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EX-23.2 - CONSENT OF ERNST & YOUNG LLP - TRIA Beauty, Inc.d257857dex232.htm
EX-10.1 - MANUFACTURING SERVICES AGREEMENT - TRIA Beauty, Inc.d257857dex101.htm
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As filed with the Securities and Exchange Commission on May 21, 2012

Registration No. 333-179228

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Amendment No. 5

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

TRIA BEAUTY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   3845   46-0518735

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

 

4160 Dublin Blvd., Suite 200

Dublin, CA 94568

(925) 452-2500

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Kevin J. Appelbaum

Chief Executive Officer

4160 Dublin Blvd., Suite 200

Dublin, CA 94568

(925) 452-2500

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

David J. Saul

Ropes & Gray LLP

1900 University Avenue

East Palo Alto, CA 94303

Tel: (650) 617-4085

Fax: (650) 566-4232

 

Bruce K. Dallas

Davis Polk & Wardwell LLP

1600 El Camino Real

Menlo Park, CA 94025

Tel: (650) 752-2000

Fax: (650) 752-2111

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨        

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨        

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨        

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨        

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer  ¨

   Accelerated filer  ¨   Non-accelerated filer  þ   Smaller reporting company  ¨
    

(Do not check if a smaller reporting company)

 

The Registrant is an emerging growth company, as defined in Section 2(a) of the Securities Act. This Registration Statement complies with the requirements that apply to an issuer that is an emerging growth company.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued May 21, 2012

4,600,000 Shares

 

LOGO

COMMON STOCK

 

 

Tria Beauty, Inc. is offering 4,600,000 shares of its common stock. This is our initial public offering and no public market exists for our shares. We anticipate that the initial public offering price of our common stock will be between $13.00 and $15.00 per share.

 

 

Our common stock has been approved for listing on The NASDAQ Global Market under the symbol “TRIA”.

 

 

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and will be subject to reduced public company reporting requirements. Investing in the common stock involves risks. See “Risk Factors ” beginning on page 9.

 

 

PRICE $         A SHARE

 

 

 

     Price to
Public
   Underwriting
Discounts  and
Commissions
   Proceeds  to
Company

Per Share

   $                $                $            

Total

   $                $                $            

Tria Beauty, Inc. has granted the underwriters the right to purchase up to an additional 690,000 shares of common stock to cover over-allotments at the initial public offering price less the underwriting discount.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2012.

 

 

 

MORGAN STANLEY  

PIPER JAFFRAY

 

 

WELLS FARGO SECURITIES

                    , 2012


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Neither we nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus. We take no responsibility for, and can provide no assurance as to the reliability of, any information that others may give you. We and the underwriters are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, or such other dates as are stated in this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

Until                     , 2012 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: We have not, and the underwriters have not, done anything that would permit this offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this prospectus.

TRIA BEAUTY, INC.

Our Business

Tria Beauty brings clinically-proven light-based aesthetic medical technologies out of the physician’s office and into the home. We sell easy-to-use, FDA-cleared medical devices to consumers that deliver results comparable to professional aesthetic treatments at a fraction of the cost. As a result, we believe we are expanding the market for aesthetic light-based treatments. Our recent customer survey suggests that roughly three quarters of our customers have never tried professional in-office laser treatments before purchasing our products. We have successfully combined our technical light-based expertise with extensive consumer marketing experience to produce and sell hand-held consumer skincare devices that are safe and effective, yet simple to use. Our two current product lines and our most advanced product under development are:

Hair Removal Laser, our leading product, is a diode laser device that provides permanent reduction in hair regrowth comparable to devices used in a physician’s office. It was cleared by the FDA in 2005 as a prescription device and in 2008 as an over-the-counter device.

Skin Perfecting Blue Light uses high-intensity blue light that inhibits acne-causing bacteria with anti-acne effectiveness comparable to light-based acne treatments performed in a physician’s office. It was cleared by the FDA in 2006 as a prescription device and in 2010 as an over-the-counter device. In April 2012, we received a medical CE mark to market the device over the counter in Europe.

Skin Rejuvenating Laser, a product in late stage development, is a fractional non-ablative laser device designed to enable our entry into the anti-aging skincare market. We received Health Canada clearance in April 2012 to market the device in Canada for the treatment of wrinkles, skin discoloration and rough skin and expect to obtain European CE marking and to begin selling this device outside of the United States in the second half of 2012. We believe, based on technical similarities to predicate, animal histology and pilot clinical studies, that our pivotal clinical studies will support a 2012 FDA application for over-the-counter treatment of periorbital wrinkles (crow’s feet), perioral wrinkles (wrinkles around the mouth), dyschromia (uneven pigmentation) and textural irregularities like tactile roughness, for which fractional non-ablative technology has become an accepted treatment standard in professionals’ offices. We also believe that these clinical studies will demonstrate that the device has safety and effectiveness comparable to fractional non-ablative laser treatments in a physician’s office.

We have historically derived substantially all of our sales from our Hair Removal Laser. Our Skin Perfecting Blue Light, which we launched in 2010, remains in the early stages of commercialization and we expect that the Hair Removal Laser will be our primary source of sales and growth for the foreseeable future. We are involved in intellectual property litigation with Palomar Medical Technologies regarding technology incorporated into our Hair Removal Laser. There has been no trial date set, though summary judgment briefing is scheduled to be completed in December 2012. If we do not ultimately prevail in this litigation, we could be required to pay damages for past sales of the Hair Removal Laser and could be required to pay royalties for, or be enjoined from, future U.S. sales of the Hair Removal Laser through the expiration of the relevant patents in 2015.

A core element of our business is our distinctive marketing strategy and multi-channel distribution model. We believe high-engagement media such as our websites, infomercials and home shopping television are particularly effective at informing consumers about our innovative products, the compelling skincare benefits they produce and the way in which they are used and incorporated into a personal skincare regimen. We have built

 

 

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our brand by educating consumers about the specific benefits of light-based skincare and our products and developing direct relationships with those consumers. Our physical presence at premium retailers such as Bloomingdale’s, as well as in physician offices, helps to further strengthen our brand image, validate our technology and provide additional points of contact to educate consumers about our products.

We have applied our expertise to develop custom-designed components with proprietary safety systems, such as the Hair Removal Laser’s built-in skin sensor, that permit effective, high-power treatment while protecting the user’s eyes and skin. Our demonstrated ability to move products from concept to commercialization has allowed us to launch three versions of our Hair Removal Laser in the United States in the last three years, with substantial improvements to enhance the user experience and reductions in unit cost with each new introduction.

For the year ended December 31, 2011, and the quarter ended March 31, 2012, we had net sales of $45.0 million and $13.5 million, respectively, representing a 66% increase and a 49% increase over the corresponding prior year period. Sales in North America, primarily from the United States, comprised 65% and 74% of our total net sales for the year ended December 31, 2011 and for the quarter ended March 31, 2012, respectively. Our remaining sales were derived from international markets, including the Asia-Pacific, or APAC, countries of Japan and Korea, as well as European sales in the United Kingdom, Germany and Spain. Our net loss was $34.8 million and $11.1 million for the year ended December 31, 2011, and for the quarter ended March 31, 2012, respectively, compared to a net loss of $25.6 million and $6.9 million for the prior year’s corresponding periods, a 36% increase and a 61% increase, respectively. As of March 31, 2012, we had an accumulated deficit of $112.8 million.

As of March 31, 2012, we had working capital of $13.4 million.

Our Markets

We operate at the confluence of the markets for professional aesthetic skincare treatments and over-the-counter, or OTC, cosmetic skincare products. According to Medical Insight, the professional aesthetic skincare market represented an estimated $15.0 billion of global sales for 2011, which included light-based aesthetic treatment procedure fees of $2.4 billion related to hair removal, $0.4 billion related to anti-acne treatments and $4.0 billion related to anti-aging treatments. Based on data from Euromonitor, the OTC cosmetic skincare products market for hair removal, anti-acne treatments and anti-aging treatments and nourishers represented an estimated $4.5 billion, $3.2 billion and $22.2 billion in 2011 global sales, respectively. While a majority of these products are sold at low prices through mass merchandise retail outlets, prestige skincare products are sold primarily through luxury outlets such as department stores and generally command higher prices. These prestige skincare products are marketed to our target customer and, according to the NPD group, U.S. sales of the category grew by 14% to $3.7 billion from 2010 to 2011. Kline & Company reports that a combination of factors, including heightened awareness and technological advances, is driving the emergence of our at-home skincare device market, which grew an estimated 48% and achieved estimated sales of approximately $532 million for 2011, of which an estimated $163 million was attributable to light-based devices, which grew at an estimated rate of 50%.

We believe consumers demonstrate high levels of awareness and broadly accept the effectiveness of light-based skincare treatments. For example, the American Society of Plastic Surgeons reports that, in terms of absolute number of procedures performed, laser hair removal is the number one aesthetic procedure for women between the ages of 20 and 29 and the number two procedure behind Botox for women between the ages of 30 and 39. Despite this broad acceptance, sales for light-based professional aesthetic treatments remain low compared to sales for OTC products that generally offer relatively little long-term benefit for consumers. We believe we are expanding the market for light-based aesthetic treatments; our recent customer survey suggests that roughly three quarters of our U.S. customers have never tried professional in-office laser treatments before purchasing our products.

 

 

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Competitive Strengths

We believe there is significant unmet demand in the skincare market for home-use medical devices that deliver results comparable to in-office professional aesthetic treatments. We attribute our historic success and future growth prospects to the following:

 

   

clinically-demonstrated effectiveness comparable to professional treatments with in-home convenience at affordable prices,

 

   

consumer-focused sales and marketing approach,

 

   

innovative, proprietary technology,

 

   

clinical data and scientific publications,

 

   

demonstrated international penetration, and

 

   

a growing customer base.

We believe that we are well positioned to pursue the market for home-use medical devices because addressing this market is the focus of our business. We have developed our research and development and marketing competencies specifically to pursue this opportunity. We believe that a significant investment in, for example, retail cosmetic skin care products, or capital equipment for use in physicians’ offices, would represent a significant departure from and conflict with, our primary business model and expertise.

Our clinically-demonstrated effectiveness is based upon data from clinical studies that are discussed in detail in “Business—Technology and Clinical Results.” Even where such studies demonstrate statistically significant results, many of these studies have relatively small sample sizes, which may be viewed as inherently less predictive of individual results than larger studies. Additionally, our clinical studies involve the use of our products under trained supervision and pursuant to our specifications, which may lead to better results than self-directed use by consumers.

Current Treatment Alternatives and their Limitations

Treatment alternatives for hair removal, acne and skin rejuvenation have historically been hindered by significant consumer trade-offs. Consumers who choose professional office-based aesthetic treatments commit to a relatively expensive and time-consuming process, while those who choose OTC skincare products sacrifice effectiveness for convenience and short-term affordability. Many current treatment alternatives suffer from one or more of the following limitations and trade-offs:

 

   

Cost: While professional office-based aesthetic treatments can be effective, they can cost several thousand dollars to effectively treat a single area of the body. OTC skincare products can be low cost on a per use basis, but the cost over years of use of OTC skincare products can far exceed the cost of professional office-based alternatives.

 

   

Effectiveness: OTC skincare products are typically used daily for an indefinite period of time to maintain their desired effects because they only deliver short-term results. OTC skincare products generally lack the proven effectiveness of professional office-based aesthetic treatments.

 

   

Convenience: Professional office-based aesthetic procedures take several minutes to several hours per session. For optimal results, multiple sessions have to be scheduled over many months, which may create significant disruption to work or personal life. Time spent scheduling appointments, traveling to and from sessions and sitting in the waiting room further add to the overall inconvenience of these procedures. OTC skincare products are generally convenient, involving easy home-use treatment.

 

 

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Our Solution

Our products and our products in development provide light-based solutions for hair removal, acne treatment and skin rejuvenation without many of the compromises inherent in professional office-based aesthetic procedures and OTC skincare products. They are designed to deliver results comparable to professional aesthetic treatments at a fraction of the cost in the convenience and privacy of the home. Our consumer-focused products address the cost and convenience limitations facing services sold through the professional in-office setting, as well as the effectiveness limitations facing OTC skincare alternatives.

 

   

Cost: Over the course of a treatment regimen, our products are typically significantly less expensive than professional in-office treatment alternatives. We believe that our products are affordable not only to the affluent consumers of professional treatments, but also to consumers who otherwise sacrifice effectiveness for the short-term affordability of less expensive OTC treatments. Our products are more expensive than many competitive OTC cosmetic products.

 

   

Effectiveness: Our products deliver comparable results to professional treatments, providing the consumer an alternative to often ineffective OTC products. Each of our FDA-cleared hand-held devices is supported by multiple clinical studies demonstrating safety and effectiveness. Our laser hair removal product permanently reduces the regrowth of unwanted hair and can reduce or eliminate the need for ongoing shaving, waxing or spa treatments. Our acne blue light device emits the dose of a professional in-office device, inhibiting acne-causing bacteria within the skin and providing healthier looking, clearer skin and improved complexion.

 

   

Convenience: Each of our light-based hair removal, acne and skin rejuvenation products is designed with our customers’ needs for convenience and ease of use in mind, a characteristic shared by many OTC products. Our rechargeable products are engineered to be simple, lightweight and ergonomic, and utilize proprietary laser and high-power LED systems. This allows our customers to use our products in the privacy of their homes as part of their existing personal skincare and beauty regimens.

Customer satisfaction with aesthetic products and procedures is inherently subjective. Additionally, unlike office-based procedures, home-use products require the user to comply with recommended treatment instructions for optimal effectiveness. Our Hair Removal Laser is only intended for treatment on parts of the body below the neck by people with light-to-medium skin tones and brown or black hair color, since laser hair removal is not effective on individuals with light, red or grey hair color and may cause damage to individuals with darker skin tones.

Growth Strategy

Our goal is to be a leading global developer and marketer of premium at-home, light-based skincare products by continuing to pursue the following strategies:

Grow Our Brand: We are growing what we believe to be an emerging category of at-home light-based skincare devices, and establishing our brand as a leader within it. Our multi-channel distribution model allows us to reach our customers directly to communicate the specific benefits of light-based skincare devices for home use.

Penetrate Our Existing Channels and Markets: We are in the early stages of penetrating our existing markets. We intend to continue implementing our global multi-channel sales and marketing strategy, which is in various stages of deployment in existing geographies.

Expand into New Geographies: Our consumer-focused sales and marketing model, anchored by our direct channel, has allowed us to rapidly expand into new geographies, as evidenced by our track record of successfully launching our products outside the United States. We intend to grow our international presence by leveraging our experience to expand into new geographies with demographics that offer the potential for significant demand for our products.

 

 

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Drive Product Innovation: We will continue to create new products and improve existing ones by leveraging our proven technology platforms. We anticipate introducing our Skin Rejuvenating Laser outside of the United States in the second half of 2012, and will continue to develop other light-based skincare products to provide consumers with a comprehensive and complementary portfolio of topical skincare solutions.

Risks Associated with Our Business

Our business is subject to a number of risks of which you should be aware before making an investment decision, as our failure to adequately manage these risks may significantly harm our business. These risks are discussed more fully under the caption “Risk Factors,” and include but are not limited to the following:

 

   

We are currently dependent upon the success of our lead product, the Hair Removal Laser;

 

   

We are involved in costly and time-consuming intellectual property litigation with Palomar Medical Technologies relating to our leading Hair Removal Laser product. An unfavorable outcome in this litigation could require us to pay royalties for a U.S. license, and a judgment could prevent us from selling our Hair Removal Laser product in the United States until the relevant patents expire in 2015;

 

   

We have a history of net losses, and we may never achieve or maintain profitability;

 

   

Our loan and security agreement contains restrictions on our ability to engage in certain transactions, includes a prepayment fee of up to 5%, and all amounts owed under the agreement may become due and payable if, following the closing of this offering, our unrestricted cash and cash equivalents on hand fall below $15.0 million or 110% of the amount outstanding under the agreement;

 

   

There is significant existing and potential future competition that could prevent us from increasing market penetration;

 

   

To compete effectively, we must continue to commercialize new products;

 

   

We are unable to predict whether we will be successful in expanding our existing international operations and establishing operations in new international territories;

 

   

Our Skin Perfecting Blue Light is in the early stages of commercialization and we are unable to predict if it will achieve significant market adoption; and

 

   

Our Skin Rejuvenating Laser is under development, and must be cleared by the Food and Drug Administration, or FDA, and international regulatory authorities before it can be sold in the United States and other jurisdictions, as applicable.

Corporate Information

Our principal executive offices are located at 4160 Dublin Blvd., Suite 200, Dublin, CA 94568, and our telephone number at that address is (925) 452-2500. Our corporate website address is www.triabeauty.com. We do not incorporate the information contained on, or accessible through, our corporate website into this prospectus, and you should not consider it part of this prospectus. We were originally incorporated in California in January 2003 under the name SpectraGenics, Inc. We changed our name to Tria Beauty, Inc. in July 2008 and reincorporated in Delaware in August 2010.

References herein to “Tria,” the “company,” “we,” “our” and “us” refer to the operations of Tria Beauty, Inc. and its consolidated subsidiaries unless otherwise specified.

“Tria”, “Tria Beauty” and “See Beauty in a New Light” are our trademarks appearing in this prospectus. All other trademarks or service marks appearing in this prospectus are trademarks or service marks of their respective owners.

 

 

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THE OFFERING

 

Common stock offered by us

4,600,000 shares

 

Total common stock to be outstanding after this offering

19,294,722 shares

 

Use of proceeds

We intend to use the net proceeds received by us from this offering for sales and marketing initiatives, to support our research and development activities, and for working capital and general corporate purposes. See “Use of Proceeds.”

 

NASDAQ Global Market symbol

TRIA

 

 

The number of shares of common stock that will be outstanding after this offering is based on 14,694,722 shares outstanding as of March 31, 2012, and excludes:

 

   

2,046,683 shares issuable upon the exercise of options outstanding as of March 31, 2012 under our 2004 Stock Incentive Plan, or our 2004 Plan, at a weighted average exercise price of approximately $2.11 per share;

 

   

2,500,000 shares reserved for issuance under our 2012 Equity Incentive Plan, or our 2012 Plan, which includes those shares reserved but unissued under our 2004 Plan at the completion of this offering, plus any shares of common stock subject to awards granted under the 2004 Plan that are forfeited, returned or otherwise become available for issuance in accordance with the terms of the 2004 Plan, and plus annual increases in the number of shares authorized under the 2012 Plan beginning January 1, 2013; and

 

   

the exercise of (i) warrants to purchase 30,518 shares of our common stock and (ii) warrants to purchase 134,019 shares of our series CC preferred stock.

Except as otherwise indicated, all information in this prospectus assumes:

 

   

a reverse stock split of 1-for-6.6 of our shares of outstanding common stock effected in May 2012;

 

   

the underwriters will not exercise their over-allotment option;

 

   

no exercise of warrants to purchase 30,518 shares of our common stock;

 

   

the conversion of all outstanding shares of our redeemable convertible preferred stock into 13,879,031 shares of our common stock prior to completion of this offering (not including the exercise and conversion of all warrants to purchase 134,019 shares of our series CC preferred stock); and

 

   

the effectiveness of our amended and restated certificate of incorporation prior to completion of this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize our historical financial data. You should read this information in conjunction with our consolidated financial statements, the related notes to these financial statements and the information under the captions “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The consolidated statements of operations for the years ended December 31, 2009, 2010 and 2011 were derived from our audited financial statements data appearing elsewhere in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2011 and 2012 and the balance sheet data as of March 31, 2012 have been derived from our unaudited financial statements appearing elsewhere in this prospectus. Our unaudited interim financial data have been prepared on a basis consistent with our audited financial statements and include, in the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for the fair presentation of the financial information in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and our interim results are not necessarily indicative of the results to be expected for the full fiscal year.

 

     Year Ended December 31,      Three Months Ended
March 31,
 
     2009      2010      2011      2011      2012  
    

(in thousands, except per share data)

 
Consolidated Statements of Operations Data:                                   

Net sales

   $ 19,417       $ 27,140       $ 45,049       $ 9,058       $ 13,518   

Cost of goods sold

     9,621         14,109         22,533         4,895         6,536   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     9,796         13,031         22,516         4,163         6,982   

Operating expenses:

              

Sales and marketing

     9,005         19,863         32,256         5,952         9,377   

Research and development

     8,253         9,381         9,341         1,941         2,992   

General and administrative

     5,583         9,792         14,867         3,101         4,965   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     22,841         39,036         56,464         10,994         17,334   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loss from operations

     (13,045      (26,005      (33,948      (6,831      (10,352

Other income (expense):

              

Interest income

     386         50         46         13         8   

Interest expense

     (1      (7      (601              (479)   

Change in fair value of warrant liability

                     (252              (135

Foreign exchange gain (loss)

     372         366         (38      (42      (102
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loss before provision for income taxes

     (12,288      (25,596      (34,793      (6,860      (11,060

Provision for income taxes

     (91      (23      (44      (11      (5
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

     (12,379      (25,619     
(34,837

     (6,871      (11,065

Adjustment to net loss resulting from preferred stock modification and extinguishment

             982                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net loss attributable to common stockholders

   $ (12,379    $ (24,637    $ (34,837    $ (6,871    $ (11,065
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Net loss per share attributable to common stockholders - basic and diluted    $ (24.46    $ (41.41    $ (43.06    $ (8.51    $ (13.61
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Weighted-average shares of common stock used in computing net loss attributable to common stockholders - basic and diluted(1)      506         595         809         807         813   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Pro forma net loss per share attributable to common stockholders - basic and diluted (unaudited)(1)          $ (2.84       $ (0.75
        

 

 

       

 

 

 
Weighted-average shares of common stock used in computing the pro forma net loss attributable to common stockholders - basic and diluted (unaudited)(1)            12,278            14,692   
        

 

 

       

 

 

 

 

 

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     As of March 31, 2012  
         Actual         Pro  Forma(2)     Pro forma,
as adjusted(3)
 
Consolidated Balance Sheet Data:   

(in thousands)

 

Cash and cash equivalents

   $ 19,447      $ 19,447      $ 76,339   

Working capital

     13,418        13,418        70,310   

Total assets

     37,723        37,723        94,615   

Notes payable, including current portion

     18,774        18,774        18,774   

Other liabilities

     1,152                 

Redeemable convertible preferred stock

     109,540                 

Total stockholders’ (deficit) equity

   $ (109,523   $ 1,169      $ 58,061   

 

(1)

See Notes 2 and 15 to our financial statements for an explanation of the calculations of our basic and diluted net loss per share of common stock attributable to common stockholders and pro forma net loss per share of common stock attributable to common stockholders.

 

(2)

The pro forma column reflects the assumed conversion of all outstanding shares of redeemable convertible preferred stock into 13,879,031 shares of common stock and reclassification of warrants prior to completion of this offering.

 

(3)

On a pro forma, as adjusted basis to reflect the adjustment described in (2) above and the receipt of the estimated net proceeds from the sale of 4,600,000 shares of common stock offered by us at an assumed initial public offering price of $14.00 per share, the mid-point of the range on the front cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and all of the other information contained in this prospectus before deciding whether to purchase our stock. Our business, prospects, financial condition or operating results could be materially adversely affected by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information contained in the prospectus, including our consolidated financial statements and the related notes, before deciding to purchase any shares of our common stock.

Risks Related to Our Business

We are currently dependent upon the success of our lead product, the Hair Removal Laser.

We have historically derived substantially all of our sales from the sale of our Hair Removal Laser, which was our only product until we launched the Skin Perfecting Blue Light in 2010. We anticipate that the Hair Removal Laser will be our primary source of sales and growth for the foreseeable future. To increase our sales, our Hair Removal Laser must continue to gain recognition and adoption by consumers. We do not know if our product will be successful over the long term because market acceptance may be hindered if consumers are not presented with compelling reasons to choose the Hair Removal Laser over alternative products and treatments. For example, alternative products and treatments may have perceived advantages compared to our product in terms of price, convenience, safety and effectiveness. In addition, demand for the Hair Removal Laser may decline or may not increase as quickly as we expect and the market for at-home light-based hair removal devices may not continue to grow as we anticipate. Furthermore, our geographic expansion will be limited, since our Hair Removal Laser is only intended for treatment on parts of the body below the neck by individuals with light-to-medium skin tones and brown or black hair color, as laser hair removal is not effective on individuals with light, red or gray hair colors and our device may cause damage to individuals with darker skin tones. Failure of the Hair Removal Laser to significantly increase its penetration of current or new markets would negatively impact our business, financial condition and results of operations.

We are also involved in intellectual property litigation with Palomar Medical Technologies regarding technology incorporated into our Hair Removal Laser. If we were not to prevail in the litigation, we could have to pay damages for past sales of the Hair Removal Laser and we could be required to pay royalties for, or be enjoined from, future U.S. sales of the Hair Removal Laser through the expiration of the relevant patents in 2015. For a full discussion of the Palomar litigation and the associated risks, see “We are involved in costly and time-consuming intellectual property litigation with Palomar Medical Technologies relating to our leading Hair Removal Laser product. An unfavorable outcome in this litigation could require us to pay royalties for a U.S. license, and a judgment could prevent us from selling our Hair Removal Laser product in the United States until the relevant patents expire,” below.

We have a history of net losses, and we may never achieve or maintain profitability.

We have incurred significant net losses since our inception, including net losses of approximately $12.4 million in 2009, $25.6 million in 2010, $34.8 million in 2011 and $11.1 million in the quarter ended March 31, 2012. At March 31, 2012, we had an accumulated deficit of approximately $112.8 million. We have financed our operations primarily through debt financing and private placements of equity securities. We expect our operating expenses to increase, primarily due to growth in our worldwide sales and marketing efforts in support of our current and future products. We cannot assure you that we will be able to achieve or sustain profitability even if we are able to generate significant sales growth. Our failure to achieve and sustain profitability would negatively impact the market price of our common stock and require us to seek additional funding, which may not be available to us on terms acceptable to us or at all.

 

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Our recent sales growth rate may not be sustainable, which could negatively affect our stock price, financial condition and results of operations.

Our sales have grown rapidly, increasing from $9.8 million in 2008 to $45.0 million in 2011, representing a compound annual growth rate of 66%. For the quarter ended March 31, 2012, our $13.5 million in sales represented a growth rate of 7.6% over the prior quarter ended December 31, 2011. We may not be able to sustain our recent growth rate in future periods and you should not rely on the sales growth of any prior quarterly or annual periods as an indication of our future performance. If our future growth fails to meet our expectations, it could have a negative effect on our stock price, our financial condition and our results of operations.

We have a limited operating history, and we expect our financial condition and operating results to fluctuate on a seasonal, quarterly and annual basis in potentially unpredictable ways.

We have a limited history of operations upon which you can evaluate our business. Our operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. Factors relating to our business that may contribute to quarterly and annual fluctuations include the following factors, as well as other factors described elsewhere in this prospectus:

 

   

the rate of market adoption of the Hair Removal Laser and the Skin Perfecting Blue Light;

 

   

the receipt and timing of regulatory approval for, and our ability to successfully introduce, our Skin Rejuvenating Laser;

 

   

the success of competitors’ products that are now available or that may become commercially available in the future;

 

   

the effectiveness of promotional and marketing campaigns conducted by us or our competitors;

 

   

the success of international expansion efforts by us or our competitors;

 

   

positive or negative media coverage of our products, our competitors’ products or our industry;

 

   

seasonal variations in demand; and

 

   

changes in general economic conditions and the related impact on discretionary spending on aesthetic products.

We may be unable to reduce our expenditures in a timely manner to compensate for any unexpected shortfall in sales. Accordingly, a significant shortfall in demand for our products could have an immediate and material adverse effect on our business, results of operations and financial condition. Due to the various factors mentioned above, and others, the results of any prior quarterly or annual periods, or guidance regarding expectations of future results, should not be relied upon as an indication of our future operating performance.

Our Skin Perfecting Blue Light is in the early stages of commercialization, and we are unable to predict if it will achieve significant market adoption.

We launched our Skin Perfecting Blue Light in 2010 and it remains in the early stages of commercialization. Our ability to significantly increase market adoption will depend upon a number of factors, including:

 

   

the success of our sales and marketing efforts worldwide, including our physician-dispensed program;

 

   

the demonstrated safety and effectiveness of the Skin Perfecting Blue Light;

 

   

the acceptance of our Skin Perfecting Blue Light in markets outside of the United States; and

 

   

the perceived advantages and disadvantages of the Skin Perfecting Blue Light compared to other acne treatments.

 

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If our Skin Perfecting Blue Light fails to achieve significant market adoption, our business, financial condition and results of operations would be negatively impacted.

Our Skin Rejuvenating Laser is under development, and must be cleared by the FDA and international regulatory authorities before it can be sold in the United States and other jurisdictions, as applicable.

We expect our Skin Rejuvenating Laser, for which we plan to market outside the United States in the second half of 2012 and to seek FDA 510(k) clearance in 2012, to become a significant contributor to our future sales. Although we received Health Canada clearance in April 2012 to market the Skin Rejuvenating Laser in Canada, the Skin Rejuvenating Laser is still under development and there remain significant challenges to address before it can be commercialized, including:

 

   

producing compelling clinical data on safety and effectiveness;

 

   

obtaining FDA 510(k) and other regulatory clearances, including clearances to sell the product without requiring a prescription;

 

   

obtaining regulatory approval or clearance in other jurisdictions, including Europe, in which we plan to sell the product;

 

   

protecting the Skin Rejuvenating Laser with intellectual property rights;

 

   

partnering, as necessary, with suppliers; and

 

   

manufacturing consistently within our specifications and in accordance with the FDA’s Quality System Regulations.

Even if we are able to overcome these challenges, we cannot assure you that our commercialization of our Skin Rejuvenating Laser will be successful. For example, we may be unable to convince potential customers that the Skin Rejuvenating Laser represents a compelling alternative to competing products or procedures. Our planned commercialization of the Skin Rejuvenating Laser could significantly miss our expectations or not happen at all, causing a material adverse effect on our future financial performance.

If our clinical studies do not provide consumers with compelling support of the safety and effectiveness of our products, our reputation and the growth prospects of our business could be harmed.

We believe that our ability to demonstrate the clinically-proven safety and effectiveness of our products is an important competitive strength that contributes to our success and is important to our future growth prospects. Our past clinical studies have generally involved testing on a relatively small number of treated subjects (ranging from 21 subjects for the smallest study up to 121 subjects for the largest study). Even where such studies demonstrate statistically significant results, studies with small sample sizes may be viewed as inherently less predictive of individual results than larger studies. Additionally, our clinical studies involve the use of our products under trained supervision and pursuant to our specifications, which may lead to better results than self-directed use by consumers.

Our Skin Rejuvenating Laser is a product under development and we cannot predict whether future clinical studies will provide results that will be supportive of FDA approval for the device or for one or more of our intended indications. Even if approved, data from such studies may not drive consumer adoption of the product. To the extent the results of our clinical studies fail to provide compelling results, our ability to convince consumers of the safety and effectiveness of our products may be diminished, harming our future growth prospects.

The success of our business is largely dependent upon the growth of the at-home light-based skincare device market, which is still small compared to the overall size of the skincare market.

Our business plan is targeted at the emerging at-home light-based skincare device market and our products have been designed to address this market. While we believe that our products enhance the growth potential of this market, we believe that other manufacturers’ failure to put their devices through rigorous clinical testing and

 

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comply with FDA-clearance requirements may be detrimental to market growth. If consumers do not view at-home light-based hair removal, acne treatment and anti-aging devices as compelling alternatives to other OTC products or professional treatments, our market may not grow as we anticipate. If at-home light-based devices fail to be adopted at the rate we expect, our anticipated growth will be adversely affected and our results will suffer.

Negative perception of our products, even if unfounded, may inhibit adoption.

There are many professional and OTC alternatives for hair removal and acne and anti-aging treatments. Consumers, and to a lesser extent, medical professionals, must believe that our products present an attractive alternative to existing treatments before they use our products or recommend our products to others. Their perceptions of our products may be influenced by negative reviews and comments regarding the safety or effectiveness of our products, even if those reviews and comments are unfounded or based upon a failure to comply with recommended treatment instructions. Additionally, our reputation may be indirectly adversely affected by competitors’ products that advertise similar capabilities but are unsafe or ineffective and/or negative reviews and comments regarding the safety and effectiveness of those products.

Our future success depends upon customers having a positive experience with our products to generate repeat business and word-of-mouth referrals. Results obtained from use of our products are subjective, may be subtle and may not meet customers’ expectations. If customers are not satisfied with our products or feel that our products are too expensive for the results obtained, our reputation and future sales will suffer.

Our media spending might not result in increased net sales or generate the levels of product and brand name awareness we desire, and we might not be able to increase our net sales at the same rate as we increase our advertising expenditures.

Our future growth and profitability will depend, in part, on the effectiveness and efficiency of our marketing and media spending, including our ability to:

 

   

create greater awareness of our products and brand name;

 

   

determine the appropriate marketing message and media mix for future expenditures;

 

   

effectively manage advertising costs, including marketing and media costs, to maintain acceptable costs per sale and operating margins; and

 

   

successfully adapt to new marketing strategies in response to changing customer preferences.

For example, we depend on infomercials as a significant method for marketing and selling our products. To the extent that sales resulting from our infomercials decrease or if there is a marked increase in the price we pay for our media time, the cost-effectiveness for such infomercials will decrease. If our infomercials are broadcast during times when our target customer viewership is low, or our infomercials fall out of favor with our targeted customer base, this could also result in a decrease of the cost-effectiveness of such broadcasts, which could cause our results of operations to suffer.

We rely on our direct distribution channel to sell a vast majority of our products.

We sell a vast majority of our products through our direct distribution channel, including our e-commerce websites, e-commerce affiliates and infomercials. See “Business—Distribution Channels.” Utilizing a direct distribution channel to sell the majority of our products requires us to be able to attract consumers to our brand, as we are not able to rely on the reputation of established retail partners, such as Bloomingdale’s, to drive sales through this channel. Moreover, as we expand geographically, we must establish our brand in each location. Establishing our brand requires that we understand our foreign consumers and employ marketing messages that will be effective in encouraging such consumers to purchase our products. In each country in which we operate, there are retail stores and competitors with broader name recognition and that have more experience in attracting

 

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consumers than we do. Using a direct distribution model can therefore put us at a disadvantage relative to other companies that do not rely on direct distribution as heavily as we do until we are able to effectively establish our brand within each location in which we sell our products.

In addition, our reliance on the direct distribution channel also subjects us to many risks, including risks related to service interruption or suspension of our websites and unsatisfactory performance of our affiliated websites, as well as risks related to the imposition of tax on internet sales if we increase the number of jurisdictions we have a legal nexus to and the potential deterioration of our relationship with our affiliated websites (and negative reviews of our products thereon). Because we are not involved in the operation of our affiliated websites, we cannot control the technical performance of the websites or the consumer experience. We also lack an effective mechanism to respond to any negative reviews of our products thereon and to communicate with and educate the customers using the websites. Any or a combination of the above risks could materially and adversely affect our business and results of operations.

Failure to maintain and grow existing retail partner relationships and to establish new ones could materially harm our business.

Our marketing strategy involves certain third-party retailer relationships. There are a number of risks inherent in establishing this as an effective channel of distribution, including:

 

   

there are no contractual commitments to sell our products, or to place future orders;

 

   

retailers may permit product returns beyond the time provided in our own return policy, which would increase returns as a percentage of sales;

 

   

we may get poor product placement, or store set-up and design;

 

   

the retailer may not effectively attract our target customer demographic; and

 

   

retailers may decide to carry directly competitive products and recommend those products over ours.

If we are unable to maintain and expand effective retail partner relationships, our financial condition and our expansion efforts could be materially harmed.

We are unable to predict whether we will be successful in expanding our existing international operations and establishing operations in new international territories.

Our business success depends, in part, on our ability to grow our business in existing international geographies in which we market and sell our products, as well as to expand into new geographies. In 2010 and 2011, a declining percentage of 55% and 35%, respectively, of our net sales came from outside of North America. In the quarter ended March 31, 2012, 26% of our net sales came from outside of North America. As part of our growth strategy, we plan to expand our international operations. Such expansion will make us susceptible to risks associated with international operations, including:

 

   

staffing and managing our foreign operations;

 

   

penetrating markets in which our competitors’ products are more established;

 

   

identifying demographics that suggest potential meaningful demand may exist for our products;

 

   

understanding consumer preferences, which often differ among cultures;

 

   

complying with laws and regulations that differ from country to country, including obtaining and maintaining necessary registrations, certificates and permits;

 

   

protecting our intellectual property rights;

 

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identifying, and maintaining relationships with, effective retail partners within each geography;

 

   

exposing ourselves to fluctuating foreign currency exchange rates;

 

   

facing lengthy payment cycles and difficulty in collecting accounts receivable;

 

   

clearing customs and experiencing shipping delays; and

 

   

encountering political and economic instability.

Addressing these risks could require us to expend significant resources, and if we are unsuccessful at finding a solution, we could underperform on our international expansion efforts and our sales or profitability may be harmed.

Additionally, our ability to grow sales of our Hair Removal Laser internationally may be limited in certain countries, because the product is not effective on individuals with light, red or grey hair color and may cause damage to individuals with darker skin tones.

There is significant existing and potential future competition that could prevent us from increasing market penetration.

We primarily compete against three categories of companies: those that sell premium positioned cosmetic OTC skincare products, such as Murad; those that provide capital equipment for office-based aesthetic procedures, such as Lumenis; and those that provide at-home light-based skincare devices, such as HomeSkinovations. Competing with other companies could result in price-cutting, reduced profit margins and loss of market share, any of which would harm our business, financial condition and results of operations. Additional competitors are also likely to enter the market in the future. Our ability to compete effectively depends upon our success in distinguishing our company and our products from our competitors and their products, and includes such factors as:

 

   

product performance;

 

   

brand reputation;

 

   

product pricing;

 

   

intellectual property protection;

 

   

quality of customer support;

 

   

success and timing of new product development and introductions;

 

   

development of successful distribution channels, both domestically and internationally; and

 

   

effectiveness of marketing efforts.

If our competitors’ products are perceived to offer benefits that are equivalent to or better than the ones our products offer, demand for, and sales of, our products could be harmed. We expect that competitive pressures may, over time, result in price reductions and reduced margins for our products. Conversely, if competitors’ products or competitors’ advertising generate negative goodwill with consumers, that could also negatively affect demand for, and sales of, our products.

Although we believe our expertise in designing and marketing consumer-focused products, as well as our rigorous scientific approach and focus on regulatory approvals, differentiate us from many of our competitors, some of our competitors may have more established products and customer relationships as well as better

 

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protected intellectual property rights than we have, which could inhibit our market penetration efforts. In addition, some of our current and potential competitors have significantly greater financial, research and development, manufacturing and sales and marketing resources than we have. These competitors could utilize their greater financial resources to acquire or develop new technologies or products that could compete directly against our product lines. We cannot guarantee that our competitors will not pursue this opportunity or that, if they try, they will not be successful.

To compete effectively, we must continue to develop new products and improve our existing products.

Our industry is subject to intense competition. Product introductions and technological developments are expected to continue at a rapid pace. Our current and future competitors will introduce new products or new formulations of existing products that will result in near-term and long-term increased competition. While we attempt to protect our products through patents and other intellectual property rights, there are few barriers of entry that would prevent new entrants or existing competitors from developing products that would compete directly with ours. We believe that our success partially depends upon our ability to develop and commercialize new products that appeal to changing customer tastes and preferences. Consequently, our business strategy is based, in part, on our expectation that we will continue to make novel product introductions and improvements or acquire new products that we can sell to new and existing customers. If we are unable to innovate successfully, our products could become obsolete and our sales will decline as our customers purchase our competitors’ products.

We are involved in trade disputes with competitors, which are costly and could impact the marketing claims that we can make in the future.

Our market includes competitors that, we believe, engage in unfair competition by, among other things, making false and misleading claims in advertising regarding their products. We have in the past taken, and may in the future take, action against competitors for such unfair competition. For example, we are currently engaged in litigation with Radiancy, in which we seek injunctive and monetary remedies for, among other things, Radiancy’s false and misleading advertising of its no!no! Hair and no!no! Skin products. Radiancy, in response, has asserted counterclaims against us, seeking injunctive relief and damages arising from our advertising of our Hair Removal Laser and Skin Perfecting Blue Light. See “Business—Legal Proceedings.” Our ability to make marketing claims for our products and our competitive position could be weakened as a result of an adverse ruling with respect to either our injunctive claims against Radiancy or Radiancy’s injunctive counterclaims against us, and if Radiancy were to prevail on its damages counterclaims, we would be required to pay money damages to Radiancy. Whether or not we are successful in this lawsuit, this litigation consumes substantial financial resources and diverts management’s attention away from business functions.

We are currently dependent on a single contract manufacturer to produce our Hair Removal Laser, which exposes us to risks including disruption in our operations.

We currently manufacture our Hair Removal Laser through one third-party manufacturer, Flextronics Sales and Marketing, or Flextronics. Our contract with Flextronics allows Flextronics to terminate the agreement and stop manufacturing our Hair Removal Laser at any time and for any reason upon 180 days’ notice to us. Moreover, Flextronics manufactures our Hair Removal Laser at one location in southern China. China-based manufacturing has been known to involve potential heightened risk of infringement of intellectual property rights and the resulting production of counterfeit products that are sold on the black market, undermining sales of legitimate products. Additionally, if our supply of product from Flextronics were terminated or interrupted, or if Flextronics were unable to meet our delivery requirements due to capacity limitations, manufacturing errors, delays, adverse regulatory actions, or other constraints, we could be unable to fulfill customer orders in a timely manner. Additionally, identifying and qualifying alternative manufacturers could be an expensive and time-consuming process and may result in an increase in our cost of goods sold. Any new manufacturer may also not perform to our expectations or produce quality products in a timely manner, which may result in damage to our brand reputation caused by defective components or delays in production and may also result in increased cost of

 

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our warranty program on account of defects in products manufactured by such manufacturers. There can be no assurance that we will be able to identify and qualify acceptable alternative manufacturers on a timely basis.

Our contract with Flextronics provides that Flextronics may reject any of our purchase orders that would extend Flextronics’s liability beyond our approved credit limit. Our credit limit with Flextronics may be adjusted higher or lower in Flextronics’s sole discretion for any reason, including based on Flextronics’s views about the riskiness of extending credit to us based on our cash flows, assets or our ability to pay all invoices from Flextronics within 30 days as required by our contract. If Flextronics chooses to lower our credit limit, this would hamper our ability to fulfill customer orders. Additionally, if customer demand for our products increases and Flextronics does not raise our credit limit, this could have an adverse effect on our ability to fulfill customer orders.

Our manufacturing operations, and those of our contract manufacturer, are dependent upon third-party suppliers, making us vulnerable to supply shortages and price fluctuations that could harm our business.

Certain of the components used in our products are currently manufactured by a single supplier or limited number of suppliers. In many of these cases, we and our manufacturers have not yet qualified alternate suppliers and rely upon purchase orders rather than long-term supply agreements. A supply interruption or an increase in demand beyond our current suppliers’ capabilities could harm our and our manufacturer’s ability to manufacture our Hair Removal Laser and our Skin Perfecting Blue Light until new sources of supply are identified and qualified. Our reliance on these suppliers subjects us to a number of risks that could harm our business, including:

 

   

interruption of supply resulting from modifications to or discontinuation of a supplier’s operations;

 

   

delays in product shipments resulting from uncorrected defects, reliability issues, or a supplier’s variation in a component;

 

   

price fluctuations due to a lack of long-term supply arrangements for key components with our suppliers, or other reasons;

 

   

difficulty and cost associated with locating and qualifying alternative suppliers for our components in a timely manner;

 

   

production delays related to the evaluation and testing of products from alternative suppliers, and corresponding regulatory qualifications;

 

   

delay in delivery due to our suppliers prioritizing other customer orders over ours;

 

   

damage to our brand reputation caused by defective components produced by our suppliers; and

 

   

increased cost of our warranty program due to product repair or replacement based upon defects in components produced by our suppliers.

The occurrence of any one or more of the foregoing could materially harm our business.

We forecast sales to determine requirements for our products and components and materials used in our products and, if our forecasts are incorrect, we may experience either delays in shipments or increased inventory costs.

We arrange for the manufacture of our products by third parties on a purchase order basis. With respect to products produced directly, we keep limited materials and components on hand. To manage our manufacturing operations and the manufacturing operations of our third-party manufacturer, we forecast product orders and material requirements to predict our inventory needs up to twelve months in advance and enter into purchase

 

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orders on the basis of these requirements. Our limited historical experience may not provide us with enough data to accurately predict future demand. If our business expands, our demand for products and components and materials would increase and our manufacturers and suppliers may be unable to meet our demand. If we overestimate our product and component and material requirements, we will have excess inventory, which would increase our expenses. If we underestimate our product and component and material requirements, we may have inadequate inventory, which could interrupt, delay or prevent delivery of our products to our customers. Any of these occurrences would negatively affect our financial performance and the level of satisfaction our customers have with our business.

We are dependent on third parties for the fulfillment of product orders, which exposes us to inventory and order processing risks.

We depend on several third-party logistics providers, including RHIEM Services GmbH, Kintetsu World Express, Landmark Global and DisCopyLabs for fulfillment of customer orders. If any of these logistics providers were to terminate its relationship with us before we are able to arrange for a suitable replacement, we might have to temporarily take over or suspend fulfillment duties and could experience delays in packing and shipping products to our customers, which could harm our business. Additionally, a natural disaster or other catastrophic event at one of our fulfillment locations could cause interruptions or delays in our business and loss of inventory and could render us unable to accept or fulfill customer orders in a timely manner.

Misuse of our products, failure to follow instructions for use of our products or product defects could harm the user, result in ineffective treatment, increase our warranty costs and subject us to product liability claims, which could harm our reputation and our business.

Our Hair Removal Laser and Skin Perfecting Blue Light are medical devices designed for at-home use by consumers. If consumers fail to understand or follow the instructions for use, they could be unsatisfied with the effectiveness of our product or they could be injured. Injury could also result if our products are defectively manufactured. Product liability lawsuits can be expensive and time consuming. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, harm our reputation in the industry, cause regulatory scrutiny and reduce product sales. We currently have product liability coverage in amounts that we believe are adequate but we may not have, or may not be able to obtain, insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Product liability judgments in excess of our insurance coverage would be paid out of cash reserves, harming our financial condition and reducing our operating results. In addition, we provide a full replacement warranty that our products are free of defects and provide a full refund as part of our money-back guarantee program. Product defects, therefore, could increase our warranty costs and harm our business.

The terms of our debt financing facility may restrict our ability to engage in certain transactions.

In January 2012, we entered into a loan and security agreement with MidCap Financial, or Midcap, Silicon Valley Bank and General Electric Capital. Pursuant to the terms of the loan and security agreement, subject to certain exceptions, we cannot engage in certain transactions, unless certain conditions are met or unless we receive the prior approval of lenders holding more than 75% of the aggregate principal of the loans, including the approval of Midcap. Such transactions include:

 

   

disposing of our business or certain assets;

 

   

changing our business, management, ownership or business locations;

 

   

incurring additional debt or liens or making payments on other debt;

 

   

making certain investments and declaring dividends;

 

   

acquiring or merging with another entity in excess of an allowable amount;

 

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engaging in transactions with affiliates; or

 

   

encumbering intellectual property.

If the requisite lenders do not consent to any of these actions that we desire to take, we could be prohibited from engaging in transactions that could be beneficial to our business and our stockholders unless we were to repay the loans, which may not be desirable or possible. In addition, if, following the closing of this offering, we fail to maintain a minimum liquidity (meaning unrestricted cash and cash equivalents on hand) in an amount greater than $15,000,000 or 110% of the amount outstanding under the loan and security agreement, the agent or required lenders under the facility can declare all amounts due and payable. Our loan and security agreement is secured by a pledge of substantially all of our assets except for intellectual property. If we were to default under our loan and security agreement and were unable to obtain a waiver for such a default, Midcap would have a right to foreclose on these assets in order to satisfy our obligations under the loan and security agreement. In addition, Midcap would have the right to accelerate the debt and terminate all commitments under the loan and security agreement. Any such action on the part of Midcap against us could have a materially adverse impact on our business, financial condition and results of operations. We may voluntarily repay all or any portion of the term loans upon notice to each lender and payment of a prepayment fee.

We face risks associated with currency exchange rate fluctuations, which could adversely affect our operating results.

Internationally, a portion of our sales received and expenses paid are denominated in currencies other than the United States dollar, such as the Japanese Yen, Korean Won, British pound sterling, Canadian dollar and euro. As part of our growth strategy, we plan to expand our international operations. As a result, we may in the future be at an increased risk for exchange rate fluctuations between foreign currencies and the United States dollar, which could affect our results of operations. We attempt to limit our exposure by paying our operating expenses incurred in foreign jurisdictions with sales received in the applicable currency, but if we do not have enough local currency to pay all our expenses in that currency, we are exposed to currency exchange rate risk with respect to those expenses. We are also exposed to exchange rate risk with respect to our profits earned in foreign currency. Even if we were to implement hedging strategies to mitigate foreign currency risk, these strategies might not eliminate our exposure to foreign exchange rate fluctuations and would involve costs and risks of their own, such as ongoing management time, external costs to implement the strategies and potential accounting implications.

The loss of one or more of our key employees, or our failure to attract and retain other highly qualified personnel in the future, could harm our business.

We depend on the continued service and performance of our key employees, including Kevin J. Appelbaum, our president and chief executive officer. We maintain key man insurance on Mr. Appelbaum, but not on any of our other officers or key employees. We also do not have long-term employment agreements with any of our officers or key employees. The loss of key members of our executive management team, as well as general managers of our foreign offices, could disrupt our operations and have an adverse effect on our ability to grow our business. In addition, to execute our growth plan, we must attract and retain highly qualified personnel. Competition for these employees is intense, and we may not be successful in attracting and retaining qualified personnel. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we fail to attract new personnel, or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

We may need to raise additional funds in the future, and such funds may not be available on a timely basis, on acceptable terms or at all.

Until such time, if ever, as we can obtain and maintain profitability from sales of our products, we will be required to finance our operations with our cash resources. We may need to raise additional funds in the future to support our operations. We cannot be certain that additional capital will be available as needed or on acceptable terms. If we raise additional funds through the issuance of equity or convertible securities, the percentage ownership of holders of our common stock could be significantly diluted and these newly issued securities may have rights, preferences, or privileges senior to those of holders of our common stock. If we obtain debt financing, a substantial

 

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portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, and the terms of the debt securities issued could impose significant restrictions on our operations.

We may be adversely affected by the current economic environment.

Our operating and financial performance may be adversely affected by a variety of factors that influence the general economy in the United States and worldwide. For example, as observed during the recent economic crisis, consumer spending may deteriorate significantly if individual income levels or general consumer confidence decline, unemployment levels rise, interest rates fluctuate, there is uncertainty with respect to taxation and stock market performance or there are widespread concerns regarding political instability, recessionary periods or the potential for inflation. A decline in consumer spending could result in consumers electing to purchase lower-cost products in lieu of purchasing our products or in deferring purchases of aesthetic and skincare products altogether. If any of these circumstances occurs, the market demand for our products and our business and results of operations could be materially and adversely affected.

Our sales may be adversely affected if we are required to charge sales taxes in additional jurisdictions and/or other taxes for our products.

We collect or have imposed upon us sales or other taxes related to the products we sell in certain states and other jurisdictions. Additional states or one or more countries or other jurisdictions may seek to impose sales or other tax collection obligations, tariffs and duties in the future. A successful assertion by any state, country or other jurisdiction in which we do business that we should be collecting sales or other taxes on the sale of our products could, among other things, create significant administrative burdens for us, result in substantial tax liabilities for past sales, discourage customers from purchasing from us or otherwise substantially harm our business and results of operations.

Moreover, we are not currently charging sales tax in jurisdictions in which we do not have a legal nexus. With the increase in online sales of products throughout the world, there has been an effort to expand laws and regulations related to the imposition of sales tax on internet sales. The increased imposition of a tax on internet sales could discourage customers from purchasing our products and harm our business and results of operations.

Our information technology infrastructure is vulnerable to damage and interruption, which could harm our business.

Our ability to fulfill orders successfully is dependent on the efficient and uninterrupted operation of our computer and communications hardware and software systems, as well as those of our supply chain partners. Our primary computer systems and operations, which are located at a co-location facility, and our corporate headquarters, both in Dublin, California, are vulnerable to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, catastrophic events (such as earthquakes) and errors in usage by our employees and customers. Systems integration issues are complex, time consuming and expensive.

We outsource the hosting of our websites and our data backup. Any significant interruption in the availability or functionality of our website or our sales processing, distribution or communications systems, for any reason, could seriously harm our business, prospects, financial condition and results of operations.

Any acquisitions that we make could disrupt our business and harm our financial condition.

We expect to evaluate potential strategic acquisitions of complementary businesses, products or technologies from time to time. We may also consider joint ventures and other collaborative projects. We may not be able to identify appropriate acquisition candidates or strategic partners, or successfully negotiate, finance or integrate acquisitions of any businesses, products or technologies. Furthermore, the integration of any acquisition and management of any collaborative project may divert management’s time and resources from our core business and disrupt our operations. If we decide to expand our product offerings beyond our current products, we may

 

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spend time and money on projects that do not increase our sales. Any cash acquisition we pursue would diminish the cash available to us for other uses, and any stock acquisition would dilute our stockholders’ ownership. While we from time to time evaluate potential collaborative projects and acquisitions of businesses, products and technologies, and anticipate continuing to make these evaluations, we have no present understandings, commitments or agreements with respect to any future acquisitions or collaborative projects.

Our ability to use our net operating loss carryforwards may be limited.

Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards to offset its post-change taxable income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by certain “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We may have experienced an ownership change in the past and may experience ownership changes in the future as a result of this issuance or future transactions in our stock, some of which may be outside our control. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset United States federal and state taxable income may be subject to limitations.

Risks Related to Our Intellectual Property

We are involved in costly and time-consuming intellectual property litigation with Palomar Medical Technologies relating to our leading Hair Removal Laser product. An outcome in this litigation could require us to pay royalties for a U.S. license, and a judgment could prevent us from selling our Hair Removal Laser product in the United States until the relevant patents expire in 2015.

We are currently defending a patent infringement lawsuit filed on June 24, 2009 by Palomar Medical Technologies, or Palomar, in the United States District Court for the District of Massachusetts. In the lawsuit, Palomar alleges that the manufacture, import, sale and use of our Hair Removal Laser infringes two United States patents that it licenses: U.S. Patent Nos. 5,735,844, entitled “Hair Removal Using Optical Pulses,” and 5,595,568, entitled “Permanent Hair Removal Using Optical Pulses.” Palomar seeks both monetary damages for our past sales of the Hair Removal Laser and injunctive relief to stop us from selling the Hair Removal Laser. Fact discovery is essentially completed and expert discovery is ongoing. As of the date of this prospectus, no trial date has been set, though summary judgment briefing is scheduled to be completed in December 2012.

In our answers to Palomar’s lawsuit, we raised a number of defenses, including that Palomar’s patents are invalid and unenforceable, and that the use, import, manufacture and sale of the Hair Removal Laser does not infringe Palomar’s patents. While we are vigorously contesting Palomar’s allegations, intellectual property litigation is complex and outcomes cannot reasonably be predicted, including not only the likelihood of winning or losing, but also the remedies that might ultimately be granted by a court. If we lose the litigation, we may be ordered to pay compensatory damages and enhanced damages of up to three times the amount of actual damages. Compensatory damages may be measured by Palomar’s lost profits and/or reasonable royalty payments for past and future U.S. sale and manufacture of the Hair Removal Laser through the expiration of the relevant patents in 2015. Furthermore, we could be enjoined from making, using, importing or selling our Hair Removal Laser in the United States through the expiration of the patents in 2015. Alternatively, if we and Palomar agree to settle this litigation, we may still have to pay significant damages and a royalty on future sales through the expiration of the patents.

An adverse outcome in this lawsuit could materially hurt our business, financial condition, results of operations and cash flows. This litigation has been and will continue to be expensive and protracted, and our intellectual property position may be weakened as a result of an adverse ruling. Whether or not we are successful in this dispute, this litigation consumes substantial amounts of our financial resources and diverts management’s attention away from our core business. For additional discussion, see “Business—Legal Proceedings.”

 

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Because of our reliance on proprietary technology within our products, we are dependent on our ability to operate without infringing or misappropriating the property rights of others.

There is a substantial amount of litigation over patent and other intellectual property rights in the medical device industry. While we attempt to ensure that our products do not infringe other parties’ patents, patent applications and proprietary rights, our competitors may assert that our products or processes may infringe their patent or other intellectual property rights. Although we may seek to obtain a license or other agreement under a third party’s intellectual property rights to avoid or bring an end to certain claims or actions asserted against us, we may not be able to obtain such an agreement on reasonable terms or at all. If we are not successful in obtaining a license or redesigning our products when necessary, we may have to stop manufacturing and marketing our products and our product sales and profitability could suffer as a result.

Also, with respect to our current products or processes, we may be inadvertently infringing one or more third-party patents. As we expand into new markets and as new competitors emerge, the possibility of a patent infringement claim against us, in-licensing costs and research and development expense, may increase. We are aware of published U.S. patent applications that may issue into U.S. patents that might cover certain aspects of our current or future products. In addition, because patent applications often remain confidential for 18 months or more after filing and can take many years to issue into patents, there may now or in the future be relevant pending patent applications of which we are unaware. If any of these applications issues as a patent, its owner might initiate patent litigation against us or demand that we obtain a patent license that may significantly affect the profitability or financial feasibility of any products covered by the license. Any patent litigation, regardless of merit, could be expensive and time consuming and divert our management’s attention from our core business. Further, if we were to lose such litigation, a court could require us to pay substantial damages or royalties and prohibit us from using technologies essential to our current or future products. Alternatively, a license to any such patent may not be available at all or may only be available on terms that would place significant constraints on our manufacture and sale of our products. In addition, design changes to our current or future products to avoid such licensing or litigation may add significant development and/or manufacturing costs, thus affecting the profitability or financial feasibility of such products.

Intellectual property rights may not provide adequate protection for some or all of our products, which may permit third parties to compete against us.

We rely and expect to continue to rely on patent, copyright, trade secret and trademark laws, as well as confidentiality agreements, to protect our technology and products. As of March 31, 2012, in the United States we had six issued patents, 12 published patent applications and a number of unpublished patent applications (including provisional patent applications), and internationally we had five issued patents, 11 published patent applications and four unpublished patent applications relating to our current products and products under development. Some of the components of our products are not, and in the future may not, be protected by patents. Additionally, our patent applications may not result in the issuance of patents or, if issued, may not issue in a form that will be advantageous to us. Any patents we obtain may be challenged, construed narrowly, invalidated or legally circumvented by third parties. Many of our trademarks contain words or terms having a common usage and, as a result, may not be protectable under applicable law. Because of this concern, we have elected not to file applications with respect to certain of our trademarks, and some of our trademarks for which we have filed applications may not be protectable, which could restrict our ability to exclude our competitors from using these trademarks.

The limits to our intellectual property protection expose us to a greater risk of direct competition. Competitors could purchase one of our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, design around our protected technology, or develop their own competitive technologies that fall outside of our intellectual property rights. In addition, the laws of certain countries in which we develop, manufacture or sell our products may not protect our intellectual property to the same extent as the laws of the United States, and gaining protection for and enforcing our rights in these jurisdictions may be particularly difficult and expensive. Our Hair Removal Laser is manufactured by Flextronics in China. China-

 

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based manufacturing has been known to involve potential heightened risk of infringement of intellectual property rights and the resulting production of counterfeit products that are sold on the black market, undermining the sales of the legitimate product. If our intellectual property is not adequately protected against competitors’ products and methods, our competitive position could be adversely affected, as could our business.

Nondisclosure and assignment agreements with employees and others may not adequately prevent disclosure of trade secrets, know-how and other proprietary information.

A substantial portion of our technologies and intellectual property are protected by trade secret laws. We rely on a combination of patent and other intellectual property laws and nondisclosure and assignment agreements with our employees, consultants and third parties with whom we have relationships to protect and otherwise seek to control access to, and distribution of, our proprietary information. These measures may not be adequate to prevent disclosure of confidential information, third-party infringement or misappropriation. The nondisclosure and assignment agreements may be breached, and we may not have adequate remedies for any breach. We have limited control over the protection of trade secrets used by our third-party manufacturers and suppliers. We could lose future trade secret protection if any unauthorized disclosure of such information occurs. In addition, others may independently discover our trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Laws regarding trade secret rights in certain markets in which we operate may afford little or no protection to our trade secrets. Parties to our nondisclosure and assignment agreements may breach these agreements, and we may not have adequate remedies for any breach. Also, others may learn of our trade secrets through a variety of methods. Failure to obtain or maintain trade secret protection could adversely affect our business, sales, reputation and competitive position.

Risks Related to Regulation

To introduce new products or to expand our U.S. marketing claims for current products, we may need to obtain additional FDA clearances or approvals, which may not be granted.

Our products are generally subject to 510(k) clearance by the FDA prior to their marketing for commercial use in the United States. In the United States, each of our Hair Removal Laser and our Skin Perfecting Blue Light are indicated for over-the-counter use. Our Hair Removal Laser is indicated for adjunctive use with shaving for hair removal sustained with periodic treatments and intended for permanent reduction in hair regrowth defined as a long-term, stable reduction in hair counts following a treatment regime. Our Skin Perfecting Blue Light is generally indicated to treat dermatological conditions and specifically indicated to treat mild to moderate inflammatory acne vulgaris. These clearances restrict our ability to market or advertise the Hair Removal Laser and the Skin Perfecting Blue Light for other uses. If we want to expand our marketing claims with respect to our Hair Removal Laser or Skin Perfecting Blue Light or make any changes or modifications to these products that could significantly affect product safety or effectiveness, or would constitute a change in either product’s intended use, we may be required to engage in additional clinical trials and submit a new application for 510(k) clearance or possibly a premarket approval application. These processes can be expensive, time consuming and uncertain.

Although developing and promoting new treatment indications and protocols for our Hair Removal Laser and Skin Perfecting Blue Light are elements of our growth strategy, we cannot predict when or if we will receive the FDA clearances required to implement these elements. Delays in receipt of, or failure to obtain, FDA clearances or approvals for any product enhancements or new products we develop would adversely affect our ability to introduce new or enhanced products in a timely manner, limit our ability to promote our products in the United States and result in delayed, or no, realization of sales from such product enhancements or new products. In addition, FDA requirements to obtain additional clinical or non-clinical data in support of such clearances or approvals could result in substantial additional costs that could decrease our profitability. Because we anticipate that sales in the United States will continue to be a significant portion of our business for the foreseeable future, ongoing restrictions on our ability to market the Hair Removal Laser, the Skin Perfecting Blue Light, and any new products we develop in the United States could harm our business and limit our sales growth.

 

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We are also required to continue to comply with applicable FDA and other regulatory requirements once we have obtained marketing clearance for a product. There can be no assurance that we will successfully comply with such regulatory requirements or that we will maintain the FDA marketing clearances that we have received or may receive in the future. Our FDA clearances can be revoked if safety or effectiveness problems develop. Any failure to maintain compliance with FDA and other regulatory requirements could result in public notice of noncompliance, product recalls, government-mandated manufacturing or distribution shutdowns, financial penalties, criminal prosecution, or other harm to our business, financial condition and results of operations.

We may not be able to obtain or maintain international regulatory qualifications or approvals for our current products and products under development, which would harm our geographic expansion efforts and future sales.

Sales of our products outside the United States are subject to foreign regulatory requirements that vary widely from country to country, some of which we may not be fully aware of or which may be subject to changes affecting our ability to sell our products in those jurisdictions. In addition, if we make any modifications to products already approved outside the United States that could significantly affect product safety or effectiveness, or would constitute a change in intended use, then we may be required to submit new applications for foreign regulatory approvals. Complying with international regulatory requirements can be an expensive and time-consuming process, and approval is not certain. The foreign regulatory approval process may include all of the risks associated with obtaining FDA clearance or approval, in addition to other risks. For example, the time required to obtain foreign approvals may exceed the time required for FDA approval, and requirements for such approvals may differ significantly from FDA requirements. Foreign regulatory authorities may not approve our product for the same uses cleared or approved by the FDA. Additionally, we may be unable to maintain existing foreign approvals or obtain such approvals as are required in geographies into which we intend to expand, which would harm our international growth strategy.

We may be subject to significant liability if we promote our products for uses that have not been approved by the FDA or other applicable agencies.

The FDA strictly regulates the promotional claims that may be made about FDA-cleared medical devices. In particular, a device may not be promoted for uses that are not cleared or approved by the FDA. If we are found to have inappropriately marketed our products for off-label uses, we may be subject to significant liability. The federal government has levied large civil and criminal fines against companies for alleged promotion of uncleared or unapproved uses. The FDA has also demanded that companies enter into consent decrees of permanent injunction under which specified promotional conduct is prohibited. State Attorneys General also have investigated promotional practices of FDA-regulated products and entered into settlements of allegations that off-label promotional practices violated state consumer protection laws. Similarly, foreign regulatory agencies could take action against us if we are found to have marketed our products for off-label uses.

Regulatory agencies may fail to take action against competitors that illegally market products without obtaining required approvals or clearances.

Achieving regulatory approvals and clearances for medical devices is costly and delays the introduction of new or modified products into the marketplace. In addition, after regulatory agencies approve or clear a medical device for marketing, maintaining ongoing compliance with postmarket medical device regulations requires constant management attention and the devotion of significant operational resources. We believe that a number of companies are marketing medical devices that compete with one or more of our products without the required regulatory approvals or clearances. Although we can bring such matters to the attention of regulatory agencies, those agencies may not take action at all or action may be significantly delayed. Regulatory agencies’ failure to act against competitors that illegally market their products could result in harm to our competitive position and could undermine consumer confidence in our industry in general, affecting our reputation and ability to market our products successfully.

 

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Our failure, and the failure of our contract manufacturer and suppliers, to comply with regulations applicable to the production of medical devices, could harm our business.

Our manufacturing processes and facilities are required to comply with the FDA’s Quality System Regulation, or the QSR, which covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our devices, as well as similar foreign regulatory requirements including ISO 13495 medical quality system requirements in some cases. The FDA enforces the QSR, and foreign regulators enforce similar requirements, through periodic announced or unannounced inspections of manufacturing facilities. We are subject to such inspections, as well as to inspections by other federal and state regulatory agencies. In addition, the contract manufacturer for our Hair Removal Laser, Flextronics, is required to comply with the QSR and similar foreign requirements, and is also subject to regulatory inspections. We have limited ability to ensure that Flextronics is taking, or any other third-party manufacturers we may use in the future will take, the necessary steps to comply with applicable regulations, which could cause delays in the delivery of our products.

We are also subject to adverse event reporting regulations in the United States and abroad. For example, we are required to report to the FDA if our products may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. We must report product corrections and removals to the FDA where the correction or removal was initiated to reduce a risk to health posed by the device or to remedy a violation of the Federal Food, Drug, and Cosmetic Act, or FDCA, caused by the device that may present a risk to health, and we must maintain records of other corrections or removals.

Failure to comply with applicable FDA or other regulatory requirements, or later discovery of previously unknown problems with our products or manufacturing processes, including our failure or the failure of Flextronics or third-party manufacturers we may utilize in the future to take satisfactory corrective action in response to an adverse regulatory inspection, can result in, among other things:

 

   

administrative or judicially-imposed sanctions;

 

   

injunctions or the imposition of civil penalties;

 

   

recall or seizure of our products;

 

   

total or partial suspension of production or distribution;

 

   

regulatory authorities’ refusal to grant pending future marketing clearance or approvals for our products;

 

   

withdrawal or suspension of marketing clearances or approvals;

 

   

clinical holds that suspend our ability to conduct clinical trials of our products;

 

   

regulatory warning letters;

 

   

refusal to permit the import or export of our products; and

 

   

criminal prosecution of us or our employees.

Any of these actions, in combination or alone, could prevent us from marketing, distributing, or selling our products and would likely harm our business.

A product defect or regulatory violation could lead to a government-mandated or voluntary recall by us. Regulatory agencies in other countries have similar authority to require the recall of devices because of material deficiencies or defects in design or manufacture that could endanger health. Any recall would divert management attention and financial resources, could cause the price of our shares of common stock to decline and may expose us to product liability or other claims, including contractual claims from parties to whom we sold products, and

 

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harm our reputation with customers. A recall involving our Hair Removal Laser would be particularly harmful to our business and financial results and, even if we remedied a particular problem, could have a lasting negative effect on our reputation and demand for our products.

Legislative or regulatory healthcare reforms may make it more difficult and costly for us to obtain regulatory clearance or approval of our products and to produce, market and distribute our products after clearance or approval is obtained.

From time to time, legislation is drafted and introduced in Congress or in foreign jurisdictions that could significantly change the statutory provisions governing the regulatory clearance or approval, manufacture and marketing of regulated products. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. For example, in the future, the FDA may require more burdensome premarket approval of our products rather than the 510(k) clearance process we have used to date and anticipate primarily using in the future. Our Hair Removal Laser and Skin Perfecting Blue Light are also subject to state and foreign laws and regulations which are, in many instances, in flux. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of our products, or otherwise restrict our ability to promote and sell our products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted, may have on our business in the future. Such changes could, among other things, require:

 

   

new and more burdensome clinical trials or non-clinical testing for future products or product changes;

 

   

postmarket tracking of device use by customers;

 

   

changes in manufacturing methods;

 

   

recall, replacement, refund, repairs or discontinuance of certain products; and

 

   

additional record keeping.

Each of these changes would likely entail substantial time and cost and could materially harm our financial results. In addition, delays in receipt of or failure to receive regulatory clearances or approvals for our new products would harm our business, financial condition and results of operations.

Federal and state governments in the United States are also undertaking efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and third-party payors. In 2010, Congress enacted comprehensive healthcare reform legislation known as the Patient Protection and Affordable Care Act of 2010, as modified by the Health Care and Education Reconciliation Act of 2010, which we refer to as the Affordable Care Act, or ACA. The ACA imposes a 2.3% excise tax on sales of medical devices by manufacturers. Taxable devices include any medical device defined in Section 201(h) of the FDCA and intended for use by humans, with limited exemptions, including an exemption for devices that are determined to be of a type generally purchased by the public at retail for individual use. The Internal Revenue Service published a proposed rulemaking in February 2012 that would exempt devices that are regularly available for purchase and use by individual consumers who are not medical professionals and whose design demonstrates that it is not primarily intended for use in a medical institution or office, or by medical professionals. Because our products are sold over the counter directly to consumers, we believe that they would be exempt from the tax; however, if this proposed exemption is deleted from the final rule, we could be required to pay the excise tax, which we would expect to begin paying in 2013. We expect that compliance with the ACA may, if we are subject to the excise tax, impose a significant financial and administrative burden on us, which may harm our financial results.

We are subject to various anti-bribery laws, and any violations by us of such laws could result in fines or other penalties.

The U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or

 

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retaining business. Some of our partners are located in parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure you that our internal control policies and procedures will protect us from reckless or negligent acts committed by our employees, partners or agents. Violations of these laws, or allegations of such violations, could result in fines, penalties or prosecution and have a negative impact on our business, results of operations and reputation.

We are subject to numerous environmental, health and safety laws and regulations, and must maintain licenses or permits; noncompliance with these laws, regulations, licenses or permits may expose us to significant costs or liabilities.

We are subject to numerous foreign, federal, state and local environmental, health and safety laws and regulations relating to, among other matters, safe working conditions and environmental protection, including those governing the generation, storage, handling, use, transportation and disposal of hazardous or potentially hazardous materials. Some of these laws and regulations require us to obtain licenses or permits to conduct our operations. Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. If we violate or fail to comply with these laws, regulations, licenses or permits, we could be fined or otherwise sanctioned by regulators. We cannot predict the impact on our business of new or amended laws or regulations or any changes in the way existing and future laws and regulations are interpreted or enforced, nor can we ensure we will be able to obtain or maintain any required licenses or permits.

Risks Related to this Offering and Our Common Stock

An active, liquid and orderly trading market for our common stock may not develop, our share price may be volatile and you may be unable to sell your shares at or above the offering price.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which a trading market will develop or how liquid that market might become. The initial public offering price for our shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section and others beyond our control, including:

 

   

actual or anticipated fluctuations in our key operating metrics, financial condition and operating results;

 

   

a greater than expected loss of existing customers;

 

   

a negative change in one or more of our key metrics;

 

   

actual or anticipated changes in our growth rate;

 

   

issuance of new or updated research or reports by securities analysts;

 

   

our announcement of actual results for a fiscal period that are higher or lower than projected or expected results or our announcement of sales or earnings guidance that is higher or lower than expected;

 

   

fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

   

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

   

sales or expected sales of additional common stock;

 

   

announcements from, or operating results of, our competitors; or

 

   

general economic and market conditions.

 

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Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may cause the market price of shares of our common stock to decline. If the market price of shares of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

If our future operating performance does not meet the expectations of investors or financial analysts, our stock price will likely decline.

Our ability to sell our products successfully is subject to many uncertainties, as discussed in this prospectus. Accordingly, it is difficult to estimate our future results with accuracy. Expectations regarding these results will be subject to numerous risks and uncertainties that could make actual results differ materially from those anticipated. If our actual results do not meet the expectations of investors or third-party financial analysts, our stock price could decline significantly.

If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have any and may never obtain research coverage by industry or financial analysts. Even if we do obtain analyst coverage, if one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

We are an “emerging growth company” and we cannot be certain if we will be able to maintain such status or if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart our Business Startups Act of 2012, or JOBS Act, and we intend to adopt certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may remain as an “emerging growth company” for up to five full fiscal years following our initial public offering. We would cease to be an emerging growth company, and therefore not be able to rely upon the above exemptions, if we have more than $1 billion in annual revenues in a fiscal year, we issue more than $1 billion of non-convertible debt over a three-year period, or we have more than $700 million in market value of our common stock held by non-affiliates as of any June 30 before the end of the five full fiscal years. Additionally, we cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

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Our financial controls and procedures may not be sufficient to ensure timely and reliable reporting of financial information, which, as a public company, could materially harm our stock price and quotation on The NASDAQ Global Market.

As a public company, we will require greater financial, systems and accounting resources than we have had as a private company. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we will be required to furnish a report by our management on the effectiveness of our internal control over financial reporting beginning with our annual report for the fiscal year ending December 31, 2012. When we no longer qualify as an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will also need to attest to the effectiveness of our internal control over financial reporting.

The controls and other procedures are designed to ensure that information required to be disclosed by us in the reports that we file with the Securities and Exchange Commission, or SEC, is disclosed accurately and is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. We are in the early stages of implementing our internal control procedures to meet our public company obligations. Even if we develop effective controls, these new controls may become inadequate because of changes in conditions or the degree of compliance with these policies or procedures may deteriorate. Even after we develop these new procedures, additional weaknesses in our internal control over financial reporting may be discovered.

The effectiveness of our controls and procedures may in the future be limited by a variety of factors, including:

 

   

faulty human judgment and simple errors, omissions or mistakes;

 

   

fraudulent action of an individual or collusion of two or more people;

 

   

inappropriate management override of procedures; and

 

   

the possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial control.

If we fail to have effective controls and procedures for financial reporting in place, we could be unable to provide timely and accurate financial information and be subject to delisting from The NASDAQ Global Market, SEC investigation and civil or criminal sanctions.

Substantial future sales of our common stock or securities convertible or exchangeable for our common stock in the public market could cause our stock price to fall.

Additional sales of our common stock in the public market after this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. Upon completion of this offering (assuming no exercise of the underwriters’ over-allotment option), we will have 19,294,722 shares of common stock outstanding. The 4,600,000 shares sold in this offering, as well as any shares disposed of upon exercise of the underwriters’ over-allotment option, will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended, or the Securities Act. A significant portion of the shares of our common stock outstanding after this offering will continue to be restricted as a result of securities laws or lock-up agreements. The lock-up agreements restrict holders’ ability to transfer their stock for 180 days after the date of this prospectus, subject to extension in certain circumstances. Of the outstanding restricted shares, no shares will be available for sale in the public market on the date of this offering, and an additional 14,694,722 shares will be available for sale in the public market beginning 180 days after the date of this prospectus, subject to extension in certain circumstances and to the requirements of Rule 144.

In addition, the approximately 4,546,683 shares underlying options that are either subject to the terms of our equity compensation plans or reserved for future issuance under our equity compensation plans as of the date of this prospectus will become eligible for sale in the public market to the extent permitted by the provisions of various option agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. At any time,

 

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any or all of the shares subject to the lock-up may be released prior to expiration of the 180-day lock-up period (subject to extension in certain circumstances) at the discretion of Morgan Stanley & Co. LLC and Piper Jaffray & Co. As resale restrictions end, the market price of our common stock could decline if the holders of those shares sell them or are perceived by the market as intending to sell them. In addition, after this offering (assuming no exercise of the underwriters’ over-allotment option), the holders of approximately 14,013,050 shares of common stock will be entitled to rights to cause us to register the sale of those shares under the Securities Act but cannot exercise any such registration rights during the lock-up period. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration.

Our management will have broad discretion over the use of the proceeds from this offering and might not apply the proceeds of this offering in ways that increase the value of your investment.

Our management will have broad discretion to use the net proceeds from this offering. We expect to use the net proceeds from this offering for sales and marketing initiatives, research and development activities and general corporate purposes, including working capital. We may also use net proceeds for other purposes, including prepayment of debt, or for possible investments in, or acquisitions of, complementary products or technologies, although we have no specific plans at this time to do so. We may fail to use these funds effectively to yield a significant return, or any return, on any investment of these net proceeds. Our failure to apply these funds effectively could have a material adverse effect on our business and cause the price of our common stock to decline.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the securities exchange on which we will trade and other applicable federal and state securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time consuming or costly and increase demand on our business systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from sales-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors, particularly to serve on our audit committee and compensation committee.

New investors in our common stock will experience immediate and substantial dilution.

The initial public offering price is expected to be substantially higher than the book value per share of our common stock. Investors purchasing common stock in this offering will therefore incur immediate dilution of

 

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$11.04 per share in net tangible book value per share of common stock, based on the assumed initial offering price of $14.00 per share, the mid-point of the range on the cover of this prospectus. Investors will incur additional dilution upon the exercise of outstanding stock options and warrants. See “Dilution” for additional information.

Our directors, executive officers and significant stockholders will continue to hold a substantial portion of our stock after this offering, which may lead to conflicts of interest with other stockholders over corporate transactions and other corporate matters.

Following the completion of this offering, our directors, executive officers and beneficial holders of 10% or more of our outstanding common stock will beneficially own approximately 58.4% of our outstanding common stock, including warrants and stock options exercisable within 60 days after March 31, 2012. This concentration of ownership may not be in the best interests of our other stockholders. We are not aware of any stockholder or voting agreements or understandings between or among our directors, officers or holders of our outstanding common stock which will be in place following our initial public offering. However, these stockholders, acting together, would be able to significantly influence all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as mergers or other business combinations. This control could delay, deter or prevent a third party from acquiring or merging with us, which could adversely affect the market price of our common stock.

Anti-takeover provisions in our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current directors and management team and limit the market price of our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws that will become effective prior to completion of this offering contain provisions that may delay or prevent a change of control, discourage bids at a premium over the market price of our common stock, and adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions include:

 

   

dividing our board into three classes, with each class serving a staggered three-year term;

 

   

prohibiting our stockholders from calling a special meeting of stockholders or acting by written consent;

 

   

permitting our board to issue additional shares of our preferred stock, with such rights, preferences and privileges as they may designate, including the right to approve an acquisition or other changes in control;

 

   

establishing an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;

 

   

providing that our directors may be removed only for cause;

 

   

providing that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and

 

   

requiring the approval of our board of directors or the holders of a supermajority of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.

Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management team by making it more difficult for stockholders to replace members of our board, which is responsible for appointing the members of our management.

 

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Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. The restrictions contained in Section 203 are not applicable to any of our existing stockholders that will own 15% or more of our outstanding voting stock upon the closing of this offering.

We have not paid dividends in the past and do not currently intend to pay dividends on our common stock in the future and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our common stock and do not intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. In addition, the provisions of our debt facility prohibit us from paying cash dividends. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus contains forward-looking statements, including statements regarding the progress and timing of clinical trials, the safety and effectiveness of our products, the goals of our development activities, estimates of the potential markets for our products, estimates of the capacity of manufacturing and other facilities to support our products, projected cash needs and our expected future revenues, operations and expenditures. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. These risks and uncertainties include, among others:

 

   

the implementation of our business model and strategic plans for our business, and our current and future products;

 

   

the outcome of our active litigation, including the intellectual property litigation with Palomar Medical Technologies regarding our lead product, the Hair Removal Laser;

 

   

our ability to grow our business by successfully marketing our current products and expanding our sales to existing customers or introducing our products to new customers;

 

   

our ability to successfully expand our business into new geographies;

 

   

the timing or likelihood of regulatory filings and approvals for additional indications of our current products and for future products;

 

   

our ability to successfully introduce new products, including our Skin Rejuvenating Laser;

 

   

competition, both direct and indirect, with currently available and future products, within the markets in which we compete;

 

   

our use of proceeds from this offering;

 

   

the scope of protection we are able to establish and maintain for intellectual property rights covering our current and future products;

 

   

our ability to manage our growth and estimate and control our expenses, future revenue and capital requirements and our needs for additional financing; and

 

   

our financial performance.

Forward-looking statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “contemplate,” “seek,” “project,” “predict,” “potential,” or the negative of those terms, and similar expressions and comparable terminology intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this prospectus and, except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus. The forward-looking statements contained in this prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.

 

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Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our products. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of the shares of our common stock in this offering will be approximately $56.9 million, or $65.9 million if the underwriters fully exercise their option to purchase additional shares, based upon an assumed initial public offering price of $14.00 per share, which represents the mid-point of the estimated price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share would increase or decrease the net proceeds to us from this offering by $4.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

Of the net proceeds that we will receive from this offering, we expect to use approximately:

 

   

$23.0 million for sales and marketing initiatives to support the ongoing commercialization of our products; and

 

   

$7.0 million for research and development activities, including support of product development, regulatory and clinical study initiatives.

We expect to use the remainder of the net proceeds for working capital and general corporate purposes. At our option, we may use a portion of the net proceeds to prepay the principal and interest outstanding, and a 5% prepayment fee, under our loan and security agreement with three financial institutions, which bears interest at a rate of 9.36% per annum and is due in July 2015. This indebtedness has been used to date to repay, in full, our prior indebtedness incurred under the 2011 Facility; see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Loan Agreements.” As of April 30, 2012, we would have had to pay $20.7 million in principal, interest and prepayment fees to retire the loan agreement in full. We may also use a portion of the proceeds to expand our current business through acquisitions or investments in other strategic businesses, products or technologies. We have no commitments with respect to any future acquisitions at this time. We will have broad discretion in the way we use the net proceeds.

We intend to invest the net proceeds in short- and intermediate-term interest-bearing obligations, investment-grade instruments, certificates of deposit or guaranteed obligations of the United States government, pending their use as described above.

The primary purposes of this offering are to raise additional capital, create a public market for our common stock, allow us easier and quicker access to the public markets should we need more capital in the future, increase the profile and prestige of our company with existing and possible future customers, vendors and strategic partners, and make our stock more valuable and attractive to our employees and potential employees for compensation purposes.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock and our debt facility prohibits us from paying cash dividends. We currently expect to retain future earnings to finance the growth and development of our business and do not anticipate paying any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent on then-existing conditions.

 

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CAPITALIZATION

The following table sets forth, our current portion of long-term debt and capitalization at March 31, 2012 on:

 

   

an actual basis;

 

   

a pro forma basis after giving effect to the conversion of all our outstanding shares of redeemable convertible preferred stock into 13,879,031 shares of common stock and reclassification of warrants prior to completion of this offering; and

 

   

a pro forma, as adjusted basis after giving effect to the pro forma adjustments described above and the receipt of the estimated net proceeds from the sale of 4,600,000 shares of common stock offered by us at an assumed initial public offering price of $14.00 per share, the mid-point of the range on the front cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and assuming that we do not prepay amounts outstanding under our loan agreement.

You should read this table in conjunction with the financial statements and notes to the consolidated financial statements included elsewhere in this prospectus and the information set forth under the captions “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    As of March 31, 2012  
    Actual     Pro Forma     Pro Forma,
As  Adjusted
 
         

(unaudited)

 
    (in thousands, except share data)  

Notes payable, including current portion

  $ 18,774      $ 18,774      $ 18,774   

Convertible preferred stock warrant and common stock warrant liability

    1,152        —          —     

Redeemable convertible preferred stock, $0.001 par value; 94,585,697 shares authorized, actual, and 10,000,000 shares authorized pro forma and pro forma as adjusted, 13,879,031 shares issued and outstanding, actual, and no shares issued and outstanding, pro forma and pro forma as adjusted

    109,540        —          —     

Stockholders’ (deficit) equity:

     

Common stock, $0.001 par value; 120,000,000 shares authorized, actual, and 100,000,000 shares authorized pro forma and pro forma as adjusted, 815,691 shares issued and outstanding, actual, and 14,694,722 shares issued and outstanding, pro forma, and 19,294,722 shares issued and outstanding, pro forma as adjusted

    1        15        19   

Additional paid-in capital

    3,216        113,894        170,782   

Accumulated other comprehensive income

    93        93        93   

Accumulated deficit

    (112,833     (112,833     (112,833
 

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

    (109,523     1,169        58,061   
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 19,943      $ 19,943      $ 76,835   
 

 

 

   

 

 

   

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share would increase or decrease each of pro forma, as adjusted, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $4.3 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The above table excludes:

 

   

2,046,683 shares issuable upon the exercise of options outstanding as of March 31, 2012 under our 2004 Plan at a weighted average exercise price of approximately $2.11 per share;

 

   

2,500,000 shares of common stock to be reserved for issuance under our 2012 Plan, which amount includes those shares reserved but unissued under our 2004 Plan at the completion of this offering; and

 

   

the exercise of (i) warrants to purchase 30,518 shares of our common stock and (ii) warrants to purchase 134,019 shares of our series CC preferred stock.

 

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DILUTION

Our pro forma net tangible book value as of March 31, 2012 was approximately $0.2 million, or $0.01 per share, based on 14,694,722 shares of common stock outstanding after giving effect to the conversion of all outstanding shares of redeemable convertible preferred stock into 13,879,031 shares of common stock. Pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the pro forma number of shares of common stock outstanding before giving effect to this offering.

After giving effect to the issuance and sale of 4,600,000 shares of common stock in this offering at an initial public offering price of $14.00 per share, the mid-point of the range on the front cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of March 31, 2012 would have been $57.1 million or $2.96 per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $2.95 per share and an immediate dilution in pro forma net tangible book value of $11.04 per share to new investors purchasing our common stock in the offering at an initial public offering price of $14.00 per share, the mid-point of the range on the front cover of this prospectus. Dilution per share to new investors is determined by subtracting pro forma net tangible book value per share after this offering from the initial public offering price per share paid by a new investor. The following table illustrates the per share dilution without giving effect to the over-allotment option granted to the underwriters:

 

Assumed initial public offering price per share

      $ 14.00   

Pro forma net tangible book value per share as of March 31, 2012

   $ 0.01      

Increase in net tangible book value per share attributable to new investors

     2.95      
  

 

 

    

Pro forma net tangible book value per share after this offering

        2.96   
     

 

 

 

Dilution of net tangible book value per share to new investors

      $ 11.04   
     

 

 

 

Each $1.00 increase or decrease in the assumed public offering price of $14.00 per share, the mid-point of the price range set forth on the cover of this prospectus, would increase or decrease our pro forma net tangible book value by approximately $4.3 million, or approximately $0.22 per share, and the pro forma dilution per share to investors in this offering by approximately $0.78 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions payable by us. We may also increase or decrease the number of shares we are offering. The pro forma information discussed above is illustrative only and will adjust based on the actual public offering price, number of shares sold and other terms of this offering determined at pricing.

The following table sets forth, as of March 31, 2012, on the pro forma basis discussed above, the number of shares of common stock purchased from us, the approximate total consideration paid to us and average price per share paid to us by existing stockholders and to be paid by new investors purchasing shares of common stock in this offering. The table reflects an initial public offering price of $14.00 per share (the mid-point of the range on the front cover of this prospectus) and before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration    

Average

Price per
     Share     

 
     

Number

    

Percent

   

Amount

    

Percent

   

Existing stockholders

     14,694,722         76.2   $ 112,000,000         63.5   $ 7.62   

New investors

     4,600,000         23.8        64,400,000         36.5        14.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     19,294,722         100   $ 176,400,000         100  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

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If the underwriters exercise their over-allotment option in full to purchase 690,000 additional shares of common stock in this offering, the pro forma net tangible book value per share after the offering would be $3.31 per share, the increase in pro forma net tangible book value per share to existing stockholders would be $3.30 per share and the dilution to new investors purchasing shares in this offering would be $10.69 per share.

The above discussion and tables exclude:

 

   

2,046,683 shares issuable upon the exercise of options outstanding as of March 31, 2012 under our 2004 Plan at a weighted average exercise price of approximately $2.11 per share;

 

   

2,500,000 shares of common stock to be reserved for issuance under our 2012 Plan, which amount includes those shares reserved but unissued under our 2004 Plan at the completion of this offering; and

 

   

the exercise of (i) warrants to purchase 30,518 shares of our common stock and (ii) warrants to purchase 134,019 shares of our series CC preferred stock.

To the extent any of the foregoing options are exercised, there will be further dilution to investors participating in this offering.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected financial data in conjunction with our consolidated financial statements, the notes to the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The selected financial data included in this section are not intended to replace the consolidated financial statements and the related notes included elsewhere in this prospectus.

We derived the selected statements of operations data for the years ended December 31, 2009, 2010 and 2011 and the balance sheet data as of December 31, 2010 and 2011 from our audited consolidated financial statements appearing elsewhere in this prospectus. The selected statements of operations data for the three months ended March 31, 2011 and 2012 and the balance sheet data as of March 31, 2012 are derived from our unaudited financial statements appearing elsewhere in this prospectus. The selected statements of operations data for the year ended December 31, 2008 and the balance sheet data as of December 31, 2008 and 2009 are derived from our audited financial statements not included in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future.

 

    Year Ended December 31,     Three Months Ended
March 31,
 
         2008               2009               2010               2011          2011     2012  
    (in thousands, except per share data)  
Consolidated Statements of Operations Data:                              

Net sales

  $ 9,805      $ 19,417      $ 27,140      $ 45,049      $ 9,058      $ 13,518   

Cost of goods sold

    6,477        9,621        14,109        22,533        4,895        6,536   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    3,328        9,796        13,031        22,516        4,163        6,982   

Operating expenses:

           

Sales and marketing

    6,373        9,005        19,863        32,256        5,952        9,377   

Research and development

    5,767        8,253        9,381        9,341        1,941        2,992   

General and administrative

    3,870        5,583        9,792        14,867        3,101        4,965   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    16,010        22,841        39,036        56,464        10,994        17,334   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (12,682     (13,045     (26,005     (33,948     (6,831     (10,352

Other income (expense):

           

Interest income

    515        386        50        46        13        8   

Interest expense

    (1     (1     (7     (601            (479

Change in fair value of warrant liability

                         (252            (135

Foreign exchange gain (loss)

    1,081        372        366        (38     (42     (102
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before benefit (provision) for income taxes

    (11,087     (12,288     (25,596     (34,793     (6,860     (11,060

Benefit (provision) for income taxes

    77        (91     (23     (44     (11     (5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (11,010     (12,379     (25,619     (34,837     (6,871     (11,065

Adjustment to net loss resulting from preferred stock modification and extinguishment

                  982                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (11,010   $ (12,379   $ (24,637   $ (34,837   $ (6,871   $ (11,063
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net loss per share attributable to common stockholders - basic and diluted   $ (22.84   $ (24.46   $ (41.41   $ (43.06   $ (8.51   $ (13.61
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Weighted-average shares of common stock used in computing net loss per share attributable to common stockholders - basic and diluted(1)     482        506        595        809        807        813   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Pro forma net loss per share attributable to common stockholders - basic and diluted (unaudited) (1)         $ (2.84     $ (0.75
       

 

 

     

 

 

 
Weighted average shares of common stock used in computing pro forma net loss per share attributable to common stockholders - basic and diluted (unaudited) (1)           12,278          14,692   
       

 

 

     

 

 

 

 

(1)

See Notes 2 and 15 to our audited consolidated financial statements for an explanation of the calculations of our basic and diluted net loss per share of common stock attributable to common stockholders and pro forma net loss per share of common stock attributable to common stockholders.

 

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    As of December 31,     As of
March 31,
2012
 
         2008               2009               2010              2011         
    (in thousands)  
                               

Consolidated Balance Sheet Data:

         

Cash and cash equivalents

  $ 7,816      $ 5,590      $ 5,809      $ 14,972      $ 19,447   

Short-term investments

    25,785        13,876        10,713              

  

Working capital

    35,531        22,232        17,384        13,520       
13,418
  

Assets

    38,616        29,684        27,977        31,470        37,723   

Notes payable, including current portion

                         7,213        18,774   

Redeemable convertible preferred stock

    64,542        64,542        83,878        109,540        109,540   

Stockholders’ (deficit) equity

  $ (28,453   $ (40,641   $ (64,423   $ (98,734   $ (109,523

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under “Risk Factors.”

Overview

Tria Beauty brings clinically-proven light-based aesthetic medical technologies out of the physician’s office and into the home. We sell easy-to-use, FDA-cleared medical devices to consumers that deliver results comparable to professional aesthetic treatments at a fraction of the cost. Our net sales have grown from $9.8 million in 2008 to $45.0 million in 2011. We were originally incorporated in California in January 2003 under the name SpectraGenics, Inc. We changed our name to Tria Beauty, Inc. in July 2008 and reincorporated in Delaware in August 2010.

We have developed and market rechargeable consumer hand-held devices that are safe and effective, yet simple to use. Our two current devices on the market are the Hair Removal Laser and Skin Perfecting Blue Light. The Hair Removal Laser, our leading product, is a diode laser device that provides permanent reduction in hair regrowth comparable to devices used in a physician’s office. It was cleared by the FDA in 2005 as a prescription device. In 2008, we obtained FDA clearance to market the device over the counter for home use. Our Skin Perfecting Blue Light delivers high-intensity blue light that inhibits acne-causing bacteria to treat mild to moderate acne comparable to phototherapy performed in a physician’s office. In January 2010, we obtained clearance to market the device over the counter for home use. Our most advanced product under development is our Skin Rejuvenating Laser, a fractional non-ablative laser device designed to enable our entry into the anti-aging market. We received Health Canada clearance in April 2012 to market the device in Canada for the treatment of wrinkles, skin discoloration and rough skin and expect to obtain European CE marking and to begin selling this device outside the United States in the second half of 2012. We believe that our pivotal clinical studies will support a 2012 FDA application for over-the-counter, or OTC, treatment of periorbital wrinkles (crow’s feet), perioral wrinkles (wrinkles around the mouth), dyschromia (uneven pigmentation) and textural irregularities like tactile roughness, for which fractional non-ablative technology has become an accepted treatment standard. We also believe that these clinical studies will demonstrate that our device has safety and effectiveness results comparable to those obtained by fractional non-ablative laser treatments in a physician’s office.

We sell our products outside of the United States in Japan, South Korea, Canada, the United Kingdom, Germany and Spain. We intend to grow our business further in these geographies by fully deploying our multi-channel distribution model, which consists of both direct and indirect sales channels. Additionally, we intend to selectively expand our international presence into new geographies that offer the potential for significant demand for our products. We initially began selling our Hair Removal Laser in Japan, which accounted for the vast majority of our revenue until our U.S. OTC launch in 2008. Since then, the United States and Japan have been our two largest markets, with sales in the United States generally accounting for an increasing percentage of our net sales over time. Sales in North America, primarily from the United States, comprised 45% and 65% of our net sales for the years ended December 31, 2010 and December 31, 2011, respectively and 74% for the quarter ended March 31, 2012.

We have consistently grown our sales. Our sales have increased from $9.8 million in 2008 to $45.0 million in 2011, representing a compound annual growth rate of 66% and over 90% annual average unit growth rate. During this same time frame, our net losses have increased from $11.0 million to $34.8 million, a 47% compound annual increase. Throughout this timeframe, we have strategically sought to reach a broader group of consumers by pricing our products at more attractive retail price points. As a result, we have introduced new versions of our Hair Removal Laser at lower average costs to manufacture, allowing us to reduce our average selling prices while adding features that we believe make the product increasingly attractive to consumers. Following FDA clearance in 2008, we commercially launched our Hair Removal Laser in the United States at a price of $995. Our next generation model, introduced in the United States in 2009, sold for $595 and increased

 

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the energy delivery from one to three settings. Our most recent model, introduced in 2011, retails in the United States for $395 and includes an increased treatment spot size and five adjustable energy delivery settings.

We have achieved year-over-year quarterly sales growth for the past 13 consecutive quarters. Since our inception, we have incurred losses and negative cash flow from our operations. Our net losses were $12.4 million, $25.6 million and $34.8 million in the years ended December 31, 2009, 2010 and 2011, respectively, and $11.1 million for the quarter ended March 31, 2012. For the year ended December 31, 2011, we used $32.4 million of cash from our operating activities, and $7.4 million for the quarter ended March 31, 2012. At December 31, 2011 and March 31, 2012, we had accumulated deficits of $101.8 million and $112.8 million, respectively. We expect to continue to incur losses as we invest in building the market for at-home light-based skincare devices through our sales and marketing activities, expanding our development of new products and expanding our international sales geographically. Historically, we have funded our operations primarily from proceeds from issuances of common stock and redeemable convertible preferred stock and borrowings under our debt facilities. As of March 31, 2012, we had $20.0 million outstanding under a $27.0 million debt facility with the remaining $7.0 million available under certain circumstances. See “—Loan Agreements.”

Basis of Presentation

Sales

We currently generate substantially all of our sales from our Hair Removal Laser. We sell our products directly to individual consumers through our e-commerce website at www.triabeauty.com, e-commerce affiliates, such as www.amazon.com and our infomercials. The significant majority of purchases made through these channels of distribution are paid for by credit card. We also sell our products wholesale through a number of indirect sales channels, including on television through QVC, and at physical locations and websites of select high-end retailers and physician offices. Our mix of sales between direct and wholesale was approximately 86% and 14%, respectively, for the year ended December 31, 2011.

We believe that the long-term outlook for our sales will continue to benefit from several factors. First, we are in the early stages of penetrating our target markets. While we have grown our net sales at a compound annual growth rate of 66% from 2008 to 2011 and have increased our unit sales from approximately 16,000 in 2008 to over 116,000 in 2011, our sales represent only a small percentage of the potential markets we target. We intend to continue implementing our multi-channel sales and marketing strategy, which is in various stages of deployment in existing geographies. We also intend to continue to expand into new international geographies by leveraging our experience and existing infrastructure. We further intend to continue to create new products and improve existing ones by leveraging our proven technology platforms and product design capability. We anticipate introducing our Skin Rejuvenating Laser outside of the United States in the second half of 2012, and expect to continue to develop other light-based skincare products to provide consumers with a comprehensive and complementary portfolio of skincare solutions.

Sales by Geography

We generate sales in North America, Asia Pacific, or APAC, and in the rest of the world. In North America, most of our sales are generated in the United States, which represents our largest single market, with the balance generated in Canada. In APAC, our sales are primarily generated in Japan, our second largest market, and a smaller amount is generated in South Korea. In the rest of the world, the majority of our sales are generated in Spain and in the United Kingdom. Sales are attributed to a particular region based on the location to which we ship our customers’ products. Our North American market generally involves lower margins (and lower average selling prices) than international markets.

The percentage of our total sales generated in North America has increased from 24% in 2008 to 65% in 2011 and to 74% in the three months ended March 31, 2012, primarily as a result of significant sales growth in the U.S. market. We anticipate that our sales in North America will continue to grow, but through our efforts to

 

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expand into new international geographies and to grow existing international geographies, APAC and the rest of the world will grow faster than North America and make up a larger percentage of our net sales.

The following presents our net sales shipped to customers in each geographic region, as a percentage of total net sales:

 

     Year Ended December 31,     Three Months
Ended
March 31,
 
     2008     2009     2010     2011     2011     2012  
                             (unaudited)  

North America

     24     45     45     65     60     74

APAC

     58        38        51        34        39        24   

Rest of World

     18        17        4        1        1        2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

     100     100     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of Goods Sold

Cost of goods sold consists of costs of finished products purchased from our third-party manufacturer, labor, material and overhead involved in our internal manufacturing processes, shipping costs, warranty estimates, warehouse personnel costs and warehouse storage costs.

We outsource the assembly of our Hair Removal Laser to Flextronics, a third-party contract manufacturer who sources the raw materials, parts, components, subassemblies and packaging products from our list of qualified suppliers. Using a third-party manufacturer allows us to fulfill demand without corresponding capital expenditures or procurement and storage of raw materials, and allows us to maintain a limited inventory. Because our current production volume of our Skin Perfecting Blue Light is not large enough to warrant a third-party contract manufacturer, we manufacture that product in-house at our headquarters in California. We anticipate transitioning the manufacture of our Skin Perfecting Blue Light to a third-party contract manufacturer once product sales warrant such a transition.

We anticipate that our cost of goods sold will increase in absolute dollars as we grow our sales. We also believe that cost of goods sold as a percentage of net sales will decrease as we continue to reduce the manufacturing costs of our Hair Removal Laser and Skin Perfecting Blue Light. We anticipate accomplishing this by reducing the costs of our components and implementing lower cost designs, by reducing our packaging and freight expenses, and by outsourcing the manufacturing of our Skin Perfecting Blue Light, as well as by introducing our Skin Rejuvenating Laser, which we believe will be produced with lower costs in relation to sales.

Operating Expenses

Sales and Marketing

Our sales and marketing expenses include costs that are of a fixed nature that do not vary significantly with sales volumes, as well as variable costs that can be more quickly adjusted in conjunction with fluctuations in sales. Fixed sales and marketing expenses primarily consist of labor-related costs, including salaries, benefits, stock-based compensation, consulting and professional fees. Fixed costs also include the costs of developing advertisements used internationally and the production of television infomercials. Variable sales and marketing expenses primarily include the costs of placement of television infomercials, online search and advertising fees, payments to affiliates on sales made through their websites, credit card processing fees, public relations, marketing agency fees and other promotional expenses. We expect to continue to invest in sales and marketing activities to grow sales, increase brand awareness and educate consumers about light-based skincare devices. We expect that as our brand grows in recognition, and as fixed costs are leveraged over a larger sales base, sales and marketing expenses will continue to increase in absolute dollars but decrease as a percentage of sales.

 

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Research and Development

Research and development expenses primarily consist of personnel-related salaries, benefits, stock-based compensation, consulting and professional fees, materials and supplies, depreciation and facilities and related costs involved in research and development. Research and development includes product development costs for new or improved devices, as well as regulatory and clinical trial expenditures for new or extended claims and clearances. We expense all research and development costs in the periods in which they are incurred.

We intend to continue to invest in bringing light-based technologies into the home by designing and developing new products, including the Skin Rejuvenating Laser, and investing in clinical studies to prove the products’ safety and effectiveness. Accordingly, we expect our research and development expense to increase in absolute dollars but to decrease as a percentage of sales.

General and Administrative

General and administrative expense primarily consists of personnel-related salaries, benefits and stock-based compensation for administrative, human resources, information technology support, finance and accounting. This category also includes legal expenses, professional fees, insurance, depreciation, technology related costs, facilities and related costs. We anticipate we will incur increased personnel expenses, professional service fees, including legal and audit, investor relations, cost of compliance with securities laws and regulations, and higher director and officer insurance costs as a result of becoming a public company. In addition, we expect our general and administrative expenses to increase in absolute dollars as we continue to add personnel to support the growth of our business internationally but to decrease as a percentage of sales.

Other Income (Expense)

Interest Income

Interest income includes interest earned on cash and cash equivalents and short-term investments.

Interest Expense

Interest expense includes the interest expense associated with our long-term debt and amortization of deferred financing costs. Our interest expense varies based on the level of debt outstanding.

Foreign Exchange Gain (Loss)

The functional currency for most of our foreign operations is the relevant local currency. We have translated the financial statements of our foreign subsidiaries into U.S. dollars using the exchange rate in effect at the balance sheet date for our asset and liability accounts and using the average exchange rate for the period for our revenue, cost and expense accounts. We record gains and losses resulting from translating the financial statements in the accumulated other comprehensive loss account in stockholders’ (deficit) equity. We record transaction gains or losses in net loss in the period in which they occur.

Results of Operations

The following tables set forth, for the periods presented, our consolidated statements of operations. In the tables below and throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” consolidated statements of operations data for the years ended December 31, 2009, 2010 and 2011 have been derived from our audited consolidated financial statements and the consolidated statements of operations data for the three month periods ended March 31, 2011 and 2012 have been derived from our unaudited interim consolidated financial statements, each of which are included elsewhere in this prospectus. The information contained in the tables below should be read in conjunction with our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

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The following table sets forth, for the periods presented, the amounts of the listed items from our consolidated statements of operations.

Comparison of Three Months Ended March 31, 2011 and 2012

 

     Three Months Ended              
     March 31,     Change  
     2011     2012     $     %  
     (unaudited)              
     (in thousands)  

Net sales

     $9,058        $13,518        $4,460        49

Cost of goods sold

     4,895        6,536        1,641        34   
  

 

 

   

 

 

   

 

 

   

Gross profit

     4,163        6,982        2,819        68   

Operating expenses:

        

Sales and marketing

     5,952        9,377        3,425        58   

Research and development

     1,941        2,992        1,051        54   

General and administrative

     3,101        4,965        1,864        60   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     10,994        17,334        6,340        58   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (6,831     (10,352     (3,521     52   

Other income (expense):

        

Interest income

     13        8        (5     (38

Interest expense

            (479     (479     (100

Change in fair value of warrant liability

            (135     (135     (100

Foreign exchange gain (loss)

     (42     (102     (60     143   
  

 

 

   

 

 

   

 

 

   

Loss before benefit (provision) for income taxes

     (6,860     (11,060     (4,200     61   

Benefit (provision) for income taxes

     (11     (5     6        (55
  

 

 

   

 

 

   

 

 

   

Net loss

     $(6,871     $(11,065     $(4,194     61
  

 

 

   

 

 

   

 

 

   

Net Sales

Net sales increased by $4.5 million, or 49%, to $13.5 million in the three months ended March 31, 2012 as compared to $9.1 million in the three months ended March 31, 2011. The growth in sales for the three months

ended March 31, 2012 was primarily due to higher sales in North America, our most developed region, where sales increased to $10.0 million, up $4.5 million or 82% as compared to $5.5 million in the year ago period. Unit sales volume of our Hair Removal Laser in North America more than doubled, partially offset by a reduction in the price of our Hair Removal Laser from $595 to our target retail price in the United States of $395, made possible by the introduction of our lower-cost third generation Hair Removal Laser. Sales benefited from continued development of channels of distribution, particularly in television infomercial programs and eCommerce and from improved efficiencies gained from our marketing programs. A $0.2 million increase in sales in Europe was offset by a similar decline in sales in APAC. During the quarter, we increased the investment in direct response television in Japan and continued to implement marketing programs that we believe have been successful in North America.

Cost of Goods Sold and Gross Profit

Costs of goods sold increased by $1.6 million, to $6.5 million in the three months ended March 31, 2012, up from $4.9 million in the three months ended March 31, 2011. Gross profit increased by $2.8 million, to $7.0 million in the three months ended March 31, 2012, up from $4.2 million in the three months ended March 31, 2011. The increase in our cost of goods sold and our gross profit was due to higher sales volume of our Hair Removal Laser in 2012 as compared to 2011. As a percentage of sales, cost of goods sold decreased to 48% for the three months ended March 31, 2012, compared to 54% of sales for the three months ended March 31, 2011

 

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and gross profit increased to 52% of sales for the three months ended March 31, 2012, compared to 46% of sales for the three months ended March 31, 2011. The increase in gross profit margin for the period was mainly due to the impact of a significant increase in the percentage of sales into our highest margin channels of distribution and from the impact to the prior year’s quarter of a large one-time promotional sale on QVC (a televised home shopping provider) for the three months ended March 31, 2011 that did not occur in 2012. The increase in gross profit margin was partially reduced by the geographic mix of sales that included a larger percentage of lower margin North American sales.

Operating Expenses

Sales and Marketing

Sales and marketing costs increased by $3.4 million, or 58%, to $9.4 million in the three months ended March 31, 2012 as compared to $6.0 million in the three months ended March 31, 2011. This increase was primarily attributable to investments in advertising expenses to acquire new customers, particularly the use of television infomercial programs in North America and Asia and the use of celebrity spokespersons during the period.

Research and Development

Research and development costs increased by $1.1 million, or 54%, to $3.0 million in the three months ended March 31, 2012 as compared to $1.9 million in the three months ended March 31, 2011. The increase in our research and development expenses was primarily due to the costs incurred for the development of our Skin Rejuvenating Laser during the period.

General and Administrative

General and administrative costs increased by $1.9 million, or 60%, to $5.0 million in the three months ended March 31, 2012 as compared to $3.1 million in the three months ended March 31, 2011. The increase in our general and administrative expenses was primarily due to higher legal fees, net of reimbursement payments received under our liability insurance policy, related to ongoing litigation described elsewhere in this prospectus, and an increase in headcount to support our growth.

Other Income (Expense)

Other expense increased by $0.7 million to $0.7 million in the three months ended March 31, 2012 as compared to $29,000 in the three months ended March 31, 2011. The increase in our other expense was due primarily to an increase in interest expense of $0.5 million related to the 2012 Facility (See “—Loan Agreements”).

 

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Comparison of the Years Ended December 31, 2009, 2010 and 2011

The following table shows the amounts of the listed items from our statements of operations for the periods presented, showing period-over-period changes.

 

    Year Ended December 31,        2009 vs. 2010     
        2009             2010             2011           2010 vs. 2011  
   

( in thousands)

 

Net sales

  $ 19,417      $ 27,140      $ 45,049      $ 7,723        40   $ 17,909        66

Cost of goods sold

    9,621        14,109        22,533        4,488        47        8,424        60   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Gross profit

    9,796        13,031        22,516        3,235        33        9,485        73   

Operating expenses:

             

Sales and marketing

    9,005        19,863        32,256        10,858        121        12,393        62   

Research and development

    8,253        9,381        9,341        1,128        14        (40       

General and administrative

    5,583        9,792        14,867        4,209        75        5,075        52   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total operating expenses

    22,841        39,036        56,464        16,195        71        17,428        45   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Loss from operations

    (13,045     (26,005     (33,948     (12,960     99        (7,943     31   

Other income (expense):

             

Interest income

    386        50        46        (336     (87     (4     (8

Interest expense

    (1     (7     (601     (6     600        (594     (849

Change in fair value of warrant liability

                  (252                   (252     (100

Foreign exchange gain (loss)

    372        366        (38     (6     (2     (404     (110
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Loss before provision for income taxes

    (12,288     (25,596     (34,793     (13,308     108        (9,197     (36

Provision for income taxes

    (91     (23     (44     68        (75     (21     (91
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net loss

  $ (12,379   $ (25,619   $ (34,837   $ (13,240     107   $ (9,218     (36 )% 
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net Sales

2010 compared to 2011. Sales increased by $17.9 million, or 66%, to $45.0 million for the year ended December 31, 2011 as compared to $27.1 million for the year ended December 31, 2010. The growth in sales was primarily due to a near doubling of the number of units of our Hair Removal Laser that we sold worldwide, from approximately 59,000 units in 2010 to 116,000 units in 2011. This increase resulted from several factors, including a significant increase in spending on our direct response television spots, various digital marketing programs and a reduction in the price of our Hair Removal Laser from $595 to our target retail price in the United States of $395, made possible by the introduction of our lower-cost third generation Hair Removal Laser. Although APAC grew in sales for the year, the rate of growth declined due to the market for home-use hair removal devices becoming more competitive. In response, in late 2011, we made changes to our marketing approach to implement various e-commerce and other strategies similar to those that had been implemented in North America, including the launch of direct response television in an effort to stimulate sales. Sales in the rest of the world were impacted by our decision to exit certain markets that had been historically served by distributors in preparation for our entry on a direct basis.

2009 compared to 2010. Sales increased by $7.7 million, or 40%, to $27.1 million for the year ended December 31, 2010, compared to $19.4 million for the year ended December 31, 2009. The increase was primarily due to an increase in unit volume from approximately 38,000 units in 2009 to 59,000 units in 2010 due to growing demand for our Hair Removal Laser through direct to consumer e-commerce channels, driven by increased marketing spending and a sales price reduction, partially offset by a decline in the rest of the world due to lower distributor sales in Europe as we exited certain markets that had been historically served by distributors in preparation for our entry on a direct basis.

Cost of Goods Sold

2010 compared to 2011. Costs of goods sold increased by $8.4 million, or 60%, to $22.5 million for the year ended December 31, 2011, up from $14.1 million for the year ended December 31, 2010. The increase in our cost

 

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of goods sold was primarily driven by higher sales volume of our Hair Removal Laser in 2011 as compared to 2010. As a percentage of sales, cost of goods sold decreased to 50% for the year ended December 31, 2011, compared to 52% of sales for the year ended December 31, 2010. The decrease in cost of goods sold as a percentage of sales for the period was primarily due to a benefit of two percent to gross margins related to an increase in the amount of refurbished inventory that was sold for the period resulting in a gain, and one percent related to a reimbursement from a customer holding consigned goods a portion of which had been physically lost. These improvements were partially offset by the impact of our geographic mix of sales that included a larger percentage of lower margin North American sales, inventory write-downs of $1.2 million and introductory pricing for our Skin Perfecting Blue Light.

2009 compared to 2010. Cost of goods sold increased by $4.5 million, or 47%, to $14.1 million for the year ended December 31, 2010, compared to $9.6 million for the year ended December 31, 2009. The increase was primarily due to an increase in the volume of our Hair Removal Laser sold during 2010, partially offset by lower unit costs due to a redesign of the product. Cost of goods sold as a percentage of sales increased from 50% for the year ended December 31, 2009 to 52% for the year ended December 31, 2010, primarily due to higher warranty costs related to a defective battery.

Gross Profit

2010 compared to 2011. Gross profits increased by $9.5 million, or 73%, to $22.5 million for the year ended December 31, 2011, up from $13.0 million for the year ended December 31, 2010. As a percentage of sales, our gross profit was 50% for the year ended December 31, 2011, compared to 48% of sales for the year ended December 31, 2010. The increase in the gross profit margin for the period was primarily due to a benefit of two percent to gross margins related to an increase in the amount of refurbished inventory that was sold for the period resulting in a gain, and one percent related to a reimbursement from a customer holding consigned goods a portion of which had been physically lost. These improvements were partially offset by the impact of our geographic mix of sales that included a larger percentage of lower margin North American sales, inventory write-down’s of $1.2 million and introductory pricing for our Skin Perfecting Blue Light.

2009 compared to 2010. Gross profit increased by $3.2 million, or 33%, to $13.0 million for the year ended December 31, 2010, up from $9.8 million for the year ended December 31, 2009. The increase in our gross profit was due to higher sales volume of our Hair Removal Laser in 2010 as compared to 2009. As a percentage of sales, gross profit decreased to 48% for the year ended December 31, 2010 from 50% for the year ended December 31, 2009, primarily due to higher warranty costs related to a defective battery.

Operating Expenses

Sales and Marketing

2010 compared to 2011. Sales and marketing costs increased by $12.4 million, or 62%, to $32.3 million in the year ended December 31, 2011 as compared to $19.9 million in the year ended December 31, 2010. This increase was primarily attributable to advertising expenses incurred through various digital marketing, traditional print advertising, promotional campaigns, the development of new television infomercial programs in North America and Asia, and increased headcount in support of the growth in our marketing activities.

2009 compared to 2010. Sales and marketing expenses increased by $10.9 million, or 121%, to $19.9 million for the year ended December 31, 2010, as compared to $9.0 million for the year ended December 31, 2009. The increase was primarily due to higher spending in support of customer acquisition through our direct-to-consumer channel, launch costs associated with our Skin Perfecting Blue Light, expenses incurred in the entry into the South Korean and Canadian markets and an increase in headcount to support the growth in marketing activities.

Research and Development

2010 compared to 2011. Research and development costs decreased by $0.1 million to $9.3 million in the year ended December 31, 2011 as compared to $9.4 million in the year ended December 31, 2010. The decrease in our

 

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research and development expenses was primarily due to the completion of the development of our third generation Hair Removal Laser, which was partially offset by initial spending on the development of our Skin Rejuvenating Laser. As a percentage of sales, research and development costs were 20.7% in 2011 as compared to 34.6% in 2010.

2009 compared to 2010. Research and development expenses increased by $1.1 million, or 14%, to $9.4 million for the year ended December 31, 2010, as compared to $8.3 million for the year ended December 31, 2009. The increase was primarily due to an increase in headcount and professional services associated with the development of our third generation Hair Removal Laser. As a percentage of sales, research and development costs were 35% in 2010 as compared to 43% in 2009.

General and Administrative

2010 compared to 2011. General and administrative costs increased by $5.1 million, or 52%, to $14.9 million in the year ended December 31, 2011 as compared to $9.8 million in the year ended December 31, 2010. The increase in our general and administrative expenses was primarily due to higher legal fees, related to ongoing litigation described elsewhere in this prospectus, and an increase in headcount to support our growth.

2009 compared to 2010. General and administrative expenses increased by $4.2 million, or 75%, to $9.8 million for the year ended December 31, 2010, as compared to $5.6 million for the year ended December 31, 2009. The increase in our general and administrative expenses was primarily due to higher legal fees related to ongoing litigation as described elsewhere in this prospectus, as well as increased headcount to support our growth.

Other Income (Expense)

2010 compared to 2011. Other income (expense) decreased from income of $0.4 million to expense of $0.8 million, a $1.2 million decrease in the year ended December 31, 2011 as compared to the year ended December 31, 2010. This decline was primarily due to higher interest expense of $0.6 million related to the 2011 term loan with Silicon Valley Bank. In addition, the foreign currency gain of $0.4 million in 2010 turned to a small loss in 2011, primarily due to unfavorable changes in currency exchange rates related to payable amounts denominated in U.S. dollars compared to our subsidiaries’ functional currencies.

2009 compared to 2010. Other income (expense) was $0.3 million lower for the year ended December 31, 2010 as compared to December 31, 2009, primarily due to a reduction in interest income as we had less cash to invest throughout the year.

Unaudited Quarterly Results of Operations

The following tables present our unaudited quarterly consolidated results of operations for the nine quarters ended March 31, 2012, as well as the percentage that each line item represented of net sales. This unaudited quarterly consolidated information has been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, the statements of operations data includes all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. You should read this table in conjunction with our financial statements and the related notes located elsewhere in this prospectus. The results of operations for any quarter are not necessarily indicative of the results of operations for any future periods.

 

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    Three Months Ended  
    March 31,
2010
    June 30,
2010
    September 30,
2010
    December 31,
2010
    March 31,
2011
    June 30,
2011
    September 30,
2011
    December 31,
2011
    March 31,
2012
 
    (in thousands, unaudited)  

Net sales

  $ 5,754         $ 5,314         $ 7,400         $ 8,672         $ 9,058         $ 11,949         $ 11,473         $ 12,569         $ 13,518   

Cost of goods sold

    2,802        2,515        3,762        5,030        4,895        5,287        6,360        5,991        6,536   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    2,952        2,799        3,638        3,642        4,163        6,662        5,113        6,578        6,982   

Operating expenses:

                 

Sales and marketing

    4,241        4,564        4,962        6,096        5,952        7,788        8,873        9,643        9,377   

Research and development

    2,128        2,520        2,562        2,171        1,941        2,004        2,501        2,895        2,992   

General and administrative

    2,211        2,999        2,254        2,328        3,101        3,800        3,642        4,324        4,965   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    8,580        10,083        9,778        10,595        10,994        13,592        15,016        16,862        17,334   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (5,628     (7,284     (6,140     (6,953     (6,831     (6,930     (9,903     (10,284     (10,352

Other income (expense):

                 

Interest income

    22        6        13        9        13        10        10        13        8   

Interest expense

                  (2     (5            (101     (207     (293     (479

Change in fair value of warrant liability

                                                     (252     (135

Foreign exchange gain (loss)

    (61     49        296        82        (42     62        (29     (29     (102
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (5,667     (7,229     (5,833     (6,867     (6,860     (6,959     (10,129     (10,845     (11,060

Provision for income taxes

    (11                   (12     (11     (3     (7     (23     (5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (5,678   $ (7,229   $ (5,833   $ (6,879   $ (6,871   $ (6,962   $ (10,136   $ (10,868   $ (11,065
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Three Months Ended  
    March 31,
2010
    June 30,
2010
    September 30,
2010
    December 31,
2010
    March 31,
2011
    June 30,
2011
    September 30,
2011
    December 31,
2011
    March 31,
2012
 

Net sales

    100     100     100     100     100     100     100     100     100

Cost of goods sold

    49        47        51        58        54        44        55        48        48   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    51        53        49        42        46        56        45        52        52   

Operating expenses:

                 

Sales and marketing

    74        86        67        70        66        65        77        77        69   

Research and development

    37        47        35        25        21        17        22        23        22   

General and administrative

    38        56        30        27        34        32        32        34        37   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    149        189        132        122        121        114        131        134        128   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (98     (136     (83     (80     (75     (58     (86     (82     (77

Other income (expense):

                 

Interest income

                                                              

Interest expense

                                       (1)        (2     (2     (4

Change in fair value of warrant liability

                                                     (2     (1

Foreign exchange gain (loss)

    (1     1        4        1               1                      (1)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (99     (135     (79     (79     (75     (58     (88     (86     (82

Provision for income taxes

                                                              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (99 )%      (135 )%      (79 )%      (79 )%      (75 )%      (58 )%      (88 )%      (86 )%      (82 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We believe our business is affected by seasonal trends, but the full impact of these trends is difficult to measure due to the developing nature of our markets, our relatively short operating history and our sales growth.

In the four quarters ended June 30, 2011, our sales for each of those quarters grew sequentially mainly as a result of increasing acceptance of our Hair Removal Laser in the North America and APAC regions, increased spending on direct response television spots and in various digital marketing efforts and because of the introduction in March 2011 of the third generation of our Hair Removal Laser at more attractive retail price points. Sales in the three months ended September 30, 2011 were down slightly compared with the previous quarter primarily because the growth in the North American market was offset by a slow-down in APAC as marketing strategies were restructured to deal with a more competitive home-use hair removal device market. Sales in the two quarters preceding March 31, 2012 increased because of higher North American sales.

Factors affecting gross profit as a percentage of sales during the periods listed generally included a reduction in manufacturing costs, lowered prices at retail, promotionally priced sales programs and a change in the geographic mix of sales to include a greater number of lower margin North American sales. Gross profit as a percentage of sales declined in the three months ended September 30, 2010 to 49% as compared with the previous quarter because we reduced prices prior to realizing the cost reductions from outsourcing the manufacture of our Hair Removal Laser. Gross profit further declined to 42% in the three months ended December 31, 2010 due to a shift in geographic revenue mix resulting from significant growth in North America.

 

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Due to our pricing strategy in the Japanese market, gross profit as a percentage of sales in Japan is normally higher than in the North American market. Gross profit as a percentage of sales increased in the quarter ended March 31, 2011 due to a reduction in the cost of the third generation Hair Removal Laser. The gross profit percentage again improved in the quarter ended June 30, 2011 reflecting additional benefits from the cost reduction mentioned above and from seasonal growth in APAC sales for the quarter. The gross profit percentage declined in the quarter ended September 30, 2011 due to an unfavorable mix of sales from the lower margin North America region and from inventory reserves that were established for excess Skin Perfecting Blue Light inventory. In the quarter ended December 31, 2011, gross profit as a percentage of sales benefited from the sale of refurbished inventory previously written off. In the quarter ended March 31, 2012, gross profit as a percentage of sales was the same as the previous quarter. Cost reductions were offset by continued sales growth in the lower margin North American region.

The increases in sales and marketing expenses as a percentage of sales are generally due to higher spending in direct response television spots and in various digital marketing efforts, the launch of new products, geographies and channels of distribution and a larger percentage of sales in North America as compared to APAC and the rest of the world. In the quarter ended June 30, 2010, sales and marketing expenses as a percentage of sales increased to 86% due to the cost of a celebrity promotional program that occurred during the quarter. The increase in the quarters ended September 30, 2011 and December 31, 2011 were due to higher spending on direct response television. The decrease in the quarter ended March 31, 2012 was due to volume leverage and improved efficiencies in the North American region. On an absolute dollars basis, our research and development expenses remain relatively constant, with fluctuations due to periodic spending on development projects or in clinical studies. On a percentage basis, our research and development expenses have declined as sales have increased. General and administrative expenses generally fluctuate on an absolute dollars basis based on periodic spending on legal fees related to ongoing litigation as described elsewhere in this prospectus and have remained relatively constant as a percentage of sales.

Liquidity and Capital Resources

Since our inception, we have incurred losses and negative cash flow from our operations. For the year ended December 31, 2011 and the three months ended March 31, 2012, we incurred net losses of $34.8 million and $11.1 million, respectively, and we used $32.4 million and $7.4 million of cash flows from our operating activities. At December 31, 2011 and March 31, 2012, we had accumulated deficits of $101.8 million and $112.8 million, respectively.

As of December 31, 2011 and March 31, 2012, we had working capital of $13.5 million and $13.4 million, respectively. Historically, we have funded our operations primarily from proceeds from issuances of redeemable convertible preferred stock and borrowings under our debt facilities. As of March 31, 2012, we had a loan and security agreement with three financial institutions to be used for general corporate purposes under which we drew down $20.0 million and we have an additional $7.0 million available to us if we meet certain milestones. See “—Loan Agreements.”

Our primary uses of cash include expenditures made in order to develop our sales channels (both domestically and internationally) and for our increased general and administrative needs for working capital to support our sales growth as well as for research and development activities for new and improved products. We believe that our existing cash, cash equivalents and short-term investments (prior to the proceeds from this offering) together with our new debt facility will be sufficient to fund our operations for at least the next 12 months. However, there can be no assurance that we will be able to meet our operational plan and adequately fund our operations or ultimately achieve profitability. If we cannot meet our objectives, we may need to curtail planned activities to reduce costs, and doing so will likely have an unfavorable effect on our ability to execute on our intended business objectives.

Our ability to continue to meet our obligations and to achieve our business objectives is dependent primarily upon our ability to execute on our business plan, including generating sufficient revenues and cash flows from operating activities. If we are unable to execute on our business plan and adequately fund our operations, we may need to seek additional financing and/or reduce our investment in growing our business.

 

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Summary Statement of Cash Flows

Summary cash flow information for the years ended December 31, 2009, 2010 and 2011 and the three months ended March 31, 2011 and 2012 is set forth below.

 

     Year Ended December 31,     Three Months Ended
March 31,
 
     2009     2010     2011     2011     2012  
          

(unaudited)

 
     (in thousands)  

Net cash and cash equivalents (used in) provided by:

          

Operating activities

   $ (13,174   $ (22,731   $ (32,395   $ (2,761   $ (7,395

Investing activities

     11,046        1,952        8,757        (1,328     (225

Financing activities

     8        20,807        32,734       
5,682
  
   
12,110
  

Effect of exchange rate changes on cash and cash equivalents

     (106     191        67        (12     (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

   $ (2,226   $ 219      $ 9,163      $ 1,581      $ 4,475   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows for the Three Months Ended March 31, 2011 and 2012

Operating activities

For the three months ended March 31, 2012, net cash used in operating activities was $7.4 million and consisted primarily of a net loss of $11.1 million, partially offset by $1.0 million in non-cash items and an increase in cash of $2.6 million due to changes in operating assets and liabilities relating primarily to an increase in accounts payable. Included in our non-cash items was a $0.3 million charge for non-cash stock-based compensation expense.

For the three months ended March 31, 2011, net cash used in operating activities was $2.8 million and consisted primarily of a net loss of $6.9 million, partially offset by $0.3 million in non-cash items and an increase in cash of $3.8 million due to changes in operating assets and liabilities. Included in our non-cash items was a $0.1 million charge for non-cash stock-based compensation expense.

Net cash (used in) provided by investing activities

For the three months ended March 31, 2012, net cash used in investing activities was $0.2 million and consisted primarily of the purchase, sale and maturities of short-term investments. The amounts related to investments in capital expenditures, including tooling for the manufacture of our Hair Removal Laser and Skin Rejuvenating Laser, were $0.2 million.

For the three months ended March 31, 2011, net cash used in investing activities was $1.3 million and consisted primarily of the purchase, sale and maturities of short-term investments. The amounts related to investments in capital expenditures, including tooling for the manufacture of our Hair Removal Laser and Skin Rejuvenating Laser, were $0.4 million.

Net cash provided by financing activities

For the three months ended March 31, 2012, net cash provided by financing activities totaled $12.1 million and consisted primarily of the net proceeds from a new loan facility (see “Loan Agreements”). For the three months ended March 31, 2011, net cash provided by financing activities totaled $5.7 million, primarily from the issuance of preferred stock.

Cash Flows for the Years Ended December 31, 2009, 2010 and 2011

Operating activities

For the year ended December 31, 2011, net cash used in operating activities was $32.4 million and consisted primarily of a net loss of $34.8 million, partially offset by $1.7 million in non-cash items and a net cash increase due to changes in our operating assets and liabilities of $0.7 million.

 

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For the year ended December 31, 2010, net cash used in operating activities was $22.7 million and consisted primarily of a net loss of $25.6 million, offset by $0.9 million in non-cash items and an increase in cash of $1.9 million due to changes in operating assets and liabilities.

For the year ended December 31, 2009, net cash used in operating activities was $13.2 million and consisted primarily of a net loss of $12.4 million, offset by $0.5 million in non-cash items and a decrease in cash of $1.3 million due to changes in operating assets and liabilities.

Net cash (used in) provided by investing activities

For the year ended December 31, 2011, net cash provided by investing activities was $8.8 million. This consisted primarily of the purchase, sale and maturities of short-term investments. The amounts related to investments in capital expenditures, including tooling for the manufacture of our Hair Removal Laser and Skin Perfecting Blue Light, were $1.9 million.

For the year ended December 31, 2010, net cash provided by investing activities totaled $2.0 million and consisted primarily of the net purchase, sale and maturities of short-term investments, less $1.0 million used for capital expenditures.

For the year ended December 31, 2009, net cash provided by investing activities totaled $11.0 million and consisted primarily of the net purchase, sale and maturities of short-term investments, less $0.9 million used for capital expenditures.

Net cash provided by financing activities

For the year ended December 31, 2011, net cash provided by financing activities totaled $32.7 million and consisted primarily of net proceeds from the issuance of preferred stock and from the proceeds of a term loan.

For the year ended December 31, 2010, net cash proceeds from financing activities totaled $20.8 million and consisted primarily of net proceeds from the issuance of preferred stock.

For the year ended December 31, 2009, net cash proceeds from financing activities were minimal and were the result of employees exercising options.

Contractual Obligations and Commitments

The following is a summary of our contractual obligations as of December 31, 2011:

 

     Payments Due by Period  
     Less than
1 Year
     1 to 3 Years      3 to 5 Years      More than
5  Years
     Total  
     (in thousands)  

Operating leases(1)

   $ 1,581       $ 2,640       $ 407       $  —       $ 4,628   

Purchase commitments

     6,401                                 6,401   

2011 Facility(2)

     2,413         4,800                         7,213   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,395       $ 7,440       $ 407       $  —       $ 18,242   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Represent our obligations to make payments under our non-cancelable lease agreements for our facilities in California, Japan and Korea.

(2)

The 2011 facility was fully paid off with proceeds from our January 2012 loan and security agreement described below (See “— Loan Agreements”).

Loan Agreements

In May 2011, we entered into a loan and security agreement with Silicon Valley Bank, or SVB (the “2011 Facility”). The loan agreement provided for a term loan of up to $8.0 million available in two separate tranches.

 

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The loan and security agreement was amended and restated in August 2011 to provide for our ability to borrow up to $2.0 million on a revolving basis. Additionally, we issued a warrant to SVB in May 2011 to purchase 42,160 shares of series CC preferred stock at $7.59 per share and a warrant to purchase 18,939 shares of common stock at $1.32 per share. In September 2011, we issued a warrant to SVB to purchase 10,822 shares of common stock at $1.39 per share. The fair value of these warrants resulted in a debt discount that is being amortized to interest expense over the term of the notes. The loan and credit facility was fully paid off with proceeds from our January 2012 loan and security agreement described below, but the warrants described above remain outstanding.

In January 2012, we entered into a loan and security agreement (the “2012 Facility”) with three financial institutions that provides up to $27.0 million to be used for general corporate purposes. When we entered into the 2012 Facility, we repaid in full the principal, plus accrued interest and the final payment fee due under the 2011 Facility. Borrowings under the 2012 Facility are collateralized by all of our assets, except intellectual property. Concurrent with the closing of the 2012 Facility, we borrowed $20.0 million of which $7.5 million was used to pay off the 2011 Facility, resulting in net proceeds of $12.3 million after expenses. Payments are due as follows: interest only for the first eleven months, followed by 30 equal monthly amounts for principal and interest. Interest on the unpaid principal balance is 9.36% per annum. In conjunction with entering into the 2012 Facility, we issued warrants to purchase 91,860 shares of series CC preferred stock at $7.59 per share. The fair value of these warrants resulted in a debt discount that is being amortized to interest expense over the term of the notes. Principal payments will be $0, $8.0 million, $8.0 million and $4.0 million in the years ending 2012, 2013, 2014 and 2015, respectively.

In addition to being the creditor to our 2011 Facility, SVB was one of the three financial institutions involved in the 2012 Facility. In accordance with the provisions of ASC 470, Debt, we determined that the terms associated with the exchange of SVB debt instruments were not significantly different and therefore this exchange was treated as a modification and accounted for accordingly. All unamortized fees and discount associated with the 2011 Facility are being amortized over the remaining term of the 2012 Facility using the interest method.

The remaining $7.0 million available under the 2012 Facility will be available to us if we launch our Skin Rejuvenating Laser before December 31, 2012 either in the United States or in both Canada and Europe, when our ability to borrow the $7.0 million expires. Payments on the $7.0 million, if borrowed, will be due as follows: interest only through December 31, 2012 (commencing once the borrowing has been made), followed by 30 equal monthly amounts for principal and interest. Interest on the unpaid principal balance is fixed at funding as the greater of 9.36% and the sum of the then current U.S. Treasury note yield to maturity plus 8.95% per annum.

The loan and security agreement contains certain affirmative and negative covenants and certain financial covenants, including restrictions with respect to payment of cash dividends, payment on any subordinated debt, merger or consolidation, changes in the nature of our business, disposal of assets, obtaining additional loans, maintenance of collateral accounts and transactions with affiliates. Among these covenants, the 2012 Facility requires that, following the closing of this offering, we maintain a minimum liquidity (meaning unrestricted cash and cash equivalents on hand) in an amount greater than $15,000,000 or 110% of the amount outstanding under the loan and security agreement. The loan and security agreement also contains certain cross-default provisions. As of the date of this filing, we were in compliance with our debt covenants in all material respects. In the event we fail to comply with the covenants in the loan and security agreement, the amounts outstanding thereunder would become due and payable absent a waiver by the requisite lenders, which could materially and adversely affect our liquidity.

Purchase Commitments

We have certain purchase commitments related to a third-party contract manufacturer, Flextronics Sales and Marketing, Ltd. The total noncancelable amount of such purchase commitments as of December 31, 2011 and March 31, 2012 was $6.4 million and $9.2 million, respectively, which we expect to fund through existing sources of available funds.

 

 

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements and we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Quantitative and Qualitative Disclosures about Market Risk

We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks include primarily interest rate risk, foreign exchange risks and inflation.

Interest Rate Risk

We are exposed to interest rate risk that relates primarily to our investment portfolio, which is affected by changes in the general level of the interest rates in the United States. We had cash and cash equivalents and short-term investments as set forth in the table below:

 

    Year Ended December 31,     Three Months Ended
March 31,
 
    2009     2010     2011     2011     2012  
                      (unaudited)  
    (in thousands)  

Cash and cash equivalents

  $ 5,590      $ 5,809      $ 14,972      $ 7,390      $ 19,447   

Short-term investments

    13,876        10,713               11,635          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash and investments

  $ 19,466      $ 16,522      $ 14,972      $ 19,025      $ 19,447   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The cash, cash equivalents and short-term investments were held primarily for working capital purposes in cash deposits, money market funds, U.S. Treasury and agency debt securities and commercial paper with a maturity of 90 days or less. Due to the short-term nature of these instruments, a sudden change in market interest rates would not be expected to have a material impact on our financial condition or our results of operations.

We had debt of $18.8 million ($1.5 million short-term and $17.3 million long-term) as of March 31, 2012, consisting of our outstanding obligations under the 2012 Facility. An increase or decrease in the prime rate by one percentage point would not have had a material impact on our interest expense.

Foreign Currency Risk

The functional currencies of our operations in the United States, Japan, Korea and the UK are the U.S. Dollar, Japanese Yen, Korean Won and the British Pound respectively. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date, and costs and expenses are translated at the average rates of exchange in effect during the year. The effects of foreign currency translation adjustments are recorded as part of a separate component of stockholders’ (deficit) equity. Foreign currency transaction gains and losses are included in the net loss for the period.

Our foreign currency exchange gains and losses have been generated primarily from intercompany receivables and payables. In the future, we may continue to experience foreign currency exchange gains and losses on our accounts receivable and intercompany receivables and payables that are denominated primarily in U.S. dollars. We recognized a foreign currency gain of $0.4 million in both 2009 and 2010 and a $38,000 loss in 2011. We recognized foreign currency losses of $42,000 and $0.1 million in the three months ended March 31, 2011 and 2012, respectively. At this time, we do not enter into derivatives or other financial instruments to attempt to hedge our foreign currency exchange risk. In the future, foreign currency exchange losses could have a material adverse effect on our business, operating results and financial condition.

Inflation Risk

To date, we do not believe inflation has had a material effect on our business, financial condition or results of operations. However, if our costs were to become subject to significant inflationary pressures in the future, we

 

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may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Critical Accounting Policies and Use of Estimates

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States, or GAAP. The preparation of these consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, sales, costs and expenses and related disclosures. These estimates and assumptions are often based on judgments that we believe to be reasonable under the circumstances at the time made, but all such estimates and assumptions are inherently uncertain and unpredictable. Actual results may differ from those estimates and assumptions, and it is possible that other professionals, applying their own judgment to the same facts and circumstances, could develop and support alternative estimates and assumptions that would result in material changes to our operating results and financial condition. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances.

We consider the assumptions and estimates associated with revenue recognition, sales returns and allowances, bad debt reserves, warranty reserves, stock-based compensation, inventory reserves and income taxes to be our critical accounting policies where we apply judgments and estimates in the preparation of our financial statements. For further information on our significant accounting policies, see Note 2 of the accompanying notes to our consolidated financial statements. There have been no changes to our significant accounting policies since December 31, 2011, except as discussed in “—Recent Accounting Pronouncements.”

Revenue recognition.  We recognize sales when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collectability is reasonably assured. We consider that products are delivered when delivery terms are met and title and risk of loss have been transferred. For sales from our website, and for sales to our retail customers and the independent distributor, this occurs at the time of shipment. We recognize revenue as the net amount we estimate to be received after deducting estimated amounts for product returns, discounts and allowances. We estimate future product returns, discounts and allowances based upon historical experience and changes in current sales trend.

Sales returns and allowances.  When we sell our products we reduce the amount of revenue recognized from such sales by an estimate of future product returns and other sales allowances. Sales allowances include rebates and sales incentives relating to products sold in the current period. Factors that we consider in our estimates of sales returns include the historical rate of returns as a percentage of net product sales, gross of returns and allowances and shipping and handling revenue, and the current market conditions as well as quality of the product and recent promotional activity. We maintain a return policy that allows our customers to return products, generally within 60 to 90 days after shipment, but with no rights of return to distributors.

Bad debt reserve.  We offer our direct customers the option to purchase certain products on a payment plan. The payment plan requires a down payment plus four to five equal monthly payments secured by a credit card. At the time of sale we reserve an estimated bad debt allowance for these transactions and for sales to retail customers and to physicians. We consider the following factors when calculating the bad debt reserve: historical loss rate and current trends.

Warranty reserve.  We provide a full replacement warranty for our Hair Removal Laser and our Skin Perfecting Blue Light that these products are free from defects. Warranty periods range from 12 to 24 months for the products depending on the geographic region in which the product is sold. We accrue for potential warranty claims by estimating our unit failure rates and multiplying this amount by our estimated fulfillment costs of replacing the units. We estimate our failure rates by reviewing our recent failure rate

 

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history by product and region of the world and adjusting for any known specific issues. We estimate our fulfillment costs based on the cost to replace the products, including the manufacturing and delivery cost. Our cost assumptions have generally declined with the decline in the cost of the products and our failure rates generally increase when introducing a new generation product or when a specific manufacturing issue occurs. Excluding the impact of these discrete events, our actual results have been substantially consistent with our estimates and we do not anticipate that our estimated failure rates will change substantially in the foreseeable future.

Stock-based compensation.  We have a stock-based compensation plan that allows us to grant either stock options or stock purchase rights, representing the right to purchase shares of our common stock, to employees, directors and consultants. Accounting guidance requires employee stock-based payments to be accounted for under the fair value method. Under this method, we are required to record compensation cost based on the fair value estimated for stock-based awards granted over the requisite service periods for the individual awards, which generally equal the vesting periods. We use the straight-line amortization method for recognizing stock-based compensation expense.

For accounting purposes, the fair value of each stock option grant was estimated on the date of grant using the Black-Scholes-Merton option pricing model, which requires the use of highly subjective estimates and assumptions to determine the fair value of share-based awards, including the expected term of the grant, the expected volatility, the risk-free interest rate and the expected dividends. The Black-Scholes-Merton option pricing model also requires that we estimate the fair value of the underlying ordinary shares. These inputs are subjective and generally require significant judgment. We used the following assumptions for stock-based awards granted in the years ended December 31, 2009, 2010, and 2011, and the three months ended March 31, 2011 and 2012:

 

     Year Ended December 31,    Three Months Ended
March 31,
     2009    2010    2011    2011    2012
                    (unaudited)

Expected term

   6.1 years    5.9 years    6.0 years    5.9 years    *

Expected volatility

   65%    60%    60%    59%    *

Risk-free interest rate

   2.5%    2.0%    2.0%    2.5%    *

Expected dividend rate

   0.0%    0.0%    0.0%    0.0%    *

 

      

*  No options granted during the three months ended March 31, 2012.

Expected term.    The expected term represents the period that our stock-based awards are expected to be outstanding and for at-the-money options is determined using the simplified method for estimating expected term for awards in accordance with the guidance provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the awards. We will continue to utilize the simplified method for all “plain vanilla” awards until we have established a reasonable period of representative trading history as a public company, at which time we will determine the expected term based on the historical option exercise behavior of our employees, expectations about future option exercise behavior and post-vesting cancellations. For awards not issued at-the-money a probability weighted expected life calculation was used to estimate the expected term.

Expected volatility.    As a private company, we have lacked company-specific historical and implied volatility information. Therefore, we estimate our expected volatility based on the historical volatility of our publicly-traded peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our traded stock price. We consider companies as peers based on a number of factors including, but not limited to, similarity to us with respect to industry, business model, stage of growth, financial risk or other factors, along with considering the future plans of our company. The peer companies used in determining our expected volatility were, at the time of volatility determination, generally larger and operationally further developed than we are. However, the operational and financial growth and development of

 

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the peer companies during the period in which historical volatility were considered were determined to be sufficiently similar to our expectations for future growth to provide a reasonable basis on which to establish our expected volatility.

Risk-free interest rate.    The risk-free interest rate is the yield currently available on U.S. Treasury zero-coupon issues with a remaining term approximating the expected term of the option.

Expected dividend rate.    We assumed the expected dividend to be zero since we have never paid dividends and have no current plans to do so.

We recognize compensation expense for only the portion of options that are expected to vest. Accordingly, we have estimated expected forfeitures of stock options based on our historical forfeiture rate and used these rates in developing a future forfeiture rate. If our actual forfeiture rate varies from our historical rates and estimates, additional adjustments to compensation expense may be required in future periods.

We will continue to use judgment in evaluating the expected term, expected volatility and forfeiture rates related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may make refinements to the estimates of our expected volatility, expected terms and forfeiture rates, all of which could materially impact our future stock-based compensation expense.

The following table sets forth our total stock-based compensation expense for awards granted in the years ended December 31, 2009, 2010, and 2011, and the three months ended March 31, 2011 and 2012:

 

     Year Ended December 31,      Three Months Ended
March 31,
 
     2009      2010      2011      2011      2012  
            (unaudited)  
     (in thousands)  

Cost of goods sold

     $6         $6         $3         $1         $4   

Sales and marketing

     52         30         41         7         43   

Research and development

     68         74         103         33         61   

General and administrative

     188         193         321         71         189   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

     $314         $303         $468      

 

$112

  

  

 

$297

  

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2012, we had $3,217,000 of unrecognized stock-based compensation expense, net of estimated forfeitures, that is expected to be recognized over a weighted-average period of 2.4 years. In future periods, we expect our stock-based compensation expense to increase as a result of our existing unrecognized stock-based compensation which will be recognized as these awards vest and as we issue additional stock-based awards to attract and retain our employees.

Common stock valuations.    We are required to estimate the fair value of the common stock underlying our stock options when performing the fair value calculations of our outstanding stock options using the Black-Scholes-Merton option-pricing model. The fair value of our common stock was determined on a periodic basis by our compensation committee of our board of directors, taking into account our most recent valuation analysis among other factors. The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different. In determining the fair value of our common stock, our compensation committee considered valuation methods intended to comply with Section 409A of the Code that creates a presumption that the resulting valuation is reasonable. In addition, these common stock valuations were performed in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification 718, Stock Compensation, or ASC 718. Our compensation committee and management intended all options granted to be exercisable at a price per share not less than the fair value per share of our common stock on the date of grant based on the facts and circumstance known on the date of grant.

 

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For all granted stock options, our compensation committee determined the fair value of our common stock on each grant date with reference to the factors listed below:

 

   

prices for our convertible preferred stock sold to outside investors in arm’s-length transactions;

 

   

our capital structure, including the rights, preferences and privileges of our preferred stock relative to those of our common stock;

 

   

our operating and financial performance;

 

   

business conditions and projections;

 

   

our likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our company given prevailing market conditions and the nature and history of our business;

 

   

market value of comparable public companies;

 

   

illiquidity of stock-based awards involving securities in a private company; and

 

   

U.S. and global capital market conditions.

To assist our compensation committee, our management provided our compensation committee with an estimate of the fair value of our common stock on each grant date.

To determine the fair value of our common stock, we first analyzed the equity value of the company using a weighted combination of two methodologies, the discounted cash flow method and the guideline public companies method. The discounted cash flow method estimates the value of the company based on our expected future cash flows discounted to present value at a rate of return commensurate with the risks associated with the cash flows. Management determined a financial forecast for each valuation date to be used in the computation of the equity value under the income approach. These financial forecasts took into account our past experience and future expectations. The discount rate is related generally to market-required rates of return observed in the venture capital industry as well as the specific perceived risks of achieving the forecasted financial performance. The guideline public companies method generally estimates the equity value of a company by applying market multiples of comparable companies that are publicly traded. We selected comparable companies on the basis of operational and economic similarity to our business at the time of the valuation. We then calculated a multiple of key metrics implied by the enterprise values of these comparable companies. Based on our historical and expected performance as compared to the comparable companies, we selected appropriate multiples and applied them to our metrics to derive an indication of equity value.

Specifically, we considered several factors affecting our equity value, including:

Common stock pricing indications implied from our most recent sales of preferred securities.    We used arm’s-length private transactions involving our convertible preferred stock, including the closings of the sale of our series CC rounds of convertible preferred stock at a purchase price of $7.59 per share in August 2010, October 2010, February 2011 and December 2011, adjusted to reflect our capitalization structure, the prevailing risk-free interest rates as of the dates of the sales, estimates of expected equity volatility and the expected time to liquidity.

Market pricing information from companies that we considered to be comparable or that we believed would be priced in a similar fashion.    The companies selected had significant operations in the medical technologies or aesthetics industry. We analyzed market equity values from these selected companies and applied appropriate multiples to our projected financial metrics to determine the future equity value or future common stock value. These values were then discounted to the valuation date at a risk adjusted rate of return to determine a current common stock value.

Discounted cash flow models.    Discounted cash flow models were based on our then existing financial projections. These cash flows were discounted to the present to determine a present common stock value

 

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indication, using a risk-adjusted equity rate. During the period November 17, 2010 through December 24, 2011, the equity rates of return used in our assumptions have fluctuated from a low of 15% to a high of 35%.

Market volatility.    We factored prevailing market conditions into our analysis when deriving the equity value indications. More specifically, we evaluated the volatility of companies we consider to be comparable to determine the equity value.

Liquidity considerations.    We considered the liquidity of our securities in determining our equity value and common stock value. Because our stockholders have not had access to an organized exchange on which to trade their securities, the appropriate adjustment to the value to account for this lack of liquidity was assessed. During the period November 17, 2010 through December 24, 2011, the adjustments for illiquidity of our common stock have fluctuated from a low of 12% to a high of 31%.

Once we determined an equity value, we utilized the option pricing method, or OPM, to allocate the equity value to each of our classes of stock. The OPM values each equity class by creating a series of call options on our equity value, with exercise prices based on the liquidation preferences, participation rights and strike prices of derivatives. This method is generally preferred when future outcomes are difficult to predict and dissolution or liquidation is not imminent. Prior to starting our preparation for this offering, we utilized the OPM because we could not reasonably estimate the form and timing of potential liquidity events.

The Probability Weighted Expected Return Method, or PWERM, involves a forward-looking analysis of the possible future outcomes of the company. This method is particularly useful when discrete future outcomes can be predicted at a high confidence level with a probability distribution. Discrete future outcomes considered under the PWERM included outcomes based on a public offering of our common stock as well as other scenarios. In the other scenarios, a large portion of the equity value is allocated to the preferred stock to incorporate higher aggregate liquidation preferences. In the public offering scenario the equity value is allocated pro rata among the shares of common stock and each series of preferred stock, which causes the common stock to have a higher relative value per share than under the other scenarios. Determining the fair value of the enterprise using the PWERM requires us to estimate the probability of both types of scenarios and if different estimates are used, the fair value of the company could be significantly different.

The following table summarizes the fair value of the common stock underlying our stock options granted between November 17, 2010 and December 24, 2011:

 

Grant Date

   Number of
Options Granted
    

Per Share Exercise

Price of Options

     Fair Value Per
Share of
Common Stock
     Updated Fair Value
Per Share of
Common Stock
 

November 17, 2010

     322,398         $1.32         $1.32         $1.32   

January 25, 2011

     116,682         1.32         1.32         1.32   

February 8, 2011

     98,106         1.32         1.32         1.32   

February 16, 2011

     55,696         1.32         1.32         1.32   

May 9, 2011

     83,636         1.32         1.32         1.32   

July 20, 2011

     55,681         1.39         1.39         1.39   

October 4, 2011

     144,696         1.39         1.39         6.67   

December 24, 2011

     475,757         $2.84         $2.84         $7.33   

No single event caused the valuation of our common stock to increase or decrease through December 24, 2011. Instead, a combination of the factors described below in each period led to the changes in the fair value of our common stock. The changes in fair value of our ordinary shares at the date of each grant are as follows:

November 17, 2010 Grants.  In November 2010, the compensation committee of our board of directors performed a valuation of our common stock intended to comply with section 409A of the Code. This valuation included reference to a contemporaneously obtained valuation report prepared by a valuation consulting firm dated as of October 2010. The report employed multiple valuation approaches including the market and income

 

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approach in determining our equity value as recommended by the American Institute of Certified Public Accountants practice guide on valuing private companies. The report applied a 15% non-marketability discount in the calculation of final fair value per share and also considered the impact of the series CC shares of preferred stock we issued during this time. Accordingly, the common stock value was determined to be $1.32 per share as of November 2010.

January 25, February 8, February 16 and May 9, 2011 Grants.  Our compensation committee issued grants at $1.32 per share, which reflected their determination of the fair value, based in part on the most recently available third-party valuation report and the determination that there were no events that occurred in the intervening period which would impact the fair value of the common stock on the date of grant nor were there any significant changes in our business or forecasts since November 17, 2010 to warrant a higher valuation.

July 20, 2011 Grants.  Our compensation committee performed a valuation of our common stock in July 2011. This valuation included reference to a contemporaneously obtained valuation report prepared by a valuation consulting firm dated as of June 2011, establishing our fair market value at $1.39 per share. The overall market conditions remained relatively stable from the previous valuation, but the valuation of our common stock was affected by moderately higher valuation multiples affecting comparable companies. Accordingly, the fair market value of our common stock was determined to be $1.39 per share in June 2011.

October 4, 2011 Grants.  For the stock option grants in October 2011, our compensation committee determined the fair market value to be $1.39 per share. This fair value was based on a number of factors, including considering those included in the most recent available valuation and considering that no events had occurred during the intervening period from the date of the last valuation report that would have increased the value of the stock. Subsequently, in preparing for this offering, we reviewed our October 4, 2011 option grants solely for the purpose of calculating the fair value of our stock options. During this review, we considered several additional factors: the effects of altering our allocation method from an option based method to a PWERM method; the effects of updating the initial public offering (IPO) scenario calculation to reflect the valuation multiples of a list of comparable public companies used in a presentation from an investment bank to our board of directors on July 26, 2011; and the effects of updating the probability weighting of an IPO to 50% to reflect the board discussion held at the July 26, 2011 board meeting regarding a possible initial public offering. Offsetting these factors, we took into consideration weaker than expected operating results, especially internationally; the need to significantly strengthen our finance function, including by hiring a chief financial officer; our immediate need to raise significant additional funding through a combination of equity and debt financing; and, the continued volatility of the capital markets and the lack of recent examples of comparable companies with successful initial public offerings. These factors led us to an updated fair value of common stock of $6.67 per share for the options granted on October 4, 2011 solely for purposes of calculating the fair value of our outstanding stock options.

December 24, 2011 Grants.  Our compensation committee performed a valuation of our common stock in December 2011. This valuation included reference to a contemporaneously obtained valuation report prepared by a valuation consulting firm dated as of November 2011, establishing our fair market value at $2.84 per share. The increase in our common stock fair market value was primarily attributable to the committee’s determination that potential for an initial public offering had increased. We subsequently obtained a revised valuation report using the PWERM methodology for the December 2011 grants that validated our $2.84 valuation. In preparing for this offering, we reviewed our December 24, 2011 option grants solely for the purpose of calculating the fair value of our stock options. During this review we noted that the board of directors selected underwriters for a potential IPO on November 1, 2011, and that we held an organizational meeting to formally begin the process for this offering on November 8, 2011 and had commenced the registration statement drafting process in preparation for filing. As a result, in addition to increasing the valuation multiples in the IPO scenario to reflect the valuation multiples of a list of comparable public companies used in a presentation from an investment bank to the board of directors on July 26, 2011, we also increased the probability weighting of a potential IPO to 70% to reflect the potential for an initial public offering had increased, while recognizing the volatility of the capital markets continued to create uncertainty as to our ability to complete this offering. We also took into consideration the

 

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November and December 2011 subsequent closings of our Series CC preferred stock financing at $7.59 per share in which several large existing investors declined to participate. These factors led us to an updated fair value of common stock of $7.33 per share for the options granted on December 24, 2011 solely for purposes of calculating the fair value of our outstanding stock options.

Convertible preferred stock warrants.  We account for warrants to purchase shares of our convertible preferred stock as liabilities at fair value because these warrants may obligate us to transfer assets to the holders at a future date under certain circumstances, such as a change of control. We re-measure these warrants to current fair value at each balance sheet date, and any change in fair value is recognized as a component of interest income and interest (expense) in our statements of operations. We estimated the fair value of these warrants at the respective balance sheet dates using an enterprise value option-pricing model. We use a number of assumptions to estimate the fair value including the remaining expected life of the warrant, risk-free interest rates, expected dividend yield, and expected volatility of the price of the underlying stock. These assumptions are subjective and the fair value of these warrants may have differed significantly had we used different assumptions. We will continue to adjust the convertible preferred stock warrant liability for changes in fair value until the earlier of the exercise or expiration of the convertible preferred stock warrants or until holders of our outstanding preferred stock can no longer trigger a deemed liquidation event.

Inventory reserves.  We record write-downs to inventory for potentially excess, obsolete or slow-moving goods in order to state inventory at its net realizable value. We regularly review inventory for excess and obsolete products and components, taking into account product life cycle and development plans, product expiration and quality issues, historical experience and our current inventory levels. If actual market conditions are less favorable than anticipated, additional inventory adjustments could be required.

Income taxes.  We account for income taxes under the liability method in accordance with ASC 740-10, Income Taxes, or ASC 740. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect when the differences are expected to be recovered or settled. A valuation allowance is recorded against deferred tax assets if it is more likely than not that all or a portion of the deferred tax assets will not be realized.

We recognize liabilities for uncertain tax positions based upon a two-step process. To the extent a tax position does not meet a more-likely-than-not level of certainty, no benefit is recognized in the financial statements. If a position meets the more-likely-than-not level of certainty, it is recognized in the financial statements at the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. As part of our implementation for the fiscal year beginning January 1, 2009, we analyzed our tax positions taken with respect to all applicable income tax issues for all open tax years (in each respective jurisdiction), and concluded that no uncertain tax positions were required to be recognized in our financial statements. In accordance with ASC 740, our accounting policy is that interest and penalties recognized are classified as part of our income taxes. Since we have not recorded any reserves related to unrecognized tax benefits, we have not recorded any interest or penalties in our provision for income taxes.

The actual liability for unrealized tax benefits in any such contingency may be materially different from our estimates, which could result in the need to record additional liabilities for unrecognized tax benefits or potentially adjust previously-recorded liabilities for unrealized tax benefits and materially affect our results of operations.

As of December 31, 2011, we had federal and state net operating loss carryforwards of $95.1 million and $69.1 million, respectively. The federal net operating loss carryforwards will begin to expire in 2023, and the state net operating loss carryforwards will begin to expire in 2013. We are subject to income taxes in the U.S. federal jurisdiction and various state and local jurisdictions. Our tax years from inception through 2011 are subject to examination by the U.S. and state tax authorities due to the carryforward of unutilized net operating losses and research and development credits. We are not currently under examination in any tax jurisdictions.

 

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Under federal and similar state tax statutes, substantial changes in our ownership, including ownership changes resulting from the offering contemplated by this prospectus, may limit our ability to use our available net operating loss and tax credit carryforwards. The annual limitation, as a result of a change of control, may result in the expiration of net operating losses and credits before utilization.

Recent Accounting Pronouncements

The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

In May 2011, the FASB issued new guidance for fair value measurements to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The guidance changes certain fair value measurement principles and enhances the disclosure requirements, particularly for level three fair value measurements. The guidance is effective for us prospectively beginning in the first quarter of fiscal 2012. The adoption of this guidance did not have a material impact on our financial statements.

In June 2011, the FASB issued Accounting Standards Update, or ASU, No. 2011-05, Presentation of Comprehensive Income, or ASU 2011-05. ASU 2011-05 requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. Under the continuous statement approach, the statement would include the components and total of net income, the components and total of other comprehensive income and the total of comprehensive income. Under the two statement approach, the first statement would include the components and total of net income and the second statement would include the components and total of other comprehensive income and the total of comprehensive income. Comprehensive income may no longer be presented only within the consolidated statement of stockholders’ equity. ASU 2011-05 does not change the items that must be reported in other comprehensive income. ASU 2011-05 is effective retrospectively for interim and annual periods beginning after December 15, 2011, with early adoption permitted. We adopted this ASU in the first quarter of 2012 and are reporting under the two statement approach.

 

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BUSINESS

Overview

Tria Beauty brings clinically-proven light-based aesthetic medical technologies out of the physician’s office and into the home. We sell easy-to-use, FDA-cleared medical devices to consumers that deliver results comparable to professional aesthetic treatments at a fraction of the cost. As a result, we believe we are expanding the market for aesthetic light-based treatments. Our recent customer survey suggests that roughly three quarters of our customers have never tried professional in-office laser treatments before purchasing our products. We have successfully combined our technical light-based expertise with extensive consumer marketing experience to produce and sell hand-held consumer skincare devices that are safe and effective, yet simple to use. Our two current product lines and our most advanced product under development are:

Hair Removal Laser, our leading product, is a diode laser device that provides permanent reduction in hair regrowth comparable to devices used in a physician’s office. It was cleared by the FDA in 2005 as a prescription device and in 2008 as an over-the-counter device.

Skin Perfecting Blue Light uses high-intensity blue light that inhibits acne-causing bacteria with anti-acne effectiveness comparable to light-based acne treatments performed in a physician’s office. It was cleared by the FDA in 2006 as a prescription device and it was cleared as an over-the-counter device for the treatment of mild to moderate inflammatory acne in 2010. In April 2012, we received a medical CE mark to market the device in Europe for the treatment of mild to moderate acne.

Skin Rejuvenating Laser, a product in late stage development, is a fractional non-ablative laser device designed to enable our entry into the anti-aging skincare market. We received Health Canada clearance in April 2012 to market the device in Canada for the treatment of wrinkles, skin discoloration and rough skin and expect to obtain European CE marking and to begin selling this device outside of the United States in the second half of 2012. We believe, based on technical similarities to predicate, animal histology and pilot clinical studies, that our pivotal clinical studies will support a 2012 FDA application for OTC treatment of periorbital wrinkles (crow’s feet), perioral wrinkles (wrinkles around the mouth), dyschromia (uneven pigmentation) and textural irregularities like tactile roughness, for which fractional non-ablative technology has become an accepted treatment standard in professionals’ offices. We also believe that these clinical studies will demonstrate that the device has safety and effectiveness comparable to fractional non-ablative laser treatments in a physician’s office.

We have historically derived substantially all of our sales from our Hair Removal Laser. Our Skin Perfecting Blue Light, which we launched in 2010, remains in the early stages of commercialization and we expect that the Hair Removal Laser will be our primary source of sales and growth for the foreseeable future. We are involved in intellectual property litigation with Palomar Medical Technologies regarding technology incorporated into our Hair Removal Laser. There has been no trial date set, though summary judgment briefing is scheduled to be completed in December 2012. If we do not ultimately prevail in this litigation, we could be required to pay damages for past sales of the Hair Removal Laser and could be required to pay royalties for, or be enjoined from, future U.S. sales of the Hair Removal Laser through the expiration of the relevant patents in 2015.

Our focus on innovation has enabled us to rapidly develop new products, as well as introduce new generations of existing ones with improved performance characteristics and reduced manufacturing costs; our average manufacturing costs for our Hair Removal Laser have decreased 47% since 2008. Our devices are developed by engineers with decades of combined experience designing light-based aesthetic medical technologies for the professional setting. We have successfully applied our expertise to develop custom-designed components with proprietary safety systems, such as the Hair Removal Laser’s built-in skin sensor, that permit effective, high-power treatment while protecting the user’s eyes and skin. Safe and effective consumer devices present engineering and manufacturing challenges absent in large aesthetic capital equipment designed for physician use. As a result, we believe our expertise in designing products specifically for the consumer differentiates us from competitors who remain focused primarily on producing capital equipment for use by physicians.

A core element of our business is our distinctive marketing strategy and multi-channel distribution model. We believe high-engagement media such as our websites, infomercials and home shopping television are particularly

 

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effective at informing consumers about our innovative products, the compelling skincare benefits they produce and the way in which they are used and incorporated into a personal skincare regimen. We have built our brand by educating consumers about the specific benefits of light-based skincare and our products and developing direct relationships with those consumers. Our physical presence at premium retailers such as Bloomingdale’s, as well as in physician offices, helps to further strengthen our brand image, validate our technology and provide additional points of contact to educate consumers about our products.

Our net losses were $25.6 million, $34.8 million and $11.1 million in the years ended December 31, 2010 and 2011, and the quarter ended March 31, 2012, respectively. As of March 31, 2012, we had an accumulated deficit of $112.8 million. We expect to continue to incur losses as we invest in building the market for light-based skincare devices through our sales and marketing activities, expand our commercialization of new products and expand into new international geographies.

Competitive Strengths

We believe there is significant unmet demand in the skincare market for home-use medical devices that deliver results comparable to in-office professional aesthetic treatments. We believe that we are well positioned to pursue the market for home-use medical devices because addressing this market is the focus of our business. We have developed our research and development and marketing competencies specifically to pursue this opportunity. We believe that a significant investment in, for example, retail cosmetic skincare products, or capital equipment for use in physicians’ offices, would represent a significant departure from and conflict with, our primary business model and expertise. We attribute our historic success and future growth prospects to the following:

Effectiveness Comparable to Professional Treatments with In-Home Convenience at Affordable Prices:  We market to consumers who seek an effective alternative to traditional lotion and cream at-home skincare regimens that does not involve the inconvenience or expense of in-office professional treatments.

Consumer-Focused Sales and Marketing Approach:  We have established a multi-channel consumer-focused marketing approach with an emphasis on our direct sales channel. This allows us to acquire and retain customers by:

 

   

maintaining premium brand positioning with scalable investments in direct marketing while avoiding dependence on third-party retailers;

 

   

developing direct customer relationships that provide us with opportunities to continue to communicate with our customers through email and social media in an effort to improve their treatment compliance and satisfaction; and

 

   

encouraging the purchase of new product offerings, including new devices, topical skincare products and other consumables.

Innovative, Proprietary Technology:  Our expertise in incorporating light-based energy into safe, consumer-friendly home-use devices has allowed us to internally develop and launch two product lines, with a third expected to follow in 2012. Our demonstrated ability to move products from concept to commercialization has allowed us to launch three versions of our Hair Removal Laser in the United States in the last three years, with substantial improvements to enhance the user experience and reductions in unit cost with each new introduction.

Clinical Data and Scientific Publications: Our rigorous scientific approach, clinical trials and focus on regulatory approvals and compliance set us apart from many of our competitors who cannot legitimately make similar safety and effectiveness claims. The FDA and other regulatory clearances and approvals that we have received both domestically and internationally attest to our commitment to regulatory compliance and distinguish us from competitors that have not obtained legally required marketing approvals. We have conducted clinical studies with

 

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key opinion leading physicians that have been published in peer-reviewed scientific journals, including the Journal of Drugs in Dermatology and Lasers in Surgery and Medicine.

Demonstrated International Penetration:  Our proven direct sales strategy built on a scalable e-commerce platform has permitted us to enter new international markets with limited investment. Approximately 35% and 26% of our net sales were derived from outside of North America in 2011 and the three months ended March 31, 2012, respectively, primarily from Japan and South Korea. We have also leveraged our experience to rapidly expand into Canada and several countries in Europe. We believe that we have developed effective procedures that will facilitate our expansion into additional countries with demographics that offer the potential for significant demand for our products.

A Growing Customer Base:  We have doubled the size of our customer base every year since 2008. Our recent customer research suggests we attract the majority of our customers from the OTC consumer skincare products market for hair removal and acne as, we believe, those customers trade up to more effective, longer-lasting skincare solutions. Approximately 80% of the approximately 1,300 individuals who responded to our recent customer survey indicated that they would both recommend our products to others and consider buying from us in the future. Almost half of the respondents who indicated that they would consider buying from us in the future responded that they would be interested in Tria products that address aging skin. As a result, we believe we are well positioned to enter the anti-aging category with our Skin Rejuvenating Laser.

Our clinically-demonstrated effectiveness is based upon data from clinical studies that are discussed in detail in “—Technology and Clinical Results.” Even where such studies demonstrate statistically significant results, many of these studies have relatively small sample sizes, which may be viewed as inherently less predictive of individual results than larger studies. Additionally, our clinical studies involve the use of our products under trained supervision and pursuant to our specifications, which may lead to better results than self-directed use by consumers.

Our Markets

We operate at the confluence of the markets for professional aesthetic skincare treatments and OTC cosmetic skincare products. According to Medical Insight, the professional aesthetic skincare market represented an estimated $15.0 billion of global sales for 2011, which included light-based aesthetic treatment procedure fees of $2.4 billion related to hair removal, $0.4 billion related to anti-acne treatments and $4.0 billion related to anti-aging treatments. Based on data from Euromonitor, the OTC cosmetic skincare products markets for hair removal, anti-acne treatments and anti-aging treatments and nourishers represented an estimated $4.5 billion, $3.2 billion and $22.2 billion in 2011 global sales, respectively. Kline & Company reports that a combination of factors, including heightened awareness and technological advances, is driving the at-home skincare device market, which grew an estimated 48% and achieved estimated sales of approximately $532 million for 2011, of which an estimated $163 million was attributable to light-based devices, which grew at an estimated rate of 50%.

The $15.0 billion global professional aesthetic skincare market includes non-surgical aesthetic procedures delivered either in the physician’s office or in the professional spa setting. We believe consumers demonstrate high levels of awareness and broadly accept the effectiveness of light-based skincare treatments. For example, the American Society of Plastic Surgeons reports that, in terms of absolute number of procedures performed, laser hair removal is the number one aesthetic procedure for women between the ages of 20 and 29 and the number two procedure behind Botox for women between the ages of 30 and 39. Despite this broad acceptance, sales for light-based professional treatments remain low compared to sales for OTC products that generally offer relatively little long-term benefit for consumers.

The $29.9 billion global OTC cosmetic skincare products market is composed of three product categories—depilatories, acne treatments and nourishers/anti-agers—which were identified, studied and estimated by Euromonitor in early 2012. The majority of these products are sold at low prices through mass merchandise retail outlets. While a majority of these products are sold at low prices through mass merchandise

 

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retail outlets, prestige skincare products are sold primarily through luxury outlets such as department stores and generally command higher prices. These prestige skincare products are marketed to our target customer and, according to the NPD group, U.S. sales of the category grew by 14% to $3.7 billion from 2010 to 2011.

Key Trends

The Boston Consulting Group estimates that the number of middle-income and affluent consumers in developing countries, defined as those with annual disposable incomes of more than $15,000, will reach 2.7 billion by 2020. Emerging economies are providing the platform for an increasing number of consumers to access prestige beauty and personal care products. As these consumers accumulate disposable income, we believe they tend to purchase products that improve physical appearance. We believe this consumer behavior is universal and will be embraced by the emerging economies that contain growing middle classes.

Increasingly, consumer products are being sold through e-commerce and infomercials, where companies have the ability to provide detailed product information, share extensive testimonials and demonstrate the product’s functionality and benefits. Such direct selling to consumers has emerged as a powerful sales channel for companies because it enables high-quality engagement with target consumers. We believe the distribution of prestige beauty products through the direct sales channel is resonating with a broader potential market than ever before, especially for products that provide solutions that may be new to the targeted consumer.

The at-home light-based skincare device industry is emerging and rapidly growing. This industry includes sonic-, light-, heat-, microcurrent- and microdermabrasion-based devices, and it addresses areas of skincare such as laser hair removal, anti-aging, acne and rosacea. At-home skincare devices typically cost less than, and offer greater convenience and privacy than, their office-based analogues, and these advantages have caused the industry to grow rapidly in recent years. In addition to FDA-cleared medical devices, of which there are few, there are a multitude of devices available that are marketed without FDA clearance or approval, on the purported basis that they are cosmetic products and not medical devices. Some of these devices are marketed as having medical device characteristics, in violation of FDA and Federal Trade Commission regulations, and lack clinically demonstrated safety and effectiveness.

Current Treatment Alternatives and their Limitations

Treatment alternatives for hair removal, acne and skin rejuvenation have historically been hindered by significant consumer trade-offs. Consumers who choose professional office-based aesthetic treatments commit to a relatively expensive and time-consuming process, while those who choose OTC skincare products sacrifice effectiveness for convenience and short-term affordability. Many current treatment alternatives suffer from one or more of the following limitations:

 

   

Cost: While professional office-based aesthetic treatments can be effective, they can cost several thousand dollars to effectively treat a single area of the body. OTC skincare products can be low cost on a per use basis, but the cost over years of use of OTC skincare products can far exceed the cost of professional office-based alternatives.

 

   

Effectiveness: OTC skincare products are typically used daily for an indefinite period of time to maintain their desired effects because they only deliver short-term results. OTC skincare products generally lack the proven effectiveness of professional office-based aesthetic treatments.

 

   

Convenience: Professional office-based aesthetic procedures take several minutes to several hours per session. For optimal results, multiple sessions have to be scheduled over many months, which may create significant disruption to work or personal life. Time spent scheduling appointments, traveling to and from sessions and sitting in the waiting room further add to the overall inconvenience of these procedures. OTC skincare products are generally convenient, involving easy home-use treatment.

Hair Removal Alternatives:  Permanent hair removal can be accomplished through a laser or other light-based procedure or through electrolysis, which involves the application of electrical current one follicle at a time. Laser

 

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hair removal procedures are typically performed by or under the supervision of a physician using capital equipment, while electrolysis treatments are typically performed by a skilled licensed or certified electrologist. Few patients achieve desired results after a single session because it is believed that hair in the active growth phase is more susceptible to treatment than hair in the dormant phase. Hair enters that growth phase at different times, so multiple sessions are required to best address the hair follicles in a particular treatment area. To achieve desired results, most patients require three to six laser hair removal sessions scheduled approximately three to six weeks apart. Electrolysis, which is performed one hair at a time, can take fifteen or more treatment sessions to treat a comparable area of the body to that treated in three to six laser hair removal sessions.

The total cost of either method can vary widely, primarily depending on the size of the area being treated. Typically, each laser hair removal session costs several hundred dollars and, to achieve desired results, patients must commit to several sessions that can cost thousands of dollars in the aggregate. Electrolysis treatment can range from several hundred dollars for a small area to several thousand dollars for larger areas.

Shaving and waxing products, as well as depilatory creams, are the most common OTC skincare products purchased for temporary removal of unwanted hair. These treatment alternatives share the advantage of being able to be performed in the privacy and convenience of one’s home. However, they do not provide permanent results and must be repeated frequently for an indefinite period of time. These OTC skincare products frequently cost several hundred dollars per year.

Acne Treatment Alternatives:  Acne is a multi-factorial skin disease caused in part by P. acnes bacteria, which occurs normally in post-pubescent skin. Under the right conditions, the bacteria become trapped within the skin and acne blemishes occur in the form of redness, blackheads and whiteheads. For adult women, acne is sometimes also associated with the hormonal changes related to menstruation, pregnancy or menopause, as well as with the use of makeup and masking creams, which can remove the skin’s protective coating of helpful bacteria or cause too much dryness.

Acne treatments are available in many different forms, including OTC creams and lotions, prescription medications and in-office procedures performed by professionals. OTC creams and lotions are the most common treatment option because they are convenient and can be self-administered in the privacy of one’s home. However, these creams and lotions have significant drawbacks when measuring effectiveness. Common acne creams and lotions use chemicals such as benzoyl peroxide, which is found in, for example, Proactiv Solution, or salicylic acid, which is found in, for example, Neutrogena acne wash. These chemicals can cause irritating side effects, including dryness or redness, which may result in termination of treatment. Additionally, the cost of these treatment regimes can vary widely, from less than a hundred dollars per year to upwards of a thousand dollars per year, based on customer needs and preferences, and are often used for many years.

Professional acne treatments, such as LED blue light therapy or laser therapy, have emerged as alternatives to prescription medications, such as topical creams and antibiotics. Unlike professional hair-removal treatment, professional acne treatment does not generally produce permanent results. Professional light-based therapies are primarily based on the anti-bacterial and anti-inflammatory properties of specific wavelengths of light that inhibit the acne-causing bacteria without harming the skin’s surface. However, P. acnes bacteria can rapidly re-establish, so ongoing in-office treatments are necessary for best results. Consequently, these professional treatments, while effective, are temporary, costly and inconvenient.

Anti-aging Treatment Alternatives:  Anti-aging treatment represents a broad category of aesthetic products and procedures designed to target unwelcome skin changes that occur naturally through the aging process or from environmental factors such as sun exposure and include fine lines, wrinkles, age spots, uneven skin tone, poor texture and sagging skin. Facial lotions claiming anti-aging properties can range in price from under $10 to $150 or more. Anti-aging cosmetics are not subject to FDA clearance and often lack credible clinical data demonstrating effectiveness. Treatment with FDA-cleared anti-aging products, as with hair removal and acne, typically involves the expense and inconvenience of repeated professional in-office procedures, whether treatment is with laser or other light-based procedures, toxins like Botox or dermal fillers. Of the available anti-aging treatment alternatives, many doctors believe that fractional non-ablative laser skin rejuvenation represents

 

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a breakthrough solution. Similar to more traditional light-based skin rejuvenation procedures, fractional non-ablative laser skin rejuvenation only treats a fraction of the skin by restricting the laser beam to fine “spot sizes” surrounded by untreated tissue, producing faster recovery times and fewer adverse side effects than non-fractional therapy while still delivering results. A professional in-office light-based fractional non-ablative treatment regimen requires approximately three to five sessions spaced about two to four weeks apart to achieve desired results. The cost ranges from $750 to $1,000 per session, or between $3,000 and $6,000 for a full treatment regimen. The results can last for up to six months or more before another treatment regimen is required.

Our Solution

Our products and our products in development provide light-based solutions for hair removal, acne treatment and skin rejuvenation without many of the compromises inherent in professional office-based aesthetic procedures and OTC skincare products. They are designed to deliver results comparable to professional aesthetic treatments at a fraction of the cost in the convenience and privacy of the home. Our consumer-focused products address the cost and convenience limitations facing services sold through the professional in-office setting, as well as the effectiveness limitations facing OTC skincare alternatives.

 

   

Cost:  Over the course of a treatment regimen, our products are typically significantly less expensive than professional in-office treatment alternatives. We believe that our products are affordable not only to the affluent consumers of professional treatments, but also to consumers who otherwise sacrifice effectiveness for the short-term affordability of less expensive OTC treatments. Our products are more expensive than many competitive OTC cosmetic products.

 

   

Effectiveness:  Our products deliver comparable results to professional treatments, providing the consumer an alternative to often ineffective OTC products. Each of our FDA-cleared hand-held devices is supported by multiple clinical studies demonstrating safety and effectiveness. Our laser hair removal product permanently reduces the regrowth of unwanted hair and can reduce or eliminate the need for ongoing shaving, waxing or spa treatments. Our acne blue light device emits the dose of a professional in-office device, inhibiting acne-causing bacteria within the skin and providing healthier looking, clearer skin and improved complexion.

 

   

Convenience:  Each of our light-based hair removal, acne and skin rejuvenation products is designed with our customers’ needs for convenience and ease of use in mind, a characteristic shared by many OTC products. Our rechargeable products are engineered to be simple, lightweight and ergonomic and utilize proprietary laser and high-power LED systems. This allows our customers to use our products in the privacy of their homes as part of their existing personal skincare and beauty regimens.

Hair Removal Solution: Our Hair Removal Laser operates at a lower maximum energy density than typical professional devices and without skin cooling, while still delivering a wavelength of approximately 800 nanometers with an energy pulse of up to 22 joules per square centimeter, which provides sufficient energy to effect permanent hair reduction for indicated users. This enables cost-effective self-treatment on parts of the body below the neck for individuals with light-to-medium skin color and brown or black hair color. To deliver these energy levels within a consumer product at an affordable price, our device operates at a lower coverage rate than typical professional devices. While reduced coverage rate increases the time required to treat a particular area, it does not impact safety or effectiveness. Because our product enables treatment at home as part of the customer’s existing skincare regimen, we believe our products offer significantly more convenience and privacy than professional treatment alternatives.

Acne Solution:  The current professional blue-light acne treatment regimen generally involves one to two treatments per week for four to eight weeks. This treatment delivers an accumulated dose of approximately 400 joules per square centimeter to treat the underlying P. acnes bacteria and reduce the number of acne lesions. However, the bacteria will re-establish after treatments cease and the acne will return without regular re-treatment, which makes professional treatment especially expensive, inconvenient and impractical. We have

 

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designed our Skin Perfecting Blue Light device to provide the same effective, accumulated dose of 400 joules per square centimeter found in the professional setting but in brief daily treatments, rather than treatments administered once or twice a week in a physician’s office.

Anti-Aging Solution: Our Skin Rejuvenating Laser, which is currently under development, incorporates fractional laser technology. Similar to our currently marketed products, we are designing our Skin Rejuvenating Laser to change the current treatment paradigm by integrating our device into the consumer’s daily skincare regimen in a way that is convenient and minimally invasive. The current professional fractional anti-aging treatment regimen generally involves a series of three to six once-per-month sessions. At each session, the skin is treated with thousands of laser pulses that each treat only a microscopic area but in total add up to treat approximately 30-60% of the skin. Because such a large percentage of skin receives laser pulses at each session, there can be significant redness, swelling and discomfort. We have designed our home fractional device to deliver a sufficient number of laser pulses to treat 1-2% of the skin each day, thereby providing 30-60% coverage each month, which is equivalent to the professional dose, but, we believe, with fewer side effects and in a low-cost, hand-held device.

Customer satisfaction with aesthetic products and procedures is inherently subjective. Additionally, unlike office-based procedures, home-use products require the user to comply with recommended treatment instructions for optimal effectiveness. Our Hair Removal Laser is only intended for treatment on parts of the body below the neck by people with light-to-medium skin tones and brown or black hair color, since laser hair removal is not effective on individuals with light, red or grey hair color and may cause damage to individuals with darker skin tones.

Growth Strategy

Our goal is to be a leading developer and marketer of premium at-home, light-based skincare products by continuing to pursue the following strategies:

Grow Our Brand: We are growing what we believe to be an emerging category of at-home light-based skincare devices, and establishing our brand as a leader within it. Our multi-channel distribution model allows us to reach our customers directly to communicate the specific benefits of light-based skincare devices for home use. Over time, we believe that consumers will increasingly recognize and trust in our brand’s consistent ability to create high-quality, clinically-validated and FDA-cleared aesthetic medical devices and complementary topical products for home use.

Penetrate Our Existing Channels and Markets: We are in the early stages of penetrating our existing markets. While we have grown our sales at an annual rate of 66% over the past three calendar years, our sales represent a small percentage of the multi-billion dollar markets we target. We intend to continue implementing our multi-channel sales and marketing strategy, which is in various stages of deployment in existing geographies.

Expand into New Geographies: Our consumer-focused sales and marketing model, anchored by our direct channel, has allowed us to rapidly expand into new geographies, as evidenced by our track record of successfully launching our products outside the United States. We intend to grow our international presence by leveraging our experience to expand into new geographies with demographics that offer the potential for significant demand for our products.

Drive Product Innovation: We will continue to create new products and improve existing ones by leveraging our proven technology platforms. We anticipate introducing our Skin Rejuvenating Laser outside of the United States in 2012, and will continue to develop other light-based skincare products to provide consumers with a comprehensive and complementary portfolio of topical skincare solutions.

Our Customers

Our customer base consists of consumers from both the OTC cosmetic skincare market and the professional aesthetics market. According to our recent consumer sizing surveys, we draw the vast majority of our customers

 

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from the OTC consumer skincare products market for hair removal and acne as, we believe, they trade up to more effective, longer-lasting skincare solutions. Our typical U.S. customer is a woman between the ages of 25 and 55 with an average household income greater than $50,000. According to 2010 U.S. Census Bureau data, there are an estimated 33 million women in the United States who fall into this category. We believe this customer demographic contains highly favorable attributes, especially with respect to willingness to pay and capacity to spend on premium beauty products. In December 2011, we conducted a general population survey in an effort to determine an estimated size of our target U.S. population for hair removal, anti-acne and anti-aging. The survey gathered responses from over 1,600 men and women. The results showed that 42% of respondents not only fell within our typical age and income category, but also had naturally light brown to black hair and fair to light brown skin, shaved greater than three times per week or waxed greater than four times per year and indicated an interest in undergoing professional laser hair removal if the costs were lower. We extrapolated this 42% subpopulation to the 33 million U.S. women from the census data to conclude that the target U.S. population for our hair removal product consists of approximately 14 million women. We performed similar analyses for anti-acne and anti–aging to conclude that the size of those target U.S. populations are approximately 5 million men and women for anti-acne and 18 million women for anti-aging.

In the fall of 2011, we conducted an additional online survey of existing customers who purchased either or both of our Hair Removal Laser and Skin Perfecting Blue Light within the last year. Of the customers to whom we sent this survey, we received approximately 1,300 total responses. Approximately 75% of our customers indicated that they had never tried professional in-office laser treatments before purchasing our products. Roughly 80% of the survey respondents indicated that they would both recommend our products to others and consider buying from us in the future. Almost half of the respondents who indicated that they would consider buying from us in the future responded that they would be interested in Tria products that address aging skin. As a result, we believe we are well positioned to enter the anti-aging category with our Skin Rejuvenating Laser.

Distribution Channels

We believe that a core element of our business is our distinctive multi-channel distribution model, which differs significantly from traditional skincare distribution, because our products are not sold primarily through retail stores, which would require us to act as a wholesaler, nor are they sold to physicians as capital equipment, which would require us to employ a large sales force. We primarily sell our products to consumers through a direct sales channel strategy anchored by our e-commerce website at www.triabeauty.com and infomercials. Secondarily, we sell our products wholesale through a number of indirect sales channels, including on television through QVC, and at physical locations and websites of select high-end retailers and physician offices.

Our domestic distribution model focuses on the direct channel, which is the primary driver of our domestic sales and growth. Our indirect channel strategy is designed to complement and reinforce our direct channel. We believe that this distribution model enables us to effectively and efficiently:

 

   

drive brand awareness across channels;

 

   

measure and optimize the cost of acquiring and educating customers;

 

   

sell additional products to existing customers;

 

   

develop and adjust strategies to improve sales efficiency;

 

   

build premium brand positioning while effectively maximizing the return on advertising and marketing investments; and

 

   

provide a convenient means for consumers to purchase our products.

 

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The aspects and benefits of both our primary direct distribution channel and our indirect distribution channel are summarized by the following table.

 

Channel

  

Marketing Benefits

  Direct

  

  Corporate e-commerce sites

  www.triabeauty.com

  www.trytrialaser.com

  e-commerce affiliates

  

•     Cost-effective consumer acquisition

•     Consumer education

•     Cross marketing of products

•     Direct and repeated contact with customers

  

  Infomercials

  Long-form

  Short-form

  

•     Consumer education

•     Brand awareness

•     Message control

•     Wide audience

  

  Indirect

  

  Premium Wholesale

  Bloomingdale’s stores and website

  Bergdorf Goodman website

  

•     Brand prestige

•     Personal interaction

•     Wide audience

  

  Physician-Dispensed

  

•     Professional endorsement

•     Product credibility

•     Consumer education

  

  Television Shopping

  QVC

  www.qvc.com

  

•     Consumer education

•     Brand awareness

•     Targeted demographic

•     Wide audience

  

Direct Channel.  Our direct sales distribution channel includes numerous digital and direct marketing efforts that drive traffic to our main website, www.triabeauty.com, and e-commerce affiliates, such as www.amazon.com. Our leading direct traffic sources consist of paid and unpaid search referrals, affiliate sites and online and traditional public relations. This channel is the emphasis of our sales and marketing strategy because it drives strong margins and enables us to scale internationally, while maintaining control over our marketing messages and costs. Through the use of the internet, we are able to efficiently acquire our target customers. Once we acquire a customer through a direct sales channel, we have a significant opportunity to continue to communicate with them through email and social media to cross-sell additional products, introduce new products and provide reminders when it is time to reorder consumable aspects of our products. This interaction also allows us to encourage customer compliance, which is a key driver of improved outcomes and satisfaction.

Our direct response television efforts include infomercials broadcast in 29-minute “long-form” programs and one- and two-minute “short-form” programs. In addition to driving immediate response to sites and call centers resulting in direct sales, our direct response television spots enable us to increase brand awareness, communicate the specific properties of the Hair Removal Laser and Skin Perfecting Blue Light and educate the consumer regarding proper use of our products. We work