Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SLTM > SEC Filings for SLTM > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for SOLTA MEDICAL INC

Form 10-Q for SOLTA MEDICAL INC


7-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These statements include, but are not limited to, introduction of new procedures and associated treatment tips in the future; sales organization growth; growth in international sales and expansion into new international markets; and our belief that our cash, cash equivalents and marketable investments, along with our credit facility will satisfy our anticipated cash requirements. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see "Risk Factors" section in Item 1A of this Quarterly Report on Form 10-Q. We caution the reader not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Form 10-Q. We undertake no obligation to update forward-looking statements, which reflect events or circumstances occurring after the date of this Form 10-Q. We also encourage you to read the Critical Accounting Policies in Item 7"Management's Discussion and Analysis" contained in Part II of our Annual Report on Form 10-K filed on March 6, 2013.

Overview

We design, develop, manufacture and market aesthetic energy devices to address a range of issues, including skin resurfacing and skin rejuvenation, body tightening and body contouring, and acne reduction. Our products are patented and generally require Food and Drug Administration ("FDA") clearance in the United States and CE Marking in Europe prior to marketing. The product technologies we use include radio frequency ("RF") energy, to heat and shrink collagen and tighten tissue while simultaneously cooling and protecting the surface of the skin; lasers for skin resurfacing and the treatment of actinic keratosis; intense pulsed light ("IPL") for the treatment of mild to moderate acne and other dermatologic conditions; and high-intensity ultrasound for the destruction of subcutaneous adipose tissue for the purpose of waist circumference reduction.

We were incorporated in 1996 and received FDA clearance for our first Thermage RF system in 2002. Through a number of acquisitions, we added the Fraxel laser systems from our acquisition of Reliant Technologies, Inc. in December 2008; the Isolaz (IPL) system from our acquisition of Aesthera Corporation in February 2010; the CLARO (IPL) personal care acne treatment device from our acquisition of CLRS Technology Corporation in October 2010, the Liposonix system from our acquisition of Medicis Technologies Corporation in November 2011, and the VASER system from our acquisition of Sound Surgical Technologies LLC in February 2013. In addition, FDA clearance for the Clear + Brilliant laser system and the second generation Liposonix system were received in May and October 2011, respectively.

Net revenue for the six months ended June 30, 2013 increased 12% or $8.0 million, to $77.7 million, from $69.7 million in the same period in 2012, due primarily to the sale of VASER products acquired in the acquisition of Sound Surgical Technologies LLC in February 2013 and an increase in tips and consumable product sales. Our business continued to be impacted by the weakness in global economic conditions and tight credit markets, which we believe have continued to contribute to a slowdown in customer purchase decisions. The tight credit markets may have limited the ability of some of our customers to obtain financing for the purchase of our products. In response to the continuing difficulties in the economy, we have implemented a number of initiatives in response to the tight worldwide credit market, including working with financing companies to identify attractive leasing or borrowing options for our customers as well as offering incentives to doctors who buy more than one of our brands.

Acquisition of Sound Surgical

We completed the acquisition of Sound Surgical on February 26, 2013. See Note 3 of the Notes to Condensed Consolidated Financial Statements. The Company's consolidated financial statements include the results of operations of Sound Surgical from the date of acquisition through June 30, 2013.

Significant Business Trends

We derive revenue primarily from the sale of systems, treatment tips and consumables. For the six months ended June 30, 2013 and 2012, we derived 53% and 50% respectively, of our revenue from treatment tips and consumable sales, and 42% and 46% respectively, of our revenue from system sales. The balance of our revenue is derived from service, research and development, shipping and royalty revenue.


Table of Contents

We market our products in North America to physicians, primarily dermatologists and plastic surgeons, through a direct sales force and internationally through a network of independent distributors and our direct sales force in certain countries. In the six months ended June 30, 2013 and 2012, we derived 43% and 52%, respectively, of our revenue from sales of our products and services within North America, and 57% and 48%, respectively, of our total sales outside of North America. We believe that a significant portion of our business will continue to come from international sales through increased penetration in countries where we currently sell our products, combined with expansion into new international markets. The percentages of our revenue by region are presented in the table below:

                                  Three Months Ended           Six Months Ended
                                       June 30,                    June 30,
                                  2013            2012         2013          2012
           North America              46 %           52 %          43 %         52 %
           Asia Pacific               38 %           34 %          40 %         33 %
           Europe/Middle East         13 %           10 %          14 %         12 %
           Rest of the world           3 %            4 %           3 %          3 %

           Total net revenue         100 %          100 %         100 %        100 %

Future operating results are difficult to predict accurately. We anticipate that our quarterly results of operations may fluctuate for the foreseeable future due to several factors, including prevailing economic conditions and our customers' access to credit, the timing of introduction and the degree of acceptance of future product offerings, unexpected interruptions and expenses related to our manufacturing operations, and the performance of our direct sales force and international distributors.

As new or enhanced products are introduced, we must successfully manage the transition from older products in order to minimize disruption in customers' ordering patterns, avoid excessive levels of older product inventories, and ensure that enough supplies of new products can be delivered to meet customer demand.

Significant Industry Factors

The success of our business is subject to the impact of economic conditions on the growth of the industry and to our ability to continue to develop new products, applications and innovative technologies, obtain and maintain regulatory clearances for our products, protect our proprietary technology, and successfully market and distribute our products. Our industry is characterized by seasonally lower demand during the third calendar quarter of the year, when both physicians and prospective patients take summer vacations. Additionally, our industry is highly competitive and our success depends on our ability to compete successfully. Our business is sensitive to a number of factors that influence the levels of consumer spending, including political and economic conditions such as recessionary environments, the level of disposable consumer income, consumer debt, interest rates and consumer confidence. Declines in consumer spending on aesthetic procedures could have an adverse effect on our operating results. A detailed discussion of these and other factors that impact our business is provided in the "Risk Factors" section in this Quarterly Report on Form 10-Q.

Results of Operations

Three and Six Months Ended June 30, 2013 and 2012

Net Revenue. Revenue is derived from the sales of systems, treatment tips and other consumables, and service and other revenue. Net revenue was $43.2 million for the three months ended June 30, 2013, an increase of $5.9 million, or 16%, compared to $37.3 million for the three months ended June 30, 2012. The increase in revenue was due primarily from the sale of the new VASER products that launched in March 2013, an increase of net tips and consumable sales and an increase in service and other revenue. The increase was partially offset by a decrease in existing system revenue and system upgrade revenue which was due primarily to competitive market pressures and a larger mix of lower average-priced international sales. System sales for the three months ended June 30, 2013 was $19.0 million, an increase of $1.4 million, or 8%, compared to $17.6 million for the same period of 2012. Sale of treatment tips and other consumables increased by $4.1 million or 23%, to $22.3 million for the three months ended June 30, 2013 from $18.2 million for the same period of 2012, driven primarily from the sale of Thermage, Clear + Brilliant, and Liposonix tips, and VASER consumables.

Net Revenue increased $8.0 million, or 12%, to $77.7 million for the six months ended June 30, 2013 from $69.7 million for the same period of 2012. The increase in revenue was due primarily from the sale of the new VASER products that launched in March 2013, an increase of net tips and consumable sales, and an increase in service and other revenue. The increase was partially offset by a decline in total Liposonix revenue which was primarily driven by an increased mix of lower average-priced international sales and a manufacturing issue with the transducer treatment tip that we experienced in our North America regions during the first quarter of 2013. The Liposonix transducer manufacturing issue was corrected by the end of March 2013. System sales increased $1.0 million or 3%, to $32.8 million for the six months ended June 30, 2013 from $31.8 million for the same period of 2012. Sale of treatment tips and other consumables increased by $6.2 million or 18%, to $41.2 million for the six months ended June 30, 2013 from $34.9 million for the same period of 2012, driven primarily from the sale of Thermage, Clear + Brilliant, and Liposonix tips, and VASER consumables.


Table of Contents

Cost of Revenue and Gross Margin. Our cost of revenue consists primarily of material, labor and manufacturing overhead expenses. Gross margin was 60% of revenue for the three months ended June 30, 2013, compared with 63% of revenue for the same period in 2012. The decrease in gross margin as a percent of revenue when compared to the prior year period was primarily due to a higher mix of international system sales and competitive pricing pressures, partially offset by a higher mix of tip sales, lower manufacturing spending net of overhead absorption and lower excess and obsolete reserves.

Gross margin was 61% of revenue in the first half of 2013, compared with 63% of revenue in the first half of 2012. The slight decrease in gross margin as a percent of revenue for the first half of 2012 when compared to the prior year period was primarily due to a higher mix international system sales and competitive pricing pressures, partially offset by a higher mix of tip sales, lower manufacturing spending net of overhead absorption, lower warranty reserves, and lower excess and obsolete reserves.

Sales and Marketing. Sales and marketing expenses consist primarily of personnel related costs in our sales, marketing, clinical training, and customer service departments, customer-attended workshops, trade shows, advertising, public relations, marketing sponsorship programs, and marketing materials. Sales and marketing expenses for the three months ended June 30, 2013 were $16.9 million, an increase of $3.2 million, or 23%, compared to $13.7 million for the same period in 2012. The increase was primarily attributable to an increase of $1.3 million in employee payroll, commissions and related travel and entertainment expenses, which was mainly due to increased sales and marketing personnel acquired in our Sound Surgical acquisition, $0.7 million in advertising and marketing program expenses associated with launching VASER products from the Sound Surgical acquisition, an increase of $0.7 million in amortization of intangibles acquired in the Sound Surgical acquisition, an increase of $0.4 million in professional outside services, and an increase of $0.1 million in depreciation and allocated information technology and facility expenses.

Sales and marketing expenses increased $3.4 million, or 13%, to $31.1 million in the first half of 2013 from $27.6 million for the same period of 2012. The increase in the first half of 2013 was primarily attributable to an increase of $0.9 million in employee payroll, commissions and related travel and entertainment expenses, which was mainly due to increased sales and marketing personnel acquired in our Sound Surgical acquisition, an increase of $0.9 million in discretionary marketing expenses associated with launching VASER products from the Sound Surgical acquisition, an increase of $0.9 million in amortization of intangibles acquired in the Sound Surgical acquisition, an increase of $0.5 million in professional outside services, and an increase of $0.2 million in depreciation and allocated information technology and facility expenses.

Research and Development. Research and development expenses consist primarily of personnel costs, clinical and regulatory costs, material costs and quality assurance costs not directly related to the manufacturing of our products. Research and development expenses for the three months ended June 30, 2013 increased by $0.4 million, or 9% to $5.4 million from $5.0 million for the same period in 2012. The increase was primarily due to an increase of $0.3 million in professional outside services and an increase of $0.2 million in clinical studies and other research, offset by a decrease of $0.1 million in employee payroll and related expenses.

Research and development expenses increased $0.5 million, or 4%, to $10.8 million in the first half of 2013 from $10.3 million for the same period in 2012. Compared to the first half of 2012, clinical studies and other research and development projects increased by $.3 million, employee payroll and related expenses increased by $0.1 million, and professional outside services increased by $0.1 million.

General and Administrative. General and administrative expenses consist primarily of personnel costs, legal and accounting fees, human resources costs and other general operating expenses. General and administrative expenses for the three month ended June 30, 2013 were $6.4 million, an increase of $1.8 million, or 39%, compared with $4.6 million for the same period in 2012. The increase from the prior year period was primarily due to an increase of $0.8 million in acquisition and severance related expenses resulting from the acquisition of Sound Surgical. In addition, the general and administrative expenses increased due to an increase in professional outside services increased of $0.5 million, due to mostly legal services, an increase of $0.3 million in additional excise taxes due to the new medical device excise tax effective January 1, 2013, an increase of $0.3 million in depreciation and allocated information technology and facility expenses, and an increase of $0.1 million in business insurance, partially offset by a decrease of $0.2 million in bad debt expense.

General and administrative expenses in the first half of 2013 was $13.4 million, an increase of $4.1 million or 45%, compared with $9.3 million in the first half of 2012. The increase from the prior year period was primarily due to an increase of $2.3 million in acquisition and severance related expenses resulting from the acquisition of Sound Surgical in February 2013, an increase of $0.8 million in professional outside services, due to mostly legal services, primarily legal services, an increase of $0.4 million in depreciation and allocated information technology and facility expenses, an increase of $0.5 million in additional excise taxes due to the new medical device excise tax effective January 1, 2013, an increase of $0.2 million in employee payroll and related expenses, and an increase of $0.1 million in business insurance, partially offset by a decrease of $0.2 million in bad debt expense.


Table of Contents

Remeasurement of contingent consideration liability. Remeasurement of the contingent consideration liability is the quarterly fair value adjustment of the contingent consideration liability associated with certain acquisitions. Adjustments can arise due to accretion of the liability as the Company approaches payment or for any changes to the assumptions used to measure the liability. For the three and six months ended June 30, 2013, the contingent consideration fair value adjustment was a $9.5 million and a $12.6 million, respectively, credit associated with the acquisitions of Liposonix and Sound Surgical, and for the three and six months ended June 30, 2012, the contingent consideration fair value adjustment was a $26.0 million and a $30.7 million, respectively, expense associated with the acquisition of Liposonix. The acquisition of Liposonix closed in the fourth quarter of 2011 and the acquisition of Sound Surgical closed in the first quarter of 2013. The decrease to the contingent consideration liability recorded in the first half of 2013 was due primarily to changes in our estimates of achievement in specified net sales and adjusted gross profit targets over the remaining six-year Liposonix earnout period, and changes in the Company's estimate of achievement against certain Sound Surgical revenue milestones, changes in the company's stock price and a decrease in the discount for lack of marketability rate used to value the Sound Surgical contingent consideration liability. The increase to the contingent consideration liability recorded in the first half of 2012 was due primarily to changes in our estimates of achievement in specified net sales and adjusted gross profit targets over the seven-year Liposonix earnout period.

Interest Income. Interest income consists primarily of interest income generated from our cash and cash equivalents. Interest income increased $16,000, to $18,000 for the three months ended June 30, 2013, from $2,000 for the same period in 2012, and increased $22,000, to $27,000 for the six months ended June 30, 2013 from $5,000 for the same period in 2012. The increase is primarily due to higher average cash and cash equivalent balances in the first half of 2013 when compared to the comparable period of the prior year.

Interest Expense. Interest expense consists primarily of interest expense resulting from borrowings on the line of credit and term loans. Interest expense increased by $453,000 to $803,000 for the three month period ended June 30, 2013, from $350,000 for the same period in 2012, and increased by $794,000 to $1,495,000 for the six months ended June 30, 2013 from $701,000 for the same period in 2012. The increase is primarily a result of the new subordinated debt facility we entered into in August 2012.

Other Expense, net. Net other expense consists primarily of activity resulting from foreign exchange gains and losses and activity from our equity investment. Net expense of $150,000 and $121,000 in the three month period ended June 30, 2013 and 2012, respectively, and net expense of $245,000 and $147,000 in the six months ended June 30, 2013 and 2012, respectively. The net expense increase during both periods is primarily due to higher foreign exchange losses from currency fluctuations when compared to the same periods in the prior year.

Income Tax Provision. There was an income tax provision of $2.1 million and $64,000 for the three month periods ended June 30, 2013 and 2012, respectively, and $2.2 million and $121,000 for the six month periods ended June 30, 2013 and 2012, respectively. The provision for income taxes for both periods ended June 30, 2013, primarily represents taxes in foreign and state jurisdictions, tax reserves for uncertain tax positions, and tax expense resulting from the reduction of tax deductible contingent consideration related to the Sound Surgical acquisition. The provision for income taxes for both periods ended June 30, 2012, primarily represents taxes in foreign and state jurisdictions and tax reserves for uncertain tax positions.

Stock-Based Compensation

For the three and six months ended June 30, 2013 and 2012 employee and
non-employee stock-based compensation expense has been allocated as follows (in
thousands):



                                             Three Months ended          Six Months ended
                                                  June 30,                   June 30,
                                              2013          2012         2013         2012
  Cost of revenue                          $      144      $   127     $     280     $   239
  Sales and marketing                             165          259           378         466
  Research and development                        170          197           309         359
  General and administrative                      759          626         1,471       1,285

  Total stock-based compensation expense   $    1,238      $ 1,209     $   2,438     $ 2,349

Reconciliation of GAAP to Non-GAAP Financial Measures

The following presentation includes non-GAAP measures. Our non-GAAP measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures. The Company believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with the Company's results of operation as determined in accordance with GAAP and that these measures should only be used to evaluate the Company's results of operations in conjunction with the corresponding GAAP measures.


Table of Contents

The non-GAAP financial measures presented are non-GAAP gross margin, non-GAAP gross margin as a percentage of sales, non-GAAP operating income, non-GAAP adjusted EBITDA, non-GAAP net income and non-GAAP net income per share. These non-GAAP financial measures, as defined by us, are adjusted to exclude one or more of the following items: in process research and development, amortization of acquired intangibles and other non-cash acquisition-related charges, severance expense, acquisition-related expenses, loss on investments and stock-based compensation expense.

We use non-GAAP financial measures as performance measures to supplement the financial information we present on a GAAP basis. We believe these non-GAAP financial measures provide useful information to investors and management for the reasons stated below.

Non-GAAP gross margin and non-GAAP gross margin as a % of sales provide useful information to investors regarding our gross margin by excluding from cost of sales non-cash items like amortization of acquisition related intangibles and stock-based compensation expenses. These costs are generally fixed at the time of acquisition or when the stock-based award is granted, are then expensed or amortized over several years and generally cannot be changed or influenced by management after acquisition or once granted. We further believe that excluding these charges can provide useful information to investors for the reasons stated in the footnotes to these respective items in the presentation that follows.

Non-GAAP operating income reflects our ongoing business in a manner that allows for meaningful period-to-period comparison and analysis of trends in our business, as it excludes expenses that may not be regarded as reflective of ongoing operating results like severance expenses and acquisition related in-process research and development expenses, as well as those discussed in non-GAAP gross margin above. We further believe that excluding the identified expenses can provide useful information to investors for the reasons stated in the footnotes to these respective items in the presentation that follows.

Non-GAAP Adjusted EBITDA enables investors to assess our compliance with financial covenants under its debt instruments. Our credit facility loans have financial covenants that use non-GAAP adjusted EBITDA as part of the measure.

Non-GAAP net income and non-GAAP net income per share, by excluding non-cash and one-time expenses like those discussed in non-GAAP gross margin and non-GAAP operating income measures above, provide useful information to investors and others in understanding and evaluating our financial results and future prospects in the same manner as management and in comparing financial results across accounting periods.


Table of Contents

For a detailed explanation of the adjustments made to comparable GAAP measures and the reasons why management uses these adjustments, see items (1) -
(7) below.

                                               Three Months Ended                         Six Months Ended
                                                    June 30,                                  June 30,
                                           2013                 2012                 2013                 2012
GAAP Gross margin                      $      26,102        $      23,548        $      47,781        $      43,791

GAAP gross margin as % of sales                   60 %                 63 %                 61 %                 63 %

Non-GAAP adjustments to gross
margin:
GAAP Gross margin                      $      26,102        $      23,548        $      47,781        $      43,791
Amortization and other non-cash
acquisition related charges (1)                1,781                1,375                3,219                3,033
Stock-based compensation (4)                     144                  127                  280                  239

Non-GAAP gross margin                  $      28,027        $      25,050        $      51,280        $      47,063

Non-GAAP gross margin as % of
sales                                             65 %                 67 %                 66 %                 68 %

GAAP income (loss) from operations     $       6,876        ($     25,753 )      $       5,136        ($     34,121 )
Non-GAAP adjustments to net income
(loss) from operations:
Amortization and other non-cash
acquisition related charges (1)                2,874                1,729                4,870                3,746
Remeasurement of contingent
consideration liability (6)                   (9,500 )             26,000              (12,600 )             30,700
Acquisition-related expenses (3)                 510                   58                1,904                  151
Severance expenses (credits) (2)                 303                  (11 )                616        $       19.00
Stock-based compensation (4)                   1,238                1,209                2,438                2,349

Non-GAAP income from operations        $       2,301        $       3,232        $       2,364        $       2,844
Depreciation expenses (5)                        854                  937                1,729                1,875

Non-GAAP Adjusted EBITDA               $       3,155        $       4,169        $       4,093        $       4,719
. . .
  Add SLTM to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SLTM - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.