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As filed with the Securities and Exchange Commission on January 30, 2012

Registration No. 333-            

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

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)

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  

Proposed Maximum

Aggregate Offering

Price(1)(2)(3)

  

Amount of

Registration Fee

Common Stock, $0.001 par value per share

   $86,250,000    $9,885

 

 

(1)

In accordance with Rule 457(o) under the Securities Act of 1933, the number of shares being registered and the proposed maximum offering price per share are not included in this table.

(2)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

(3)

Includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments.

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 January 30, 2012

             Shares

LOGO

COMMON STOCK

 

 

Tria Beauty, Inc. is offering              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 $         and $         per share.

 

 

We expect to apply to list our common stock on The NASDAQ Global Market under the symbol “TRIA”.

 

 

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              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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TABLE OF CONTENTS

 

    Page  

Prospectus Summary

    1   

Risk Factors

    9   

Special Note Regarding Forward-Looking Statements and Industry Data

    31   

Use of Proceeds

    33   

Dividend Policy

    33   

Capitalization

    34   

Dilution

    35   

Selected Consolidated Financial Data

    37   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    39   

Business

    61   

Management

    85   
    Page  
Executive Compensation     92   

Certain Relationships and Related Party Transactions

    108   
Principal Stockholders     109   
Description of Capital Stock     111   
Shares Eligible for Future Sale     117   

Material U.S. Federal Income and Estate Tax Considerations to Non-U.S. Holders

    119   
Underwriters     123   
Legal Matters     128   
Experts     128   

Where You Can Find Additional Information

    128   

Index to the Consolidated Financial Statements

    F-1   
 

 

 

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 is defining a new category of skincare by bringing 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 and elegantly designed. 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.

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 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.

A core element of our success 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 the category and 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 successfully applied our expertise to develop custom-designed components with proprietary safety systems 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.

 

 

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For the nine months ended September 30, 2011, we had net sales of $32.5 million, representing a 76% increase over the corresponding prior year period. Sales in North America, primarily from the United States, comprised 62% of our total net sales for the nine months ended September 30, 2011. Our net loss was $24.0 million for the nine months ended September 30, 2011, compared to a net loss of $18.7 million in the corresponding prior year period. As of September 30, 2011, we had an accumulated deficit of $90.9 million.

As of September 30, 2011, we had working capital of $5.3 million. In the fourth quarter of 2011, we raised $20.0 million in an extension of our series CC preferred stock financing and, in January 2012, we raised net proceeds of $12.4 million after repayment of the existing loan and related costs.

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 and, based on data from Euromonitor, the OTC cosmetic skincare products market represented an estimated $28.9 billion of global sales for 2011. 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 8% to $2.7 billion from 2009 to 2010. 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.

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.

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:

 

   

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

 

   

consumer-focused sales and marketing approach,

 

   

innovative, proprietary technology,

 

   

robust clinical data,

 

   

demonstrated global penetration, and

 

   

enthusiastic and loyal customer base.

We believe companies that have invested heavily either in retail distribution of cosmetic, or non-medical, OTC skincare products or in capital equipment for physician use are not well positioned to pursue the market for home-use medical devices because doing so represents a significant departure from their primary business models and expertise. In contrast, we have developed our research and development and marketing competencies specifically to pursue this opportunity.

 

 

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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:

 

   

Expensive: Professional office-based aesthetic treatments 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.

 

   

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

 

   

Inconvenient: 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.

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.

 

   

Affordable: Over the course of a treatment regimen, our products typically cost consumers a fraction of what professional in-office treatment alternatives and extended use of OTC skincare products cost. 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.

 

   

Effective: 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.

 

   

Convenient: 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. Our rechargeable products are elegantly engineered 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.

 

 

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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 Category-Defining Brand: We are defining a new category of skincare and establishing our brand as a trusted 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 successful track record of launching our products outside the United States. We intend to grow our international presence by leveraging our experience to expand into new geographies such as Brazil, China and additional countries within the European Union and Asia-Pacific region.

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 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.

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;

 

   

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

 

   

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.

 

 

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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” and “Tria Beauty” 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

            shares

 

Total common stock to be outstanding after this offering

            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, to repay our outstanding indebtedness and for working capital and general corporate purposes. See “Use of Proceeds.”

 

Proposed NASDAQ Global Market symbol

TRIA

 

 

The number of shares of common stock that will be outstanding after this offering is based on 96,962,371 shares outstanding as of December 31, 2011, and excludes:

 

   

13,700,062 shares issuable upon the exercise of options outstanding as of December 31, 2011 under our 2004 Stock Incentive Plan, or our 2004 Plan, at a weighted average exercise price of approximately $0.32 per share;

 

   

            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 and;

 

   

the exercise of (i) warrants to purchase 201,429 shares of our common stock and (ii) warrants to purchase 278,260 shares of our series CC preferred stock.

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

 

   

a reverse stock split of              for              of our shares of outstanding common stock to be effected prior to the completion of this offering;

 

   

the underwriters will not exercise their over-allotment option;

 

   

no exercise of warrants to purchase 201,429 shares of our common stock;

 

   

the conversion of all outstanding shares of our redeemable convertible preferred stock into 91,602,072 shares of our common stock prior to completion of this offering (not including the exercise and conversion of all warrants to purchase 278,260 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 statement of operations for the years ended December 31, 2008, 2009 and 2010 were derived from our audited financial statements data appearing elsewhere in this prospectus. The consolidated statement of operations data for the nine months ended September 30, 2010 and 2011 and the balance sheet data as of September 30, 2011 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 statement 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,     Nine Months Ended
September 30,
 
     2008     2009     2010     2010     2011  
    

(in thousands, except per share data)

 
           (unaudited)  
Consolidated Statements of Operations Data:             

Net sales

   $ 9,805      $ 19,417      $ 27,140      $ 18,468      $ 32,480   

Cost of goods sold

     6,477        9,621        14,109        9,079        16,542   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     3,328        9,796        13,031        9,389        15,938   

Operating expenses:

          

Sales and marketing

     6,373        9,005        19,863        13,767        22,613   

Research and development

     5,767        8,253        9,381        7,210        6,446   

General and administrative

     3,870        5,583        9,792        7,464        10,543   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     16,010        22,841        39,036        28,441        39,602   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (12,682     (13,045     (26,005     (19,052)        (23,664

Other income (expense):

          

Interest income

     515        386        50        41        33   

Interest expense

     (1     (1     (7     (2     (308

Foreign exchange gain (loss)

     1,081        372        366        284        (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before benefit (provision) for income taxes

     (11,087     (12,288     (25,596     (18,729     (23,948

Benefit (provision) for income taxes

     77        (91     (23     (11     (21
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (11,010     (12,379     (25,619     (18,740     (23,969
          

Adjustment to net loss resulting from preferred stock modification and extinguishment

                   982                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (11,010   $ (12,379   $ (24,637   $ (18,740   $ (23,969
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net loss per share attributable to common stockholders - basic and diluted    $ (3.46   $ (3.70   $ (6.26   $ (5.18   $ (4.49
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Weighted-average shares of common stock used in computing net loss attributable to common stockholders - basic and diluted(1)      3,183        3,345        3,933        3,617        5,339   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Pro forma net loss per share attributable to common stockholders - basic and diluted (unaudited)(1)        $ (0.43)        $ (0.30)   
      

 

 

     

 

 

 
Weighted-average shares of common stock used in computing the pro forma net loss attributable to common stockholders - basic and diluted (unaudited)(1)          57,747          78,949   
      

 

 

     

 

 

 

 

 

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     As of September 30, 2011
         Actual         Pro  Forma(2)     Pro forma,
as adjusted(3)
Consolidated Balance Sheet Data:    (unaudited)            

Cash and cash equivalents

   $ 5,916      $ 5,916     

Short-term investments

     1,001        1,001     

Working capital

     5,308        5,308     

Total assets

     21,872        21,872     

Notes payable, including current portion

     7,533        7,533     

Redeemable convertible preferred stock

     89,559            

Total stockholders’ equity (deficit)

   $ (88,042   $ 1,517     

 

(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 74,210,765 shares of common stock prior to completion of this offering.

 

(3)

On a pro forma, as adjusted basis to reflect the receipt of the estimated net proceeds from the sale of             shares of common stock offered by us at an assumed initial public offering price of $         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 hair removal devices may not continue to grow as we anticipate. Furthermore, 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 royalties for future U.S. sales and we could be enjoined from selling the Hair Removal Laser in the United States. 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 $11.0 million in 2008, $12.4 million in 2009, $25.6 million in 2010 and $24.0 million for the nine months ended September 30, 2011. At September 30, 2011, we had an accumulated deficit of approximately $90.9 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.

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 $27.1 million in 2010, representing a compound annual growth rate of 66%. Our sales also increased 76% from $18.5 million during the nine months

 

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ended September 30, 2010 to $32.5 million during the nine months ended September 30, 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 seek FDA 510(k) clearance in 2012, to become a significant contributor to our future sales. 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 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.

The success of our business is largely dependent upon the growth of the at-home aesthetic 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 aesthetic 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 comply with FDA-clearance requirements may be detrimental to market growth. If consumers do not view at-home 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 aesthetic 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

 

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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 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.

 

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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 2008, 2009, 2010 and the nine months ended September 30, 2011, 76%, 55%, 55% and 38%, respectively, of our net sales came from outside of North America. As part of our growth strategy, we plan to expand our international operations. See “Business—Growth Strategy.” As we expand our international operations, we become increasingly susceptible to risks associated with international operations, including:

 

   

staffing and managing our foreign operations;

 

   

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

 

   

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;

 

   

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.

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 skincare devices, such as HomeSkinovations.

 

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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 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.

 

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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. 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 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 line. Our credit line 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;

 

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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 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.

 

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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 or bypass the built-in safety controls, 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;

 

   

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. 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.

 

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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 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.

 

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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. 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 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

 

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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.

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.

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. 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.”

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

 

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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 December 31, 2011, 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. 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

 

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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.

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

 

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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.

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

 

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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 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;

 

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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 has requested public comments regarding this exemption and other issues surrounding the excise tax that should be addressed in guidance implementing the tax. Because our products are sold over the counter to consumers, it is possible they would be exempt from the tax; however, this is uncertain pending guidance from the Internal Revenue Service. In the event we are subject to paying the excise tax, we would expect to begin paying the tax 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 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.

 

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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.

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.

 

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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.

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.

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 our internal control over financial reporting beginning with our annual report for the fiscal year ending December 31, 2012. As a public company, we will require greater financial, systems and accounting resources than we have had as a private company. 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.

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 conforming our internal control procedures to the requirements of Section 404 and we may not be able to complete our evaluation, testing and any required remediation needed to comply with Section 404 in a timely fashion. Our independent registered public accounting firm has not been engaged to perform an audit of our internal control over financial reporting. 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. In order to fully comply with Section 404, we will need to retain additional employees to supplement our current finance staff, and we may not be able to so in a timely manner, or at all. In addition, in the process of evaluating our internal control over financial reporting we expect that certain of our internal control practices will need to be updated to comply with the requirements of Section 404 and the regulations promulgated thereunder, and we may not be able to do so on a timely basis, or at all. In the event that we are not able to demonstrate compliance with Section 404 in a timely manner, or are unable to produce timely or accurate financial statements, we may be subject to sanctions or investigations by regulatory authorities such as the SEC and the securities exchange on which we trade and investors may lose confidence in our operating results and the price of our common stock could decline. Furthermore, if we or our independent registered public accounting firm are unable to certify that our internal control over financial reporting is effective and in compliance with Section 404 we may be subject to sanctions or investigations by regulatory authorities such as the SEC or the securities exchange on which we trade and we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on our business and on the price of our common stock and our ability to access the capital markets.

We have not been subject to these requirements in the past and cannot provide you with assurance that our finance department has or will maintain adequate resources to ensure that we will not have any future material weakness in our system of internal controls. 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;

 

 

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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              shares of common stock outstanding. The              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              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              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, 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              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 general corporate purposes, including working capital and the repayment of indebtedness. We may also use net proceeds for other purposes, including 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.

 

 

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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. 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 $         per share in net tangible book value per share of common stock, based on the assumed initial offering price of $         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     % of our outstanding common stock, including warrants and stock options exercisable within 60 days after December 31, 2011. 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.

 

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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.

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. We have not independently verified any third-party information and cannot assure you of its accuracy or completeness. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. 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 $        , or $         if the underwriters fully exercise their option to purchase additional shares, based upon an assumed initial public offering price of $         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 $         per share would increase or decrease the net proceeds to us from this offering by $        , 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:

 

   

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

 

   

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

 

   

$         million for repayment of the principal and interest outstanding, and a 3% 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.”

We expect to use the remainder of the net proceeds for working capital and general corporate purposes. 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 cash and cash equivalents, our current portion of long-term debt and capitalization at September 30, 2011 on:

 

   

an actual basis; and

 

   

a pro forma, as adjusted basis after giving effect to (i) the conversion of all our outstanding shares of redeemable convertible preferred stock into 74,210,765 shares of common stock prior to completion of this offering and (ii) the receipt of the estimated net proceeds from the sale of              shares of common stock offered by us at an assumed initial public offering price of $         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.

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 September 30, 2011    
    Actual     Pro Forma,
as adjusted
 
    (unaudited)  
    (in thousands, except share
data)
 

Cash, cash equivalents and short-term investments

    $     6,917        $                   
 

 

 

   

 

 

 

Notes payable, including current portion

    $     7,533        $       7,533   

Convertible preferred stock and common stock warrant liability

    206     

Redeemable convertible preferred stock, $0.001 par value; 75,085,697 shares authorized, no shares issued and outstanding, actual and as adjusted

    89,559     

Stockholders’ equity (deficit):

   

Common stock, $0.001 par value; 100,000,000 shares authorized, actual and as adjusted, 5,355,299 issued and outstanding, actual, and              issued and outstanding, as adjusted

    5     

Additional paid-in capital

    2,736     

Accumulated other comprehensive income

    117          

Accumulated deficit

    (90,900)     
 

 

 

   

 

 

 

Total stockholders’ equity (deficit)

    (88,042)     
 

 

 

   

 

 

 

Total capitalization

    $     9,256        $                   
 

 

 

   

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease each of pro forma, as adjusted, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $         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:

 

   

9,624,562 shares issuable upon the exercise of options outstanding as of September 30, 2011 under our 2004 Plan at a weighted average exercise price of approximately $0.29 per share; and

 

   

             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.

 

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DILUTION

Our pro forma net tangible book value as of December 31, 2011 was approximately $         million, or $         per share, based on 97,442,060 shares of common stock outstanding after giving effect to the conversion of all outstanding shares of redeemable convertible preferred stock into 91,880,332 shares of common stock (including the exercise, on a cash basis, and conversion of all warrants to purchase 278,260 shares of our series CC preferred stock) and the exercise, on a cash basis, of warrants to purchase 201,429 shares of our 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              shares of common stock in this offering at an initial public offering price of $         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 December 31, 2011 would have been $         million or $         per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $         per share and an immediate dilution in pro forma net tangible book value of $         per share to new investors purchasing our common stock in the offering at an initial public offering price of $         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

        $                

Pro forma net tangible book value per share as of December 31, 2011

     $                  

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

     $                  
  

 

 

    

Pro forma net tangible book value per share after this offering

        $                
  

 

 

    

 

 

 

Dilution of net tangible book value per share to new investors

        $                
     

 

 

 

Each $1.00 increase or decrease in the assumed public offering price of $         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 $         million, or approximately $         per share, and the pro forma dilution per share to investors in this offering by approximately $         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 December 31, 2011, on the pro forma basis discussed above, the number of shares of common stock purchased from us, the total consideration paid to us and the 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 $         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

                 $                                $               

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

Total

        100     $                     100  
  

 

  

 

 

   

 

 

    

 

 

   

 

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

The above discussion and tables exclude:

 

   

13,700,062 shares issuable upon the exercise of options outstanding as of December 31, 2011 under our 2004 Plan at a weighted average exercise price of approximately $0.32 per share; and

 

   

             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.

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 financial statements, the notes to the 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 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, 2008, 2009 and 2010 and the balance sheet data as of December 31, 2009 and 2010 from our audited financial statements appearing elsewhere in this prospectus. The selected statements of operations data for the nine months ended September 30, 2010 and 2011 and the balance sheet data as of September 30, 2011 are derived from our unaudited financial statements appearing elsewhere in this prospectus. The selected statements of operations data for the years ended December 31, 2006 and 2007 and the balance sheet data as of December 31, 2006 and 2007 are derived from our unaudited financial statements not included in this prospectus. The balance sheet data as of December 31, 2008 is 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, and our interim results are not necessarily indicative of the results to be expected for the full fiscal year.

 

    Year Ended December 31,     Nine Months  Ended
September 30,
 
    2006     2007     2008     2009     2010     2010     2011  
    (in thousands, except per share data)  
Consolidated Statements of Operations Data:   (unaudited)                       (unaudited)  

Net sales

  $ 2,188      $ 6,145      $ 9,805      $ 19,417      $ 27,140      $ 18,468      $ 32,480   

Cost of goods sold

    1,804        3,750        6,477        9,621        14,109        9,079        16,542   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    384        2,395        3,328        9,796        13,031        9,389        15,938   

Operating expenses:

             

Sales and marketing

    2,622        3,747        6,373        9,005        19,863        13,767        22,613   

Research and development

    2,643        3,442        5,767        8,253        9,381        7,210        6,446   

General and administrative

    1,848        2,804        3,870        5,583        9,792        7,464        10,543   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    7,113        9,993        16,010        22,841        39,036        28,441        39,602   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (6,729     (7,598     (12,682     (13,045     (26,005     (19,052     (23,664

Other income (expense):

             

Interest income

    210        633        515        386        50        41        33   

Interest expense

                  (1     (1     (7     (2     (308

Foreign exchange gain (loss)

    (3     323        1,081        372        366        284        (9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before benefit (provision) for income taxes

    (6,522     (6,642     (11,087     (12,288     (25,596     (18,729     (23,948

Benefit (provision) for income taxes

           (54     77        (91     (23     (11     (21
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (6,522     (6,696     (11,010     (12,379     (25,619     (18,740     (23,969

Adjustment to net loss resulting from preferred stock modification and extinguishment

                                982                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (6,522   $ (6,696   $ (11,010   $ (12,379   $ (24,637   $ (18,740   $ (23,969
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net loss per share attributable to common stockholders - basic and diluted   $ (2.15   $ (2.18   $ (3.46   $ (3.70   $ (6.26   $ (5.18   $ (4.49
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Weighted-average shares of common stock used in computing net loss attributable to common stockholders - basic and diluted (1)     3,036        3,078        3,183        3,345        3,933        3,617        5,339   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Pro forma net loss per share attributable to common stockholders - basic and diluted (unaudited) (1)           $ (0.43     $ (0.30
         

 

 

     

 

 

 
Weighted average shares of common stock used in computing the pro forma net loss attributable to common stockholders - basic and diluted (unaudited) (1)             57,747          78,949   
         

 

 

     

 

 

 

 

(1)

See Notes 2 and 15 to our audited 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
September 30,
        2011         
 
            2006                     2007                     2008                     2009                     2010            
    (in thousands)  
    (unaudited)                       (unaudited)  

Consolidated Balance Sheet Data:

           

Cash and cash equivalents

  $ 4,423      $ 13,260      $ 7,816      $ 5,590      $ 5,809      $ 5,916   

Short-term investments

                  25,785        13,876        10,713        1,001   

Working capital

    5,705        16,194        35,531        22,232        17,384        5,308   

Assets

    7,418        18,296        38,616        29,684        27,977        21,872   

Notes payable, including current portion

                                       7,533   

Redeemable convertible preferred stock

    17,356        34,563        64,542        64,542        83,878        89,559   

Stockholders’ equity (deficit)

  $ (11,207   $ (17,842   $ (28,453   $ (40,641   $ (64,423   $ (88,042

 

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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 is defining a new category of skincare by bringing 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 $27.1 million in 2010 and to $32.5 million for the nine months ended September 30, 2011.

We have successfully developed and we currently market rechargeable consumer hand-held devices that are safe and effective, yet simple to use and elegantly designed. 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 believe that our clinical studies will support an FDA clearance 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 such as Brazil, China and additional countries within the European Union. 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% of our net sales for the year ended December 31, 2010, and 62% of our net sales for the nine months ended September 30, 2011.

We have consistently grown our sales. Our sales have increased from $9.8 million in 2008 to $27.1 million in 2010, representing a compound annual growth rate of 66%. Our sales also increased 76% from $18.5 million during the nine months ended September 30, 2010 to $32.5 million during the nine months ended September 30, 2011. 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 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.

 

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We have achieved year-over-year quarterly sales growth for the past 11 consecutive quarters. Since our inception, we have incurred losses and negative cash flow from our operations. Our net losses were $11.0 million, $12.4 million and $25.6 million in the years ended December 31, 2008, 2009 and 2010, respectively, and $24.0 million for the nine months ended September 30, 2011. For the year ended December 31, 2010 and the nine months ended September 30, 2011, we used $22.7 million and $22.4 million of cash from our operating activities, respectively. At December 31, 2010 and September 30, 2011, we had accumulated deficits of $66.9 million and $90.9 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 global 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 September 30, 2011, we had $7.5 million outstanding under a bank term loan that was fully drawn down and we had $2.0 million that was undrawn and available under our existing revolving line of credit. Additionally, in the fourth quarter of 2011, we raised $20.0 million in an extension of our series CC preferred stock financing. In January 2012, we entered into a loan and security agreement with three financial institutions that provides a $27.0 million debt facility to be used for general corporate purposes. 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.

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 2010, 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 in 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.

The percentage of our total sales generated in North America has increased from 24% in 2008 to 45% in 2010 and from 41% in the nine months ended September 30, 2010 to 62% in the nine months ended September 30, 2011, 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 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.

 

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

 

     Year Ended
December 31,
    Nine Months
Ended

September 30,
 
     2008     2009     2010     2010     2011  
                       (unaudited)  

North America

     24     45     45     41     62

APAC

     58        38        51        54        37   

Rest of World

     18        17        4        5        1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

     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 in 2012.

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 sales also include the costs of developing advertisements used globally 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.

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

 

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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 globally 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’ equity (deficit). 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, 2008, 2009 and 2010 have been derived from our audited consolidated financial statements and the consolidated statements of operations data for the nine month periods ended September 30, 2010 and 2011 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 the Nine Months Ended September 30, 2010 and 2011

 

    
 
Nine Months Ended
September 30,
  
  
    Change   
     2010     2011     $     %  
     (dollars in thousands)              
     (unaudited)              

Net sales

   $ 18,468      $ 32,480      $ 14,012        76

Cost of goods sold

     9,079        16,542        7,463        82   
  

 

 

   

 

 

   

 

 

   

Gross profit

     9,389        15,938        6,549        70   

Operating expenses:

        

Sales and marketing

     13,767        22,613        8,846        64   

Research and development

     7,210        6,446        (764     (11

General and administrative

     7,464        10,543        3,079        41   
  

 

 

   

 

 

   

 

 

   

Total operating expenses

     28,441        39,602        11,161        39   
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (19,052     (23,664     (4,612     24   

Other income (expense):

        

Interest income

     41        33        (8     (20

Interest expense

     (2     (308     (306     *   

Foreign exchange gain (loss)

     284        (9     (293     (103
  

 

 

   

 

 

   

 

 

   

Loss before benefit (provision) for income taxes

     (18,729     (23,948     (5,219     28   

Benefit (provision) for income taxes

     (11     (21     (10     *   
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (18,740   $ (23,969   $ (5,229     28
  

 

 

   

 

 

   

 

 

   

 

*

Not meaningful.

Net Sales

Sales increased by $14.0 million, or 76%, to $32.5 million in the nine months ended September 30, 2011 as compared to $18.5 million in the nine months ended September 30, 2010. The growth in sales was primarily due to the sales volume of our Hair Removal Laser in the United States more than doubling, 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. Additionally, the growth rate in APAC declined as marketing strategies were restructured to deal with changes in the marketplace in the third quarter. The rest of the world was impacted by 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 and Gross Profit

Costs of goods sold increased by $7.5 million, to $16.5 million in the nine months ended September 30, 2011, up from $9.1 million in the nine months ended September 30, 2010. Gross profit increased by $6.5 million, to $15.9 million in the nine months ended September 30, 2011, up from $9.4 million in the nine months ended September 30, 2010. The increase in our cost of goods sold and our gross profit was due to higher sales volume of our Hair Removal Laser in 2011 as compared to 2010. As a percentage of sales, cost of goods sold increased to 51% for the nine months ended September 30, 2011, compared to 49% of sales for the nine months ended

 

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September 30, 2010 and gross profit was 49% of sales for the nine months ended September 30, 2011, compared to 52% of sales for the nine months ended September 30, 2010. The decrease in gross profit margin for the period was mainly due to the impact of the geographic mix of sales that included a larger percentage of lower margin North American sales and introductory pricing for our Skin Perfecting Blue Light. The decrease in gross margin was partially offset by a recovery of inventory loss related to consigned goods and from a reduction in the unit cost of our third generation Hair Removal Laser as compared to the second generation model.

Operating Expenses

Sales and Marketing

Sales and marketing costs increased by $8.8 million, or 64%, to $22.6 million in the nine months ended September 30, 2011 as compared to $13.8 million in the nine months ended September 30, 2010. This increase was primarily attributable to $8.1 million in advertising expenses incurred to acquire new customers, the development of new television infomercial programs in North America and Asia and an increase in headcount to support growth in marketing activities.

Research and Development

Research and development costs decreased by $0.8 million, or 11%, to $6.4 million in the nine months ended September 30, 2011 as compared to $7.2 million in the nine months ended September 30, 2010. The decrease in our 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.

General and Administrative

General and administrative costs increased by $3.1 million, or 41%, to $10.5 million in the nine months ended September 30, 2011 as compared to $7.5 million in the nine months ended September 30, 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.

Other Income (Expense)

The decrease in our other income (expense) of $0.6 million in the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010 was primarily due to an increase in interest expense of $0.3 million related to the 2011 term loan with Silicon Valley Bank. In addition, the foreign currency loss increased by $0.3 million primarily due to unfavorable changes in currency exchange rates related to payable amounts denominated in U.S. dollars compared to our subsidiaries’ functional currencies.

 

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Comparison of the Years Ended December 31, 2008, 2009 and 2010

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,        2008 vs. 2009        2009 vs. 2010   
        2008             2009             2010          
   

(dollars in thousands)

 

Net sales

  $ 9,805      $ 19,417      $ 27,140      $ 9,612        98   $ 7,723        40

Cost of goods sold

    6,477        9,621        14,109        3,144        49        4,488        47   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Gross profit

    3,328        9,796        13,031        6,468        194        3,235        33   

Operating expenses:

             

Sales and marketing

    6,373        9,005        19,863        2,632        41        10,858        121   

Research and development

    5,767        8,253        9,381        2,486        43        1,128        14   

General and administrative

    3,870        5,583        9,792        1,712        44        4,210        75   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total operating expenses

    16,010        22,841        39,036        6,830        43        16,196        71   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Loss from operations

    (12,682     (13,045     (26,005     (362     3        (12,961     99   

Other income (expense):

             

Interest income

    515        386        50        (129     (25     (336     (87

Interest expense

    (1     (1     (7                   (6     600   

Foreign exchange gain (loss)

    1,081        372        366        (709     (66     (6     (2
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Loss before benefit (provision) for income taxes

    (11,087     (12,288     (25,596     (1,200     11        (13,309     108   

Benefit (provision) for income taxes

    77        (91     (23     (168     (218     68        (75
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net loss

  $ (11,010   $ (12,379   $ (25,619   $ (1,368     12   $ (13,241     107
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net Sales

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 sales volume in both North America and APAC due to growing demand for our Hair Removal Laser through direct to consumer e-commerce channels, and was 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.

2008 compared to 2009. Sales increased by $9.6 million, or 98%, to $19.4 million for the year ended December 31, 2009, compared to $9.8 million for the year ended December 31, 2008. The increase was primarily due to an increase in sales volume in all regions of the world. In the United States, our increase in sales volume was due to the introduction of the Hair Removal Laser after receiving FDA clearance for over-the-counter sales, while in APAC we experienced growing demand for our Hair Removal Laser, primarily in Japan.

Cost of Goods Sold

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.

2008 compared to 2009. Cost of goods sold increased by $3.1 million, or 49%, to $9.6 million for the year ended December 31, 2009, compared to $6.5 million for the year ended December 31, 2008. The increase was primarily due to an increase in the volume of our Hair Removal Laser sold during 2009. Cost of goods sold as a

 

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percentage of sales decreased from 66% for the year ended December 31, 2008 to 50% for the year ended December 31, 2009, due to a reduction of unit costs related to design and supply chain improvements and higher manufacturing volumes.

Gross Profit

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.

2008 compared to 2009. Gross profit increased by $6.5 million, or 194%, to $9.8 million for the year ended December 31, 2009, up from $3.3 million for the year ended December 31, 2008. The increase in our gross profit was primarily due to higher sales volume of our Hair Removal Laser in 2009 as compared to 2008. As a percentage of sales, gross profit increased to 50% for the year ended December 31, 2009 from 34% for the year ended December 31, 2008 due mainly to the impact of a reduction of unit costs related to design and supply chain improvements and higher manufacturing volumes.

Operating Expenses

Sales and Marketing

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.

2008 compared to 2009. Sales and marketing expenses increased by $2.6 million, or 41%, to $9.0 million for the year ended December 31, 2009, as compared to $6.4 million for the year ended December 31, 2008. The increase was primarily due to spending in support of customer acquisition through our direct-to-consumer channel and an increase in headcount to support the growth in marketing activities.

Research and Development

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.

2008 compared to 2009. Research and development expenses increased by $2.5 million, or 43%, to $8.3 million for the year ended December 31, 2009, as compared to $5.8 million for the year ended December 31, 2008. The increase was primarily due to an increase in headcount and professional services associated with the development of our Skin Perfecting Blue Light. As a percentage of sales, research and development costs were 43% in 2009 as compared to 59% in 2008.

General and Administrative

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.

 

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2008 compared to 2009. General and administrative expenses increased by $1.7 million, or 44%, to $5.6 million for the year ended December 31, 2009, as compared to $3.9 million for the year ended December 31, 2008. The increase in our general and administrative expenses was primarily due to a higher headcount and an investment in building our direct-to-consumer website.

Other Income (Expense)

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.

2008 compared to 2009. Other income (expense) was $0.8 million lower for the year ended December 31, 2009 as compared to December 31, 2008, primarily due to a reduction in interest income as we had less cash to invest throughout the year and a decline in favorable unrealized currency gains from 2008 when we benefited from a significant strengthening of the Japanese Yen.

Unaudited Quarterly Results of Operations

The following tables present our unaudited quarterly consolidated results of operations for the seven quarters ended September 30, 2011, 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.

 

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

Net sales

  $ 5,754      $ 5,314      $ 7,400      $ 8,672      $ 9,058      $ 11,949      $ 11,473   

Cost of goods sold

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

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

Operating expenses:

             

Sales and marketing

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

Research and development

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

General and administrative

    2,211        2,999        2,254        2,328        3,101        3,800        3,642   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    8,580        10,083        9,778        10,595        10,994        13,592        15,016   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

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

Other income (expense):

             

Interest income

    22        6        13        9        13        10        10   

Interest expense

                  (2     (5            (101     (207

Foreign exchange gain (loss)

    (61     49        296        82        (42     62        (29
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before benefit (provision) for income taxes

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

Benefit (provision) for income taxes

    (11                   (12     (11     (3     (7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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
 

Net sales

     100     100     100     100     100     100     100

Cost of goods sold

     49        47        51        58        54        44        55   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     51        53        49        42        46        56        45   

Operating expenses:

              

Sales and marketing

     74        86        67        70        66        65        77   

Research and development

     37        47        35        25        21        17        22   

General and administrative

     38        56        30        27        34        32        32   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     149        189        132        122        121        114        131   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

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

Other income (expense):

              

Interest income

                                                 

Interest expense

                                        (1)        (2

Foreign exchange gain (loss)

     (1     1        4        1               1          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (99     (135     (79     (79     (75     (58     (88

Benefit (provision) for income taxes

                                                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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, 2010 through 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 of the growth rate in APAC as marketing strategies were restructured to deal with changes in the marketplace in the third quarter.

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. 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 again declined in the nine months ended September 30, 2011, again reflecting higher North American sales as a percentage of total net sales.

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. 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,

 

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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, 2010 and the nine months ended September 30, 2011, we incurred net losses of $25.6 million and $24.0 million, respectively, and we used $22.7 million and $22.2 million of cash flows from our operating activities, respectively. At December 31, 2010 and September 30, 2011, we had accumulated deficits of $66.9 million and $90.9 million, respectively.

As of December 31, 2010 and September 30, 2011, we had working capital of $17.4 million and $5.3 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 September 30, 2011, we had $7.5 million outstanding under a bank term loan that was fully drawn down and we had $2.0 million that was undrawn and available under our existing revolving line of credit. In January 2012, we entered into a new loan and security agreement with three financial institutions to be used for general corporate purposes. We immediately drew down $20.0 million and repaid in full the $7.5 million outstanding under the prior bank term loan. We have an additional $7.0 million available to us if we meet certain milestones. See “—Loan Agreements.” In the fourth quarter of 2011, we raised $20.0 million in an extension of our series CC preferred stock financing.

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.

Summary Statement of Cash Flows

Summary cash flow information for the years ended December 31, 2008, 2009 and 2010, the nine months ended September 30, 2010 and the nine months ended September 30, 2011 is set forth below.

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
     2008       2009       2010       2010     2011  
     (in thousands)  
                      

(unaudited)

 

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

          

Operating activities

   $ (10,245   $ (13,174   $ (22,731   $ (18,567   $ (22,190

Investing activities

     (25,718     11,046        1,952        6,082        8,973   

Financing activities

     30,032        8        20,807        15,636        13,263   

Effect of exchange rate changes on cash and cash equivalents

     487        (106     191        113        61   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

   $ (5,444   $ (2,226   $ 219      $ 3,264      $ 107   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Cash Flows for the Nine Months Ended September 30, 2010 and 2011

Operating activities

For the nine months ended September 30, 2011, net cash used in operating activities was $22.2 million and consisted primarily of a net loss of $24.0 million, partially offset by $0.9 million in non-cash items and a net increase in our operating assets and liabilities of $0.7 million.

For the nine months ended September 30, 2010, net cash used in operating activities was $18.6 million and consisted primarily of a net loss of $18.7 million, partially offset by $0.6 million in non-cash items and a net increase in our operating assets and liabilities of $0.5 million.

Net cash (used in) provided by investing activities

Net cash provided by investing activities was $9.0 million and $6.1 million for the nine months ended September 30, 2011 and 2010, respectively. 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 $0.6 million and $0.9 million for the respective time periods.

Net cash provided by financing activities

For the nine months ended September 30, 2011, net cash provided by financing activities totaled $13.3 million and consisted primarily of net proceeds from the issuance of preferred stock and from the proceeds of a term loan. For the nine months ended September 30, 2010, net cash provided in financing activities totaled $15.6 million, primarily from the issuance of preferred stock.

Cash Flows for the Years Ended December 31, 2008, 2009 and 2010

Operating activities

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 a net decrease to our operating assets and liabilities of $1.9 million.

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 net increase to our operating assets and liabilities of $1.3 million.

For the year ended December 31, 2008, net cash used in operating activities was $10.2 million and consisted primarily of a net loss of $11.0 million, offset by $0.3 million in non-cash items and a net increase to our operating assets and liabilities of $0.5 million.

Net cash (used in) provided by investing activities

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.

For the year ended December 31, 2008, net cash used in investing activities totaled $25.7 million and consisted primarily of the net purchase, sale and maturities of short-term investments, less $0.2 million used for capital expenditures.

 

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Net cash provided by financing activities

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.

For the year ended December 31, 2008, net cash proceeds from financing activities totaled $30.0 million and consisted primarily of net proceeds from the issuance of preferred stock of $29.9 million.

Contractual Obligations and Commitments

The following is a summary of our long-term contractual obligations as of December 31, 2010. As of September 30, 2011, we had indebtedness in the amount of $7.5 million, resulting from our 2011 Facility. See “—Loan Agreements”:

 

     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)

   $ 397       $ 2,272       $ 1,184       $       $ 3,853   

Purchase commitments

     4,022                                 4,022   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,419       $ 2,272       $ 1,184       $       $ 7,875   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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

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. 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 278,260 shares of series CC preferred stock at $1.15 per share and a warrant to purchase 125,000 shares of common stock at $0.20 per share. In September 2011, we issued a warrant to SVB to purchase 71,429 shares of common stock at $0.21 per share. We recorded the fair value of these warrants as debt discount at issuance and will amortize them 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 $12.4 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 606,281 shares of series CC preferred stock at $1.15 per share. We intend to use a portion of the net proceeds received by us from this offering to repay, in full, this indebtedness.

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:

 

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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. 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. The total noncancelable amount of such purchase commitments as of December 31, 2010 and September 30, 2011 were $4.0 million and $5.5 million, respectively, which we expect to fund through existing sources of available funds.

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,     Nine Months  Ended
September 30,
 
    2008     2009     2010     2010     2011  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

(in thousands)

 
                      (unaudited)  

Cash and cash equivalents

  $ 7,816      $ 5,590      $ 5,809      $ 8,854      $ 5,916   

Short-term investments

    25,785        13,876        10,713        6,755        1,001   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash and investments

  $ 33,601      $ 19,466      $ 16,522      $ 15,609      $ 6,917   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

 

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We had debt of $7.5 million ($2.3 million short-term and $5.2 million long-term) as of September 30, 2011, consisting of our outstanding obligations under the 2011 Facility. We have not drawn on the revolving line of credit that has a variable interest rate (prime rate published in the Money Rates section of the Wall Street Journal plus 2.5% per annum). In January 2012, we repaid in full the principal, plus accrued interest and final payment due under the 2011 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 and Korea are the U.S. Dollar, Japanese Yen and Korean Won, 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’ equity (deficit). 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. It is uncertain whether these currency trends will continue. In the future, we may experience foreign currency exchange losses on our accounts receivable and intercompany receivables and payables. 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 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, 2010, 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

 

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title and risk of loss have been transferred. For sales from our website, this occurs at the estimated time of product delivery 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 for any reason, generally within 60 to 90 days after shipment .

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 based on historical claims experience and costs to service or replace the products.

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, 2008, 2009, and 2010, and the nine months ended September 30, 2010 and 2011:

 

     Year Ended December 31,    Nine Months Ended
September 30,
     2008    2009    2010    2010    2011
                    (unaudited)

Expected term

   6.1 years    6.1 years    5.9 years    6.0 years    6.1 years  

Expected volatility

   63%    65%    60%    61%    59%

Risk-free interest rate

   2.7%    2.5%    2.0%    2.7%    2.4%

Expected dividend rate

   0.0%    0.0%    0.0%    0.0%    0.0%

 

 

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Expected term.    The expected term represents the period that our stock-based awards are expected to be outstanding and 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.

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 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, 2008, 2009, and 2010 and the nine months ended September 30, 2010 and 2011:

 

     Year Ended December 31,      Nine Months  Ended
September 30,
 
     2008      2009      2010      2010      2011  
     (in thousands)  
                          (unaudited)  

Cost of goods sold

     $3         $6         $6         $4         $3   

Sales and marketing

     63         52         30         21         18   

Research and development

     44         68         74         49         89   

General and administrative

     85         188         193         127         188   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

     $195         $314         $303         $201         $298   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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As of September 30, 2011, we had $529,000 of unrecognized stock-based compensation expense, net of estimated forfeitures, that is expected to be recognized over a weighted-average period of 2.7 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.

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

 

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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 $1.15 per share in August 2010, October 2010, February 2011 and December 2011, adjusted to reflect our capitalization structure, the prevailing risk-free interest rate as of the dates for the sale, 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 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 30% 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

 

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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    

November 17, 2010

     2,127,827         $0.20      $0.20  

January 25, 2011

     770,105         0.20    0.20

February 8, 2011

     647,500         0.20    0.20

February 16, 2011

     367,600         0.20    0.20

May 9, 2011

     552,000         0.20    0.20

July 20, 2011

     367,500         0.21    0.21

October 4, 2011

     955,000         0.21    0.21

December 24, 2011

     3,140,000         $0.43      $0.43  

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 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 $0.20 as of November 2010.

January 25, February 8, February 16 and May 9, 2011 Grants.  Our compensation committee issued grants at $0.20 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 $0.21 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 $0.21 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 $0.21 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.

 

 

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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 $0.43 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, partially offset by its determination that the volatility of the capital markets created significant uncertainty as to our ability to complete the offering. We subsequently obtained a revised valuation report using the PWERM methodology for the December 2011 grants that validated our $0.43 valuation.

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, 2010, we had federal and state net operating loss carryforwards of $63.0 million and $48.3 million, respectively. The federal net operating loss carryforwards will begin to expire in 2023, and the

 

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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 2010 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.

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

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. We are currently evaluating the impact this guidance may have on our financial position, results of operations and cash flows.

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 are currently evaluating the impact this guidance may have on our presentation of our financial position, results of operations and cash flows.

 

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BUSINESS

Overview

Tria Beauty is defining a new category of skincare by bringing 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 and elegantly designed. 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.

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 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.

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 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 success 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 the category and 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 $11.0 million, $12.4 million and $25.6 million in the years ended December 31, 2008, 2009 and 2010, respectively, and $24.0 million for the nine months ended September 30, 2011. As of

 

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September 30, 2011, we had an accumulated deficit of $90.9 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 companies that have invested heavily either in retail distribution of cosmetic, or non-medical, OTC skincare products or in capital equipment for physician use are not well positioned to pursue this opportunity because doing so represents a significant departure from their primary business models and expertise. In contrast, we have developed our research and development and marketing competencies specifically to pursue this opportunity. 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 improve 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.

Robust Clinical Data: 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 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 Global 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 38% of our net sales were derived from outside of North America over the three quarters ended September 30, 2011, primarily from Japan and South Korea. We have also leveraged our experience to successfully 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 the potential for significant demand for our products, including Brazil, China and additional countries within the European Union and Asia-Pacific region.

Enthusiastic and Loyal 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

 

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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 global 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 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 and, based on data from Euromonitor, the OTC cosmetic skincare products market represented an estimated $28.9 billion of global sales for 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.

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. According to Medical Insight, professional light-based aesthetic treatments for hair removal, acne reduction and skin rejuvenation generated procedure fees estimated at $6.8 billion globally in 2011. 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 $28.9 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 late 2010. 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 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 8% to $2.7 billion from 2009 to 2010.

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 skincare device industry is new and rapidly growing. This industry includes sonic-, light-, heat-, microcurrent- and microdermabrasion-based devices, and it addresses areas of skincare such as laser hair

 

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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:

 

   

Expensive: Professional office-based aesthetic treatments 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.

 

   

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

 

   

Inconvenient: 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.

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 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

 

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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, these treatment regimens frequently cost several hundred dollars per year 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 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 four to six 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.

 

   

Affordable:  Over the course of a treatment regimen, our products typically cost consumers a fraction of what professional in-office treatment alternatives and extended use of OTC skincare products cost. 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.

 

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Effective:  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.

 

   

Convenient:  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. Our rechargeable products are elegantly engineered 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 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.

 

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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 Category-Defining Brand: We are defining a new category of skincare and establishing our brand as a trusted 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 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 successful track record of launching our products outside the United States. We intend to grow our international presence by leveraging our experience to expand into new geographies such as Brazil, China and additional countries within the European Union and Asia-Pacific region.

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 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 survey, we successfully draw the vast majority of our customers 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. This demographic consists of approximately 14 to 18 million U.S. women. We believe this customer demographic contains highly favorable attributes, especially with respect to willingness to pay and capacity to spend on premium beauty products.

Taking our customer demographics of gender, age, household income level and willingness to spend on beauty treatments into account, we believe that our target demographic in the laser hair removal market consists of approximately 14 million women, our target demographic in the acne market consists of approximately 5 million men and women and our target demographic in the anti-aging market consists of approximately 18 million women. For example, with respect to hair removal, the U.S. Census Bureau estimates that, as of 2010, there are 157 million women in the United States, and approximately 33 million of those 157 million women have a similar age and household income level as our typical customer. Of those 33 million women, based on our recent sizing survey, we believe that approximately 26 million are eligible to use our Hair Removal Laser based upon their hair and skin color. Of those 26 million women, our recent sizing survey indicates that approximately 17 million shave more than three times a week or wax more than four times a year to remove unwanted hair and an estimated 14 million of those 17 million women have indicated an interest in undergoing professional laser hair removal treatments if the cost of such treatments were lower. With respect to acne treatment, the U.S. Census Bureau estimates that, as of 2010, there are 309 million men and women in the United States, and approximately 62 million of those 309 million men and women have a similar age and household income level as our typical customer. Of those 55 million men and women, our recent sizing survey indicates that approximately 20 million have seen a dermatologist for acne treatment in the last five years and approximately 5 million of

 

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those 20 million are dissatisfied or very dissatisfied with their current treatment regimen and are willing to try alternative solutions. With respect to anti-aging, the U.S. Census Bureau estimates that, as of 2010, there are 157 million women in the United States, and approximately 32 million of those 157 million women have a similar age and household income level as our typical customer. Of those 32 million women, our recent sizing survey indicates that 26 million express multiple anti-aging concerns. Of the 26 million women who express multiple anti-aging concerns, our recent sizing survey indicates that approximately 18 million currently use anti-aging products.

In the fall of 2011, we conducted an 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 globally. Approximately 75% of our customers indicated that they had never tried professional in-office laser treatments before purchasing our products. Roughly 80% of the global 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 success is our distinctive multi-channel distribution model, which differs significantly from traditional skincare or professional aesthetic marketing and involves significant commitment to both direct and indirect channels. We sell our products to consumers through a direct sales channel strategy anchored by our e-commerce website at www.triabeauty.com and infomercials. 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. We acquire the significant majority of our customers globally through direct marketing channels.

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

•      Authenticity

•      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 globally 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 with an independent media agency to develop a media strategy and acquire desired time slots.

Indirect Channel.  Since February 2009, we have marketed and sold our products on-air at QVC and through QVC’s website at www.qvc.com. According to QVC, they reach approximately 85 million American homes and more than 190,000 customers shop with QVC every day. We believe that QVC is a strong consumer acquisition channel and we use home television shopping to develop brand awareness and educate consumers on product differentiation, proper use and resulting benefits.

 

 

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We also market and sell our products through high-end retailers. Our retail channel enables us to provide additional points of contact to drive customer awareness with limited capital investment, educate consumers about our products and further strengthen our brand image. We believe that our physical presence at high-end retailers, such as Bloomingdale’s, reinforces our image as a quality brand, allows us to target a consumer who may be less inclined to shop online and provides an inviting venue to experience our products personally and discuss product features with experienced sales personnel.

Our Skin Perfecting Blue Light is also sold through our physician dispensing program, whereby dermatologists and other physicians can sell the product to patients suffering from mild to moderate inflammatory acne. We believe that selling the Skin Perfecting Blue Light to patients represents an attractive alternative for physicians unwilling or unable to make an investment in professional blue light capital equipment, as well as those physicians who recognize the benefits of home treatment over in-office treatment. In addition, our blue light therapy can be an attractive adjunct to other treatments that the physician might dispense or prescribe.

International.  In our more mature international markets, we typically employ a similar distribution strategy to the United States, utilizing both direct and indirect channels, as is the case in Japan. In our newer geographies, including Korea, the United Kingdom and Canada, we start with the direct channel, which provides the most efficient and cost-effective means to test market receptiveness and adoption before investing in the indirect channel.

Branding, Product Design and Packaging

We are defining a new category of skincare and establishing our brand as a trusted leader within it. Over time, we believe consumers will 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 at-home use, increasing consumer awareness and expectations for what is possible. Our marketing strategy reflects the following priorities:

 

   

introducing and acquiring new consumers to our brand;

 

   

merchandising products according to channel demographics;

 

   

encouraging the purchase of additional product offerings;

 

   

generating and renewing excitement among our consumers; and

 

   

reinforcing our brand.

We believe that for a skincare product to succeed in the home setting, it must also create a pleasurable experience for the user. As a result, we complement our scientific capabilities with marketing expertise to develop products that appeal to the consumer. We compete on the basis of product performance, brand recognition, value and other core benefits to consumers. We work with leading global agencies to develop a holistic, best-in-class marketing and product experience, across all consumer touch points. We recognize that advertising, promotion, merchandising and packaging have a significant impact on consumer purchasing decisions. Consequently, our products are simple and easy to use and our packaging is elegant. We partner with strategic consultants and invest in developing deep consumer insights, significantly influencing product design and marketing communications. Our products, branding and pricing structure are consistent and widely recognizable through all distribution channels, including direct to consumer, retail and physician-dispensed.

 

 

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We provide a full replacement warranty that our Hair Removal Laser and Skin Perfecting Blue Light are free of defects. Warranty periods range from 12 to 24 months from the date of purchase, depending on the geographical location and year purchased. If customers are not satisfied with our products, we also provide a full refund as part of our money-back guarantee program. For purchases made after March 30, 2011, customers have 90 days to return our Hair Removal Laser and 60 days to return our Skin Perfecting Blue Light and other acne products and kits for a full refund. Purchases made prior to March 30, 2011 are subject to our previous 30-day money-back guarantee program. We also allow our customers to purchase certain products in installments. For example, we offer our direct customers a payment plan consisting of a down payment plus four to five equal monthly payments secured by a credit card.

Technology and Clinical Results

Our products incorporate proprietary technology developed by skilled scientists and tested in clinical studies for safety and effectiveness using the same methodologies established by professional aesthetic medical equipment used in the physician’s office. Our products are comparable to devices used in a physician’s office in terms of technological similarities, clinical results and, for our commercially-available products, regulatory clearances of substantial equivalence.

Hair Removal Laser.  Our Hair Removal Laser is a hand-held, cordless, rechargeable diode laser designed with features for easy operation by the consumer, including:

 

   

lightweight, ergonomic design;

 

   

skin sensor to ensure that the user falls within the intended skin tone range of light-to-medium skin tones (because our Hair Removal Laser is only intended for people with light-to-medium skin tones and may cause injury to those with darker skin tones);

 

   

automatic pulse upon contact with the skin;

 

   

five adjustable comfort settings to control the amount of energy emitted during treatment; and

 

   

easy-to-use graphic user interface with universal symbols for battery charge, heat setting and skin sensor indicator.

The primary components of our Hair Removal Laser include a solid-state light engine, optical diffuser and optical delivery mechanism, optical skin sensor, along with a lithium battery and control electronics. The Hair Removal Laser delivers beams of infrared light at a wavelength of approximately 800 nanometers with an energy pulse of up to 22 joules per square centimeter. This energy level is generally less than the maximum energy levels of professional devices but within the range of settable energy levels for those devices and still capable of inducing permanent hair reduction when used as directed. This energy can be absorbed by melanin, disabling the hair follicles without harming the surrounding skin by thermally injuring the stem cells responsible for the hair growth cycle, a process known as selective photothermolysis. A typical treatment can take from 10 to 40 minutes depending on the size and condition of the area being treated. Because hair cycles through active and dormant phases, and laser hair removal is believed to be most effective in the active phase, customers are instructed to continue treatments twice a month for the first three months and then once a month for five additional months to achieve best results.

The core technology of our Hair Removal Laser has been examined in several studies, including a clinical study designed to simulate consumer home use. The study involved the treatment of 77 “appropriate” users and 44 “inappropriate” users. The study was designed to test both the safety and effectiveness of the device in appropriate users and just the safety of the device in inappropriate users. Appropriate users were defined as individuals with naturally light brown to black hair and fair to light brown skin (Fitzpatrick Skin Types I-IV), while inappropriate users were defined as individuals not meeting one or both of those criteria. Appropriate users self-administered three treatments over six weeks (less than one-third of the treatments that we currently recommend for use of our Hair Removal Laser), while inappropriate users were given a single pulse at the

 

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device’s highest energy setting. The results of this clinical study were published by Ronald G. Wheeland, M.D., FACP, the principal investigator and a leading laser dermatologist, in the July 2007 issue of Lasers in Surgery and Medicine and formed the basis of our 2008 FDA clearance. The results of the clinical study demonstrated:

 

   

short-term benefits for appropriate users of 61%, 70% and 60% hair count reduction at three weeks after the first treatment, three weeks after the second treatment and four weeks after the third and last treatment, respectively, which was the basis for our FDA indication for “adjunctive use with shaving for hair removal sustained with periodic treatments”; and

 

   

long-term benefits for appropriate users of 41%, 31% and 33% hair count reduction at 6, 9 and 12 months after the last treatment, respectively, which was the basis for our expanded FDA indication in 2009 for “permanent reduction in hair regrowth defined as a long-term, stable reduction in hair counts following a treatment regime.”

In questionnaires, one year after the appropriate users’ last treatment, relative to their pre-treatment hair, 71% of appropriate users reported finer hair, 44% reported lighter hair and 64% found their hair to be less noticeable. The only side effect observed immediately after treatment or by an investigator for appropriate users was transient erythema (redness) with an incidence rate of 33%. The erythema was judged as minimal or moderate and resolved spontaneously, often in less than 30 minutes while the subject was still in the clinic. Burning and blistering was observed with the treatment of inappropriate users.

In another clinical study (pending submission to a peer-reviewed journal), safety and effectiveness of eight treatments (a more typical number of treatments for laser hair removal than the three-treatment protocol used in our pre-clearance trial) was measured in a baseline and shaving controlled study with 12-month follow up. Here, 21 indicated subjects (naturally brown or black hair, Fitzpatrick Skin Type I-IV) were enrolled with eight discontinuing at some point in the long (20 month) study, which provided a sufficient sample size for statistical significance. Subjects were given monthly staff-administered treatments at 7, 12 and 20 J/cm2 corresponding to low, medium and high settings of the device, respectively. An adjacent area was left untreated but shaved at the same intervals as the treated sites to provide the shaving control. During the treatment period, the hair reduction on the active sites generally increased with each treatment to a mean reduction of 23%, 32% and 50% at one month after the last treatment at low, medium and high, respectively. During the follow-up period, the corresponding hair count reduction remained relatively stable with a mean reduction of 31%, 36% and 52% at 12 months after the last treatment at low, medium and high, respectively. In sharp contrast, the shaving control site was generally stable over the study duration and showed a slight increase in hair counts of 23% and 13%, compared to baseline at one and 12 months after the last treatment, respectively. After normalizing to control, the mean hair count reductions for the treatment sites were 47%, 55% and 73% at one month after the last treatment and 44%, 49% and 65% at 12 months after the last treatment, for low, medium and high settings, respectively. These reductions were all statistically significant (p<0.05) using standard statistical assessments. These clinical results are comparable to results reported for professional laser and light-based hair removal when used on indicated users and according to the device’s instructions for use.

Skin Perfecting Blue Light.  Our Skin Perfecting Blue Light is a hand-held, cordless, rechargeable device that uses high-intensity blue light to inhibit acne-causing bacteria within the skin. The Skin Perfecting Blue Light has a power density of 400 milliwatts per square centimeter and an output wavelength of 415 nanometers. We have 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. The treatment is designed to effect photochemical destruction of the P. acnes bacteria, whereby blue light is absorbed by porphyrin, producing reactive oxygen that targets the bacteria.

The Skin Perfecting Blue Light allows our customers to clear breakouts gently while improving their skin complexion, tone and texture. The Skin Perfecting Blue Light features inviting packaging, a lightweight, ergonomic design and an easy-to-use graphic user interface with universal symbols for battery charge, length of the current treatment session and the remaining time on the treatment cartridge. The device has no on/off button;

 

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instead, it automatically turns on and off as it is placed on the skin or taken away. The device uses our proprietary solid-state light engine and a replaceable encrypted treatment cartridge that permits the device to be used for 300 minutes of treatment time (60 days of typical use). Consumers can purchase additional 300-minute treatment cartridges for the device. Our Skin Perfecting Blue Light also incorporates optical diffuser technology for eye safety and visual uniformity, custom adaptive capacitive sensor and lithium battery technology.

The safety and effectiveness of our Skin Perfecting Blue Light core technology has been studied in a number of clinical trials, including a pivotal clinical study which formed the basis of our 2010 FDA clearance. That single-center, placebo-controlled study was conducted by Zoe Draelos, M.D. and measured safety and effectiveness of treating mild to moderate acne in 39 subjects. Subjects were treated in a split-face fashion in which one side of the face was randomly assigned to receive treatment with the blue light and the other side of the face receiving no treatment as a control. Subjects were treated five days a week at the study site for two weeks. A five-minute treatment with blue light treatment was applied to a 3x3cm area of the face having mild to moderate acne. In addition, individual or groups of lesions within this area were treated for an additional 30 seconds. Primary efficacy (a statistically significant improvement in the investigator’s overall assessment of acne on the treated side of the face versus the non-treated side) was achieved with a statistically significant (p=0.002) drop in acne severity at the end of two weeks of treatment. Acne lesion counts on the treated and untreated sides of the face were performed. At the end of two weeks there was an approximately 70% decrease in baseline papule counts on the treated side, versus an approximately 25% decrease on the untreated side. Treatment with the Skin Perfecting Blue Light was well tolerated; no adverse events were reported during the study. Results from this study supported the FDA clearance of the Skin Perfecting Blue Light for the treatment of mild to moderate inflammatory acne.

Subsequently, a single-center, open-label study of our Skin Perfecting Blue Light was conducted by Ronald G. Wheeland, M.D., FACP, and Andrea Koreck, M.D., Ph.D. In this study, the safety and effectiveness of a high and low dose treatment regimen for treating mild to moderate acne was evaluated in 31 subjects. Subjects treated with the blue light by using a “paint the face” motion twice daily for eight weeks. The high dose treatment was achieved by painting a 3x5cm area of the face for three minutes, representing a dose that may occur during treatment of a localized breakout, and the low dose treatment was achieved by treating the remainder of the face for three minutes, representing a full face treatment. Subjects were also instructed to spot-treat breakout areas during the first two weeks of treatment. Inflammatory lesion counts were performed by the investigator at baseline and at weeks one, two, three, four, six and eight weeks. Treatment with the Skin Perfecting Blue Light resulted in statistically significant (p£0.01) percentage reductions from baseline in inflammatory lesion count as early as week one in the high dose treatment area and in week three in the low dose treatment area. The median reductions in inflammatory lesion count at weeks one, four and eight were 29%, 43% and 60%, respectively, in the high dose area, and 23%, 33% and 46%, respectively, in the low dose treatment area. Subject-reported satisfaction was excellent, including the fact that 100% of subjects reported improvement in the frequency and severity of their flares at week eight compared with baseline. The Skin Perfecting Blue Light was well tolerated; three adverse events reported as probably related to treatment were minimal transient skin dryness in two subjects and minimal transient hyperpigmentation in one subject. This study was postered at the 2011 Maui Derm and Dermatology World Congress conferences and has been accepted for publication by the Journal of Clinical and Aesthetic Dermatology.

A follow-on, two-center, open-label study of our Skin Perfecting Blue Light used in conjunction with our Skin Perfecting Foam Cleanser and Skin Perfecting Serum was conducted by Ronald G. Wheeland, M.D., FACP and Sunil Dhawan, M.D. Here, the safety and effectiveness of the blue light device for treating mild to moderate acne was evaluated in 28 subjects when used in conjunction with our pre-treatment cleanser and post-treatment serum. Subjects washed their faces in the morning and evening with the cleanser prior to treating with the blue light and applied the serum after treating in the evening. Subjects treated with the blue light by using a “paint the face” motion twice daily for eight weeks in high and low doses, identical to the device-only study described above. Treatment was associated with significant reductions from baseline in acne lesions—from week one onward for inflammatory lesions (p<0.01) and from week two or four onward for non-inflammatory lesion counts (p<0.05).

 

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The median reduction in inflammatory lesion count at weeks one, four and eight, respectively, was 25%, 71% and 80% in the high dose treatment area and 33%, 33% and 67% in the low dose treatment area. With regard to the non-inflammatory lesion count, the median reduction at weeks one, four and eight, respectively, was 25%, 25% and 53% for the high dose and 0%, 40% and 33% for the low dose. These data show that inflammatory lesion counts can be improved by about 25% by using our topicals compared to only using our Skin Perfecting Blue Light. The Skin Perfecting Blue Light System was well tolerated; 11 adverse events involving transient dryness and erythema were reported for the topicals, and eight adverse events involving transient skin dryness and hyper pigmentation were reported for the Skin Perfecting Blue Light. One subject dropped from the study due to a facial rash attributed to the serum. This study was postered at the 2011 Maui Derm and Dermatology World Congress conferences and was published in the Journal of Drugs and Dermatology in June 2011.

An additional study was conducted to evaluate the tolerability of the Skin Perfecting Blue Light on Asian skin. This single-center, open-label study was conducted by Sunil Dhawan M.D. and Andrea Koreck, M.D., Ph.D. In this tolerability study, Asian subjects with or without acne were eligible for enrollment. Of the 31 subjects enrolled, 13 had mild to moderate acne and 18 did not have acne. Subjects were instructed to “paint their face” with the blue light for 90 seconds, twice daily for eight weeks. At week four, an improvement from baseline in skin redness and evenness of skin tone was reported in 91% of the acne group and 82% of the non-acne group. Similarly, at week four, an improvement from baseline in the smoothness of the skin was reported in 91% of the acne group and 94% of the non-acne group. At week four, 91% and 100% of the acne group and non-acne group, respectively, expressed agreement that “The device was gentle but effective.” Weekly evaluations of tolerability by the investigator showed a transient one-point worsening from baseline in erythema for one subject, dryness for three subjects and peeling in four subjects. No hyperpigmentation was reported. The Skin Perfecting Blue Light was therefore judged well tolerated in Asian skin, in both acne and non-acne skin. In addition, a majority of subjects reported a reduction in the redness of their skin and an improvement of evenness in skin tone after treatment with the device. This study was postered at the 2011 Maui Derm and Dermatology World Congress conferences.

Advanced Skincare.  Our Skin Perfecting Blue Light is complemented by several associated replenishable products, which the customer can reorder as needed or automatically at predetermined intervals, including:

 

   

Skin Perfecting Foam Cleanser: rinses away makeup and sunscreen, unclogs pores and removes dead skin cells and oil.

 

   

Clarifying Body Wash: gently exfoliates the skin and unclogs pores while helping to smooth fine lines and wrinkles and improve skin tone and texture.

 

   

Skin Perfecting Serum: calms inflammations and soothes skin to help smooth fine lines and wrinkles and improve skin tone and texture.

 

   

Oil-Free Sunblock: helps defend against sun damage.

Skin Rejuvenating Laser.  Our Skin Rejuvenating Laser is a product currently in development and designed to utilize fractional non-ablative technology to reduce wrinkles, eliminate age spots and dyschromia caused by excess pigmentation and improve the texture of the skin. Through this process, known as photothermolysis, laser light is absorbed by water, creating microscopic thermal zones to stimulate collagen and reduce pigment.

The primary components of the Skin Rejuvenating Laser include a proprietary solid-state light engine, proprietary optical scanner and contact and position sensors and a lithium battery and control electronics. The Skin Rejuvenating Laser is expected to deliver light at a wavelength of approximately 1,410 nanometers in microscopic beams (about 250 microns in diameter) that are distributed across the treated area. These microbeams generate microscopic thermal zones, or columns of coagulated tissue in the epidermis and dermis with an intact stratum corneum, that heal quickly from untreated neighboring tissue. In the healing process, collagen is stimulated and excess pigmentation is ejected, leading to a reduction in wrinkles, reduction in excess pigmentation and a smoothening of the skin. Approximately one to two percent of the skin is treated in a full face

 

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daily regimen such that 30-60% of the skin will be treated over the course of a month, which equals a typical monthly treatment at a professional clinic. This device is expected to allow our customers to obtain similar anti-aging benefits with daily at-home treatments to those that could be obtained with office-based technology. We expect that customers would treat their full face for approximately three to five minutes per day for best results. We expect, based on dosing parameters similar to predicates including the PaloVia by Palomar and the ReAura by Philips, histology and pilot clinical work, that our U.S. pivotal study will measure effectiveness end points consistent with previous studies conducted with professional aesthetic treatments. We expect that study to involve approximately 90 subjects and begin in mid-2012 and to be completed within six months thereafter.

A histological study has been performed with a prototype of the Skin Rejuvenating Laser on an animal model (hairless guinea pigs) to observe healing and the extent and depth of microthermal zones, or MTZs. At all energies studied (approximately 6, 8 and 13 mJ/MTZ), the pulses produced MTZs that were typical and consistent with commercially-available predicate devices. Immediately after treatment, the MTZs were typically less than 500 microns deep and less than 200 microns wide. No tissue ablation was observed. Slight dermal and epidermal junction de-lamination occurred immediately post-treatment as is typical and which fully resolved by five days after treatment. Complete epidermal healing occurred and restructuring of healthy dermis was evident by day five. Normal dermal collagen replacement was observed by day 15. The prototypes demonstrated the desired tissue response and an excellent safety profile that supports its use in human clinical trials. The studies were performed under GLP controls.

A pilot, safety and efficacy study of a prototype of the Skin Rejuvenating Laser has been completed and preliminary results are available. This single-center, randomized, open-label study was conducted under an investigational device exemption by Brian Biesman, M.D. at the Nashville Centre for Laser and Facial Surgery, Nashville, Tennessee. Safety and efficacy of two proprietary regimens for treating periorbital wrinkles, perioral wrinkles, dyschromia (uneven pigmentation), diffuse redness and textural irregularities (like tactile roughness) was evaluated in 22 subjects. Subjects were treated in a split face fashion, in which each side of the face was randomly assigned to be treated with one of the dose regimens, five days a week for six weeks at the study center. Subjects were followed for 12 weeks after the final treatment. Primary efficacy was established at four weeks post-treatment for all indications, except textural irregularities, in which primary efficacy was established at two weeks post-treatment. Efficacy in the treatment of periorbital and perioral wrinkles was based on the investigator’s scores of blinded photographs (baseline versus four weeks post-treatment) using the nine-point Fitzpatrick Wrinkle Assessment Scale. Efficacy in the treatment of dyschromia and diffuse redness was evaluated in the same manner using a 9-point Dyschromia and Diffuse Redness Assessment Scale. The preliminary results of the investigator’s photographic assessments four weeks post-treatment are as follows for subjects in the low dose group: for periorbital wrinkles, 36% of subjects had at least a one-point improvement; for perioral wrinkles, 36% of subjects had at least a one-point improvement; for dyschromia, 55% of subjects had at least a one-point improvement; and for diffuse redness, 45% of subjects had at least a one-point improvement. Efficacy in the treatment of textural irregularities was based on the investigator’s scores of a live tactile roughness assessment using the 9-point Tactile Roughness Scale. For textural irregularities, all subjects had at least a one-point improvement two weeks post-treatment.

All treatment regimens were demonstrated to be safe and well tolerated. No unexpected or serious adverse events were reported. The most common, expected adverse events reported were skin burning sensation, stinging, erythema, skin sensitivity, dryness, hyperpigmentation, swelling and acne flares. A vast majority of these side effects were mild and transient, resolving within hours to a few days following treatment. Two subjects had mild erythema that lasted more than a few days post-treatment; it lasted for six days in one subject and 13 days in the other. One subject had skin sensitivity on sun exposure that lasted for 25 days, two subjects had mild dryness throughout treatment and two subjects had an acne flare that lasted more than a few days; it lasted for eight days in one subject and 12 days in the other. None of the reported side effects required treatment or caused an interruption in treatment with the device. Results from the Skin Rejuvenating Laser pilot study suggest the safety and efficacy of the device in treating facial wrinkles, skin discoloration and skin roughness is comparable to professional fraction non-ablative laser treatments performed in physician offices.

 

 

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Product Development

One of our main goals as an organization is to innovate rapidly to stay ahead of our competition. To that end, we devise a product concept, refine and validate that vision, develop technology, optimize our clinical outcomes, create a product and then deliver our products both in the United States and internationally into our customers’ hands. Because we seek to innovate rapidly and render our own products obsolete, we focus a significant portion of our product development efforts on creating new products and improving existing products, based on our own innovation or based on feedback and suggestions from physicians and from our consumers. For example, our rapid pace of innovation has led to significant reductions in the manufactured cost and hence selling price of our Hair Removal Laser, as well as improvements in device function. Since introducing our first generation Hair Removal Laser in 2008, we have reduced the selling price to the consumer from $995 to $395 and we have increased product performance by reducing treatment times and lengthening battery life, while reducing manufacturing cost and maintaining or increasing gross margins.

As of December 31, 2011, our research and development staff consisted of 12 employees dedicated to all major engineering disciplines, upstream development, product development and sustaining engineering. To assist our research and development staff, we also employ a clinical/regulatory team of six people to implement clinical trials to study the safety and effectiveness of our products, handle global submissions for product clearances and ensure quality compliance. Our product development activities occur at our California headquarters.

Competition

The markets in which we compete are subject to rapidly changing industry trends partially stemming from category expansion into at-home devices. In addition, consumer preferences continually evolve as educated beauty consumers become aware of new skincare treatments and brands and seek to find better results than they receive from their current routines. To compete successfully, we must be able to, among other things:

 

   

demonstrate the professional-level effectiveness of the products being offered;

 

   

build brand credibility and differentiation, as reflected by product benefits, cross-channel sales and marketing strategy and customer reviews and testimonials;

 

   

rapidly innovate with new and improved products;

 

   

communicate safety for at-home use through published clinical studies, third-party certifications or other means;

 

   

price products competitively and provide a compelling value proposition;

 

   

improve the consumer experience through multi-channel sales touch points;

 

   

provide an assortment and continuity of merchandise selection;

 

   

reliably fulfill and deliver orders; and

 

   

commit necessary resources to brand and customer support post-purchase.

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 skincare devices, such as HomeSkinovations. We believe that our combination of advanced light-based science and demonstrated ability to market directly to consumers provides us with a distinct competitive advantage over all three types of competitors. Our proximity to the customer through our direct channel provides us with an efficient and effective way to inform, educate and present our products for sale in the proper light and affords us the opportunity to gather crucial customer

 

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feedback and tailor our products to the exact needs of our customers. The combination of a multi-channel distribution model and core competencies in consumer product design, direct marketing expertise and proprietary medical technology know-how is not usually found in either traditional medical technology companies or in beauty products companies. We believe expertise in such diverse capabilities is difficult to achieve. We also believe there exists a disincentive for any company that has historically focused on either selling aesthetic capital equipment to medical professionals or leveraging wide retail distribution of OTC skincare products to devote substantial resources to competing directly against us, because to do so would undermine their core product offerings and capabilities. Nevertheless, there are many companies currently focusing on selling aesthetic capital equipment to medical professionals or focusing on wide retail distribution of OTC skincare products that have technical capabilities and financial resources that may be greater than ours. The technical capabilities and financial resources of these companies could enable them to compete effectively with our products, even though we may have current advantages.

The third category of competitors includes those within the new and rapidly growing industry of at-home skincare devices. This industry includes sonic-, light-, heat-, microcurrent- and microdermabrasion-based devices and it addresses skincare applications including cleansing, laser hair removal, anti-aging, acne and rosacea. At-home skincare devices typically cost less and offer greater convenience and privacy than their office-based analogues, and these advantages have caused the industry to grow rapidly in recent years. However, few devices in this category are FDA-cleared medical devices, and many devices lack clinically-demonstrated safety and effectiveness.

Manufacturing

Hair Removal Laser

We outsource the manufacturing of our Hair Removal Laser. Using third-party manufacturers allows us to maintain fixed unit costs without incurring significant capital expenditures. We currently use one third-party contract manufacturer, Flextronics, to manufacture our Hair Removal Laser at its facility in southern China. Flextronics sources the raw materials, parts, components, subassemblies and packaging products from our approved vendors list that are then used by Flextronics to manufacture, assemble and test our Hair Removal Laser. We believe Flextronics’s manufacturing processes are in compliance with all pertinent U.S. and international quality and safety requirements and industry standards.

Our contract with Flextronics does not have minimum purchase requirements. Rather, we have some degree of flexibility to adjust the delivery quantities of finished products, as well as delivery schedules, to match our changing requirements. Each month, we provide Flextronics with a rolling 12-month order forecast. The order for the first 90 days of each forecast constitutes a binding purchase order. However, we may increase the size of the order by up to 50% or change delivery schedules upon 30 days’ prior notice. The forecasts we use are based on historical trends, current utilization patterns and sales forecasts of future demand. Lead times for the components used in the products may vary significantly depending on the specific component, size of the order, specific third-party supplier requirements and current market demand for the components and subassemblies. Additionally, we also make binding purchase commitments to certain suppliers of components and subassemblies either directly or indirectly through Flextronics. Flextronics may only purchase materials from suppliers who are approved by us and have been added to our approved vendor list. In total, we utilize approximately 50 different suppliers. Most of our third-party suppliers have no contractual obligations to supply us or Flextronics, and we and Flextronics are not contractually obligated to purchase from such third-party suppliers. Some components come from single suppliers, but in most cases alternate suppliers have been identified and qualified or, we believe, can be readily identified and qualified without significant disruption to our business. Our agreement with Flextronics continues indefinitely but can be terminated by either party for convenience upon 180 days’ written notice to the other party, or sooner, if there is an uncured material breach of contract. Flextronics is under no contractual non-compete and can, and does, manufacture products for competitors and potential competitors.

 

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We may use additional contract manufacturers and source new suppliers in the future to reduce manufacturing costs, increase flexibility and diversification and minimize risks to our company as a result of potential supply or manufacturing interruptions that could cause delays in product manufacturing. Also, we annually identify and audit our critical suppliers to, among other things, ensure their financial stability. One key consideration for a multiple manufacturing and sourcing strategy is to reduce risk to our manufacturing operations and leverage optimal pricing structures for cost-efficient production of our Hair Removal Laser. We selectively purchase critical and long lead time items to reduce the risk of supply interruptions and intend to continue this practice.

Skin Perfecting Blue Light

We currently manufacture our Skin Perfecting Blue Light at our California headquarters. We do this because our current volume of production is not large enough to warrant utilization of a third-party contract manufacturer, though we anticipate transitioning the manufacture of our Skin Perfecting Blue Light to a third-party contract manufacturer in 2012. To manufacture our Skin Perfecting Blue Light, we purchase components and subassemblies from a limited number of suppliers. We have flexibility with our suppliers to adjust the number of components and subassemblies as well as the delivery schedules. The forecasts we use are based on historical demands and sales forecasts of future demand. Lead times for components and subassemblies used in the finished products may vary significantly depending on the specific component, size of the order, time required to fabricate and test the components or subassemblies, specific supplier requirements and current market demand for the components and subassemblies. As with our other products, we are required to manufacture our Skin Perfecting Blue Light in compliance with the FDA’s Quality System Regulation, as well as similar foreign regulatory requirements. Our failure to maintain compliance with these requirements could result in the shutdown of our manufacturing operations, delays in production or the recall of our Skin Perfecting Blue Light. In the event that one of our suppliers fails to maintain compliance with our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result.

Fulfillment

We use several third-party logistics companies to store our finished goods and fulfill our orders. These third-party logistics companies warehouse and, in some cases, pack, ship, process electronic transaction data, receive customer returns and electronically transfer inventory and shipment transaction data on a daily basis to us. Third-party logistics companies do not invoice our customers and they do not collect money on our behalf. DisCopyLabs, out of Fremont, California, handles all of our U.S. fulfillment, Kintetsu World Express provides us with fulfillment for our Asia-Pacific region, RHIEM Services GmbH, handles fulfillment for Europe, and Landmark Global fulfills our orders for Canada. Our freight forwarders act as the agent to clear customs and pay duties on our behalf and deliver shipments to the third-party logistics companies.

Utilization of third-party logistics companies allows us to quickly and efficiently establish product supply capabilities in targeted regions without the overhead expense associated with establishing our own fulfillment operations. We leverage the logistics know-how of these third-party providers and, in some instances, their volume shipping discounts with freight carriers. Activities done on our behalf at the current third-party logistics companies can be transitioned to new third-party logistics companies on relatively short notice and hence there has not been a need to duplicate fulfillment centers within regions.

Patents, Trademarks, Licenses and Other Intellectual Property Rights

We rely on a combination of patent, copyright, trademark and trade secret laws and nondisclosure and assignment agreements to protect our intellectual property rights. We have intellectual property rights in each of our hair removal, acne and anti-aging product areas. As of December 31, 2011, we had six issued U.S. patents (the earliest of which expires in 2021 and the latest of which expires in 2025), 12 published U.S. patent applications, 13 unpublished U.S. patent applications (including provisional patent applications and design patent applications) and five issued international patents, 11 published international patent applications and four unpublished international patent applications. Our patents provide us with intellectual property protection related

 

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to the areas of eye safety, skin safety, low cost manufacturing, treatment aspects and desirable design aspects. Most of our issued patents relate to our Hair Removal Laser. We own numerous copyrights and trade dress rights for our products and product packaging, and we rely on important trade secrets in the areas of light-tissue physics and our proprietary solid-state engine design and manufacturing.

Our patent applications may not result in issued patents, and we cannot assure you that any patents that issue will protect our intellectual property rights. We intend to file for additional patents to strengthen our intellectual property rights as appropriate, but third parties may challenge the validity of any of our patents, may independently develop similar or competing technology or may design around any of our patents. We cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights in these foreign countries as fully as in the United States.

Our employees are required to execute nondisclosure and assignment agreements in connection with their employment relationships with us. We also require them to agree to disclose and assign to us all inventions conceived in connection with the relationship. We cannot provide any assurance that employees and consultants will abide by the terms of their agreements regarding confidentiality and invention assignment. Despite measures taken to protect our intellectual property, unauthorized parties may copy aspects of our products or obtain and use information that we regard as proprietary.

Government Regulation

The design, development, manufacture, testing and sale of our products are subject to regulation by numerous governmental authorities, principally the FDA, and corresponding state and foreign regulatory agencies.

Our Regulatory Clearances and Approvals

Our Hair Removal Laser has been cleared by the FDA for OTC use for permanent reduction in hair regrowth, defined as a long-term, stable reduction in hair counts following a treatment regime. The device is also certified with a CE mark for permanent hair removal in Europe, has been cleared by the Korea Food and Drug Administration in Korea for OTC hair removal, has been cleared by Health Canada in Canada for OTC temporary and permanent reduction in hair re-growth and is pending clearance from the Central State Food and Drug Administration Bureau in China for OTC hair removal. There is currently no analogous formal regulatory process in Japan with which we need to comply.

Our Skin Perfecting Blue Light has been cleared by the FDA for OTC treatment of mild to moderate inflammatory acne and we expect that we will receive updated clearance for non-inflammatory acne in 2012. In addition, the Skin Perfecting Blue Light has been cleared by Health Canada in Canada for inflammatory acne, is pending a medical CE mark for inflammatory acne in Europe and is pending clearance by the Korea Food and Drug Administration in Korea for inflammatory acne. There is currently no analogous formal regulatory process in Japan with which we need to comply.

Our Skin Rejuvenating Laser has not yet been cleared by the FDA. We have completed a pre-investigational device exemption process with the FDA, under which the FDA reviews and provides comments on the company’s proposed study protocol and labeling. In the United States, we expect to seek four marketing indications for the Skin Rejuvenating Laser: periorbital wrinkles, perioral wrinkles, dyschromia and textual irregularities. In connection with our plan to seek CE marking, we commenced CE clinical studies in December 2011. We hope to obtain CE marking for sales in Europe in the second or third quarter of 2012, expect to market the Skin Rejuvenating Laser as a cosmetic device in Japan and are currently evaluating classification in Korea and China.

 

 

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Regulation by the FDA

In the United States, the Federal Food, Drug, and Cosmetic Act, or FDCA, as well as FDA regulations and other federal and state statutes and regulations govern, among other things, medical device design and development, preclinical and clinical testing, premarket clearance or approval, registration and listing, manufacturing, labeling, storage, advertising and promotion, sales and distribution, export and import and post-market surveillance. The FDA regulates the design, manufacturing, servicing, sale and distribution of medical devices, including aesthetic medical devices. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties and criminal prosecution. The FDA can also refuse to approve pending applications.

Each medical device we wish to distribute commercially in the United States will require marketing authorization from the FDA prior to distribution. The two primary types of FDA marketing authorization applicable to a device are premarket notification, also called 510(k) clearance, and premarket approval, also called PMA approval. The type of marketing authorization is generally linked to the classification of the device. The FDA classifies medical devices into one of three classes (Class I, II or III) based on the level of regulatory control deemed sufficient to provide a reasonable assurance that the device is safe and effective. Devices requiring the lowest level of control sufficient to provide a reasonable assurance of safety and effectiveness are placed in Class I; such devices are subject only to general controls applicable to all devices, such as requirements for device labeling and adherence to the FDA’s Quality System Regulation, which establishes current good manufacturing practices for medical devices. Class II devices are subject to general controls and may also be subject to special controls such as performance standards, product-specific guidance documents, special labeling requirements, patient registries or postmarket surveillance. Class III devices are those for which insufficient information exists to assure safety and effectiveness solely through general or special controls and include life-sustaining devices, life-supporting devices, devices of substantial importance in preventing impairment of human health, or which present a potential, unreasonable risk of illness or injury.

Most Class I devices and some Class II devices are exempt from the 510(k) clearance requirement and can be marketed without prior authorization from the FDA. A small number of Class I devices and most Class II devices are eligible for marketing through the 510(k) clearance pathway. Devices in Class III generally require PMA approval prior to commercial marketing. The PMA approval process is more stringent, time consuming and expensive than the 510(k) clearance process; however, the 510(k) clearance process has also become increasingly stringent and expensive. The devices that we currently market in the United States are classified as Class II devices and were introduced into the market using the 510(k) clearance process. Historically, we have not had to use the more burdensome PMA approval procedure.

510(k) Clearance.    To obtain 510(k) clearance for a medical device, an applicant must submit a premarket notification to the FDA demonstrating that the device is “substantially equivalent” to a device legally marketed in the United States that is not subject to PMA approval, commonly known as the “predicate device.” A device is substantially equivalent if, with respect to the predicate device, it has the same intended use and has either (i) the same technological characteristics or (ii) different technological characteristics and information submitted to the FDA in the 510(k) premarket notification demonstrates that the device is as safe and effective as the predicate device and does not raise different questions of safety or effectiveness. A showing of substantial equivalence sometimes, but not always, requires clinical data. During its review of a 510(k), the FDA may request additional information or clarification of information already provided, which in some cases can require the applicant to conduct additional studies or otherwise provide additional data. The time it takes to obtain a final decision from the FDA regarding a substantially equivalent/not substantially equivalent determination on a 510(k) submission is difficult to estimate and can range from as short as a few months to a year or more.

After a device has received 510(k) clearance for a specific intended use, any change or modification to the indications for use or any change or modification that could significantly affect the device’s safety or effectiveness, such as a significant change in the design, materials, or method of manufacture of the device, may

 

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require a new 510(k) clearance or PMA approval. The determination as to whether a modification could significantly affect the device’s safety or effectiveness is initially left to the manufacturer using available FDA guidance. However, the FDA may review this determination to evaluate the regulatory status of the modified product at any time and, if the FDA disagrees with a manufacturer’s determination that a given modification or series of modifications did not require a new 510(k), it may require the manufacturer to cease marketing and recall the modified device until 510(k) clearance or PMA approval is obtained. The manufacturer may also be subject to other FDA enforcement action, including significant monetary or other penalties, for failing to seek FDA clearance or approval of product modifications.

Regulation After FDA Clearance or Approval

Any medical devices we manufacture or distribute pursuant to clearance or approval by the FDA are subject to pervasive and continuing regulation by the FDA and certain state agencies. We and our manufacturers are required to adhere to applicable regulations setting forth detailed current Good Manufacturing Practices, or cGMP, requirements, as set forth in the Quality System Regulation, which include, among other things, testing, control and documentation requirements. Noncompliance with these standards can result in, among other things, fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspension of production, refusal of the government to grant 510(k) clearance or PMA approval of devices, withdrawal of marketing approvals and criminal prosecutions. In its manufacturing services agreement with us, Flextronics has covenanted to manufacture our devices in accordance with the FDA’s cGMP requirements.

Although we do not manufacture our Hair Removal Laser, we do manufacture our Skin Perfecting Blue Light, and are still required to comply with the FDA’s cGMP requirements. We must also comply with medical device reporting requirements by reviewing and reporting to the FDA whenever there is evidence that reasonably suggests that one of our products may have caused or contributed to a death or serious injury. We must also report any incident in which evidence reasonably suggests that our product has malfunctioned and such malfunction would likely cause or contribute to a death or serious injury if it were to recur.

Labeling and promotional activities are subject to scrutiny by the FDA under the FDCA. Medical devices approved or cleared by the FDA may not be promoted for unapproved or uncleared uses, otherwise known as “off-label” promotion. The FDA and other agencies actively enforce these laws and regulations, and a company that is found to have improperly promoted a device in violation of these laws may be subject to significant liability, including substantial monetary penalties and criminal prosecution.

Federal and State Advertising and Unfair Trade Practice Laws

The advertising for our products is regulated by the Federal Trade Commission under the Federal Trade Commission Act. In addition, medical devices must be advertised and promoted truthfully and otherwise in compliance with state consumer protection laws prohibiting false advertising and unfair or deceptive trade practices. Also, under the federal Lanham Act, competitors and others can initiate litigation relating to advertising claims and practices, which we have done against others in the past and may also do in the future. A company that is found to have violated these laws may be subject to significant liability.

Food and Drug Administration Amendments Act of 2007

The Food and Drug Administration Amendments Act, or FDAAA, expanded the federal government’s clinical trial registry and results databank maintained by the NIH to include all (with limited exceptions) medical device trials. In particular, it requires certain information about device trials, including a description of the trial, participation criteria, location of trial sites, and contact information, to be sent to NIH for inclusion in a publicly accessible database. In addition, the NIH is currently drafting regulations to implement that law’s requirement that study sponsors report the results of clinical trials that form the primary basis for efficacy claims or are conducted after a device is approved or cleared for posting to the public database. Under the FDAAA, companies that violate these and other provisions of the new law are subject to substantial civil monetary penalties. We are in compliance with the FDAAA’s clinical study registry requirements.

 

 

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Export of Our Products

Export of medical devices that are legally marketed in the United States is permitted without prior FDA notification or approval. Export of products subject to the 510(k) notification requirements, but not yet cleared for marketing, is permitted if certain requirements set forth in Section 801(e)(1) of the FDCA are met, including that the product accords with the specifications of the foreign purchaser, does not conflict with the importing country’s laws, is labeled as intended for export, and is not sold in the United States.

Foreign Government Regulation

The regulatory review process for medical devices varies from country to country, and many countries also impose product standards, packaging requirements, environmental requirements, labeling requirements and import restrictions on devices. Each country has its own tariff regulations, duties and tax requirements. Failure to comply with applicable foreign regulatory requirements may subject a company to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions, criminal prosecution or other consequences.

Some of our products are regulated in the European Union as medical devices per the Medical Device Directive. An authorized third party, known as a notified body, must approve these products for medical CE marking indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout the member states of