of its customers and maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. We estimate appropriate allowances based upon any specific customer
collection issues, our history of losses, economic
87
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
conditions and age of customer balances. Our assessment of the ability of our customers to pay generally includes direct contact with the customer, a review of their financial status, as well as
consideration of their payment history with us.
Segment Information
The Company operates in one business segment, which encompasses the developing, manufacturing and marketing of aesthetic
energy devices. Management uses one measurement of profitability and does not segregate its business for internal reporting. Long-lived assets are primarily maintained in the United States. The Chief Operating Decision Maker is the Chairman,
President and Chief Executive Officer of the Company.
The
following table summarizes net revenue by product:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Systems
|
|
$
|
66,435
|
|
|
$
|
46,742
|
|
|
$
|
46,364
|
|
Tips and other consumables
|
|
|
70,626
|
|
|
|
63,371
|
|
|
|
56,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from products
|
|
|
137,061
|
|
|
|
110,113
|
|
|
|
102,972
|
|
Services and other
|
|
|
7,484
|
|
|
|
5,871
|
|
|
|
7,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
144,545
|
|
|
$
|
115,984
|
|
|
$
|
110,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes net revenue by geographic region (based on the ship to address on the invoice):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
North America
|
|
$
|
70,841
|
|
|
$
|
52,671
|
|
|
$
|
50,307
|
|
Asia Pacific
|
|
|
52,150
|
|
|
|
40,007
|
|
|
|
34,116
|
|
Europe/Middle East
|
|
|
17,576
|
|
|
|
18,167
|
|
|
|
20,727
|
|
Rest of the world
|
|
|
3,978
|
|
|
|
5,139
|
|
|
|
5,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
144,545
|
|
|
$
|
115,984
|
|
|
$
|
110,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
Inventory is stated at the lower of cost or market, cost being determined on a standard cost basis (which approximates
actual cost on a first-in, first-out basis) and market being determined as the lower of replacement cost or net realizable value. Lower of cost or market is evaluated by considering obsolescence, excessive levels of inventory, deterioration and
other factors.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the
related assets, which is two to seven years for furniture and fixtures, three to five years for machinery and equipment, and three years for software and computer hardware. Amortization of leasehold improvements is computed using the straight-line
method over the shorter of the remaining lease term or the
88
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
estimated useful life of the related assets, typically five years. Upon sale or retirement of assets, the costs and related accumulated depreciation and amortization are removed from the balance
sheet and the resulting gain or loss is reflected in operations. Maintenance and repairs are charged to operations as incurred.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets
acquired. The Company tests goodwill for impairment at least annually or more frequently if events or changes in circumstances indicate that this asset may be impaired. The goodwill test is based on our single operating segment and reporting unit
structure. The Companys annual impairment review involves a two-step process as follows:
Step 1
The Company compares its enterprise fair value to its enterprise carrying value including goodwill. If the carrying value including goodwill exceeds its fair value, the Company moves on to step 2. If the fair value exceeds the carrying value, no
further work is performed and no impairment charge is necessary. To date, the fair value of the Company has exceeded the carrying value and thus no goodwill impairment charge has been recorded.
The Company uses a combination of its market capitalization and the discounted cash flow methodology to determine the
fair value of its single reporting unit. The discounted cash flow methodology is based on the present value of the cash flows that our single reporting unit is expected to generate in the future. Key assumptions include projections of future cash
flows, growth rates, and discount rates. For the discount rate, we use a rate which reflects our weighted average cost of capital determined based on our industry and size risk premiums based on our market capitalization.
Step 2 The Company performs an allocation of the fair value to its identifiable tangible and intangible assets
(other than goodwill) and liabilities. This allows the Company to derive an implied fair value of goodwill. The Company then compares the implied fair value of goodwill to the carrying value of goodwill. If the carrying amount of goodwill is greater
than the implied fair value of goodwill, an impairment charge would be recognized for the excess.
No goodwill
impairment was identified through December 31, 2012. There can be no assurance that future goodwill impairments will not occur.
Valuation of Long-Lived Assets and
Purchased Intangible Assets
The Company reviews long-lived assets, including property and equipment
and finite lived intangibles, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future
cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Through
December 31, 2012, there have been no such impairments. There can be no assurance that future long-lived asset impairments will not occur.
Acquired intangible assets with finite lives are amortized using the straight-line method over their useful lives ranging from two to twelve years. If the acquired intangible asset is not currently
generating revenue, amortization is deferred until the acquired intangible asset begins to generate revenue.
89
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
Revenue Recognition
Product revenue is recognized when delivery has occurred, persuasive evidence of an arrangement exists, the price is
fixed or determinable and collectability is reasonably assured. Delivery is deemed to have occurred when title and risks and rewards of ownership have transferred to the customer and remaining obligations are considered perfunctory. For most of the
Companys product sales, transfer of title and risks and rewards of ownership occurs when the product is shipped. Revenue is recorded net of customer and distributor discounts and rebates. For sales transactions in which collectability is not
reasonably assured, the Company recognizes revenue upon receipt of cash payment.
The Company sells to
end-users in the United States and to distributors and end-users outside of the United States. Sales to end-users and distributors on all products except for the Claro product do not include return rights. For the Claro product, the Company
estimates a returns reserve. The Company typically recognizes revenue upon shipment for sales through independent, third party distributors as the Company has no continuing obligations subsequent to shipment, other than replacement parts. The
distributors are responsible for all marketing, sales, installation, training and warranty services for the Companys products, as well as obtaining regulatory clearances and approvals outside of the United States. While the regulatory
approval process varies greatly by country and the Company may assist the distributor in the regulatory approval process, the responsibility belongs mainly to the distributor. The Company determines whether its remaining obligation in the sale is
perfunctory prior to recording revenue. The Company does not provide price protection or stock rotation rights to any of its distributors. In addition, the Companys distributor agreements do not allow the distributor to return or exchange
products and the distributor is obligated to pay the Company for the sale regardless of whether the distributor is able to resell the product.
The Company also offers customers extended warranty service contracts. Revenue from the sale of extended service contracts is recognized on a straight-line basis over the period of the applicable extended
contract. The Company also earns service revenue from customers outside of their warranty term or extended service contracts. Such service revenue is recognized as the services are provided.
In conjunction with the Reliant acquisition, the Company assumed an agreement with an external party to collaborate on a
joint development and the worldwide commercialization of devices and accessories that incorporate Fraxel technology. Under the terms of this arrangement, the external party made quarterly payments for the costs incurred in performing activities
under the arrangement. As of December 31, 2010, all payments were received on this agreement.
Revenue Recognition for Arrangements with Multiple
Deliverables
The Company evaluates each deliverable in an arrangement to determine whether it
represents a separate unit of accounting. A deliverable is considered a separate unit of accounting when it has stand-alone value to the customers and if the arrangement includes a customer refund or return right relative to the delivered item, the
delivery and performance of the undelivered item is considered probable and substantially in the Companys control. In arrangements where the aforementioned criteria are not met, the deliverable is combined with the undelivered item(s) and
revenue recognition is determined as one single unit.
The Companys multi-element arrangements generally
consist of the sale of systems and post-sale obligations like training or installation. These obligations are fulfilled after product shipment. For multi-element arrangements like these, the Company allocates revenue to all deliverables based on
their relative selling prices
90
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
since the deliverables qualify as separate units of accounting. In such circumstances, the Company uses the following to determine the relative selling price to be used for allocating revenue to
deliverables: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (BESP). VSOE generally
exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. BESP reflects the Companys best estimate of what the selling price of that element would be if it was sold
regularly on a stand-alone basis, considering factors relevant to its pricing practices such as standalone sales prices of similar products, customer type, and geography. The Company generally determines the relative selling price by applying VSOE
to the allocated deliverables and then in situations when VSOE does not exist, the Company applies BESP to the respective deliverables. Amounts allocated to the deliverables are recognized as revenue upon delivery, provided all other revenue
recognition criteria have been satisfied.
Warranty Obligations
The Company offers a one year warranty for systems sold to all direct customers and a one year replacement parts warranty
for systems sold to distributors outside of the United States. The Company also provides a warranty for its consumable products. The Company provides for the estimated cost to repair or replace products under warranty at the time of sale in its
warranty reserves. The costs are recorded in cost of revenue.
Shipping and Handling Costs
Shipping and handling costs charged to customers are included in net revenue and the associated expense is included in
cost of revenue in the statements of operations.
Research and Development Expenditures
Costs related to research, design and development of products are charged to research and development expense as
incurred.
Advertising Costs
Advertising costs are included in sales and marketing expenses and are expensed as incurred. Advertising costs were $419,
$361 and $397 for the years ended December 31, 2012, 2011 and 2010, respectively.
Stock-Based Compensation
The Company recognizes stock-based compensation expense, using a fair-value based method, for costs related to all
share-based payments including stock options. The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing model.
Equity instruments issued to non-employees are recorded at their fair value on the measurement date and are subject to
periodic adjustment as the underlying equity instruments vest. Non-employee stock-based compensation charges are amortized over the vesting period, on a straight-line basis.
91
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
Income Taxes
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases
of assets and liabilities, measured at tax rates that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Foreign Currency Translation
The functional currency of the Companys foreign subsidiaries is the U.S. dollar. Translation adjustments resulting
from remeasuring the foreign currency denominated financial statements of the subsidiaries into U.S. dollars are included in the Companys consolidated statements of operations. Translation gains and losses have not been significant to date.
Comprehensive Income (Loss)
Comprehensive income (loss) generally represents all changes in stockholders equity except those resulting from
investments, contributions by, or distributions to stockholders. The Company does not have any changes in components of comprehensive loss that need to be excluded from net loss for the years ended December 31, 2012, 2011 and 2010.
Net Loss Per Common Share
Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common
shares outstanding during the period.
Diluted net loss per share attributed to common shares is computed by
dividing the net loss attributable to common shares for the period by the weighted average number of common and potential common shares outstanding during the period, if the effect of each class of potential common shares is dilutive. Potential
common shares include common stock subject to repurchase rights and shares of common stock issuable upon the exercise of stock options and warrants and shares of common stock issuable under the Employee Stock Purchase Plan and restricted stock
units. The dilutive effect of potential common shares is reflected in diluted net loss per share by application of the treasury stock method, which includes consideration of stock-based compensation.
Diluted net loss per share is the same as basic net loss per share for all periods presented because any potential
dilutive common shares were anti-dilutive. Such potentially dilutive shares are excluded from the computation of diluted net loss per share when the effect would be to reduce net loss per share. Therefore, in periods when a loss is reported, the
calculation of basic and diluted loss per share results in the same value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Historical net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(38,008
|
)
|
|
$
|
(1,329
|
)
|
|
$
|
(2,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
64,437,427
|
|
|
|
60,573,428
|
|
|
|
58,908,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.59
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
The following
outstanding options, warrants, common stock issuable under the Employee Stock Purchase Plan, restricted stock units, and market-based stock units were excluded from the computation of diluted net loss per common share for the periods presented
because including them would have had an antidilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Options to purchase common stock
|
|
|
5,550,305
|
|
|
|
5,765,066
|
|
|
|
7,237,334
|
|
Common stock warrants
|
|
|
4,587,082
|
|
|
|
4,414,191
|
|
|
|
4,581,179
|
|
Restricted and market-based stock units
|
|
|
2,541,468
|
|
|
|
1,714,180
|
|
|
|
807,928
|
|
Common stock issuable under Employee Stock Purchase Plan
|
|
|
177,184
|
|
|
|
172,987
|
|
|
|
113,455
|
|
NOTE 3 ACQUISITIONS
Aesthera Corporation
On February 26, 2010, the Company acquired 100% of the common stock of Aesthera Corporation (Aesthera), a
privately held company for consideration including $501 in cash and 4,750 of shares of the Companys common stock. The number of shares of the Companys common stock issued of 2,435,897 was determined based on the volume-weighted average
closing market price of $1.95 per share of the Companys common stock during the five trading days preceding the acquisition date.
In connection with this transaction, the Company entered into a contingent consideration arrangement which could have required payments ranging from $0 to $10,750 in shares of the Companys common
stock if certain revenue milestones were achieved related to the sale of Aesthera products and if certain acquired Aesthera receivables were collected. The fair value of the contingent consideration recognized on the acquisition date of $280 was
estimated by applying a probability weighted discounted cash-flow approach. Key assumptions include (i) a discount rate of 4.05% percent and (ii) probability of milestone achievement ranging from 0%-50%.
The revenue milestones were not achieved during 2010 and accordingly a $280 gain was recognized in general and
administrative expense in the Companys consolidated statement of operations during the year ended December 31, 2010.
As a result of the acquisition, the Company has expanded its product offerings by providing treatment of acne to its customers through the Companys direct sales and distribution network worldwide.
The Companys consolidated financial statements include the results of operations of Aesthera from the
date of acquisition through December 31, 2012.
93
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
The following summarizes the purchase price allocation of
the Aesthera acquisition:
|
|
|
|
|
Cash
|
|
$
|
269
|
|
Accounts receivable
|
|
|
791
|
|
Inventory
|
|
|
1,613
|
|
Prepaid expenses and other assets
|
|
|
85
|
|
Property and equipment
|
|
|
108
|
|
Intangible assets:
|
|
|
|
|
Isolaz trade name
|
|
|
300
|
|
Customer relationships
|
|
|
1,300
|
|
Core technology
|
|
|
2,100
|
|
Goodwill
|
|
|
1,421
|
|
Other long term assets
|
|
|
35
|
|
|
|
|
|
|
Total assets acquired
|
|
|
8,022
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable
|
|
|
422
|
|
Accrued liabilities
|
|
|
1,525
|
|
Deferred revenue
|
|
|
302
|
|
Other liabilities
|
|
|
242
|
|
|
|
|
|
|
Total liabilities acquired
|
|
|
2,491
|
|
Net acquired assets
|
|
$
|
5,531
|
|
|
|
|
|
|
Of the total original purchase price of $5,531, $3,700 was allocated to amortizable intangible assets,
which are being amortized using a straight-line method over their respective estimated useful lives of five to six years. The valuation of identified intangible assets acquired was based on managements estimates, currently available
information and reasonable and supportable assumptions. The allocation was based on the fair value of these assets determined using the income approach. The income approach uses a discounted cash flow model. The Company calculated the present value
of the expected future cash flows attributable to the acquired intangibles using an 18% to 19% discount rate. With respect to intangible assets, there are several methods available under the income approach to quantify fair value. The Company used
the following methods to quantify fair value of the acquired intangibles at the acquisition date. The excess earnings method was used for product technology and customer relationships. The relief from royalties method was used for the trade name
intangibles with a royalty rate of 1%.
The Company allocated the residual value of $1,421 to goodwill.
Goodwill arising from the acquisition is attributable to the workforce of the acquired business and the significant synergies expected to arise. Goodwill is not expected to be deductible for tax purposes.
For the period from February 26, 2010 to December 31, 2010, revenue from the sales of Aesthera products was
$4,973. Net income associated with Aesthera products and operations cannot be determined given the integration of Aesthera operations within the Company.
Reliable information to provide pro forma financial disclosure on the Aesthera acquisition is currently unavailable and impracticable to prepare at this time. Therefore, such pro forma financial
information has not been included herein.
94
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
CLRS Technology Corporation
On October 15, 2010, the Company acquired 100% of the common stock of CLRS Technology Corporation
(CLRS), a privately held company for consideration consisting of the payment of approximately $1,021 of debt at the closing of the acquisition.
In connection with this transaction, the Company entered into a contingent consideration arrangement which would have required additional payments if certain milestones related to revenue related from the
sale of CLRS products and operating income of CLRS were achieved during 2011. The fair value of the contingent consideration recognized on the acquisition date of $878 was estimated by applying a probability weighted discounted cash-flow approach.
Key assumptions include (i) discount rate of 2.1% and 25.6% percent and (ii) probability of milestone achievement ranging from 0%-100%. As of December 31, 2011, the fair value of this contingent consideration liability had been
reduced to zero as the revenue and operating income milestones were not achieved and accordingly, a $878 gain was recognized in general and administrative expense in our consolidated statement of operations during the year ended December 31,
2011.
As a result of the acquisition, the Company has expanded its product offerings by providing a consumer
based treatment of acne to its customers through several retail channels.
The Companys consolidated
financial statements include the results of operations of CLRS from the date of acquisition through December 31, 2012.
The following summarizes the purchase price allocation of
the CLRS acquisition:
|
|
|
|
|
Cash
|
|
$
|
10
|
|
Inventory
|
|
|
50
|
|
Property and equipment
|
|
|
32
|
|
Intangible assets:
|
|
|
|
|
CLARO trade name
|
|
|
100
|
|
Customer relationships
|
|
|
200
|
|
Core/Developed Technology
|
|
|
800
|
|
Goodwill
|
|
|
774
|
|
|
|
|
|
|
Total assets acquired
|
|
|
1,966
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable
|
|
|
3
|
|
Accrued liabilities
|
|
|
64
|
|
|
|
|
|
|
Total liabilities acquired
|
|
|
67
|
|
Net acquired assets
|
|
$
|
1,899
|
|
|
|
|
|
|
Of the total original purchase price of $1,899, $1,100 was allocated to amortizable intangible assets,
which are being amortized using a straight-line method over their respective estimated useful lives of four to six years. The valuation of identified intangible assets acquired was based on managements estimates, currently available
information and reasonable and supportable assumptions. The allocation was based on the fair value of these assets determined using the income approach and the cost method approach. The income approach uses a discounted cash flow model. The Company
calculated the present value of the expected future cash flows attributable to the acquired intangibles using a 25.6% discount rate. With respect to intangible assets, there are several methods available under the income approach to quantify fair
value. The Company used the following
95
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
methods to quantify fair value of the acquired intangibles at the acquisition date. The excess earnings method was used for customer relationships and the relief from royalties method was used
for the trade name intangibles with a royalty rate of 0.3%. The Company used the cost method approach to quantify the fair value of the product technology intangible, by using cumulative inflation rates ranging from 0% to 5.5%.
The Company allocated the residual value of $774 to goodwill. Goodwill arising from the acquisition is attributable to
the workforce of the acquired business and the significant synergies expected to arise. Goodwill is not expected to be deductible for tax purposes.
For the period from October 15, 2010 to December 31, 2010, revenue from the sales of CLRS products was $15. Net income associated with CLRS products and operations cannot be determined given the
integration of CLRS operations within the Company.
Reliable information to provide pro forma financial
disclosure on the CLRS acquisition is currently unavailable and impracticable to prepare at this time. Therefore, such pro forma financial information has not been included herein.
Medicis Technologies Corporation
On September 12, 2011, the Company entered into a stock purchase agreement (Purchase Agreement) with Medicis Pharmaceutical Corporation (Medicis) pursuant to which the Company
agreed to acquire from Medicis all the outstanding shares of Medicis Technologies Corporation (f/k/a LipoSonix, Inc.) (Liposonix), subject to the terms and conditions of the Purchase Agreement. In connection with the acquisition, a
separate subsidiary of Medicis agreed to transfer certain assets and assign certain agreements related to Liposonix (collectively, the Transaction). As a result of the acquisition, the Company has expanded its product offerings by
providing a nonsurgical fat ablation treatment to its customers through the Companys direct sales and distribution networks worldwide.
The Company closed the Transaction on November 1, 2011. At the closing of the Transaction, the Company paid to Medicis $15,541 in cash, which consisted of an upfront $15,000 payment and $541 of
preliminary working capital adjustments. Also on November 17, 2011, the Company paid a one-time payment of $20,000 to Medicis with respect to the clearance by the U.S. Food and Drug Administration of the second generation Liposonix product
which was received on October 24, 2011.
In addition, the Company has agreed to pay to Medicis additional
cash payments, which will expire after approximately seven years, based upon, among other things, the achievement of year-to-year increases and specified targets in the adjusted net sales and adjusted gross profits of the Liposonix products, subject
to the terms and conditions of the Purchase Agreement. Also, upon the closing of the Transaction, the Company assumed the contingent payment obligations of Medicis with respect to the former shareholders of Liposonix pursuant to the Agreement and
Plan of Merger among Medicis, Liposonix and the other parties thereto dated as of June 16, 2008. The fair value of the total contingent consideration recognized on the acquisition date of $26,600 was estimated by applying a probability weighted
discounted cash-flow approach using a discount rate of 30%. Also, the Company assumed the Liposonix Bothell, Washington, facility lease, and expects to maintain this facility through January 2015, the expiration of the lease.
As of December 31, 2012, the fair value of this contingent consideration liability has been increased to $59,900 to
reflect the updated fair value estimate of the liability and accordingly a $32,100 and $1,200 charge was recognized as an expense in our condensed consolidated statement of operations during the years ended
96
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
December 31, 2012 and December 31, 2011, respectively (see note 2 regarding Level 3 unobservable inputs used at December 31, 2012 and 2011 to measure the contingent consideration
liability). The increase in the updated fair value of the contingent consideration is due primarily to the Companys estimate of higher achievement in specified net sales and adjusted gross profit targets over the seven-year earnout period and
accretion of the liability. If the Companys actual results differ from those estimates, the contingent consideration liability will be adjusted accordingly.
As of December 31, 2012 and 2011, $21,400 and $0, respectively, of the contingent consideration liability was
classified as current, and $38,500 and $27,800, respectively, was classified as non-current.
The following summarizes the purchase price allocation of
the Liposonix acquisition:
|
|
|
|
|
Accounts receivable
|
|
$
|
7
|
|
Inventory
|
|
|
2,554
|
|
Prepaid expenses and other current assets
|
|
|
283
|
|
Property and equipment
|
|
|
1,896
|
|
Intangible assets:
|
|
|
|
|
Liposonix trade name
|
|
|
1,100
|
|
Customer relationships
|
|
|
400
|
|
Core/Developed Technology
|
|
|
15,900
|
|
Goodwill
|
|
|
47,139
|
|
Other long term assets
|
|
|
747
|
|
|
|
|
|
|
Total assets acquired
|
|
|
70,026
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
453
|
|
Deferred revenue
|
|
|
115
|
|
Warranty reserve
|
|
|
40
|
|
Other current liabilities
|
|
|
147
|
|
Other long term liabilities
|
|
|
7,130
|
|
|
|
|
|
|
Total liabilities acquired
|
|
|
7,885
|
|
Net acquired assets
|
|
$
|
62,141
|
|
|
|
|
|
|
Of the total original purchase price of $62,141, $17,400 was allocated to amortizable intangible
assets, which are being amortized using a straight-line method over their respective estimated useful lives of four to nine years. The valuation of identified intangible assets acquired was based on managements estimates, currently available
information and reasonable and supportable assumptions. The allocation was based on the fair value of these assets determined using the income approach and the cost method approach. The income approach uses a discounted cash flow model. The Company
calculated the present value of the expected future cash flows attributable to the acquired intangibles using a 21.0% discount rate. With respect to intangible assets, there are several methods available under the income approach to quantify fair
value. The Company used two methods to quantify fair value of the acquired intangibles at the acquisition date. The excess earnings method was used for customer relationships and the relief from royalties method was used for the developed technology
and trade name intangibles with royalty rates of 9.8% and 0.7%, respectively.
97
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
We allocated the residual value of $47,100 to goodwill. Goodwill
represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Goodwill is not expected to be deductible for tax purposes. The factors that contributed to a premium in the purchase price and the
resulting recognition of goodwill were:
|
|
|
the expansion of the Companys recurring revenue model allowing for increased treatment tip usage as well as expanding clinical applications
for our physician customers;
|
|
|
|
access to an expanded base of industry knowledge and expertise;
|
|
|
|
opportunity to complement our existing products for the aesthetic market with a synergistic technology and new clinical treatment applications; and
|
|
|
|
expansion of our global presence thereby increasing our market penetration.
|
For the period from November 1, 2011 to December 31, 2011, revenue from the sales of Liposonix products was
$819. Net income associated with Liposonix products and operations cannot be determined given the integration of Liposonix operations within the Company. The Companys consolidated financial statements include the results of operations of
Liposonix from the date of acquisition through December 31, 2012.
During the year ended
December 31, 2010, the Company incurred an aggregate $1,087 in acquisition-related costs related to the acquisitions of Aesthera and CLRS. During the year ended December 31, 2011, the Company incurred an aggregate $2,355 in
acquisition-related costs related to the acquisitions of CLRS and Liposonix. During the year ended December 31, 2012, the Company incurred an aggregate $268 in acquisition-related costs related to the acquisitions of Liposonix. These expenses
are included in general and administrative expenses in the Companys consolidated statement of operations for the twelve months ended December 31, 2012, 2011 and 2010.
Pro forma financial information (unaudited)
The unaudited financial information in the table below summarizes the combined results of operations of the Company and
Liposonix on a pro forma basis, as though the companies had been combined as of January 1, 2010. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have
been achieved if the Liposonix acquisition had taken place at the beginning of each of the periods presented.
The pro forma financial information for all periods presented includes the business combination accounting effect on the
amortization charges from acquired intangible assets, adjustments to certain acquired assets and liabilities and acquisition costs reflected in the Companys and Liposonixs historical statements of operations for periods prior to the
acquisition, and the related tax effects.
98
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
The unaudited pro forma financial information for the years
ended December 31, 2011 and 2010 combines the historical results for the Company for those years, with the historical results for Liposonix as a separate entity, for the years ended December 31, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Net revenue
|
|
$
|
116,497
|
|
|
$
|
114,996
|
|
Net loss
|
|
$
|
(32,746
|
)
|
|
$
|
(163,710
|
)
|
Net loss per share basic
|
|
$
|
(0.54
|
)
|
|
$
|
(2.78
|
)
|
Net loss per share diluted
|
|
$
|
(0.54
|
)
|
|
$
|
(2.78
|
)
|
The above table includes pro forma adjustments to:
|
|
|
record amortization of the acquired intangible assets;
|
|
|
|
record depreciation expense for acquired property and equipment based on the estimated fair values and remaining lives of the acquired assets at the
date of acquisition;
|
|
|
|
record acquisition-related charges related to the acquisition as if they had been incurred in 2010 rather than 2011;
|
|
|
|
adjust interest income to eliminate the pre-acquisition interest income recorded by the Company related to interest earned on cash and cash
equivalent balances used to fund the acquisition; and
|
|
|
|
adjust interest expense by recognizing interest expense as if the acquisition-related debt of the Company had been outstanding at January 1,
2010, offset by the respective loan warrant discount amortization relating to the common stock warrants issued in connection with the issuance of the debt.
|
NOTE 4 BALANCE SHEET DETAIL
Cash and Cash Equivalents
On a recurring basis, the Company measures its cash equivalents at fair value. Fair value is a market-based measurement
that is determined based on assumptions that market participants would use in pricing an asset or liability (see note 2). The Companys cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using
quoted market prices for identical assets that the Company has the ability to assess at the measurement date. The Companys cash equivalents, which are money market funds and other instruments that mature in three months or less, are classified
as such at December 31, 2012 and December 31, 2011.
99
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
Inventories, Net
Inventories, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Raw materials
|
|
$
|
7,564
|
|
|
$
|
6,344
|
|
Work-in-process
|
|
|
418
|
|
|
|
324
|
|
Finished goods
|
|
|
8,629
|
|
|
|
9,856
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,611
|
|
|
$
|
16,524
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
Property and equipment, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Leasehold improvements
|
|
$
|
3,305
|
|
|
$
|
3,096
|
|
Furniture and fixtures
|
|
|
1,160
|
|
|
|
1,436
|
|
Machinery and equipment
|
|
|
12,979
|
|
|
|
12,139
|
|
Software
|
|
|
2,285
|
|
|
|
2,108
|
|
Computers and equipment
|
|
|
2,863
|
|
|
|
2,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,592
|
|
|
|
20,816
|
|
Less: Accumulated depreciation and amortization
|
|
|
(16,191
|
)
|
|
|
(13,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,401
|
|
|
$
|
6,818
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property and equipment was $3,665, $3,269 and $2,926
for the years ended December 31, 2012, 2011 and 2010, respectively.
100
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
Intangible Assets
The Companys intangible assets were acquired in connection with the acquisition of Reliant Technologies, Inc. on
December 23, 2008, Aesthera Corporation on February 26, 2010, CLRS Technology Corporation on October 15, 2010 and Liposonix on November 1, 2011.
The carrying amount and accumulated amortization expense of the acquired intangible assets at December 31, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Estimated
Useful Life
|
|
|
Gross Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Value
|
|
Intangible assets amortized to cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core technology
|
|
|
6 - 12 years
|
|
|
$
|
21,320
|
|
|
($
|
7,460
|
)
|
|
$
|
13,860
|
|
Product technology
|
|
|
7 - 9 years
|
|
|
|
25,170
|
|
|
|
(7,388
|
)
|
|
|
17,782
|
|
Future royalties contract
|
|
|
10 years
|
|
|
|
3,890
|
|
|
|
(486
|
)
|
|
|
3,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,380
|
|
|
|
(15,334
|
)
|
|
|
35,046
|
|
Intangible assets amortized to operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development contract
|
|
|
1.9 years
|
|
|
|
620
|
|
|
|
(620
|
)
|
|
|
|
|
Non-compete agreement
|
|
|
2 years
|
|
|
|
500
|
|
|
|
(500
|
)
|
|
|
|
|
Trade name
|
|
|
6 - 10 years
|
|
|
|
5,080
|
|
|
|
(1,832
|
)
|
|
|
3,248
|
|
Customer relationships
|
|
|
4 - 12 years
|
|
|
|
6,710
|
|
|
|
(2,576
|
)
|
|
|
4,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,910
|
|
|
|
(5,528
|
)
|
|
|
7,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
63,290
|
|
|
($
|
20,862
|
)
|
|
$
|
42,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Estimated
Useful Life
|
|
|
Gross Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Value
|
|
Intangible assets amortized to cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core technology
|
|
|
6 -12 years
|
|
|
$
|
21,320
|
|
|
($
|
5,441
|
)
|
|
$
|
15,879
|
|
Product technology
|
|
|
7 - 9 years
|
|
|
|
25,170
|
|
|
|
(4,295
|
)
|
|
|
20,875
|
|
Future royalties contract
|
|
|
10 years
|
|
|
|
3,890
|
|
|
|
(97
|
)
|
|
|
3,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,380
|
|
|
|
(9,833
|
)
|
|
|
40,547
|
|
Intangible assets amortized to operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development contract
|
|
|
1.9 years
|
|
|
|
620
|
|
|
|
(620
|
)
|
|
|
|
|
Non-compete agreement
|
|
|
2 years
|
|
|
|
500
|
|
|
|
(500
|
)
|
|
|
|
|
Fraxel trade name
|
|
|
6 - 10 years
|
|
|
|
5,080
|
|
|
|
(1,224
|
)
|
|
|
3,856
|
|
Customer relationships
|
|
|
4 - 12 years
|
|
|
|
6,710
|
|
|
|
(1,761
|
)
|
|
|
4,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,910
|
|
|
|
(4,105
|
)
|
|
|
8,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
63,290
|
|
|
($
|
13,938
|
)
|
|
$
|
49,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has included amortization of acquired intangible assets directly attributable to
revenue-generating activities in cost of revenue. The Company has included amortization of acquired intangible assets not directly related to revenue-generating activities in operating expenses. During the years ended December 31, 2012, 2011
and 2010, the Company recorded amortization expense in the amount of $5,501, $3,732 and $3,179 to cost of revenue and $1,423, $1,125 and $1,612 to operating expenses, respectively.
101
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
As of December 31,
2012, the total expected future amortization related to intangible assets, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
included in Cost
of Revenue
|
|
|
Amortization
included in
Operating
Expense
|
|
|
Total
Amortization
Expense
|
|
2013
|
|
|
5,498
|
|
|
|
1,419
|
|
|
|
6,917
|
|
2014
|
|
|
5,498
|
|
|
|
1,408
|
|
|
|
6,906
|
|
2015
|
|
|
5,469
|
|
|
|
1,136
|
|
|
|
6,605
|
|
2016
|
|
|
3,855
|
|
|
|
964
|
|
|
|
4,819
|
|
2017 and thereafter
|
|
|
14,726
|
|
|
|
2,455
|
|
|
|
17,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,046
|
|
|
$
|
7,382
|
|
|
$
|
42,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
The changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Balance at beginning of period
|
|
$
|
96,620
|
|
|
$
|
49,481
|
|
Addition from acquisition
|
|
|
|
|
|
|
47,139
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
96,620
|
|
|
$
|
96,620
|
|
|
|
|
|
|
|
|
|
|
Equity Method Investment
The Company entered into an equity method investment in May 2011 with a privately held company and initially received
approximately 12.5% of the fully diluted as-if converted outstanding capital stock of the investee, in exchange for entering into a Development and Supply Agreement with the Company. The Company recorded the investment as a long-term other asset and
deferred income in its consolidated balance sheet. The fair value of the investment was determined based on a discounted cash-flow approach. The investment recorded during the years ended December 31, 2012 and 2011, is not material.
We may have the ability to exercise significant influence, but not control, over the investee, therefore the investment
has been accounted for as an equity method investment. The Company records its share of the investees results of operations within other income and expense, net, in the Companys consolidated statements of operations. Our share of the
investees results of operations is not material for the years ended December 31, 2012 and 2011.
As
of December 31, 2012, the Company determined that the long-term asset was impaired given the carrying amount of the investment may not be fully recoverable, and as such, the related deferred income could not be earned over the term of the
agreement. As a result, the Company released the related deferred income from the Companys consolidated balance sheet and recorded a gain within other income and expense, net, in the Companys consolidated statements of operations for the
year ended December 31, 2012. This gain was partially offset by the asset impairment loss within other income and expense, net, in the Companys consolidated statements of operations for the year ended December 31, 2012. The net gain
recorded is not material for the year ended December 31, 2012.
102
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
Accrued Liabilities
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Payroll and related expenses
|
|
$
|
6,723
|
|
|
$
|
6,002
|
|
Accrued claims and settlements
|
|
|
3,189
|
|
|
|
3,058
|
|
Standard warranty
|
|
|
1,724
|
|
|
|
1,647
|
|
Professional fees
|
|
|
662
|
|
|
|
773
|
|
Other
|
|
|
5,045
|
|
|
|
4,646
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,343
|
|
|
$
|
16,126
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 WARRANTY AND SERVICE CONTRACTS
Standard Warranty
The Company currently accrues for the estimated cost to repair or replace products under warranty at the time of sale and
is recorded as a current liability in accrued liabilities.
A summary of standard warranty accrual activity is shown below:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Balance at beginning of period
|
|
$
|
1,647
|
|
|
$
|
1,525
|
|
Additions from acquisition
|
|
|
|
|
|
|
40
|
|
Accruals for warranties issued during the period
|
|
|
4,061
|
|
|
|
3,346
|
|
Settlements made during the period
|
|
|
(3,984
|
)
|
|
|
(3,264
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,724
|
|
|
$
|
1,647
|
|
|
|
|
|
|
|
|
|
|
Extended Warranty Contracts
The Company sells extended warranty service contracts to its customers. At the time of sale, the Company defers the
amounts billed for such service contracts. Deferred service contract revenue, included as deferred revenue on the balance sheet, is recognized on a straight-line basis over the period of the applicable extended warranty contract.
A summary of extended warranty contract activity is shown below:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Balance at beginning of period
|
|
$
|
3,256
|
|
|
$
|
2,805
|
|
Additions from acquisition
|
|
|
|
|
|
|
|
|
Payments received
|
|
|
4,273
|
|
|
|
4,479
|
|
Revenue recognized
|
|
|
(4,490
|
)
|
|
|
(4,028
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,039
|
|
|
$
|
3,256
|
|
|
|
|
|
|
|
|
|
|
103
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
As of December 31, 2012 and 2011, $2,356 and $2,432 respectively,
of the extended warranty contracts was classified as current, and $683 and $824, respectively, was classified as non-current. The Company incurred costs of $1,711, $1,398 and $927 under extended warranty contracts during the years ended
December 31, 2012, 2011 and 2010, respectively.
NOTE 6 LOAN AND SECURITY AGREEMENTS
The Company entered into a Loan and Security Agreement (the Loan Agreement) with Silicon
Valley Bank (the Lender) on March 9, 2009 with a subsequent amendment on March 27, 2009, providing for a $6,000 secured revolving loan facility, with availability to be subject to a borrowing base formula, and a $3,000 secured
term loan.
On June 30, 2009, the Company entered into a second amendment to the Loan Agreement which
provided for an increase of the secured revolving loan facility to $8,000 and an additional $1,000 secured term loan.
On March 31, 2010, the Company entered into a third amendment to the Loan Agreement which provided for an increase of the commitment under the loan facility by adding a $10,000 secured term loan
facility, amended the financial covenants, which includes changes to the liquidity ratio, minimum EBITDA covenant and removal of the tangible net worth covenant, and extended the maturity date of the existing revolving loan facility from
March 9, 2011 to March 8, 2012.
On October 15, 2010, the Company entered into a fourth
amendment to the Loan Agreement, which authorized the Company to consummate the acquisition of CLRS (see note 3).
On April 20, 2011, the Company entered into a fifth amendment to the Loan Agreement, which extended the borrowing period for term loans borrowed under the secured term loan facility from
March 31, 2011 to March 31, 2012, and extended the maturity date of such borrowings from December 31, 2013 to December 31, 2014.
On September 12, 2011, the Company entered into a sixth amendment to the Loan Agreement, which authorized the Company to enter into a material definitive agreement with Medicis to acquire one of its
subsidiaries, Liposonix (see note 3).
On October 25, 2011, the Company entered into a seventh amendment
to its Loan Agreement. The seventh amendment provides for, among other things, (i) an increase of the secured term loan facility from $10,000 to $20,000, (ii) amendments to the financial covenants, including changes to the liquidity ratio,
the fixed charge coverage ratio and the leverage ratio, (iii) an extension of the draw period for term loans borrowed under the secured term loan facility from March 31, 2012 to June 30, 2012 and an extension to the maturity date
of such borrowings from December 31, 2014 to September 1, 2015, (iv) an amendment of the interest rate per annum on such borrowings from the greater of (a) 4.44% or (b) the three-year U.S. treasury note yield rate on the
funding date plus 3.00% to 3.75% and (v) an amendment to the final payment fee on such borrowings from 3.5% to 6.0%. Also, in connection with the seventh amendment, the Company issued warrants to Silicon Valley Bank to purchase 101,995 and
32,244 shares of common stock with an exercise price of $2.206 and $2.326 per share, respectively. The warrants are exercisable immediately after issuance and expire in 10 years. On October 31, 2011 and on November 17, 2011, the Company
drew down $15 million and $5 million, respectively, on the term loan facility to help fund the required payments of $15,000 and $20,000, respectively, to Medicis.
104
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
On August 29, 2012, the Company entered into a Loan and Security
Agreement with the Lender for a $10,000 subordinated debt facility (the Subordinated Debt Facility). This Subordinated Debt Facility is in addition to the facilities available under the Loan Agreement. In connection with the
Company committing to enter into the Subordinated Debt Facility, the Company issued a warrant to the Lender on July 26, 2012 for the purchase of 307,692 shares of the Companys common stock with an exercise price of $2.65 per share (see
note 8). The warrants are exercisable immediately after issuance and expire in 10 years. On August 31, 2012, the Company drew down $10,000 under its Subordinated Debt Facility to fund its ongoing operations and this amount remained outstanding
at December 31, 2012.
In connection with the Subordinated Debt Facility, on August 29, 2012, the
Company also entered into an eighth amendment to its Loan Agreement, which provides that, among other things, borrowings under the Subordinated Debt Facility will be deemed Permitted Indebtedness under the Loan Agreement and any liens
securing such borrowings will also be deemed Permitted Liens under the Loan Agreement.
Borrowings
under the original revolving loan facility accrue interest at a per annum rate equal to the Lenders prime rate as in effect from time to time plus 1.00%, subject to a minimum per annum rate of 5.00%. Interest on borrowings under the revolving
loan facility is payable monthly. The Company may borrow, repay and reborrow funds under the revolving loan facility until October 25, 2013, at which time it matures and all outstanding amounts under this facility must be repaid. In the event
the Company elects to terminate the revolving loan facility on or before the maturity date, the Company is required to pay a fee in the amount of $60.
Borrowings under the secured term loan facility accrue interest at a per annum rate of 3.75%. Term loans borrowed under such facility must be repaid in equal monthly payments of principal and interest
which mature on September 1, 2015. The Company may prepay all but not less than all amounts loaned under such facility and in connection with such prepayment, the Company is required to pay a fee equal to 2.00% of the principal amount prepaid.
On the earlier of the maturity date or the date the term loan facility is prepaid, the Company is required to make a final payment equal to 6% of the aggregate principal amount of all loans made under such facility. All obligations under the Loan
Agreement are secured by substantially all of the personal property of the Company.
Borrowings under the
Subordinated Debt Facility bear interest at a 7% fixed rate and are payable in equal monthly payments of principal and interest beginning on June 1, 2013 and ending on April 1, 2015, at which time the final two monthly payments are due
along with a final payment fee of $1,000 and expenses of Lender. All obligations under the Subordinated Debt Facility are secured by substantially all of the personal property of the Company. The Subordinated Debt Facility does not contain any
financial covenants.
Aggregate annual principal payments due under the above
term loans and Subordinated Debt Facility at December 31, 2012 are as follows (excludes warrant amortization of $674):
|
|
|
|
|
2013
|
|
$
|
8,777
|
|
2014
|
|
|
11,266
|
|
2015
|
|
|
7,039
|
|
|
|
|
|
|
|
|
|
27,082
|
|
Less: current portion
|
|
|
(8,777
|
)
|
|
|
|
|
|
Noncurrent portion
|
|
$
|
18,305
|
|
|
|
|
|
|
The Loan Agreement contains restrictions that include, among others, restrictions that limit the
Companys and its subsidiaries ability to dispose of assets, enter into mergers or acquisitions, incur
105
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
indebtedness, incur liens, pay dividends or make distributions on the Companys capital stock, make investments or loans, and enter into certain affiliate transactions, in each case subject
to customary exceptions for a credit facility of this size and type.
At December 31, 2012, $0 was
outstanding on the revolving loan facility, $17,082 was outstanding as secured term loans under the Loan Agreement, $10,000 was outstanding on the Subordinated Debt Facility and a debit of $674 was remaining as loan warrant discount. As of
December 31, 2012, the Loan Agreement contains financial covenants requiring the Company to maintain a minimum liquidity, a maximum leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with these covenants as
of December 31, 2012.
NOTE 7 COMMITMENTS AND CONTINGENCIES
Facility Lease Commitments
The Company leases its operating facilities under noncancelable operating leases, which expire at various times ranging
from 2013 to 2016. The Companys operating leases typically include renewal periods, which are at its option. Under the terms of these leases, the Company is responsible for its share of taxes, insurance and common area maintenance costs. Rent
expense for the years ended December 31, 2012, 2011 and 2010 was $2,189, $1,697 and $1,679, respectively.
A description of significant operating leases as of December 31, 2012 are as follows:
|
|
|
|
|
|
|
Lease Expiration
|
|
Renewal Option
|
Corporate Headquarters, Hayward, California
|
|
March 2016
|
|
3-year renewal
|
Bothell, Washington
|
|
January 2015
|
|
None
|
Tokyo, Japan
|
|
October 2013
|
|
2-year renewal
|
Hong Kong
|
|
December 2013
|
|
2-year renewal
|
Tokyo, Japan
|
|
March 2016
|
|
None
|
Future minimum lease payments
under the Companys noncancelable operating leases at December 31, 2012 are as follows:
|
|
|
|
|
Years Ending December 31,
|
|
|
|
|
2013
|
|
$
|
1,990
|
|
2014
|
|
|
1,819
|
|
2015
|
|
|
1,430
|
|
2016
|
|
|
352
|
|
|
|
|
|
|
|
|
$
|
5,591
|
|
|
|
|
|
|
Contingent consideration payment obligations resulting from the acquisition of Liposonix is discussed
in note 3 under the section
Medicis Technologies Corporation
.
Purchase Commitments
The Company has noncancelable purchase commitments at December 31, 2012. These commitments include purchase
obligations to contract manufacturers and suppliers for $17,687 which are payable in 2013.
106
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
Contingencies
From time to time, the Company is involved in litigation relating to claims arising from the ordinary course of business.
The Company routinely assesses the likelihood of any adverse judgments or outcomes related to legal matters and claims, including those involving its intellectual property protection, as well as ranges of probable losses. A determination of the
amount of the reserves required, if any, for these contingencies is made after thoughtful analysis of each known issue and an analysis of historical experience. In the cases where we believe that a reasonably possible loss exists, we disclose the
facts and circumstances of the litigation, including an estimate range, if possible. The Company does not believe the final disposition of these matters will have a material effect on the financial statements and future cash flows of the Company.
All legal expenses, including those related to intellectual property protection, are expensed as they are incurred. Also, the Company has not recorded any gain contingencies as of December 31, 2012.
On December 21, 2009, a complaint was filed in the Santa Clara County Superior Court by three former stockholders of
Reliant against Reliant and certain former officers and directors of Reliant in connection with the Companys acquisition of Reliant, which closed on December 23, 2008. The complaint purports to be brought on behalf of the former common
stockholders of Reliant. As a result of the acquisition, a successor entity to Reliant, Reliant Technologies, LLC, became the Companys wholly-owned subsidiary. One member of the Companys Board of Directors and the Companys former
Chief Technology Officer and former member of the Companys Board of Directors are among the defendants named in the complaint. The principal claim, among others, is that Reliant violated the California Corporations Code by failing to obtain
the vote from a majority of holders of Reliants common stock prior to the consummation of the acquisition. The complaint also purports to challenge disclosures made by Reliant in connection with its entry into the acquisition and alleges that
the defendants failed to maximize the value of Reliant for the benefits of Reliants common stockholders. On August 2, 2010, defendants filed a motion to dismiss or stay the entire action based on a mandatory forum selection clause in the
merger agreement which requires that claims related to the merger be litigated in Delaware. On September 28, 2010, the Court granted the defendants motion to dismiss or stay, and stayed the action indefinitely. On
January 20, 2012, the Court dismissed plaintiffs case without prejudice. Plaintiffs have appealed. To date, the plaintiffs have not filed a complaint against the defendants in Delaware. The Company believes that this suit is without
merit, and the Company intends to vigorously defend it. Although the Company does not expect that the final disposition of this litigation will have a material effect on its financial results, the Company expects to devote certain personnel and
resources to resolve this litigation.
On December 4, 2009, Aesthera was served with a class action
complaint filed in the United States District Court for the District of Connecticut alleging that Aesthera caused unsolicited fax advertisements to be sent to the plaintiffs in violation of the Telephone Consumer Protection Act, or TCPA, and
Connecticut state law. The complaint purports to be filed on behalf of a class, and it alleges that Aesthera caused unsolicited fax advertisements to be sent from August 1, 2006 through the present. Plaintiffs seek statutory damages under
the TCPA and Connecticut state law, attorneys fees and costs of the action, and an injunction to prevent any future violations. In May 2010, Aesthera reached an agreement in principle to settle the matter on a class-wide basis by
consenting to certification of a settlement class to receive payment out of a settlement fund. On November 5, 2010, the plaintiffs filed an unopposed motion for certification of a settlement class and for preliminary approval of the
parties settlement. On April 15, 2011, the Court denied plaintiffs motion without prejudice on the grounds that the proposed means of giving notice to the class i.e., via fax was not adequate. The Court
directed the plaintiffs to revise their motion to provide for notice to the class via United States mail. The Court further directed that the cost of this notice should be borne by Aesthera without reduction to the amount of the settlement
fund. On August 22, 2011, the plaintiffs filed a renewed unopposed motion for certification of a settlement class and for preliminary approval of the parties settlement. This renewed motion provides for notice
107
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
to the class via United States mail. Pursuant to the Class Action Fairness Act (see 28 U.S.C. § 1715), on August 30, 2011, Aesthera gave the Attorney General of the United States
and each of the state attorneys general notice of the proposed settlement. On September 29, 2011, the Court entered an Order stating that it would grant plaintiffs renewed motion upon submission of a revised notice to the class
providing that the claim form will be a fillable PDF that will enable perspective class members to complete and submit the form electronically. On October 12, 2011, the parties jointly submitted revised long-form and summary versions of
the Notice to the Class providing that the Proof of Claim will be a fillable PDF that will enable perspective class members, if they so choose, to complete and submit the form electronically without need to print it. On October 14, 2011,
the Court granted Plaintiffs renewed Motion to Certify Class for Preliminary Approval of Class Settlement. Notice was sent by the claims administrator to potential members of the class. A fairness hearing was held on March 27,
2012 at which the Court approved the settlement subject to certain conditions, which have since been fulfilled. On May 5, 2012, the Court ordered the Plaintiffs to submit an amended settlement agreement and final approval order. Plaintiffs
filed the required papers on June 15, 2012. On August 3, 2012, the Court approved the final settlement, and the claims administrator has paid out the settlement funds. The settlement did not have a material impact to the Companys
financial results.
In January 2008, a product design complaint was filed against the Company in Federal
District Court in Maryland. The individual plaintiff sought monetary damages, attorneys fees and costs of the action. Trial commenced on September 11, 2011. On September 29, 2011 a jury reached a verdict which was in
favor of the plaintiff and awarded to the plaintiff an amount of total damages that is within the Companys insurance limits. In response to the verdict, the Company filed a motion for judgment notwithstanding the verdict and alternatively, a
motion for a new trial. Those motions were denied by the court on August 2, 2012. The Company has meritorious reasons to contest the judgment and is filing an appeal to the Circuit Court of Appeals.
On May 3, 2012, the Company and Reliant Technologies, which the Company acquired in December 2008, were served with
a class action complaint filed in the United States District Court for the Northern District of California alleging that Reliant Technologies caused unsolicited fax advertisements to be sent to the plaintiff in 2008, in violation of the
TCPA. Plaintiff, on behalf of itself and the putative class, seeks the greater of actual damages or statutory damages in the amount of $500 per violation, treble damages for any willful violations, and injunctive relief. The parties have
exchanged initial disclosures and discovery has commenced. The Court granted the parties stipulated request to continue upcoming case deadlines in light of the parties agreement to participate in private mediation scheduled for
March 2013. The Company is unable to reasonably estimate a range of loss at this time and intends to vigorously defend this action.
On December 7, 2012, Richard Clement (plaintiff), as putative representative for the shareholders of CLRS Technology Company (CLRS), filed suit against the Company in the
Superior Court of the State of California for the County of Alameda. Plaintiff alleges that the Company breached its October 15, 2010 merger agreement with CLRS, and in particular alleges that the Company was required, but failed, to use its
best efforts to market CLARO during the earnout period. The Company denies these allegations. Plaintiff asserts three causes of action: breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of California
Business and Professions Code §§ 17200 et seq. The Company believes that the claims are without merit and intends to defend the action vigorously.
Indemnifications
In the normal course of business,
the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Companys exposure
108
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. To date, the Company has not paid any claims or been
required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations.
In accordance with its certificate of incorporation, bylaws and individual indemnification agreements, the Company has
indemnification obligations to its officers and directors and certain key employees for certain events or occurrences, subject to certain limits, while they are serving at the Companys request in such a capacity. There have been no claims to
date and the Company has a director and officer insurance policy that may enable it to recover a portion of any amount paid for future claims.
NOTE 8 STOCKHOLDERS EQUITY
Convertible Preferred Stock
The Companys Board of Directors has authorized 10,000,000 shares of convertible preferred stock, $0.001 par value,
issuable in series. At December 31, 2012 and 2011, there were no shares issued or outstanding.
Common Stock
The Companys amended and restated certificate of incorporation authorizes the Company to issue
100,000,000 shares of $0.001 par value common stock. At December 31, 2012 there were 68,795,987 share of common stock outstanding. Common stockholders are entitled to dividends as and when declared by the board of directors subject to the prior
rights of the preferred stockholders.
On January 7, 2010, the Company entered into securities purchase
agreements in connection with a private placement of its securities to certain institutional and other accredited investors pursuant to which the Company agreed to sell and issue (i) an aggregate of 8,529,704 newly issued shares of its common
stock and (ii) warrants to purchase an aggregate of 4,264,852 shares of common stock. This sale of securities resulted in aggregate gross proceeds of approximately $17,230. The net proceeds, after deducting offering expenses, were approximately
$15,795. The common stock and warrants were sold in units consisting of one share of common stock and a warrant to purchase one-half of a share of common stock for an aggregate purchase price of $2.02 per unit which was equal to the closing price of
the Companys common stock on the NASDAQ Global Market on January 6, 2010.
On August 7, 2012,
the Company sold an aggregate of 6,555,000 newly issued shares of its common stock in a firmly underwritten public offering. The net proceeds, after deducting offering expenses, were approximately $16,057.
2006 Employee Stock Purchase Plan
On August 2, 2006, the board of directors adopted the 2006 Employee Stock Purchase Plan (ESPP). A total of 250,000 shares of common stock were reserved for issuance pursuant to the 2006
Employee Stock Purchase Plan. The 2006 Employee Stock Purchase Plan was approved by the Companys stockholders on August 4, 2006. The 2006 Employee Stock Purchase Plan became effective upon the closing of the Companys initial public
offering. Under the 2006 Employee Stock Purchase Plan, eligible employees are permitted to
109
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
purchase common stock through payroll deduction at a price of 85% of the lower market value as of the beginning or the end of the six-month offering period. Shares of common stock will be
increased on the first day of each fiscal year, commencing in 2007, by an amount equal to the lower of: (i) 900,000 shares; (ii) 2.0% of the outstanding shares of the Companys common stock on the first day of the fiscal year; or
(iii) such other amount as may be determined by the board of directors. Each offering period starts on the first trading day on or after May 15 and November 15 of each year. The Company issued 329,486, 219,512 and 227,517 shares of
common stock under this plan during the years ended December 31, 2012, 2011 and 2010, respectively. At December 31, 2012, 3,439,837 shares remained available for future issuance. In addition, on January 1, 2013, the Company added
900,000 shares to the Plan.
2006 Equity Incentive Plan and 1997 Stock Option Plan
In 1997, the Company adopted the 1997 Stock Option Plan. The Plan provides for the granting of stock options to employees
and consultants of the Company. Options granted under the Plan may be either incentive stock options or nonqualified stock options. Incentive stock options (ISO) may be granted only to Company employees (including officers and directors
who are also employees). Nonqualified stock options (NSO) may be granted to Company employees and consultants. As of December 31, 2012, the Company has reserved 5,940,000 shares of common stock for issuance under this Plan.
On August 2, 2006, the board of directors adopted the 2006 Equity Incentive Plan. A total of 2,750,000
shares of common stock were reserved for issuance pursuant to the 2006 Equity Incentive Plan. In addition, the shares reserved for issuance under the 2006 Equity Incentive Plan included shares reserved but unissued under the Companys 1997
Stock Option Plan as the result of termination of options or the repurchase of shares. The 2006 Equity Incentive Plan was approved by the Companys stockholders on August 4, 2006.
Shares of common stock approved under the 2006 Equity Incentive Plan will be increased on the first day of each fiscal
year, commencing in 2007, by an amount equal to the lower of: (i) 1,800,000 shares; (ii) 3.5% of the outstanding shares of the Companys common stock on the last day of the immediately preceding fiscal year; or (iii) such other
amount as may be determined by the board of directors. At December 31, 2012, 3,320,550 shares remained available for future issuance. On January 1, 2013, the Company added 1,800,000 shares to the 2006 Equity Incentive Plan.
Options under the 1997 Stock Option Plan and 2006 Equity Incentive Plan may be granted for periods of up to ten years and
at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by the board of directors, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii) the exercise price of an ISO and NSO granted to a 10% stockholder shall not be less than 110% of the estimated fair value of the shares on the date of grant,
respectively. Options granted generally vest over four years.
During the year ended December 31, 2010,
the board of directors approved the issuance of 918,950 shares of restricted stock units to certain employees under the 2006 Equity Incentive Plan. The value of the restricted stock awards of $1,944 was based on the closing stock market price on the
award date. Out of the total restricted stock units granted in 2010, 731,000 of the awards would be subject to vesting over three years if such units are earned by the achievement of certain corporate performance-based milestones. As of
December 31, 2010, these milestones were not achieved. As a result, stock based compensation expense was not recognized for these awards in the year ended December 31, 2010. The remaining 187,950 restricted stock units granted in 2010 vest
over three years.
110
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
In addition, the Company also awarded 7,500 shares of restricted stock
units to a non-employee during the year ended December 31, 2010. The value attributable to these units was amortized on a straight line basis over the three month service period and the unvested portion of these units were revalued on
June 15, 2010 based on the closing stock market price on June 15, 2010. The Company believes that the fair value of the units is more reliably measurable than the fair value of the services received.
During the year ended December 31, 2011, under the 2006 Equity Incentive Plan, the board of directors approved the
issuance of 1,245,823 shares of restricted stock units and 733,300 shares of market stock units to certain employees. The value of the restricted stock awards of $3,771 was based on the closing stock market price on the date of award. These
restricted stock units generally vest over three years. The fair value of the market stock units of at the issuance date of $2,645 was estimated using the Monte-Carlo simulation model which is a probabilistic approach for calculating the fair value
of the awards. The Monte-Carlo simulation is a statistical technique used, in this instance, to simulate future stock prices of the Company and the Russell Microcap Index by using the following assumptions: expected volatility of 82.92% and 35.29%,
correlation coefficients of 1.0 and 0.2183, risk-free interest rate of 1.4%, and contractual life of 3 years. The market stock units will vest over three years if certain market conditions are met. The market conditions are tied to the performance
of the Companys common stock relative to the Russell Microcap Index. As of December 31, 2012, certain market conditions related to these market stock units were met and as such, 207,683 market stock units were released during 2012 and
253,213 market stock units will be released in 2013.
During the year ended December 31, 2012, under the
2006 Equity Incentive Plan, the board of directors approved the issuance of 977,054 shares of restricted stock units and 699,000 shares of market-based stock units to certain employees. The fair value of the restricted stock awards of $2,887 was
based on the closing stock market price on the date of award. These restricted stock units generally vest over three years. The fair value of the market-based stock units at the issuance date of $2,528 was estimated using the Monte-Carlo simulation
model which is a probabilistic approach for calculating the fair value of the awards. The Monte-Carlo simulation is a statistical technique used, in this instance, to simulate future stock prices of the Company and the Russell Microcap Index by
using the following assumptions: expected volatility of 76.38% and 29.57%, correlation coefficients of 1.0 and 0.3561, risk-free interest rate of 1.34%, and contractual term of 2.9 years. The market stock units will vest over three years if certain
market conditions are met. The market conditions are tied to the performance of the Companys common stock relative to the Russell Microcap Index. As of December 31, 2012, certain market conditions related to these market stock units were
met and as such, 287,653 market stock units will be released in 2013.
Activity for the year end December 31, 2012
under the 1997 Stock Option Plan and 2006 Equity Incentive Plan is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Average
|
|
|
Available
|
|
|
Number of
|
|
|
Exercise
|
|
|
for Grant
|
|
|
Options
|
|
|
Price
|
|
Balance, December 31, 2011
|
|
|
2,888,295
|
|
|
|
5,765,066
|
|
|
$
|
2.69
|
|
Additional shares reserved
|
|
|
1,800,000
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(293,500
|
)
|
|
|
293,500
|
|
|
|
2.83
|
|
Restricted and market stock units granted
|
|
|
(1,678,107
|
)
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(264,535
|
)
|
|
|
1.57
|
|
Options repurchased or cancelled
|
|
|
243,726
|
|
|
|
(243,726
|
)
|
|
|
3.59
|
|
Restricted stock units repurchased or cancelled
|
|
|
360,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
3,320,550
|
|
|
|
5,550,305
|
|
|
$
|
2.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
Information regarding stock options
outstanding at December 31, 2012 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Options
|
|
|
Price
|
|
|
Terms (Years)
|
|
|
Value
|
|
As of December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
|
5,550,305
|
|
|
$
|
2.71
|
|
|
|
5.68
|
|
|
$
|
3,824
|
|
Options vested and expected to vest
|
|
|
5,518,503
|
|
|
|
2.71
|
|
|
|
5.66
|
|
|
|
3,516
|
|
Options vested
|
|
|
4,605,710
|
|
|
|
2.80
|
|
|
|
5.20
|
|
|
|
3,391
|
|
The following table summarizes additional information regarding outstanding and exercisable stock options at
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number of
Shares
Outstanding
|
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Shares
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$0.45 - $0.70
|
|
|
37,526
|
|
|
|
0.43
|
|
|
$
|
0.57
|
|
|
|
37,526
|
|
|
$
|
0.57
|
|
$1.00 - $1.00
|
|
|
960,053
|
|
|
|
6.13
|
|
|
$
|
1.00
|
|
|
|
917,296
|
|
|
$
|
1.00
|
|
$1.10 - $1.88
|
|
|
419,132
|
|
|
|
5.61
|
|
|
$
|
1.44
|
|
|
|
383,557
|
|
|
$
|
1.42
|
|
$1.90 - 1.90
|
|
|
894,478
|
|
|
|
2.43
|
|
|
$
|
1.90
|
|
|
|
879,478
|
|
|
$
|
1.90
|
|
$1.91 - 1.91
|
|
|
943,085
|
|
|
|
7.10
|
|
|
$
|
1.91
|
|
|
|
654,041
|
|
|
$
|
1.91
|
|
$2.00 - $2.75
|
|
|
681,193
|
|
|
|
7.43
|
|
|
$
|
2.35
|
|
|
|
407,686
|
|
|
$
|
2.37
|
|
$2.77 - $4.30
|
|
|
670,650
|
|
|
|
7.27
|
|
|
$
|
3.23
|
|
|
|
381,938
|
|
|
$
|
3.51
|
|
$4.63 - $11.00
|
|
|
944,188
|
|
|
|
4.74
|
|
|
$
|
6.55
|
|
|
|
944,188
|
|
|
$
|
6.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.45 - $11.00
|
|
|
5,550,305
|
|
|
|
5.68
|
|
|
$
|
2.71
|
|
|
|
4,605,710
|
|
|
$
|
2.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee stock options outstanding at December 31, 2011 and 2010, were 5,000 and 444,958
shares of common stock, respectively, at weighted average exercise prices of $0.45 and $1.77 per share, respectively. There are no non-employee stock options outstanding at December 31, 2012.
Information regarding common stock warrants
outstanding at December 31, 2012 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Shares
|
|
|
Price
|
|
|
Terms (Years)
|
|
As of December 31, 2012
|
|
|
4,587,082
|
|
|
$
|
2.29
|
|
|
|
2.99
|
|
On January 7, 2010, the Company entered into securities purchase agreements in connection with a
private placement of its securities to sell and issue (i) an aggregate of 8,529,704 newly issued shares of its common stock and (ii) warrants to purchase an aggregate of 4,264,852 shares of common stock. The common stock and warrants were
sold in units consisting of one share of common stock and a warrant to purchase one-half of a share of common stock for an aggregate purchase price of $2.02 per unit which was equal to the closing price of the Companys common stock on the
NASDAQ Global Market on January 6, 2010. The warrants have an exercise price of $2.121 per share, which represents a 5% premium over the closing price of the Companys
112
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
common stock on the NASDAQ Global Market on January 6, 2010. The holders have the right to net exercise any outstanding warrants for shares of the Companys common stock. The warrants
are exercisable commencing on the six-month anniversary of the closing of the sale of securities and will expire five and a half years from the date of issuance.
The fair value of the warrants at the issuance date was estimated using the Black-Scholes model using the following
assumptions: dividend yield of 0%, risk-free interest rate of 2.57%, expected volatility of 65.5%, and contractual life of 5.5 years. The estimated fair value of the warrants was $3,690 on the date of issuance and was recorded as additional paid-in
capital within stockholders equity.
In connection with the $20 million draw down on the Companys
term loan facility on October 31, 2011 and November 17, 2011 (see note 6), the Company issued warrants to purchase 101,995 and 32,244 shares of common stock, respectively, with an exercise price of $2.206 and $2.326 per share,
respectively. The warrants are exercisable immediately after issuance and expire in 10 years. The fair value of the warrants of $216 was calculated using the Black-Scholes option pricing model at the date of issuance using the following assumptions:
dividend yield of 0%, expected volatility of 64.9%, risk free interest rate of 1.96% and 2.17% and a contractual life of ten years. The Company recorded the fair value of the warrants of $216 to loan warrant discount as a contra liability offsetting
the respective term loan amounts on the Balance Sheet.
In connection with the Company committing to enter
into the Subordinated Debt Facility (see note 6), the Company issued a warrant to the Lender on July 26, 2012 for the purchase of 307,692 shares of the Companys common stock with an exercise price of $2.65 per share. The warrant is
exercisable immediately after issuance and expires in 10 years. The fair value of the warrants of $700 was calculated using the Black-Scholes option pricing model at the date of issuance using the following assumptions: dividend yield of 0%,
expected volatility of 55.63%, risk free interest rate of 1.45% and a contractual life of ten years. The Company recorded the fair value of $700 to loan warrant discount as a contra liability offsetting the respective subordinated debt amount on the
Balance Sheet.
The Company amortized $227 and $15 from loan warrant discounts to interest expense in the
statement of operations during the years ended December 31, 2012 and 2011, respectively.
Options Granted to
Non-employees
The stock-based compensation expense related to options granted to non-employees will
fluctuate as the deemed fair value of the common stock fluctuates. In connection with the grant of stock options to non-employees, the Company recorded stock-based compensation expense of $0, $0 and $98 for the years ended December 31, 2012,
2011 and 2010, respectively. The Company did not issue any options to non-employees during the years ended December 31, 2012, 2011 and 2010.
Valuation of Awards Granted to Employees
The
Company estimated the fair value of each option award on the date of grant using the Black-Scholes option-pricing model using the assumptions noted in the following table. Due to a lack of historical information regarding the volatility of the
Companys own stock price, expected volatility is based on an average of the historical and implied volatility of the Company and a peer group of publicly traded entities in the aesthetics market. The expected term of options gave consideration
to historical exercises, the vesting term of the Companys options, the cancellation history of the Companys options and the options contractual term of ten
113
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
years. The risk-free rate for the expected term of the option is based on the U.S. Treasury Constant Maturity rate as of the date of grant.
The assumptions used to value options granted during the years ended December 31, 2012, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.71
|
%
|
|
|
1.70
|
%
|
|
|
2.14
|
%
|
Expected volatility
|
|
|
61
|
%
|
|
|
63
|
%
|
|
|
66
|
%
|
Expected term (years)
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
5.00
|
|
The
assumptions used to value ESPP shares during the years ended December 31, 2012, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.11
|
%
|
|
|
0.09
|
%
|
|
|
0.20
|
%
|
Expected volatility
|
|
|
56
|
%
|
|
|
56
|
%
|
|
|
68
|
%
|
Expected term (years)
|
|
|
0.50
|
|
|
|
0.50
|
|
|
|
0.50
|
|
Total employee stock-based compensation
expenses recorded during the years ended December 31, 2012, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Employee stock-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock-based compensation expense
|
|
$
|
726
|
|
|
$
|
1,382
|
|
|
$
|
2,120
|
|
Employee stock purchase plan
|
|
|
366
|
|
|
|
239
|
|
|
|
191
|
|
Restricted stock units
|
|
|
3,471
|
|
|
|
1,676
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
4,563
|
|
|
$
|
3,297
|
|
|
$
|
2,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2012, 2011 and 2010, the Company granted stock options to
purchase an aggregate of 293,500, 472,500 and 2,024,950 shares of common stock with an estimated weighted-average grant-date fair value of $1.45, $2.72 and $1.11 per share, respectively. The total fair value of options that vested during the years
ended December 31, 2012, 2011 and 2010 was $712, $1,381 and $2,201, respectively. The total intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was $347, $1,412 and $160, respectively. Net cash
proceeds from the exercise of stock options were $415, $1,436 and $579 for the years ended December 31, 2012, 2011 and 2010, respectively.
Employee stock-based compensation expense recognized in the years ended December 31, 2012, 2011 and 2010 was $4,563, $3,297 and $2,404, respectively. The expense was calculated based on awards
ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
At December 31, 2012 and 2011, the Company had $1,259 and $2,003 respectively, of total unrecognized compensation
expense, net of estimated forfeitures, related to stock options that will be recognized over a remaining weighted-average period of 2.4 years and 2.4 years, respectively.
114
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
At December 31, 2012 and 2011, the unrecognized compensation cost
related to ESPP shares was $115 and $118, respectively, which will be recognized using the straight-line attribution method over 0.4 years. The weighted average estimated fair values of each stock issuance under the ESPP for the years ended
December 31, 2012, 2011 and 2010 was $0.99, $0.92 and $0.78 per share, respectively.
At
December 31, 2012 and 2011, the unrecognized compensation cost related to restricted stock unit awards was $2,850 and $2,388, respectively, which will be recognized using the straight-line attribution method over 1.70 and 2.19 years. The
weighted average estimated fair values of each restricted stock unit issuance for the years ended December 31, 2012 and 2011 was $2.95 and $3.03 a share, respectively. At December 31, 2012 and 2011, the unrecognized compensation cost
related to market stock unit awards was $2,413 and $1,592, respectively, which will be recognized using the straight-line attribution method over 1.78 years and 2.12 years, respectively. The weighted average estimated fair values of each market
stock unit issuance for the year ended December 31, 2012 and 2011 was $3.62 and $3.61 a share, respectively.
Stock-based compensation expense recorded related to options granted to employees and non-employees, Employee Stock
Purchase Plan, and restricted stock unit awards was allocated to cost of revenue, sales and marketing, research and development and general and administrative expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Cost of revenue
|
|
$
|
499
|
|
|
$
|
442
|
|
|
$
|
270
|
|
Sales and marketing
|
|
|
968
|
|
|
|
820
|
|
|
|
741
|
|
Research and development
|
|
|
562
|
|
|
|
436
|
|
|
|
303
|
|
General and administrative
|
|
|
2,534
|
|
|
|
1,599
|
|
|
|
1,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
4,563
|
|
|
$
|
3,297
|
|
|
$
|
2,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9 INCOME TAXES
The components of income (loss) before
income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Loss subject to domestic income taxes only
|
|
($
|
38,179
|
)
|
|
($
|
7,035
|
)
|
|
($
|
1,693
|
)
|
Income (loss) subject to foreign income taxes only
|
|
|
381
|
|
|
|
(454
|
)
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($
|
37,798
|
)
|
|
($
|
7,489
|
)
|
|
($
|
1,798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
The components of the provision (benefit)
for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
114
|
|
State
|
|
|
68
|
|
|
|
107
|
|
|
|
76
|
|
Foreign
|
|
|
139
|
|
|
|
140
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
210
|
|
|
$
|
250
|
|
|
$
|
222
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
($
|
5,605
|
)
|
|
$
|
|
|
State
|
|
|
|
|
|
|
(805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
($
|
6,410
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) provision
|
|
$
|
210
|
|
|
($
|
6,160
|
)
|
|
$
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys deferred tax assets and
liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Net operating loss carryforwards
|
|
$
|
35,765
|
|
|
$
|
35,867
|
|
Inventory reserve
|
|
|
1,625
|
|
|
|
2,391
|
|
Research and development and alternative minimum tax credits
|
|
|
3,781
|
|
|
|
2,968
|
|
Deferred revenue
|
|
|
907
|
|
|
|
1,498
|
|
Other
|
|
|
5,406
|
|
|
|
5,539
|
|
|
|
|
|
|
|
|
|
|
Gross Deferred Tax Assets
|
|
|
47,484
|
|
|
|
48,263
|
|
Depreciation
|
|
|
(344
|
)
|
|
|
(161
|
)
|
Intangible assets
|
|
|
(14,634
|
)
|
|
|
(18,476
|
)
|
|
|
|
|
|
|
|
|
|
Gross Deferred Tax Liabilities
|
|
|
(14,978
|
)
|
|
|
(18,637
|
)
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Asset
|
|
|
32,506
|
|
|
|
29,626
|
|
Less: valuation allowance
|
|
|
(32,506
|
)
|
|
|
(29,626
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
116
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
The differences between the U.S. federal
statutory income tax rate and the Companys effective tax rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Tax at federal statutory rate
|
|
|
(34.00
|
)%
|
|
|
(34.00
|
)%
|
|
|
(34.00
|
)%
|
State, net of federal benefit
|
|
|
0.10
|
%
|
|
|
1.11
|
%
|
|
|
3.18
|
%
|
Foreign taxes
|
|
|
(0.14
|
)%
|
|
|
2.81
|
%
|
|
|
3.78
|
%
|
Meals and entertainment
|
|
|
0.71
|
%
|
|
|
2.63
|
%
|
|
|
7.72
|
%
|
Other
|
|
|
0.00
|
%
|
|
|
0.98
|
%
|
|
|
(0.07
|
)%
|
Non-deductible contingent consideration
|
|
|
28.77
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
NOL carryback
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
2.11
|
%
|
Benefit for research and development credit
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Stock-based compensation
|
|
|
0.61
|
%
|
|
|
2.73
|
%
|
|
|
28.19
|
%
|
Transaction costs
|
|
|
0.00
|
%
|
|
|
6.25
|
%
|
|
|
20.56
|
%
|
Tax reserves
|
|
|
0.31
|
%
|
|
|
1.24
|
%
|
|
|
4.30
|
%
|
Change in valuation allowance
|
|
|
4.19
|
%
|
|
|
(66.01
|
)%
|
|
|
(23.27
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for taxes
|
|
|
0.55
|
%
|
|
|
(82.26
|
)%
|
|
|
12.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based upon the weight of available evidence, which includes the Companys historical operating
performance, low level of taxable income and the accumulated deficit, the Company provided a full valuation allowance against its net deferred tax asset at December 31, 2012 and 2011. The valuation allowance increased by $2,880, decreased by
$5,108 and increased by $1,208 during the years ended December 31, 2012, 2011 and 2010, respectively.
As
of December 31, 2012, the Company had net operating loss carryforwards of approximately $110,679 and $82,959 for federal and California tax purposes, respectively. If not utilized, these carryforwards will begin to expire in 2022 for federal
and 2013 for California purposes.
As of December 31, 2012, the Company had research and development
credit carryforwards of approximately $4,500 and $5,600 for federal and state income tax purposes, respectively. If not utilized, the federal carryforward will expire in various amounts beginning in 2019. The California tax credit can be carried
forward indefinitely.
Utilization of the net operating loss and tax credit carryforwards is subject to an
annual limitation due to the ownership percentage change limitations provided by Section 382 of the Internal Revenue Code and similar state provisions. The annual limitation may result in the expiration of the net operating losses and tax
credit carryforwards before utilization. As of December 31, 2012, the Company estimates that approximately $14,800 and $14,500 in federal and California net operating losses, and $1,500 and $500 in federal and California R&D credits
may expire due to the Section 382 ownership change limitations.
As of December 31, 2012, we did not
recognize deferred tax assets relating to excess tax benefits for stock-based compensation deductions of $5,200 related to net operating losses. Unrecognized deferred tax benefits will be accounted for as a credit to additional paid in capital
when realized through a reduction in income taxes payable.
117
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
Uncertain Tax Positions
A reconciliation of the January 1, 2010
through December 31, 2012 amount of unrecognized tax benefits is as follows:
|
|
|
|
|
Beginning balance at January 1, 2010
|
|
|
2,869
|
|
Increases (decreases) of unrecognized tax benefits taken in prior years
|
|
|
(185
|
)
|
Increases (decreases) of unrecognized tax benefits related to current year
|
|
|
163
|
|
|
|
|
|
|
Ending balance at December 31, 2010
|
|
|
2,847
|
|
Increases (decreases) of unrecognized tax benefits taken in prior years
|
|
|
83
|
|
Increases (decreases) of unrecognized tax benefits related to current year
|
|
|
307
|
|
|
|
|
|
|
Ending balance at December 31, 2011
|
|
|
3,237
|
|
Increases (decreases) of unrecognized tax benefits taken in prior years
|
|
|
34
|
|
Increases (decreases) of unrecognized tax benefits related to current year
|
|
|
298
|
|
|
|
|
|
|
Ending balance at December 31, 2012
|
|
|
3,569
|
|
|
|
|
|
|
At December 31, 2012, the Company had $3,569 of unrecognized tax benefits, of which, $506 would
affect the Companys effective tax rate, if recognized. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next twelve months.
The Company records interest and penalties related to unrecognized tax benefits in income tax expense. As of
December 31, 2012 and 2011, the Company had approximately $94 and $70, respectively, accrued for estimated interest related to uncertain tax positions. For the twelve months ended December 31, 2012 and 2011, the Company recorded
estimated interest of $24 and $19, respectively. Penalties are immaterial at December 31, 2012.
The
Company is subject to taxation in the U.S. federal, foreign jurisdictions, and various states, for which tax years 2001 through 2012 remain subject to examinations by the major tax jurisdictions as of December 31, 2012. The Company may from
time to time be assessed interest or penalties by major tax jurisdictions, although there have been no such assessments historically with material impact to its financial results. In the event it receives an assessment for interest and/or penalties,
such an assessment would be classified in the consolidated financial statements as income tax expense.
Managements intent is to indefinitely reinvest the cumulative undistributed earnings of $865 from its foreign
subsidiaries (amounts in thousands). Accordingly, no provision for Federal and state income taxes has been provided thereon. Upon distribution of these earnings in the form of dividends or otherwise, the Company will be subject to
United States federal and state income taxes.
On January 2, 2013, the President signed into law The
American Taxpayer Relief Act of 2012 (ATRA). Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts incurred through December 31, 2011. The ATRA extends the research credit for two years for
qualified research expenditures incurred through the end of 2013. The extension of the research credit is retroactive and includes amounts incurred after 2011. The Company estimates the benefit that it will receive as a result of the
credit extension will be approximately $507. The benefit, which will be subjected to a full valuation allowance, will be recognized in the period of enactment, which is the first quarter of 2013.
118
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
NOTE 10 LICENSE AGREEMENT
Through the acquisition of Reliant in December 2008, the Company had an exclusive, royalty bearing,
worldwide license, with the right to sub-license, with Massachusetts General Hospital (MGH) to patent applications relating to some of the technology used in the Fraxel laser systems. This license, ongoing royalty obligations and
all rights thereunder terminated on December 31, 2010, provided however that MGH has granted a non-assert provision that applies to all of its products in the professional marketplace.
NOTE 11 LITIGATION SETTLEMENT GAIN
The Company advised Alma Lasers, Ltd. and Alma Lasers, Inc. (together Alma) in February
2006 that Almas Accent product infringed numerous patents owned by the Company. On April 26, 2007, Alma filed a lawsuit against the Company in the United States District Court for the District of Delaware requesting declaratory judgment
that Almas Accent product does not infringe the Companys patents and that the Companys patents are invalid. On June 20, 2007, the Company filed patent infringement counterclaims against Alma in the United States District Court
for the District of Delaware asserting that Almas Accent and Harmony systems infringe ten of the Companys U.S. patents. The counterclaims were amended on December 10, 2007 to include a claim of infringement of an eleventh patent. In
addition to damages and attorney fees, the Company asked the Court to enjoin Alma from further infringement. During May, June and July 2008, Alma filed with the United States Patent and Trademark Office requests that all of the eleven patents
asserted by the Company be reexamined. The United States Patent and Trademark Office has made rejections of some claims in each of these 11 patents. Some of the patents in reexamination have been reaffirmed, while others remain under
rejection. As a result of a settlement reached on May 10, 2010, the Company and Alma granted each other a covenant not to sue under the patents asserted in the lawsuit and related patents. In addition, Alma paid the Company a non-returnable
one-time amount of $2,250 in connection with this settlement. External legal fees incurred during the year ended December 31, 2010 in connection with the settlement was $37. In connection with this settlement, the Company recorded a net gain of
$2,213 in operating expenses during year ended December 31, 2010.
NOTE 12 EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) defined contribution plan covering all employees. Contributions made by
the Company are determined annually by the board of directors. The Company made no contributions under this plan for the years ended December 31, 2012, 2011 and 2010.
NOTE 13 RELATED PARTY TRANSACTIONS
During the years ended December 31, 2012, 2011 and 2010, the Company paid $75 each year to a
member of its board of directors under the terms of a consulting agreement.
During 2011, the Company entered
into an equity method investment with a privately held company and initially received approximately 12.5% of the fully diluted as-if converted outstanding capital stock of the investee, in exchange for entering into a Development and Supply
Agreement with the Company. We may have the ability to exercise significant influence, but not control, over the investee, therefore the investment has been accounted for as an equity method investment. As of December 31, 2012, the Company
determined that the carrying amount of the investment may not be fully recoverable and therefore impaired. The impairment loss was immaterial and recorded within other income and expense, net, in the Companys consolidated statements of
operations for the year ended December 31, 2012 (see note 4).
119
Solta Medical, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands of dollars, except share and per share amounts)
NOTE 14 SUBSEQUENT EVENT
On January 29, 2013, the Company, a wholly-owned subsidiary of the Company, Argonaut Limited
Liability Company (Merger Sub), Sound Surgical Technologies LLC, (Sound Surgical) and Inlign CP III, LLC, entered into an Agreement and Plan of Merger (the Merger Agreement), pursuant to which, on the terms and
subject to the conditions set forth in the Merger Agreement, the Company has agreed to acquire all of the outstanding membership interests of Sound Surgical by way of a merger in which Merger Sub will be merged with and into Sound Surgical with
Sound Surgical continuing as the surviving corporation and a wholly-owned subsidiary of the Company (the Merger).
On February 26, 2013, the Company completed the acquisition of Sound Surgical in accordance with the Merger Agreement for an aggregate of 9.73 million shares of the Companys common stock
(the Closing Shares) issued to Sound Surgicals unit holders and (ii) approximately $4.4 million in cash, which includes adjustments to account for Sound Surgicals working capital and cash balances at closing, to such
holders and in respect of certain obligations of Sound Surgical outstanding at the closing. Pursuant to the Merger Agreement the Closing Shares have an ascribed value of $25.5 million based on the per share price equal to the volume-weighted average
of the closing sales prices for the Companys common stock on the NASDAQ Stock Market for a specified period prior to the date of the Merger Agreement (the Closing Share Price).
In addition, the Merger Agreement provides that the Company will issue additional shares of its common stock (the
Earn-Out Shares) to unit holders of Sound Surgical upon the achievement of certain revenue milestones in 2013 from the sale of Sound Surgical products. The Earn-Out Shares, if any, are issuable in the first quarter of 2014. The maximum
number of Earn-Out Shares issuable under the Merger Agreement is 3.63 million shares, with an aggregate value of $9.5 million in total based on the Closing Share Price.
In connection with the acquisition, the Company assumed the Sound Surgical Louisville, Colorado, facility lease, and
expects to maintain this facility and over the next 12 months, will integrate Sound Surgical into its existing worldwide operations. The Company will complete the preliminary purchase price allocation of acquisition in the first quarter of fiscal
2013. The results of Sound Surgicals operations will be included in the Companys consolidated results of operations beginning with the date of the acquisition in the first quarter of fiscal 2013.
NOTE 15 SUPPLEMENTARY DATA QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents certain unaudited
consolidated quarterly financial information for each of the eight quarters ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
Dec. 31,
2012
|
|
|
Sep. 30,
2012
|
|
|
Jun. 30,
2012
|
|
|
Mar. 31,
2012
|
|
|
Dec. 31,
2011
|
|
|
Sep. 30,
2011
|
|
|
Jun. 30,
2011
|
|
|
Mar. 31,
2011
|
|
Net revenue
|
|
$
|
39,801
|
|
|
$
|
35,028
|
|
|
$
|
37,262
|
|
|
$
|
32,454
|
|
|
$
|
33,168
|
|
|
$
|
27,411
|
|
|
$
|
28,954
|
|
|
$
|
26,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
24,171
|
|
|
$
|
21,215
|
|
|
$
|
23,548
|
|
|
$
|
20,243
|
|
|
$
|
19,104
|
|
|
$
|
17,892
|
|
|
$
|
18,563
|
|
|
$
|
18,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(45
|
)
|
|
$
|
(2,878
|
)
|
|
$
|
(26,286
|
)
|
|
$
|
(8,799
|
)
|
|
$
|
1,047
|
|
|
$
|
(1,145
|
)
|
|
$
|
(206
|
)
|
|
$
|
(1,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
($
|
0.00
|
)
|
|
($
|
0.04
|
)
|
|
($
|
0.43
|
)
|
|
($
|
0.14
|
)
|
|
$
|
0.02
|
|
|
($
|
0.02
|
)
|
|
($
|
0.00
|
)
|
|
($
|
0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share
|
|
($
|
0.00
|
)
|
|
($
|
0.04
|
)
|
|
($
|
0.43
|
)
|
|
($
|
0.14
|
)
|
|
$
|
0.02
|
|
|
($
|
0.02
|
)
|
|
($
|
0.00
|
)
|
|
($
|
0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120