NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1 - Description of the Business, Basis of Presentation and Summary of Significant Accounting Policies
Description of the Business
Soliton, Inc. (“Soliton” or the “Company”) was organized under the laws of the State of Delaware on March 27, 2012. The Company operates in one segment as a medical device company organized to develop and commercialize products utilizing its proprietary Rapid Acoustic Pulse ("RAP") technology platform. The Company is a commercial stage company with its first products having been launched for the removal of tattoos and the reduction of cellulite. The Company received clearance from the U.S. Food & Drug Administration ("FDA") for its tattoo removal indication in June of 2019 and for the temporary improvement in the appearance of cellulite in January of 2021. The Company is based in Houston, Texas. Revenue is generated by the sale of its RAP console and disposable cartridges to dermatologists and plastic surgeons, as well as medi-spas under the supervision of a doctor.
Basis of Presentation
The accompanying condensed interim financial statements are unaudited. These unaudited condensed interim financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, they do not include all the information and notes required by generally accepted accounting principles in the United States of America ("GAAP") for complete financial statements. These unaudited condensed interim financial statements should be read in conjunction with the audited financial statements and accompanying notes as found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 4, 2021. In the opinion of management, the unaudited condensed interim financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The interim results of operations are not necessarily indicative of the results that may occur for the full fiscal year. The December 31, 2020 unaudited condensed balance sheet included herein was derived from the audited financial statements, but does not include all disclosures, including notes, required by GAAP for complete financial statements.
Summary of Significant Accounting Policies
Revenue and Related Selling Costs
Revenue is derived from the sales of the RESONICTM system, consisting of a console and handpiece, and, from time to time, related extended warranty arrangements (collectively, "System Revenue"), and from the sale of consumable cartridge cases, each of which includes our consumable cartridges and gel pads (collectively, "Consumable Revenue") used by the Company's customers during patient treatments.
The Company recognizes revenue at the amount to which it expects to be entitled when control of the products or services is transferred to its customers. Control is generally transferred when the Company has a present right to payment and the title, and the significant risks and rewards of ownership of products or services are transferred to its customers. The Company uses contracts or customer orders to determine the existence of an arrangement. The Company's standard terms specify that title transfers upon shipment to the customer. Sales prices are documented in the executed sales contract or customer order received prior to shipment. The Company's standard terms do not allow for refunds, payments contingent upon the customer obtaining financing or other terms that could impact the customer's obligation. With the customer’s initial order, where the Company has no past transaction history, the Company collects a deposit before shipment and does not recognize income until it has certainty of receipt of the cash.
Sales of its RESONIC system generally include installation and training. In most cases, consoles are sold with a limited 12 month warranty on product quality. The RESONIC console and cartridges contain enabling software that permits customers to perform patient treatments. The Company does not market this software separately from the RESONIC console or from the consumable cartridges, rather, the functionality that the software provides is part of the overall RESONIC technology. The Company markets the RESONIC system as a non-invasive aesthetic device for the improvement in the appearance of cellulite and for tattoo removal, not for its embedded software attributes included in the technology that enable its use. The Company does not provide rights to upgrades and enhancements in its contract with customers. The embedded software in the RESONIC console and cartridges is incidental to the RESONIC products as a whole and accordingly, revenue recognition is not within the scope of provisions of Accounting Standards Codification ("ASC") Topic 985.
For contracts with multiple performance obligations, each of which represent promises within a contract that are distinct, the Company allocates revenue to all distinct performance obligations based on their relative stand-alone selling prices (“SSPs”). The Company’s products and services included in its contracts with multiple performance obligations generally are not sold separately and there are no observable prices available to determine the SSP for those products and services. Since observable prices are not available, SSPs are established that reflect the Company’s best estimates of what the selling prices of the performance obligations would be if they were sold regularly on a stand-alone basis. The Company’s process for estimating SSPs without observable prices considers multiple factors that may vary depending upon the unique facts and circumstances related to each performance obligation including, when applicable, the estimated cost to provide the performance obligation, market trends in the pricing for similar offerings, product-specific business objectives, and competitor or other relevant market pricing and margins.
The Company expenses shipping and handling costs as incurred and includes them in cost of revenue. In those cases where the Company bills shipping and handling costs to customers, the Company classifies the amounts billed as System Revenue.
The Company excludes all taxes assessed by a governmental agency that are both imposed on and concurrent with the specific revenue-producing transaction from revenue (for example, sales and use taxes). In essence, the Company is reporting these amounts collected on behalf of the applicable government agency on a net basis as though they are acting as an agent. The taxes collected and not yet remitted to the governmental agency are included in accounts payable and accrued expenses in the accompanying balance sheets.
Product Warranties
Sales of the Company's consoles and handpieces includes a limited 12 month warranty on product quality. The Company accrues warranty and related costs based on its best estimates when it determines that it is probable a charge or liability has been incurred and the amount of loss can be reasonably estimated. For new product introductions in which the Company may not have any historical experience, the Company makes estimates for warranty claims based on qualitative and quantitative information. The Company exercises judgment in estimating the expected product warranty costs, using data such as the actual and projected product failure rates, estimated repair costs, material, labor, and overhead costs. Because the Company has no historical experience with which to provide a reliable basis for estimating such warranty cost, unforeseen quality issues or component failure rates could result in future costs in excess of such estimates, or alternatively, improved quality and reliability in the Company's products could result in actual expenses that are below those currently estimated.
Customer Payments and Incentives
The Company enters into transactions where we provide consideration in exchange for certain services provided under separate contractual arrangements. The Company accounts for such payments to customers in accordance with ASC Topic 605-50, which requires management to characterize the payment as a reduction of revenue if the Company is unable to demonstrate the receipt of a benefit that is identifiable and sufficiently separable from the revenue transaction and reasonably estimate the fair value of the benefit identified. Significant management judgment and estimates must be used to determine the fair value of the benefit received in any period.
Disaggregated Revenue
The Company disaggregates revenue based upon the nature of its products and services and the timing and in the manner which it is transferred to the customer. Substantially all revenue is recognized at the time of delivery, except for installation fees, which are recognized as work is completed. Installations do not represent a significant portion of the revenue recognized. For the three and nine months ended September 30, 2021, revenue consisted of the following (in thousands):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2021
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2020
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2021
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2020
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Revenue :
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System
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$
|
349
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$
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—
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$
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349
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$
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—
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Consumable
|
14
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—
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14
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—
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Installation
|
7
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—
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7
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—
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Total revenue
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$
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370
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$
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—
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$
|
370
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$
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—
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Segments
The Company operates in one reportable segment based on management’s view of its business for purposes of evaluating performance and making operating decisions.
Use of Estimates in Financial Statement Presentation
The preparation of these unaudited condensed interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. The Company's significant estimates and assumptions include work performed but not yet billed by contract manufacturers, engineers and research organizations, the valuation of equity related instruments, the amount of warranty work to be performed for customers, the stand-alone selling price of components of our revenues, depreciable lives of long-lived assets (including property and equipment and intangible assets), and the valuation allowance related to deferred taxes. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Some of these judgments can be subjective and complex, and, consequently, actual results could differ from those estimates.
The coronavirus disease (“COVID-19”) pandemic has negatively impacted, and may continue to negatively impact, the macroeconomic environment in the United States and globally, including our business, financial condition and results of operations. Due to the evolving and uncertain nature of COVID-19, it is reasonably possible that it could materially impact our estimates, particularly those that require consideration of forecasted financial information, in the near to medium term. These estimates relate to certain accounts including, but not limited to, the valuation allowance related to deferred taxes, intangible assets, and other long-lived assets. The magnitude of the impact will depend on numerous evolving factors that we may not be able to accurately predict, including the duration and extent of the pandemic, the impact of federal, state, local and foreign governmental actions, consumer and provider behavior in response to the pandemic and such governmental actions, and the economic and operating conditions that we may face in the aftermath of COVID-19.
Merger Agreement
On May 8, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with AbbVie Inc. (“AbbVie”) and Scout Merger Sub, Inc., a wholly-owned subsidiary of AbbVie (“Merger Sub”), under which Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and a wholly-owned subsidiary of AbbVie (the “Merger”).
Upon the closing of the Merger, each outstanding share of Company common stock, other than shares owned by the Company, AbbVie or Merger Sub (which will be cancelled) and shares with respect to which appraisal rights are properly exercised and not withdrawn under Delaware law, will automatically be converted into the right to receive $22.60 in cash, without interest (the “Merger Consideration”).
Each stock option outstanding and unexercised immediately prior to the effective time of the Merger (the “Effective Time”) will be converted into the right to receive a cash payment, without interest, in an amount equal to the excess of the Merger Consideration over the per share exercise price that would be due in cash upon exercise of such stock option. Each restricted stock unit award outstanding immediately prior to the Effective Time will be converted into the right to receive a cash payment, without interest, in an amount equal to the Merger Consideration. Each warrant to purchase Company common stock outstanding and unexercised immediately prior to the Effective Time will be converted into the right to receive a cash payment, without interest, in an amount equal to the excess of (i) the number of shares of common stock subject to the warrant, multiplied by the Merger Consideration over (ii) the number of shares of common stock subject to the warrant, multiplied by the per share exercise price of such warrant.
The consummation of the Merger is subject to certain customary closing conditions, including (i) the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of the Company’s common stock (the “Stockholder Approval”), (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and (iii) that no judgment or law is in effect that enjoins, makes illegal or otherwise prohibits the consummation of the Merger. Moreover, each party’s obligations to consummate the Merger are subject to certain other conditions, including (a) the accuracy of the other party’s representations and warranties (subject to certain materiality exceptions), (b) the other party’s compliance in all material respects with its obligations under the Merger Agreement, and (c) in the case of AbbVie and Merger Sub only, (i) the absence of any pending claim, proceeding or other action by a governmental authority that seeks to prevent, prohibit or make illegal the consummation of the Merger or materially limit AbbVie’s ability to own, control, direct, manage or operate the Company and (ii) the absence of any effect, change, event, development or occurrence that, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect (as defined in the Merger Agreement) that is continuing. Subject to the satisfaction of the closing conditions, closing of the Merger is expected to occur in the second half of 2021.
The Merger Agreement contains representations and warranties and covenants of the parties customary for a transaction of this nature. Until the earlier of the termination of the Merger Agreement and the Effective Time, the Company has agreed to operate its business in the ordinary course of business in all material respects and has agreed to certain other operating covenants and to not take certain specified actions prior to the consummation of the Merger, as set forth more fully in the Merger Agreement. The Company has also agreed to convene and hold a meeting of its stockholders for the purpose of obtaining the Stockholder Approval. In addition, the Merger Agreement requires that, subject to certain exceptions, the Board recommend that the Company’s stockholders approve the Merger Agreement.
The Merger Agreement contains certain termination rights for the Company and AbbVie, including, among others, the right of (1) the Company to terminate the Merger Agreement in order to enter into an agreement providing for a Superior Proposal (subject to the Company’s compliance with certain obligations under the Merger Agreement related to such Superior Proposal and such termination) and (2) AbbVie to terminate the Merger Agreement if the Board changes its recommendation with respect to the Merger Agreement. The Merger Agreement also provides that under specified circumstances, including in the event of termination as described in (1) or (2) above, the Company will be required to pay AbbVie a termination fee of $18.6 million.
In connection with a termination of the Merger Agreement under specified circumstances involving failure to obtain clearance under the HSR Act to consummate the Merger (or failure to remove certain legal restraints, or to resolve certain pending claims or proceedings, arising under antitrust laws with respect to the Merger) within six months from the date of the Merger Agreement, subject to two extensions of three months each (provided other closing conditions are satisfied), or involving a non-appealable legal restraint of the Merger arising under antitrust laws, AbbVie may be required to pay the Company a reverse termination fee ("Additional Payments") of up to $20.0 million. On September 10, 2021, AbbVie made an Additional Payment of $6.0 million and on November 8, 2021, AbbVie made an Additional Payment of $11.5 million and exercised its right to extend the term to consummate the Merger by an additional three months to February 8, 2022.
Material Uncertainties
The Company is an early-stage Emerging Growth Company ("EGC") and started generating revenue during the three months ended September 30, 2021. As such, the Company is subject to all of the risks associated with early stage and emerging growth companies. Since inception, the Company has incurred losses and negative cash flows from operating activities. For the three and nine months ended September 30, 2021 and 2020, the Company incurred net losses of $0.3 million and $3.6 million, respectively, and $13.3 million and $10.0 million, respectively, and had net cash flows used in operating activities for the nine months ended September 30, 2021 and 2020 of $14.4 million and $8.8 million, respectively. At September 30, 2021, the Company had an accumulated deficit of $83.9 million, working capital of $18.8 million and cash, cash equivalents and restricted cash of $21.9 million. The Company does not expect to experience positive cash flows from operating activities in the near future and anticipates incurring operating losses for the next few years as it supports the commercial launch of its products and continues to invest in research and development for additional indications in the Company's pipeline. The Company expects its cash, cash equivalents and restricted cash on hand of $21.9 million as of September 30, 2021 and Additional Payments that have been made by AbbVie as the Merger has not been consummated by November 8, 2021 will be sufficient to fund the Company's operations for at least the next 12 months.
These factors raise uncertainties about the Company's ability to fund operations in future years. If the Company needs additional capital or financing to continue to execute its business plan or a change to its business plan, including obtaining additional regulatory clearance for its products currently under development, and commercializing and generating revenues from products under development, there is no assurance that additional capital or financing will be available when needed or
that management will be able to raise capital or obtain financing on terms acceptable to the Company. The accompanying financial statements do not include any adjustments to reflect this uncertainty.
Net Loss per Common Share
Basic net loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. Unvested restricted stock awards contain dividend rights and are considered participating securities as contemplated for the computations of basic and diluted earnings or loss per share. These securities do not participate in losses and accordingly no such allocation has been made in the periods presented. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
As of September 30, 2021, potentially dilutive securities included options to purchase 4,266,275 common shares, warrants to purchase 529,141 common shares and unvested restricted stock of 270,850 shares.
As of September 30, 2020, potentially dilutive securities included options to purchase 3,409,550 common shares, warrants to purchase 1,324,608 common shares and unvested restricted stock of 120,842 shares.
Recent Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASC 842"), which establishes a right-of-use (“ROU”) model requiring a lessee to recognize a ROU asset and a lease liability for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Given the Company's status as an EGC, the Company may adopt this ASU in accordance with the private company guidance which has deferred the effective date to years beginning after December 15, 2021, and interim periods with fiscal years beginning after December 15, 2022. The modified retrospective transition approach applies to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has the option to instead apply the provisions at the effective date without adjusting the comparative periods presented. The Company is currently evaluating the impact of this guidance on its financial position, results of operations, and cash flows.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting entities. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. Given the Company's status as an EGC, the Company may adopt the amendments of this update for years beginning after December 15, 2021, and interim periods with fiscal years beginning after December 15, 2022.
The Company does not believe that these or other recently issued effective standards, or standards issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.
Reclassifications
In certain instances, amounts reported in prior years' financial statements have been reclassified to conform to the current financial statement presentation. Such reclassifications had an effect on previously reported expenses between general and administrative and research and development.
Note 2 - Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
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September 30,
2021
|
|
December 31,
2020
|
|
|
|
|
|
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Prepaid insurance
|
$
|
217
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|
|
$
|
49
|
|
|
Prepaid software
|
84
|
|
|
52
|
|
|
Other prepaids and receivables
|
314
|
|
|
40
|
|
|
Total prepaid expenses and other current assets
|
$
|
615
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|
|
$
|
141
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|
As of September 30, 2021, other prepaids and receivables largely included the sale of previously purchased components used in the manufacturing of our devices back to our contract manufacturer at September 30, 2021 for $0.3 million, payments made to vendors for work that has not yet been completed, payments made as a result of listing requirements for public companies and receivables from vendors.
Note 3 - Property and Equipment
As of September 30, 2021 and December 31, 2020, the net carrying value of property and equipment was approximately $2.3 million and $1.4 million, respectively, and included an amount less than $0.1 million and $0.7 million, respectively, of construction-in-process for equipment being built and software being developed but not yet placed into service.
Depreciation expense for the three months ended September 30, 2021 and 2020 was $0.2 million and $0.1 million, respectively. Depreciation expense for the nine months ended September 30, 2021 and 2020 was $0.5 million and $0.2 million, respectively.
Note 4 - Commitments and Contingencies
On April 5, 2012, the Company entered into a Patent and Technology License Agreement with The University of Texas M.D. Anderson Cancer Center ("MD Anderson"). Pursuant to the agreement, the Company obtained a royalty-bearing, worldwide, exclusive license to intellectual property including patent rights related to the patents and technology the Company uses. Under the agreement, the Company pays a nonrefundable annual maintenance fee which escalates each anniversary. Additionally, the Company agreed to a running royalty percentage of net sales in the mid-single digits. The annual maintenance fee is discontinued with the initiation of royalty payments. The specific patents initially subject to the agreement expire between 2031 and 2032.
All out-of-pocket expenses incurred by MD Anderson in filing, prosecuting and maintaining the licensed patents have been and shall continue to be assumed by the Company. For the nine months ended September 30, 2021 and 2020, the Company paid approximately $0.1 million and $0.1 million, respectively, for expenses related to this agreement.
As the inventor of the intellectual property licensed from MD Anderson, Dr. Capelli, the Company's Vice Chairman, Chief Science Officer and Co-Founder, is entitled to 50% of the license income (which is determined after MD Anderson recoups any costs associated therewith) that the Company is required to pay to MD Anderson pursuant to the Company's license agreement with MD Anderson. For the nine months ended September 30, 2021, Dr. Capelli was entitled to receive $42.5 thousand from MD Anderson. In addition, Dr. Capelli is entitled to 50% of the proceeds (after the recoupment of any costs associated therewith) from the sale by MD Anderson of 175,000 shares issued to MD Anderson in connection with the license agreement.
Purchase Commitments
As of September 30, 2021, the Company had contractual purchase obligations for engineering and design services of $1.6 million to Emphysys, Inc. ("Emphysys"). This commitment is for services used in the ordinary course of business and does not represent excess commitments or loss contracts. The remaining minimum purchase obligation is $1.5 million for the 12 month period ending June 30, 2022. If we fail to spend such minimum annual amounts or if the Company terminates the addendum without cause, the Company may be required to pay Emphysys an early termination fee of no more than $0.2 million.
On March 6, 2020, the Company entered into a manufacturing service agreement (the "Agreement") with Sanmina Corporation ("Sanmina"). The Agreement states that Sanmina will provide the Company with certain manufactured products for a one year period, with pricing adjusted for material variations of market prices for components, parts and raw material,
including variations resulting from allocations, shortages or tariffs. In addition, pricing will be based on the forecasted volumes provided by the Company and the projected inventory turns as agreed by both parties. The Company has issued purchase orders under this agreement that commit the Company to purchase $4.8 million in manufactured goods from Sanmina.
Either party may terminate the Agreement or an order under the Agreement for default, if the other party materially breaches the Agreement; provided, however, no termination shall occur until thirty days after the defaulting party is notified in writing of the material breach and has failed to cure or give adequate assurances of performance within the thirty day period after notice of material breach. In addition, the Company may terminate the Agreement for any reason upon thirty days’ prior written notice and may terminate any order under the Agreement for any reason upon 120 days’ (before scheduled shipment) prior written notice. Sanmina may terminate the Agreement for any reason upon ninety days’ notice. In the event the Agreement or an order under the Agreement is terminated for any reason other than a breach by Sanmina, the Company is required to pay Sanmina termination charges equal to (i) the contract price for all finished product existing at the time of termination; (ii) Sanmina’s cost (including labor, components and applicable mark-ups per the pricing model) for all work in process; and (iii) the cost of components ordered by Sanmina pursuant to the Agreement.
The Company entered into a manufacturing services agreement with Paramit Corporation ("Paramit") on March 22, 2021 for the production of handpieces. The agreement states that Paramit will provide the Company with certain manufactured products at prices and quantities to be agreed upon by the parties through an issued and accepted purchase order. Quantities agreed upon by both parties in an issued and accepted purchase order may only be cancelled for units to be received after the initial 60 days. The Company has issued purchase orders under this agreement that commit the Company to purchase $0.7 million in manufactured goods from Paramit.
Lease Commitments
The Company leases space for its corporate office, which provides for an original 63 month term beginning on February 1, 2016, with initial rent payments of $7.6 thousand per month that escalate annually to a maximum of $8.9 thousand per month through the expiration of the agreement. On September 15, 2020, the Company entered into a 12 month extension of its corporate office lease. On November 3, 2021, the Company entered into a three month extension of its corporate office lease. Total rent expense under this office space lease arrangement for the three months ended September 30, 2021 and 2020 was $24.8 thousand and $24.2 thousand, respectively, and for the nine months ended September 30, 2021 and 2020 was $73.1 thousand and $70.8 thousand, respectively.
Future minimum lease payments as of September 30, 2021 were $0.1 million through the lease term ending July 31, 2022.
Letter of Credit
The Company has an irrevocable letter of credit which supports its obligations to pay or perform according to the requirements of an underlying agreement with a certain vendor. Such letter of credit has an initial term of one year, renews automatically for an additional year and can only be modified or canceled with the approval of the beneficiary. As of September 30, 2021, the letter of credit was not used.
Legal Proceedings
From time to time, in the normal course of business, the Company may be subject to claims in legal proceedings. Legal proceedings are subject to inherent uncertainties and an unfavorable outcome could include monetary damages, and in such event, could result in a material adverse impact on the Company's business, financial position, results of operations or cash flows.
As previously disclosed, on May 8, 2021, the Company entered into a Merger Agreement with AbbVie and Merger Sub, pursuant to which Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of the Merger. In connection with the Merger, the following complaints have been filed against the Company and the members of the Company's board of directors: Musanto v. Soliton, Inc., et al., Case No. 1:21-cv-05088 (S.D.N.Y. June 9, 2021); Whitfield v. Soliton, Inc., et al., No. 1:21-cv-05330 (S.D.N.Y. June 16, 2021); O’Guin v. Soliton, Inc., et al., No. 1:21-cv-05359 (S.D.N.Y. June 17, 2021); Wiklund v. Soliton, Inc., et al., No. 1:21-cv-05386 (S.D.N.Y. June 18, 2021); Boland v. Soliton, Inc., et al., No. 1:21-cv-05391 (S.D.N.Y. June 18, 2021); Jabaloy v. Soliton, Inc., et al., No. 1:21-cv-03488 (E.D.N.Y. June 21, 2021); Eder v. Soliton, Inc., et al., No. 1:21-cv-05474 (S.D.N.Y. June 22, 2021); Post v. Soliton, Inc., et al., No. 1:21-cv-05496 (S.D.N.Y. June 23, 2021); Ciccotelli v. Soliton, Inc., et al., No. 2:21-cv-02843 (E.D. Pa. June 25, 2021); Walker v. Soliton, Inc., et al., No. 1:21-cv-00928 (D. Del. June 29, 2021); Sheridan v. Soliton, Inc., et al., No. 1:21-cv-05656 (S.D.N.Y. June 30, 2021); Siljanovski v. Soliton, Inc., et al., No. 1:21-cv-05935 (S.D.N.Y. July 9, 2021) (collectively, the “Complaints”). Each of the Complaints asserted claims under Sections 14(a) and 20(a) of the Exchange Act,
and Rule 14a-9 promulgated thereunder, alleging that the Company’s Definitive Proxy Statement on Schedule 14A (the “Definitive Proxy Statement”) with respect to the special meeting of the Company’s stockholders held on July 20, 2021 omitted to disclose certain facts. In addition, the Musanto Complaint alleged that the named directors of the Company breached their fiduciary duties by approving the Merger Agreement through a flawed and unfair process and by failing to not make complete and accurate disclosures regarding this process and that the Company aided and abetted the alleged breaches. Each of the Complaints sought to enjoin or rescind the Merger and requests attorneys’ fees and damages in an unspecified amount. The Company also received a demand for books and records pursuant to Section 220 of the Delaware General Corporation Law. The demand sought books and records related to the Merger, the independence and disinterestedness of the Company’s board of directors and the Definitive Proxy Statement in order to investigate whether any wrongdoing or mismanagement took place in connection with the Merger. While the Company believed that the Complaints lacked merit and that the disclosures set forth in the Definitive Proxy Statement complied fully with applicable law, the Company determined to voluntarily supplement the Definitive Proxy Statement, as set forth in the Company’s Schedule 14A filed with the SEC on July 15, 2021, solely to avoid the expense, burden and risk associated with any litigation matter.
Employment Arrangements
The Company has employment agreements with certain employees to provide benefits, including salary and other wage-related benefits, in the event of termination. In addition, the Company has adopted a severance policy for certain key members of executive management to provide certain benefits, including salary and other wage-related benefits, in the event of termination without cause. On May 8, 2021, the Board approved an amendment to the severance policy to cover all employees. In total, given the amendments to employee agreements, these benefits would amount to $5.1 million using the rate of compensation in effect at September 30, 2021.
On May 8, 2021, the Board approved the granting of retention bonuses to certain non-executive employees for an amount equal to (a) three months of annual salary, if the Merger has a closing or termination date that is on or prior to November 8, 2021, or (b) six months of annual salary, if the Merger has a closing or termination date that is after November 8, 2021. As such, the Company is committed to pay six months of annual salary in the amount of $0.7 million as the Merger will close or terminate after November 8, 2021.
Note 5 - Stockholders’ Equity
2018 Stock Plan
In June 2018, the Company’s Board of Directors (the "Board") and stockholders adopted the 2018 Stock Plan. The 2018 Stock Plan is designed to enable the Company to offer employees, officers, directors and consultants, as defined, an opportunity to acquire a proprietary interest in the Company. The types of awards that may be granted under the 2018 Stock Plan include stock options, stock appreciation rights, restricted stock, and other stock-based awards subject to limitations under applicable law. All awards are subject to approval by the Company’s Board. The 2018 Stock Plan reserves shares of common stock for issuance in accordance with the 2018 Stock Plan’s terms. Total number of shares reserved and available for issuance under the plan was 5,650,000 shares as of September 30, 2021, including an increase of 1,500,000 shares, which was approved by the Company's shareholders at the annual shareholders meeting in April 2021. As of September 30, 2021, 1,198,725 shares remained available for grant under the 2018 Stock Plan.
Restricted Stock
Restricted stock activity for the nine months ended September 30, 2021 is summarized as follows:
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Number of
Shares
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Weighted-
Average
Grant Date
Fair Value
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Outstanding, December 31, 2020
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308,344
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$
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8.70
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Vested
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(37,494)
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11.54
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Outstanding, September 30, 2021
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270,850
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$
|
8.31
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During the three and nine months ended September 30, 2021 and 2020, the Company recorded $0.2 million and $0.1 million, respectively, and $0.6 million and $0.4 million, respectively, in stock-based compensation for the restricted shares previously issued.
As of September 30, 2021, there was $1.9 million of unrecognized compensation expense related to restricted shares.
Stock Options
The following table summarizes stock option activities for the nine months ended September 30, 2021:
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Number of
Shares
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Weighted
Average
Exercise Price
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Weighted
Average
Remaining Life
(in Years)
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Aggregate
Intrinsic
Value
(in thousands)
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Outstanding, December 31, 2020
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3,919,550
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$
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4.47
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8.11
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$
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13,095
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Granted
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411,650
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9.74
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Forfeited
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(64,925)
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4.37
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Outstanding, September 30, 2021
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4,266,275
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$
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4.98
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7.56
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$
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65,619
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Exercisable, September 30, 2021
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2,360,925
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$
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3.10
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6.91
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$
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40,741
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During the nine months ended September 30, 2021, the Company granted certain individuals options to purchase 411,650 shares of common stock with an average exercise price of $9.74 per share, a contractual term of ten years, and a vesting period of 25.00% per year over four years. The options had an aggregate grant date fair value of $5.1 million that was calculated using the Black-Scholes option pricing model. Variables used in the Black-Scholes option pricing model included: (1) discount rate ranging from 0.19% to 1.03% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected life of 6.25 years based on the simplified method (vesting plus contractual term divided by two), (3) expected volatility ranging from 88.90% to 90.77% based on the historical volatility of comparable companies' stock, (4) no expected dividends and (5) fair value of the Company's stock ranging from $9.74 to $16.47 per share.
All options issued and outstanding are being amortized over their respective vesting periods. During the three and nine months ended September 30, 2021 and 2020, the Company recorded option expense of $1.0 million and $0.6 million, respectively and $3.0 million and $1.8 million, respectively. Unrecognized compensation expense for options at September 30, 2021 was $9.7 million.
Warrants
The following table summarizes warrant activity for the nine months ended September 30, 2021:
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Number of
Shares
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Weighted
Average
Exercise Price
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Weighted
Average
Remaining
Contractual
Term
(in Years)
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Aggregate
Intrinsic
Value
(in thousands)
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Outstanding, December 31, 2020
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1,324,608
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$
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11.32
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3.44
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$
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—
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Exercised
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(406,601)
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8.20
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—
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4,945
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Forfeited (cashless exercise)
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(388,866)
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13.55
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—
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—
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Outstanding, September 30, 2021
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529,141
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|
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$
|
12.08
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2.69
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$
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4,384
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Exercisable, September 30, 2021
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529,141
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$
|
12.08
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|
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2.69
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$
|
4,384
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Note 6 - Subsequent Events
The Merger and Hart-Scot-Rondino Antitrust Improvements Act of 1976 (the"HSR Act")
On August 6, 2021, the Company and AbbVie each received a request for additional information and documentary material (the "Second Request") from the FTC in connection with the FTC's review of the transactions contemplated by the Merger Agreement. The effect of the Second Request is to extend the waiting period imposed by the HSR Act until 30 days after the Company and AbbVie have certified substantial compliance with the Second Request, unless that period is extended voluntarily by the parties or terminated sooner by the FTC. The Company and AbbVie continue to work cooperatively with the FTC staff
in its review of the proposed transaction, and continue to expect to complete the transaction in the fourth quarter of 2021, subject to the satisfaction or permitted waiver of the conditions to closing.
On November 8, 2021, AbbVie made another Additional Payment of $11.5 million and exercised its right to extend the term to consummate the Merger by an additional three months to February 8, 2022.
As of November 12, 2021, both the Company and AbbVie had submitted their responses to the Federal Trade Commission’s (“FTC”) request for additional information in connection with the FTC’s review of the transactions contemplated by the Merger Agreement.
On November 5, 2021, the FDA cleared the 510(k) application the Company submitted on August 9, 2021 for long-term improvement in the appearance of cellulite.