Item 1. Business
Overview
We are a medical device company with a novel and proprietary platform technology licensed from MD Anderson. Our Rapid Acoustic Pulse (“RAP”) device uses rapid pulses of designed acoustic shockwaves to disrupt cellular structures in the dermal and subdermal tissue. The uniqueness of our designed shockwave allows us to target the differential in stiffness between cellular structures and generate a shearing effect that we believe represents a platform technology potentially useful in tattoo removal, cellulite treatment, fibrotic scar treatment and other indications. We believe the high repetition rate, rapid rise and fall of the wave, and significant peak pressure delivered in a non-focused manner make our shockwave significantly different from other available shockwave technologies. Importantly, our technology allows the disruption of targeted structures within the skin with only minimal discomfort and without additional treatment-related downtime for tattoo removal or any downtime for cellulite treatment.
We received clearance for our RAP device for tattoo removal from the U.S. Food and Drug Administration ("FDA") in May 2019 allowing our device to be used as an accessory to a 1064 nm Q-switched laser for tattoo removal on patients with skin tones on the Fitzpatrick scale between I and III. When used in conjunction with existing lasers for tattoo removal, our technology allows a doctor to treat a patient multiple times in a single office visit and significantly reduces the number of office visits required to remove a tattoo, allowing a dramatic acceleration of the tattoo removal process. In January 2021, we received additional clearance from the FDA for temporary improvement in the appearance of cellulite. Used on a stand-alone basis, our technology generates, on average, an approximate 30% reduction in the cellulite severity score ("CSS") for subjects in a single treatment without breaking the skin. RAP cellulite treatments do not involve significant pain, do not require anesthesia and do not result in any significant treatment-related side effects or patient downtime.
We plan to launch our RAP device for tattoo removal and cellulite reduction in the first half of 2021 initiating shipments into approximately 25 select cosmetic dermatology and plastic surgery offices. We expect to generate revenue from both the initial sale of the device and from the recurring sales of disposable cartridges that are required by the device to deliver the various therapies. We refer to this as our "razor and blade" recurring revenue model. Cartridges are designed to be specific to the intended indication (for example, tattoo cartridges are different from cellulite cartridges) and each treatment session requires one or more cartridges. We expect that one tattoo cartridge will facilitate up to four standard laser treatment passes in a single office visit for the average-sized tattoo (about the size of a deck of playing cards). Therefore, a patient with an average-sized tattoo that requires three office visits will require the use of three cartridges. One cellulite cartridge will treat one leg and buttocks area in a single session for an average patient. As such, cellulite patients will require two cartridges for their initial treatment of both legs and buttocks. We anticipate that patients may benefit from a second maintenance treatment using a single cartridge across the full treatment area, but have not yet demonstrated this in clinical trials.
We also have ongoing clinical programs in several indications, which, if successful, will allow us to expand commercialization of our products into additional markets. As a stand-alone device, we believe RAP has the potential to reduce the effects of fibrosis and stimulate beneficial fibroblast behavior. This capability enables the targeting of fibrotic (keloid and hypertrophic) scars, as well as smoothing and tightening skin. Importantly, we are planning to initiate additional proof-of-concept clinical trials of our RAP device in the treatment of keloid and hypertrophic scars as well as the improvement of skin laxity in 2021. We also intend to pursue regulatory approval in international markets and we are currently developing a regulatory strategy for these additional markets. We recently announced results from a study in mice demonstrating the ability of RAP to significantly reduce liver fibrosis, further validating the scientific basis for RAP’s mechanism of action and potentially widening the range of indications for which RAP may be suitable.
Our Technology
Our RAP device is composed of three parts: a console, a hand piece and a disposable cartridge. The console houses a pulse power system used to provide high voltage power to a pair of electrodes housed within the cartridge. The cartridge is automatically loaded in and out of the hand piece for easy replacement and forms the basis for our planned “razor and blade” recurring revenue model. The proprietary nature of our technology is supported by nine patent families and over 100 patents issued or pending.
Our RAP device uses electrohydraulics to generate designed acoustic shockwaves at a rate of up to 100 per second to effectively target differences in stiffness at the cellular level. The first two indications we are targeting with our RAP technology are tattoo removal and cellulite reduction. Both of these indications have been cleared by the FDA.
•In tattoo removal, our RAP device is used in conjunction with a laser and disperses both tattoo ink particles and the superficial and dermal vacuoles that are formed when a laser interacts with the ink particles during the use of the laser. Removing these vacuoles allows for subsequent laser treatment passes in the same treatment session, thereby rapidly accelerating the tattoo removal process.
•In cellulite, our RAP device is used as a stand-alone device that disrupts the stiff ("sclerotic") septa structures that run through the subcutaneous fat layer causing the dimples and ridges associated with cellulite. Importantly, it does this without breaking the skin. We call this “acoustic subcision” and the disruption of these structures allows cellulite dimples and ridges to be released and the appearance of the cellulite to be improved. Until now, such disruption of sclerotic septa could only be achieved using surgical procedures that require penetrating the skin and involve significant pain and treatment-related downtime.
Our RAP device is also in clinical development for treating certain fibrotic conditions. We have completed a proof-of-concept study for the treatment of keloid and hypertophic scars and early data suggests that our technology may be able to impact the overactive fibroblasts that generate these scars. This supports our belief that our technology can potentially have an impact on a much broader set of fibrotic conditions. Scientific publications suggest that fibroblasts become overactive when they are located in a stiffened environment and that disrupting the stiff environment may lead to fibroblast apoptosis, ultimately resulting in a resolution of the fibrosis. On this basis, we believe that our technology could have efficacy in a number of fibrotic diseases, including within the extracellular matrix, such as radiation induced fibrosis and capsular contracture, and in other systems of the body such as peripheral artery disease and even liver fibrosis. To date, we have initiated a proof-of-concept study for the treatment of keloid and hypertophic scars and we have completed some pre-clinical animal work in liver fibrosis. Further, we have entered into a collaborative agreement with the United States Navy to further study the impact of the RAP device on the treatment of keloid and hypertrophic scars. We plan to initiate this study in the first half of 2021.
Our Clinical Pipeline
Set forth below in Figure 1 is a table presenting the current status of our clinical pipeline:
Figure 1
Our Market Opportunity
Cellulite Reduction
There are 91 million women in the U.S. between the ages of 20 and 65 - 80-90% of whom suffer from cellulite. Approximately 46% of these women are in an income bracket to afford treatment and have the willingness to seek treatment within a year. These statistics result in a U.S. target market of 38 million women. Based on third-party market research, the global market for cellulite treatment was estimated to be approximately $2.4 billion in 2018 and is expected to grow to approximately $4 billion by 2025.
This is a significant addressable market, but we believe currently available effective treatment options are limited. A 2015 review of a variety of studies into the effectiveness of different non-surgical techniques for treating cellulite indicated that either the procedures did not work or the research methodology was flawed. Most of these non-surgical techniques offer only a temporary reduction in the appearance of cellulite. The American Academy of Dermatology ("AAD") reviewed a number of surgical techniques that may be successful in reducing the appearance of cellulite by cutting the bands of connective tissue under the skin's surface. However, these techniques are often painful and expensive. Our technology has demonstrated the ability to sever the septae, much like these surgical procedures, without breaking the skin. Our technology is currently cleared by the FDA for short-term improvement in the appearance of cellulite. We intend to use data from a 52-week follow-up with patients in our pivotal study to support a 510(k) filing with the FDA seeking clearance of our device for long-term improvement in the appearance of cellulite. There is no assurance that we will receive such clearance.
Tattoo Removal
Approximately one-third of all adults in the United States have a tattoo. In 2015, we commissioned our own survey of individuals with one or more tattoos in an effort to better understand their interest in, motivations for and concerns about tattoo removal. This survey was designed to be representative of the U.S. population with 95% confidence (+/- 3%) and indicated that 63% of individuals with tattoos were interested in some form of removal. At these rates, an estimated 44 million Americans are interested in tattoo removal. In fact, based upon third-party market research, the global tattoo removal market is estimated to be approximately $4 billion by 2023.
The current standard of care for tattoo removal is to use a Q-switched (pulsed) laser to ablate the tattoo ink particles into pieces small enough for the body’s natural processes to remove them. Unfortunately, this current method is highly inefficient, requiring, on average, 10 or more office visits to achieve acceptable results with 6-8 weeks of healing time required between office visits. Our clinical trial has demonstrated that using our RAP device in conjunction with a Q-switched laser has the potential to achieve removal of an average-sized tattoo in just 2 to 3 office visits by allowing for multiple laser passes in a single office visit (the "Soliton Method"). We believe this Soliton Method can not only dramatically accelerate tattoo removal, but also has the potential to lower removal cost for patients, while increasing profitability to practitioners, and to reduce the potential for unwanted scarring and ghosting (a lingering silhouette image of the tattoo).
Keloid and Hypertrophic Scars
Keloids are a type of raised scar. They typically occur where the skin has healed after an injury. They can grow to be much larger than the original injury that caused the scar. A hypertrophic scar is a cutaneous condition characterized by deposits of excessive amounts of collagen which gives rise to a raised scar, but not to the degree observed with keloids. Like keloids, they form most often at the sites of pimples, body piercings, cuts and burns.
The American Osteopathic College of Dermatology estimates that keloids affect around 10% of people, whereas hypertrophic scars are more common. Keloid scars are more prevalent among populations with darker skin pigmentation. Hypertrophic scars affect men and women from any racial group equally, although people between 10 and 30 years old are more likely to be affected. Based on third-party market research, the global market for hypertrophic and keloid scar treatment was estimated to be approximately $4.8 billion in 2017 and is expected to grow at a CAGR of 9.9% through 2025.
Planned Commercialization
We intend to begin selling our RAP device to a select group of cosmetic dermatologists and plastic surgeons in the United States in the first half of 2021 for both tattoo removal and cellulite treatment.
We plan to work with these practices throughout 2021 building advocacy and strong adoption that we believe will allow us to propel our national rollout in 2022. We have hired a Vice President of Sales, who will begin identifying the first hires for our U.S. sales team in 2021. Additionally, we have developed a robust training and marketing support strategy for the initial practices and will be actively supporting these doctors throughout the initial launch. We are diligently working with our sole manufacturer, Sanmina Corporation, to execute the build of the Generation 2.2 devices that will be used in our initial commercial market launch. We will submit a special 510(k) to the FDA outlining the changes made in our Generation 2.2 device, which must be cleared prior to our launch. We expect to file this document in March 2021 and expect the review of this filing to be within the 30 day FDA stated timeline for review. However, COVID-19 related workload within the FDA could extend this timeline.
Competitive Advantage
•Large addressable markets with significant growth potential.
•Platform technology that is non-invasive and that clinicians will be able to use across multiple indications.
•“Razor and blade” revenue model with a true consumable.
•Targeted aesthetic indications are cash-pay.
•In clinical trials, treatment across indications has shown no significant or adverse events and only minimal discomfort for patients.
Our Growth Strategy
Our goal is to provide safe, effective, and science-based solutions to the marketplace that truly improve our patients’ lives. We believe the following strategies will enable us to achieve this goal and help us to succeed and grow.
•Focus on launching aesthetic indications that are treated in dermatology and plastic surgery offices and are cash-pay.
•Execute on our clinical plan to expand our indications and support the clinical proposition in further medical indications.
•Recognize the importance of building awareness of our product offerings in both the physician and patient communities and plan our marketing strategies and spending accordingly.
•Build our specialized sales force and practice development managers as we grow to support the success of each device placed in service.
The RAP Device
Description of Technology
The RAP device uses electrohydraulics to generate the designed acoustic shockwaves at a rate of up to 100 per second to effectively disrupt fibrous septa or disperse ink particles and superficial and dermal vacuoles. The RAP device for commercial launch is composed of three parts: a console, a hand piece and a disposable cartridge. The console houses a pulse power system used to provide high voltage power to a pair of electrodes housed within the cartridge. Additionally, the console contains a fluid management system that circulates saline through the cartridge. The cartridge is automatically loaded into and ejected from the hand piece for easy replacement and forms the basis for our planned “razor and blade” recurring revenue model.
Figure 2
NOTE: the images above are artist renderings of the actual device.
Our RAP device generates high-energy designed acoustic shockwaves when electricity is applied to the electrodes immersed in the circulating saline contained in the cartridge enclosure. An electrical arc with a very short duration of 100 to 200 nanoseconds is formed within the saline between the electrodes. When this arc is formed, a small amount of water is vaporized between the electrodes creating a nearly instantaneous expansion and collapse of a plasma bubble. This creates a shockwave that propagates outward through the saline, most of which is reflected off a curved surface surrounding the electrodes designed to form a shockwave front that passes through the cartridge’s acoustically transparent window. This window is placed against the patient’s skin above the area to be treated allowing the high pressure acoustic energy to target depths from 1 to 10 mm, which corresponds with the typical depth of tattoo pigment or fibrotic septa, respectively. These shockwaves are generated at a rate of up to 100 times per second.
The high repetition rate of Soliton shockwaves is a key component of our patent-pending technology. Specifically, a single shockwave from our RAP device is delivering .25 to 12 MPa (Megapascals) of acoustic pressure. Although this is a significant level of pressure, a single shockwave will pass through a typical skin cell with relatively little disruption. This is because the general elasticity of the cell is capable of deforming slightly to absorb that single impact and then returning to its original shape. The rate at which the cell returns to its normal shape is referred to as its “relaxation rate,” and this rate is well understood in the field of biomechanics. By increasing the repetition rate of Soliton shockwaves above approximately 25 times per second, we begin to exceed the relaxation rate of skin cells, which triggers their natural “viscoelastic” property and causes them to stiffen. In that stiffened state, the cells are quite vulnerable and shear waves created by the interaction of subsequent shockwaves are now enough to rupture the cell membranes and disperse the particles or disrupt fibrotic tissue. Producing shockwaves at a repetition rate above the skin's relaxation rate forms a key element of our intellectual property.
Below is a graphical representation (Figure 3) of hydrophone measurements and compares the Soliton wave form with a competing shockwave technology that is cleared by the FDA as a massage device. Many dermatologists have this particular device in their practice and use it in conjunction with CoolSculpting to massage the treatment area post-treatment. The difference in height of the two waves represents the difference in acoustic pressure or the strength of the pulse delivered.
Figure 3
The shockwaves generated by our RAP device are designed and proprietary, comprised of high acoustic energy delivered with a very short rise time (less than 5 nanoseconds). Very high electrical energy (approximately 3000 volts at 2500 amps, or 7.5 megawatts) is discharged in the treatment head with nanosecond precision to minimize unwanted acoustic frequencies (which helps minimize pain and collateral tissue damage and extend electrode life). A proprietary custom-shaped reflector designed through finite element computer simulation technology directs the bulk of the acoustic energy to the patient’s skin in uniform waves that are nearly planar (perpendicular) to the surface of the skin but slightly diverging in order to deliver maximum acoustic pressure to the depth of a typical tattoo or fibrotic septa, but then rapidly dissipate beyond that distance. The pressure mapping diagram in Figure 4 for our tattoo removal cartridge provides an example of how our reflector design controls energy density at varying treatment depths. The brighter yellow colors indicate maximum pressure at tattoo ink depth (top layer) and the darker red colors indicate lower pressures deeper in the skin (lower levels). Our cellulite cartridge mapping would indicate peak pressure occurring deeper into the skin where the septa are located.
Figure 4
While our RAP device designed acoustic shockwaves are measured in the ultrasound spectrum, they should not be confused with typical therapeutic ultrasound that is focused and creates significant heat through cavitation (bubble formation) within the skin. In contrast, Soliton-designed acoustic shockwaves are deliberately unfocused and produce little to no heat within the skin. The specific frequency and rise time of Soliton shockwaves allow them to pass harmlessly through normal skin cells, but when encountering a significant differential in stiffness like that of tattoo ink particles as compared with the cellular
macrophage structures surrounding them, our shockwaves create shear waves that break apart macrophage structures containing the particles and dissipate the dermal vacuoles that typically result from laser treatment.
Figure 5
Given the high level of energy (up to 7.5 megawatts) involved with each electrical discharge and the high repetition rate (up to 100 times per second), the tungsten electrodes in the treatment head have a limited life, hence the need for a replaceable cartridge. The cartridge (Figure 5) is capable of delivering as many as 120,000 shockwaves before replacement, which we believe is enough to treat one side of the body for cellulite or an average sized tattoo throughout one office visit. This length of service life is only possible through the use of a proprietary drive mechanism for feeding electrode material into the electrical arc without changing the focal point established by the cartridge’s reflector, as well as proprietary circuitry and software control mechanisms that remove the unwanted acoustic and arc discharge elements that would otherwise be present in uncontrolled electrohydraulic shockwaves. These proprietary design features also contribute significantly to patient comfort and the avoidance of unintended collateral tissue damage.
In total, our patent portfolio was comprised of nine patent families relating to the technologies that make our RAP device and certain variations possible, as well as various applications of our RAP device, with still more potential patent applications underway. As of December 31, 2020, our patent portfolio was comprised of two granted and 11 pending U.S. patent applications, 29 granted and 69 pending foreign counterpart patent applications, and one pending PCT patent application, each of which we either own directly or of which we are the exclusive licensee.
Approved Indications
Improvement of Cellulite
Cellulite is a condition that primarily affects women, usually occurring in the buttock and thigh area, where the skin has a dimpled or lumpy appearance. Between 80 and 90 percent of women will probably experience cellulite sometime in their lives. There is a very large global market for cellulite treatment. In the U.S. alone, women spend roughly one billion dollars a year on cellulite therapy, with approximately 80-90% of U.S. women reporting concerns about cellulite. Based on third-party market research, the global market for cellulite treatment was estimated to be approximately $2.4 billion in 2018 and is expected to grow to approximately $4 billion by 2025. There are numerous treatments available, but the effect is mostly temporary. A 2015 review of a variety of studies into the effectiveness of different techniques indicated that either the procedures did not work, or the research methodology was flawed. The AAD reviewed a number of surgical techniques that may be successful in reducing the appearance of cellulite by breaking up the bands of connective tissue under the skin's surface. As a non-invasive technique, if a version of our device is capable of reducing the appearance of cellulite with results that approach those of the surgical techniques, we believe this could become an important new indication for our technology.
Cellulite is characterized by relief alterations (lumpiness) of the skin surface, which give the skin an orange peel, cottage cheese, or mattress-like appearance. A key factor leading to the appearance of cellulite is believed to be sclerotic septa connecting the dermis to the fascia below the subcutaneous fat layer and inadequate collagen in the dermis leading to a weak dermal extracellular matrix ("ECM"). Excess subcutaneous fat can then protrude into pockets formed between the sclerotic
septa within the weakened ECM resulting in a mottled or lumpy appearance to the skin. This same weakening of the ECM can also be associated with skin laxity whereby the skin appears loose, wrinkled and crepey.
We believe it may be possible to improve the appearance of cellulite and skin laxity by both severing sclerotic septa and strengthening the ECM. Existing methods for treating cellulite include physically cutting septa through invasive methods, however, we believe it may be possible to do this non-invasively with high-energy acoustic pulses. In addition, existing independent research suggests that weakened ECM can be strengthened by inducing the fibroblasts in the skin to produce more collagen. One approach to inducing collagen production is to apply an external force to pre-stress fibroblasts by applying external pulsed acoustic shockwaves at high repetition rates. Given the viscoelastic nature of fibroblasts, we believe external acoustic waves applied at repetition rates faster than the relaxation rate of the fibroblasts will cause the cells to stiffen and become “pre-stressed.” In this pre-stressed state, fibroblasts become more susceptible to external forces and if the external forces are great enough, we believe the fibroblast will then produce collagen.
Our RAP device produces designed acoustic shockwaves at pulse rates between 50 and 100 Hz. We believe our device at this high pulse rate may be capable of “pre-stressing” fibroblasts so that they are sensitized to the external forces from the acoustic shockwaves. As an initial proof-of-concept we have demonstrated in a pig model that a version of our device is capable of consistently forming new collagen within the ECM of the dermis. As seen in Figure 6, the histological image on the right demonstrates the stimulation of new collagen growth in pig skin after a single 2-minute application of our device (i.e., increase in blue staining) in comparison to the histological image on the left from non-treated skin.
Figure 6
Mechanical Disruption
We consider cellulite, at its core, to be a fibrotic disorder. In normal skin structure, septa run through a layer of subcutaneous fat connecting the dermis to the muscle layer of the body. In certain situations, these fibrous septa become sclerotic and inflexible. As a result, when subcutaneous fat pushes up, the sclerotic fibrous septa pull the skin down causing the appearance of cellulite with deep dimples. Surgically severing the fibrotic septa is currently the only viable permanent means to remove these dimples.
As discussed previously with regard to tattoo removal, the specific frequency and rise time of Soliton shockwaves allow them to pass harmlessly through normal skin cells but when encountering a significant differential in structural stiffness, they create shear waves. In the case of cellulite treatment, this enables our technology to differentiate between fibrotic septa and the surrounding fat cells, which appears to result in the disruption and breaking apart of these septa.
Pre-clinical animal studies have provided us with biopsy results that demonstrate the ability of the RAP device to deliver increased disruption of the fibrotic septa with increased treatment time, implying a dose response to the therapy. Shown in Figure 7 below are multiple biopsy slides, with the image on the left being an untreated septa and the three images to the right demonstrating one, two and three minute treatments with the RAP device.
Figure 7
Human Cellulite Proof of Concept Trial - 1 (HCPOCT-1)
We began our first human clinical trial for the cellulite indication during 2018. The Soliton proof-of-concept trial involved a study of five patients with moderate to severe cellulite, each treated on both of their thighs, with a higher-powered version of Soliton’s FDA-cleared RAP device intended to assist in tattoo removal. Three blinded reviewers, who are trained in the use of the CSS and the Global Aesthetic Improvement Scale ("GAIS") scoring systems, scored the before and after photos.
Patient follow-up visits were conducted at 12 and 26 weeks. At 12 weeks, the range of improvement in the CSS was 20 to 47% from the single non-invasive treatment, with the average improvement being 29%. At 26 weeks, patients were reassessed. The GAIS 5-point scale was used to evaluate changes between the 12-week and 26-week time points and patients improved, on average, a full point on this scale. At the 26-week time point, the CSS continued to improve with an average improvement compared to baseline of 31%. The average improvement for all patients was 1.24 and 1.31 on the 0 to 5-point CSS scale, for the 3-month and 6-month time points, respectively.
Importantly, the treatments required no anesthesia, caused no bruising, swelling or infection, and were
evaluated by the trial participants as a “0” on a pain scale of 0-10 in 97% of the treatments. None of the study participants experienced any post-treatment downtime.
Figure 8 below shows one of the patients treated in the study with the image on the left taken prior to treatment, the image on the middle taken at 12 weeks post the single RAP treatment, and the image on the right taken at 26 weeks post the single RAP treatment.
Figure 8
Human Cellulite Pivotal Trial - 1 (HCPT-1)
We began our pivotal clinical trial for the reduction of cellulite in the second half of 2019. The study had four clinical sites located in Phoenix, Boston, Washington, D.C. and Chicago. There were a total of 67 patients treated across the four clinical sites. The protocol called for patients between 18 and 50 years old with a Body Mass Index of less than 30. The patients were treated in a single 20-30 minute session with therapy focused on dimples and ridges in the treatment area. The apparent dimples and ridges were located on the treatment area, marked for the physician and then treated for approximately one minute per marked location in the treatment area.
A single follow-up visit at 12 weeks post-treatment was conducted for each patient with photographs taken using a camera designed to capture measurements of changes in the skin. Before and after photos for each patient were provided to three independent reviewers, who were trained in the use of the CSS and GAIS scoring systems, to score the photos before and after treatment.
In HCPT-1, our RAP technology demonstrated an average 1.01-point reduction in the CSS meeting the primary endpoint for the study. Additionally, strong patient satisfaction was demonstrated with 92.9% of subjects agreeing or strongly agreeing their cellulite appeared improved. Blinded physicians correctly identified the before and after treatment photos 96.4% of the time. These results were generated by a single, non-invasive treatment that required no anesthesia, caused no unexpected or serious adverse events, and was easily tolerated by the trial subjects, with an average pain score of 2.4 out of 10.
Selected subject results are provided in figures 9-11.
Figure 9
Figure 10
Figure 11
Patient follow-up visits for a majority of the subjects were also conducted at the 52-week point. Photos for the patients were taken in the same manner as the 12-week assessment. These photos will be compiled and provided to three independent reviewers who will assess improvement on both the CSS and GAIS scales. We intend to submit these results to the FDA in a 510(k) requesting clearance for long-term improvement in the appearance of cellulite during 2021. There is no assurance that we will receive such clearance.
Tattoo Removal
The RAP device is being commercialized to be used in conjunction with the 1064 nm Q-switched laser to enable effective multiple pass laser treatments in a single office session to accelerate removal of tattoos on the arms, legs and torso in Fitzpatrick Skin Type I-III individuals. Our animal testing suggests that the RAP device is as effective on other tattoo ink colors using alternate wavelength lasers and analytical modeling supports the expectation that RAP should also work well with Pico-switched lasers. Use of the device on other colors and with a Pico-switched laser would be considered an off-label use until further FDA clearance is achieved. The RAP device uses repeated, rapidly rising acoustic waves to both disrupt pigment laden cells and provide dermal clearing of both superficial and dermal vacuoles generated during the laser process. The clearing of these vacuoles allows for multiple laser treatments within one office visit and animal testing data suggests that remaining agglomerations of ink particles will be dispersed providing greater access for subsequent laser passes.
Understanding Tattoos
Tattooing involves the placement of pigment into the skin's dermis, the layer of dermal tissue underlying the epidermis. Ink particles are typically injected by being placed on the tips of needles that puncture the skin with the ink particles being left behind as the needles are withdrawn. While the keratinaceous cycle will eventually remove pigment particles from the epidermis, the dermis pigment particles are consumed by and remain trapped within macrophages, ultimately concentrating in a layer just below the dermis/epidermis boundary as the macrophage becomes pigment laden and immobile.
As macrophages collect individual ink particles, many are carried away by the circulatory and lymphatic systems and it has been estimated that more than half of the injected ink particles are carried away within the first several months after a tattoo is applied. However, many macrophages overconsume ink particles to the point where they can no longer be absorbed into the circulatory and lymphatic systems. These “pigment laden macrophages” thereby form the relatively permanent tattoo that remains.
Current Standard of Care for Tattoo Removal
Today, "laser tattoo removal" usually refers to the non-invasive removal of tattoo pigments using (primarily or most commonly) Q-switched lasers with some increasing use of the picosecond lasers.
This “laser tattoo removal” is further described as using lasers to fragment pigment particles, as well as break-apart pigment laden macrophages resulting in the dispersion of the ink particles they contain. The fragmented ink particles are then absorbed by the body, repeating the same natural immune response by macrophages that accounted for the loss of 50% or more of the ink originally injected when the tattoo was applied.
"Complete” (defined as 75% or greater fading of tattoo ink) laser tattoo removal usually involves numerous treatment sessions typically spaced at least six to eight weeks apart. Treating more quickly than six weeks increases the risk of adverse effects and does not necessarily increase the rate of tattoo fading. At each session, some, but not all, of the tattoo pigment particles are fragmented, and the body removes the smallest fragments over the course of several weeks. The result is that the tattoo is lightened over time. As tattoos fade, clinicians may recommend that patients wait many months between treatments to facilitate fragmented ink particle absorption and minimize unwanted side effects.
We believe the amount of time or the number of treatments required to “completely” remove a tattoo is a critical hurdle to tattoo owner adoption of the current laser tattoo removal procedure. The Wall Street Journal reported a research study conducted at a laser surgery center in Milan, Italy, from 1995 through 2010. There were 352 people in the study, of which 201 were men, with a median age of 30 years old. Overall, the study found about 47% of people had their tattoos successfully removed after 10 laser treatments and it took 15 treatments to remove tattoos from 75% of patients. The researchers also found that the amount of time between Q-switched laser treatment sessions was important to the technique's success. Treatment intervals of eight weeks or less were found to be less effective for tattoo removal. Patient frustration and dissatisfaction with removal success and with the time to achieve success results in a significant number of patients discontinuing treatments, or “dropping out.”
Many studies accepted by the FDA deem 75% or greater removal to be a "successful removal," while others simply do not define what a successful removal is, using the word “complete” without clarification. Many successful removals do not remove all traces of the original tattoo, but instead reduce the visible tattoo to the point where it is difficult to see with the naked eye. Generally speaking, we consider a removal procedure to be "complete" when 75% or more of the visible ink is gone and the patient and the physician are satisfied that whatever residual ink particles remain are likely to be absorbed by the body through natural immune, healing, and skin remodeling processes.
How the RAP Device Makes Laser Tattoo Removal More Effective
Our marketing research has shown that, for most patients interested in tattoo removal, the poor efficacy of the standard of care presents too much of a barrier for them to move forward with tattoo removal. Our laboratory research into the problem of tattoo removal has led us to the conclusion that laser shielding is a major cause of this poor efficacy. This laser shielding can be broken down into two subtypes: Particle Shielding and Vacuole Shielding, as depicted below in Figure 12.
Figure 12
Particle Shielding
Lasers are essentially “line of sight” dependent, meaning the laser light pulses can only ablate particles that are directly in their path. Because tattoo ink particles tend to aggregate into clusters within the skin, the particles at the top of the clusters (closest to the surface of the skin) effectively shield the rest of the particles from the laser energy (particle shielding).
This leads to two conclusions: each laser pass only affects a small percentage of ink particles, explaining why multiple passes are important, and, if we can spread these particles out, each subsequent laser pass has an opportunity to hit more targets.
Much of our research utilized tattooed pig skin, because pig skin is considered the most like human skin when it comes to dermatology treatments. Biopsies from pigs with mature tattoos allow us to see the effect the RAP device has on pigment particle agglomerations. A microscopic histological comparison in Figure 13 shows an untreated tattoo on the left with intact tightly formed (macrophage) agglomerations of tattoo ink and a similar tattoo on the right treated with the RAP device. The result of the RAP device treatment is a noticeable destruction of the macrophages and dispersal of the pigment particles. We have effectively created more targets for the laser to hit.
Figure 13
Vacuole Shielding
A second, and more limiting problem arises the moment that the laser light contacts ink particles within its path. Almost instantly, a plasma event occurs that quickly results in the formation of steam vacuoles. These vacuoles appear white in color and result in “optical scattering” that immediately blocks any additional laser energy from reaching ink particles below the vacuoles. Until those vacuoles are gone, subsequent laser passes will have very little effect.
However, if you apply the RAP device immediately following a laser treatment , histology reveals that these deep dermal vacuoles are dispersed, allowing lasers to again have line of sight access to pigment particles.
With traditional laser treatment tattoo removal, efficacy is limited by particle shielding resulting from the natural clustering or agglomeration of pigment particles and the formation of laser-induced dermal vacuoles, both of which block access of laser energy to the particles being targeted (see Particle Shielding and Vacuole Shielding above). Importantly, the dermal vacuoles inhibit any additional passes of the laser from effectively reaching the remaining tattoo pigment agglomerations due to optical scattering. The shape, frequency and repetition rate of the RAP device’s acoustic shockwave pulses are designed to increase dispersion of ink particles and to diffuse and disperse both superficial and dermal vacuoles, while minimizing damage to adjacent non-pigmented tissue as well as pain perceived by the patient. With RAP dermal clearing, loss of laser efficacy due to optical scattering is thereby minimized. In addition, we believe more ink is exposed to each successive laser pass due to increased particle dispersion. As a result, effective, fast, multi-pass laser treatment of tattoo sites in a single office session may be realized.
Market for RAP Tattoo Removal
Over the past two decades or so, the tattoo has become an attractive, artistic expression among many people. The popularity of tattoos continues to rise as they become more accepted in popular culture. Approximately one-third of all adults in the United States have a tattoo. People 18-29 years old have the most tattoos, according to a 2010 study by the Pew Research Center with 38% of that age group having at least one. Nearly half of this group with tattoos have between two and five tattoos, while 18% have six or more.
Currently Americans spend $3.4 billion per year on tattoos, and as social acceptance of body art steadily increases, spending on tattoos will likely continue to grow. Estimates of the size of the tattoo removal market vary widely. One independent source estimates that, globally, the market for tattoo removal is expected to grow at the rate of about 15.6% from 2017 to 2023 and that the global market for tattoo removal is expected to reach several billion in revenue by 2023.
Laser tattoo removal is an elective, private-pay procedure performed on an outpatient basis. The procedure is primarily performed at laser centers and dermatology clinics with laser centers performing 60.9% of the procedures in 2016. Because the cost of tattoo removal is many times the cost of tattoo application, the procedure only attracts those who can pay. Laser tattoo removal practitioners charge a premium for their time. Each treatment is generally priced from $100 to $500, and most patients require 10 or more treatments, depending on the size and complexity of the tattoo, to achieve comprehensive removal. Because tattoo removal is a painful, time-consuming and expensive process, patients need to be very motivated for removal.
We commissioned our own survey of individuals with one or more tattoos in an effort to better understand their interest in, motivations for and concerns about tattoo removal. This survey was designed to be representative of the U.S. population with 95% confidence (+/- 3%) and indicated that 63% of individuals with tattoos were interested in some form of removal. Importantly, a majority of these individuals didn’t regret having tattoos, they simply wanted to make a change. From this observation we conclude that the total available market in the U.S. alone could be calculated as 63% of the estimated 70 million U.S. adults with one or more tattoos (29% of the 2016 U.S. population), or 44 million potential customers.
In this survey we also asked what barriers prevented these individuals from taking action to have a tattoo removed. The primary reasons were cost, pain and efficacy (time required for removal). With this in mind, we believe the dramatic reduction in the number of office visits required for tattoo removal using the Soliton method may be sufficient to motivate many individuals who have been considering tattoo removal to finally take action, which we, in turn believe may result in a material acceleration of the current rate of growth for tattoo removal.
Clinical Trial Results
Our RAP device has received institutional review board ("IRB") approval as a non-significant risk device. Subsequent to receiving this status, we have conducted several human clinical trials to study the use of the RAP device to accelerate tattoo fading.
Human Correlation Trial - 1 (HCT-1)
An initial human clinical trial was conducted to demonstrate the dispersion of tattoo pigment. One site was treated and then immediately biopsied and the other was treated with a biopsy taken 24 hours post-treatment. All biopsies in all patients demonstrated pigment dispersion from macrophages.
In the second part of the HCT-1 study, six patients were selected for a single treatment session to demonstrate tattoo fading. For each patient, a single black tattoo was selected and divided into three adjacent areas. Two of the areas were treated (i.e. test areas) and the third area remained untreated as a control for comparison to the test areas. One test area was treated with a single laser treatment ("Laser Only"). The other test area was treated with multiple laser passes, with each laser pass followed by a treatment with the RAP device ("Laser+RAP"). After each laser pass, the laser was adjusted to increase the laser fluence. The Laser+RAP treated test area demonstrated accelerated tattoo fading at 24 hours post-treatment when compared to the non-treated tattoo test site and to tattoos treated with Laser Only.
Human Correlation Trial - 2 (HCT-2)
The RAP device was evaluated in a single-center (Skin Care Physicians, Chestnut Hill, MA), prospective study (HCT-2) as an accessory to the 1064 nm Q-switched laser.
A total of 32 black tattoos, from 22 participants, were divided into three zones. Two zones in each tattoo, separated by a control zone, were treated with the Laser+RAP method or the Laser Only method. The treatment sites were assessed for the number of laser passes and adverse events immediately following the treatment as well as at six weeks and 12 weeks following the treatment session. The treatment sites were also assessed for the degree of fading at 12-weeks post-treatment using blinded review. The observed mean number of laser passes in the Laser+RAP treated participants was 4.16.
Assessment by blinded reviewers at 12 weeks indicated that there was accelerated fading for Laser+RAP in comparison to Laser Only. Specifically, 72% of the tattoos treated with the Laser+RAP had a good, excellent or complete response (>25% fading) compared to 40% of the tattoos treated with Laser Only. Furthermore, 41% of the tattoos treated with the Laser+RAP had an excellent or complete response (≥50% fading) compared to 12% of the tattoos treated with Laser Only. Finally, 19% of the tattoos treated with the Laser+RAP had a complete response (>75% fading) compared to 3% of the tattoos treated with Laser Only.
Representative cross-polarized images of one participant’s tattoo, before treatment and 12 weeks after treatment, are shown in Figure 14. In these images, the tattoo zone marked with "A" was treated with Laser Only and the tattoo zone marked
with "B" was treated with Laser+RAP. As can be seen with these images, after 12 weeks, the tattoo zone treated with Laser+RAP demonstrated a significant degree of fading in comparison with the tattoo zone treated with Laser Only.
Figure 14
Human Correlation Trial - 3 (HCT-3)
HCT-3 built upon HCT-2 by bringing back 10 HCT-2 subjects (12 tattoos) for two additional, separate treatment sessions. The first session performed as part of the HCT-2 multi-pass laser treatment study was followed by a second session 20 weeks after the first session. The third and final session (where needed) was performed 28-weeks after the first session (eight weeks after the second session). As described for the HCT-2 study above, each test site was treated with either Laser+RAP or Laser Only. The test sites were assessed for degree of fading at 40 weeks following the first session (12 weeks following the third session).
The Laser+RAP in HCT-3 again outperformed Laser Only, with subjects showing an average of 80% fading after only two visits vs. 44% for Laser Only. After three treatments using the Soliton Method, 100% of the treated tattoos had a "complete" (76-100% faded) response; in comparison, only 16% of the tattoos treated with the Laser Only had a "complete" response.
Research and Development
In developing the planned clinical activity to fully capitalize on our technology and to expand on our pipeline, we are focused on three key areas which we believe have the potential to deliver optimal value. The first area of focus, and highest priority, is enhancing the commercial adoption of the RAP device by investing in clinical activities to improve the efficacy, shorten treatment time, and ensure safety of our RAP device for the cellulite and tattoo removal indications. Secondly, we plan to further investigate adjacent aesthetic indications that will enable us to leverage the sales infrastructure built for our initial indications and provide incremental treatment capabilities and value to our aesthetic customers. Lastly, we intend to explore indications with large therapeutic markets through early research in areas where the RAP device may provide an improvement to the current standard of care. While this third area will reach outside aesthetics, we will focus on significant market opportunities where the early research investment has a meaningful upside potential.
While we are initially targeting the tattoo removal and cellulite markets, our technology also shows promise in a number of other indications. We have conducted animal studies and some proof-of-concept human trials in some of these other indications as discussed below. The results observed in our cellulite and proof-of-concept keloid studies underlie our belief that our technology may impact a much broader set of fibrotic conditions.
Future Potential Indications
Treatment of Fibrotic Scars
Fibrotic scars, such as keloid and hypertrophic scars, represent wound healing gone awry. A typical example would be a post-surgical scar that grows beyond its boundaries. Existing published research suggests that factors relating to the wound-healing environment (including tension at the boundary of the scar) can cause fibroblasts to become stuck in a hyper-productive loop, unable to stop the production of collagen that leads to the thickened, raised and dense structures often associated with these fibrotic scars.
The American Osteopathic College of Dermatology estimates that keloids affect around 10% of people, whereas hypertrophic scars are more common. Keloid scars are more prevalent among populations with darker skin pigmentation. Hypertrophic scars affect men and women from any racial group equally, although people between 10 and 30 years old are more likely to be affected.
There are few treatment options available for fibrotic scars, which in addition to being disfiguring, can also cause significant discomfort. Current treatment methods include surgical excision of the scar, direct corticosteroid injections, laser treatment and cryotherapy. Some patients even receive radiation to help prevent the return of the scar. The most common treatment is the direct injection of steroids into the scar, however this is painful, can require multiple injections, and may not be a permanent solution.
Our preclinical and early clinical studies combined with published literature on the behavior of fibrotic tissue have suggested that our acoustic shockwaves may be capable of disrupting stiff, sclerotic structures created by unwanted fibrosis, of which fibrotic scars are just one example. Beyond this, we may also be able to help reset the targeted tissue to more normal fibroblast activity for lasting effects.
Human Fibrotic Scar Proof of Concept Trial - 1 (HFPOCT-1)
In mid-2019 we began a proof-of-concept study for the treatment of fibrotic scars. We treated 10 people, each of whom received just a single 6-minute treatment with our RAP device. Before treatment, we photographed each scar with a 3D imaging device that allows for precise measurement of both the volume and height of the raised scar. Six weeks after that single treatment we took another set of 3D images, which then allowed for an objective comparison of before and after data. We conducted the same assessment at 12 weeks post-treatment.
The six-week and 12-week results (for nine scars as one patient was not able to come in for this six-week time point) were analyzed using quantitative data captured with the 3D imaging system. At 12 weeks, there was an average reduction in volume of over 29%, and a reduction in height of almost 17% for the nine patients. Figure 15 below provides a graph depicting the average change in scar volume at six and 12 weeks.
Figure 15
Importantly, there were no unexpected treatment-related adverse events and patients reported little pain from the treatment, so with the primary endpoint of this study being to establish safety and tolerability of RAP for this indication, we believe we have met that endpoint.
In January 2021, we entered into a collaboration with the United States Navy to conduct a multi-treatment proof-of-concept clinical study to evaluate the safety and efficacy of multiple treatments with the RAP device for the improvement in the appearance of fibrotic scars. The study will be a U.S.-based, single-center, prospective trial, examining a maximum of 25 patients.
Reduction of Skin Laxity
We also believe our mechanism of action may play a role in reducing skin laxity, adding yet another important potential new indication for our technology. In addition to the physician assessment that was done for cellulite improvement during our pivotal cellulite study described above (HCPT-1), we also measured and assessed improvement in skin laxity for 44 patients. The study found meaningful improvement on the validated Hexsel skin laxity scale with an average 28.5% improvement.
One of our animal studies demonstrated the apparent potential of our treatments to strengthen the ECM in pig skin. Increased levels of new collagen are seen after treatment with the RAP device in animal biopsies. We believe that our shockwave impacts the fibroblast mechanistically triggering the production of collagen. Independent research has suggested neocollegenesis may lead to improvement in skin laxity.
The Company plans to further investigate this indication and initiate a skin laxity trial by the end of this year.
Liver Fibrosis
Liver fibrosis occurs when repetitive or long-lasting injury or inflammation causes excessive amounts of scar tissue to build up in the organ. Most types of chronic liver disease can eventually cause fibrosis. Scar tissue from fibrosis can also block or limit the flow of blood within the liver. This can starve and eventually kill healthy liver cells, creating more scar tissue in the process. Treatment tends to involve clearing infections, making lifestyle changes, and taking certain medications. This can often reverse the damage of mild to moderate liver fibrosis. If inflammation continues, possibly because a person has not received treatment, liver fibrosis can develop into more serious liver conditions.
The most common causes of liver fibrosis in the U.S. are:
•chronic alcohol abuse;
•viral hepatitis C or B;
•nonalcoholic fatty liver disease ("NAFLD"); and
•nonalcoholic steatohepatitis ("NASH"), a subtype of NAFLD.
NASH is a form of liver disease that develops in patients who are not alcoholic or consume little alcohol. NASH is one of the common liver diseases, often called silent liver disease. About 20% of people with NASH will go on to develop scarring (fibrosis) of the liver, which is known as cirrhosis when it becomes severe enough to affect the liver’s function. Independent research indicates that the global NASH was $1.1 billion in 2017 and is projected to reach $21.5 billion by 2025, growing at a CAGR of 58.4% from 2021 to 2025.
We believe the mechanism of action that has driven a response to our technology in fibrotic scars may have a similar effect on fibrosis seen in liver fibrosis.
To date, we have completed validated laboratory and histological assessments in a mouse model. The study demonstrated that RAP therapy reduced the effects of induced liver fibrosis 7-days following completion of carbon tetrachloride ("CCL4") induction by 42%. In addition, post-treatment histology slides stained with picrosirius red (PSR) showed a lower percentage of fibrosis from a single 2-minute RAP treatment compared to the control group. Figure 16 below demonstrates the level of hydroxyproline induced by the CCL4 and the reduction driven by the RAP treatment.
Figure 16
Patents and Proprietary Technology
To establish and protect our proprietary technologies and products, we rely on a combination of patent, copyright, trademark, and trade-secret laws, as well as confidentiality provisions in our contracts. We have implemented a patent strategy designed to protect our technology and facilitate commercialization of our current and future products. In total, we have nine patent families pending relating to the technologies that make our RAP device and certain variations possible, as well as various applications of our technology, with still more potential patent applications underway. As of December 31, 2020, our patent portfolio was comprised of two granted and 11 pending U.S. patent applications, 29 granted and 69 pending foreign counterpart patent applications, and one pending PCT patent application, each of which we either own directly or of which we are the exclusive licensee. Our intellectual property portfolio for our core RAP technology was built through the combination of licensing patents from third parties and the issuance or filing of new patent applications by us as the result of our ongoing development activities. Our pending patents were exclusively licensed from MD Anderson and generally relate to early variations of our core technology relating to our acoustic shockwave platform. In general, patents have a term of 20 years from the application filing date or earliest claimed priority date.
We also rely on trade secrets, technical know-how, contractual arrangements, and continuing innovation to protect our intellectual property and maintain our competitive position. We have a policy to enter into confidentiality agreements with third parties, employees, and consultants. We also have a policy that our employees and consultants sign agreements requiring that they assign to us their interests in intellectual property such as patents and copyrights arising from their work for us. It is our policy that all employees sign an agreement not to compete unfairly with us during their employment and upon termination of their employment through the misuse of confidential information, soliciting employees, and soliciting customers.
We have registered “Soliton” as a trademark in the United States, “soliton.com” is a URL registered in the name of Soliton, Inc. and our logo and product designs are protected by copyright. Additionally, we have also applied to register the “Soliton” trademark in 11 other foreign countries. These trademark applications have been allowed in the United States and registered in thirteen other countries. We have also registered our planned brand name as a trademark in the United States and intend to register this internationally as well.
MD Anderson License Agreement
On April 5, 2012, we entered into a Patent and Technology License Agreement with MD Anderson. Pursuant to the agreement, we obtained a royalty-bearing, worldwide, exclusive license to intellectual property including patent rights related to the patents and technology we use. Under the agreement, we agreed to pay a nonrefundable license documentation fee in the high-five digits 30 days after the effective date of the agreement. Additionally, we agreed to pay a nonrefundable annual maintenance fee starting on the third anniversary of the effective date of the agreement, which escalates each anniversary and is currently in the high-five digits. Additionally, we agreed to a running royalty percentage of net sales in the mid-single digits. We also agreed to make certain milestone payments in the low to mid-six digits and sublicensing payments, including a $0.25 million milestone payment made in June 2019 after we received FDA clearance for our RAP device for tattoo removal. The specific patents initially subject to the agreement expire between 2031 and 2032.
MD Anderson has the right to terminate the agreement upon advanced notice in the event of a default by Soliton. The agreement will expire upon the expiration of the licensed intellectual property. The rights obtained by us pursuant to the agreement are made subject to the rights of the U.S. government to the extent that the technology covered by the licensed intellectual property was developed under a funding agreement between MD Anderson and the U.S. government. To the extent that is the case, our license agreement with, and the intellectual property rights we have licensed from, MD Anderson are subject to such a funding agreement and any superior rights that the U.S. government may have with respect to the licensed intellectual property. Therefore, there is a risk that the intellectual property rights we have licensed from MD Anderson may be non-exclusive or void if a funding agreement related to the licensed technology between MD Anderson and the U.S. government does exist and depending on the terms of such an agreement. Notwithstanding the foregoing, we do not believe our RAP technology received any federal funding. All out-of-pocket expenses incurred by MD Anderson in filing, prosecuting and maintaining the licensed patents have been and shall continue to be assumed by the Company.
Manufacturing
We currently partner with outsourced engineering and manufacturing companies for the development and commercialization of the RAP device. Our manufacturing partner, Sanmina, is one of the world’s largest medical device manufacturers. We have worked with Sanmina on the development of the device and will partner with their engineering team and other outside contractors as we make changes to the device to ensure ease of manufacturing before our commercial launch. Once we have launched the device, our intent is that Sanmina will continue to function as our contract manufacturer.
Employees
As of December 31, 2020, we had 14 employees, including 13 full-time employees and 1 part-time employee, and accordingly, a high percentage of the work performed for our development projects is outsourced to qualified independent contractors. None of our employees are unionized.
Competitors
The aesthetic medical device industry is subject to intense competition. Many of these competitors have significantly greater financial and human resources than we do and have established reputations as well as worldwide distribution channels that are more effective than ours. Additional competitors may enter the market, and we are likely to compete with new companies in the future. We expect to encounter potential customers that, due to existing relationships with our competitors, are committed to or prefer the products offered by these competitors. We expect that competitive pressures may result in price reductions, reduced margins and loss of market share. There can be no assurance that competitors, many of which have made substantial investments in competing technologies, will not prevent, limit or interfere with our ability to make, use or sell our products either in the United States or in international markets.
The cellulite removal market is highly competitive and has numerous device companies in the space. The technologies currently being used vary significantly in approach, efficacy and invasiveness to the patient.
A significant number of additional radiofrequency based technologies are available in the marketplace today. In general, these therapies require multiple treatments to achieve efficacy and results are temporary.
Endo Pharmaceuticals is launching Qwo® in the first half of 2021. Qwo is a prescription injectible treatment for moderate to severe cellulite dimples in the buttocks. The drug is a collegenase formula that is used to dissolve collagen structures, such as septa. Identified side effects include injection site bruising, pain, areas of hardness, itching, redness, discoloration, swelling and warmth in the treatment area.
A technology called Cellfina, owned by Merz Pharma, is currently being marketed as a long-term solution for the dimples caused by cellulite. The treatment requires injected anesthesia be given to the patient prior to the portion of the skin to be treated being pulled upward utilizing a suctioning plate. A lance is inserted into the side of the treatment area which is used to slice through the septa that are causing the dimple(s). The patient is required to rest for the 24 hours following the procedure and is often bruised and discolored for significantly longer.
Cellulaze, a technology owned by Cynosure, delivers a therapy similar to Cellfina using laser energy. A very small cannula (or tube about the size of the tip of a pen) is inserted under the skin. The laser fiber delivers energy directly under the skin. This is intended to increase the thickness and quality of the patient's skin, while simultaneously releasing the septa. As with Cellfina, patients will experience bruising and discomfort, as well as fluid drainage from the incision sites.
BTL Aesthetics owns a technology called Emtone™, which is intended to provide a temporary reduction in the appearance of cellulite. Emtone simultaneously emits both radiofrequency and targeted pressure energy. There are a number of other radiofrequency devices in the market intended to provide a temporary improvement in the appearance of cellulite.
Our tattoo removal product will compete against stand-alone laser treatments offered by Cynosure, Cutera, Lumenis, and Candela, as well as several smaller aesthetic-based companies. We intend to compete primarily on the basis of improved time to remove, reduced pain, reduced chance of scarring and reduced trips to the doctor. In addition, competition among providers of devices for the aesthetic market is characterized by extensive research efforts and rapid technological progress. To compete effectively, we must demonstrate that our products are attractive alternatives to other laser-only methods for tattoo removal. Additionally, there are many companies, both public and private, that are developing devices that use both laser-based and alternative technologies for the conditions treated by our products that may prove to be more effective, safer or less costly than our products.
A company called OnLight (acquired by Merz Pharma) introduced a transparent patch infused with a clear chemical called perfluorodecalin (PFD). The DESCRIBE® PFD Patch is a single-use, optical clearing device accessory for use in laser-assisted tattoo removal procedures and is now marketed by Merz Aesthetics. Side effects, including pain, erythema and edema were reported during laser tattoo removal. The DESCRIBE® PFD Patch is available only through licensed physicians. They claim to speed the time to clearance of a tattoo by absorbing laser-induced whitening and allowing for immediate re-treatment.
As of December 31, 2020, the FDA has not approved or cleared any do-it-yourself tattoo removal ointments or creams.
Regulation of Our Business
Our product candidate and operations are subject to extensive and rigorous regulation by the FDA, under the Federal Food, Drug, and Cosmetic Act (“FDCA”), and it’s implementing regulations, guidance documentation, and standards. Our RAP device is regulated by the FDA as a medical device. The FDA regulates the design, development, research, testing, manufacturing, safety, labeling, storage, record keeping, promotion, distribution, sale and advertising of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses. The FDA also regulates the export of medical devices manufactured in the United States to international markets. Any violations of these laws and regulations could result in a material adverse effect on our business, financial condition and results of operations. In addition, if there is a change in law, regulation or judicial interpretation, we may be required to change our business practices, which could have a material adverse effect on our business, financial condition and results of operations.
Unless an exemption applies, before we can commercially distribute medical devices in the United States, we must obtain, depending on the type of device, either prior premarket clearance or premarket approval ("PMA") from the FDA. The FDA classifies medical devices into one of three classes:
•Class I devices, which are subject to only general controls (e.g., labeling, medical devices reporting, and prohibitions against adulteration and misbranding) and, in some cases, to the premarket clearance requirements;
•Class II devices, generally requiring premarket clearance before they may be commercially marketed in the United States; and
•Class III devices, consisting of devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a predicate device, generally requiring submission of a PMA supported by clinical trial data.
Our current product, the RAP device, is a class II device and requires submission of premarket notifications.
510(k) Clearance Pathway
When a 510(k) clearance is required, we must submit a premarket notification demonstrating that our proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA had not yet called for the submission of PMAs. By regulation, the FDA is required to clear or deny a 510(k) premarket notification within 90 days of submission of the application. As a practical matter, clearance may take longer. The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence.
Any modification to a 510(k)-cleared device that would constitute a major change in its intended use, or any change that could significantly affect the safety or effectiveness of the device, requires a new 510(k) clearance and may even, in some circumstances, require a PMA, if the change raises complex or novel scientific issues or the product has a new intended use. The FDA requires every manufacturer to make the determination regarding the need for a new 510(k) submission in the first instance, but the FDA may review any manufacturer's decision.
PMA Pathway
A PMA must be submitted to the FDA if the device cannot be cleared through the 510(k) process. A PMA must be supported by extensive data, including but not limited to, technical, pre-clinical, clinical trials, manufacturing and labeling to demonstrate to the FDA's satisfaction the safety and effectiveness of the device for its intended use. During the review period, the FDA will typically request additional information or clarification of the information already provided. Also, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. The FDA may or may not accept the panel's recommendation. In addition, the FDA will generally conduct a pre-approval inspection of the manufacturing facility or facilities to ensure compliance with the Quality System Regulations ("QSRs").
New PMAs or PMA supplements are required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device's indication for use, manufacturing process, labeling and design. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel.
de novo Classification
Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the de novo classification procedure. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act of 2012 (the "FDASIA"), a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. The FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. Under the FDASIA, the FDA is required to classify the device within 120 days following receipt of the de novo application. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed.
Clinical Trials
Clinical trials are generally required to support a PMA application and are sometimes required for 510(k) or de novo clearance. Such trials generally require an investigational device exemption ("IDE") application approved in advance by the FDA for a specified number of patients and study sites, unless the product is deemed a nonsignificant risk device eligible for more abbreviated IDE requirements. Clinical trials are subject to extensive monitoring, recordkeeping and reporting requirements. Clinical trials must be conducted under the oversight of an IRB for the relevant clinical trial sites and must comply with FDA regulations, including but not limited to those relating to good clinical practices. To conduct a clinical trial,
we also are required to obtain the patients' informed consent in form and substance that complies with both FDA requirements and state and federal privacy and human subject protection regulations. We, the FDA or the IRB could suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA approval to market the product in the U.S. Similarly, in Europe, the clinical study must be approved by a local ethics committee and in some cases, including studies with high-risk devices, by the ministry of health in the applicable country.
Pervasive and Continuing Regulation
After a device is placed on the market, numerous regulatory requirements apply. These include:
•product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action;
•QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;
•labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication;
•clearance of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use of one of our cleared devices;
•approval of product modifications that affect the safety or effectiveness of one of our approved devices;
•medical device reporting regulations, which require that manufacturers comply with FDA requirements to report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur;
•post-approval restrictions or conditions, including post-approval study commitments;
•post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device;
•the FDA's recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is in violation of governing laws and regulations;
•regulations pertaining to voluntary recalls; and
•notices of corrections or removals.
Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission and by state regulatory and enforcement authorities. Recently, promotional activities for FDA-regulated products of other companies have been the subject of enforcement action brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. In addition, we are required to meet regulatory requirements in countries outside the U.S., which can change rapidly with relatively short notice. If the FDA determines that our promotional materials or training constitutes promotion of an unapproved use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions.
Furthermore, our products could be subject to voluntary recall if we or the FDA determine, for any reason, that our products pose a risk of injury or are otherwise defective. Moreover, the FDA can order a mandatory recall if there is a reasonable probability that our device would cause serious adverse health consequences or death.
The FDA has broad post-market and regulatory enforcement powers. Once we have a marketed product, we will be subject to unannounced inspections by the FDA to determine our compliance with the QSR and other regulations, and these inspections may include the manufacturing facilities of some of our subcontractors. Failure by us or by our suppliers to comply with applicable regulatory requirements can result in enforcement action by the FDA or other regulatory authorities, which may result in sanctions including, but not limited to:
•untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
•unanticipated expenditures to address or defend such actions;
•customer notifications for repair, replacement, refunds;
•recall, detention or seizure of our products;
•operating restrictions or partial suspension or total shutdown of production;
•refusing or delaying our requests for premarket clearance or PMA of new products or modified products;
•operating restrictions;
•withdrawing premarket clearances or PMA approvals that have already been granted;
•refusal to grant export approval for our products; or
•criminal prosecution.
Available Information
Our Internet address is www.soliton.com. On this website, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”): our Annual Reports on Form 10-K; our Quarterly Reports on Form 10-Q; our Current Reports on Form 8-K; our proxy statements related to our annual stockholders’ meetings; and any amendments to those reports or statements. All such filings are available on our Web site free of charge. The charters of our audit, nominating and governance and compensation committees and our Code of Business Conduct and Ethics Policy are also available on our Web site and in print to any stockholder who requests them. The content on our Web site is not incorporated by reference into this Form 10-K.
Item 1A. Risk Factors.
Summary of Risk Factors
Below is a summary of the principal factors that make an investment in our Company speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below, after this summary, and should be carefully considered, together with other information in this Annual Report on Form 10-K and our other filings with the SEC before making an investment decision in our securities.
Risk Factors Relating To Our Business And The Industry In Which We Operate:
•we will require substantial additional funding, which may not be available to us on acceptable terms, or at all, and, if not so available, may require us to delay, limit, reduce or cease our operations;
•RAP utilizes potentially dangerous energy levels and we could face liability for claims related to the RAP device that would be costly and would damage our reputation;
•we cannot assure you that we will generate revenue or become profitable in the future;
•the use of lasers to remove tattoos has inherent dangers and our device will be used in conjunction with lasers for tattoo removal;
•because we have not yet launched the RAP device, we have been using our available capital resources for development of the commercial units and have not yet generated any revenues; therefore, we may not be able to continue as a going concern;
•the results of our clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects;
•we utilize a single manufacturer, Sanmina Corporation, for the manufacture of the RAP device and expect to continue to do so for commercial devices. Risks associated with the manufacturing of our products could reduce our gross margins and negatively affect our operating results;
•we have limited sales, marketing, and distribution capabilities or arrangements, and will need to substantially build-out these capabilities as we move towards commercialization of our products;
•achieving and maintaining market acceptance of the RAP device for tattoo removal and cellulite could be negatively impacted by many factors, which may prevent us from successfully commercializing the RAP device;
•all of our near-term indications are elective procedures that will be not be reimbursable and to the extent there is a general reduction in discretionary spending that could result in a reduction in the demand for these services;
•we have limited brand awareness and there is no assurance that we will be able to achieve brand awareness;
•the outbreak of the novel strain of coronavirus, SARS-CoV-2, which causes COVID-19, has adversely impacted our business, including our commercial launch plans, pre-clinical studies and clinical trials;
•to date, all of our experience operating the RAP device has been in a clinical or industrial setting and we have had no experience operating in a practitioner's office without supervision by our personnel;
•our success depends on growing physician adoption and use of our systems and adoption by physicians in cosmetic dermatology and plastic surgery;
•our success depends in part upon patient satisfaction with the effectiveness of our tattoo removal and cellulite treatments; and
•security breaches and other disruptions could compromise our information and expose us to liability.
Risk Related To Regulatory Issues
•there is no guarantee that the FDA will grant 510(k) or de novo clearance or PMA approval of our future products and failure to obtain necessary clearances or approvals for our future products would adversely affect our ability to grow our business; and
•the Generation 2.0 device, which has been cleared by the FDA for tattoo removal and cellulite, has been updated for commercial launch and requires a special 510(k) filing prior to limited launch.
Risks Related To Our License Agreement And Intellectual Property
•we have licensed certain intellectual property rights for our technology from MD Anderson, and if our license agreement with MD Anderson is terminated, our business will be materially harmed; and
•if we are unable to protect the intellectual property used in our products, others may be able to copy our innovations which may impair our ability to compete effectively in our markets.
Risks Relating To Our Common Stock
•your ownership may be diluted if additional capital stock is issued to raise capital, to finance acquisitions or in connection with strategic transactions; and
•the concentration of our common stock ownership by a single shareholder will limit your ability to influence corporate matters.
RISK FACTORS RELATING TO OUR BUSINESS AND THE INDUSTRY IN WHICH WE OPERATE
We will require substantial additional funding, which may not be available to us on acceptable terms, or at all, and, if not so available, may require us to delay, limit, reduce or cease our operations.
We have used the proceeds from our IPO and subsequent financings to advance our initially approved RAP device through the FDA clearance process and commercial development in preparation for commercial launch with a Generation 2.2 device and to begin building the infrastructure necessary for a commercial entity. The Generation 2.2 device that we intend to offer in our initial commercial launch will have changes from the Generation 2.0 device we submitted under a special 510(k) to the FDA for review and clearance in 2020. The Generation 2.0 device was used for the cellulite trials and was included in our 510(k) filing for cellulite. The changes made to our Generation 2.2 device from Generation 2.0 will necessitate the filing of an additional special 510(k) before being launched. We cannot be certain that the changes we deem appropriate to make to future RAP devices prior to the launch of any of these devices will not require another 510(k) filing. Commercializing and launching medical device products can be expensive. While we believe our current available cash will be sufficient to complete the commercialization and initial launch of our product, we cannot be certain that we will not encounter significant unplanned expenditures. We will require substantial additional future capital in order to complete commercialization, launch and market the device nationwide, build out a sales force and manufacture the device for national rollout. We will continue to require substantial additional capital to continue commercialization activities.
We have determined there is material uncertainty about our ability to continue as a going concern; as a result, we could have difficulty finding additional financing.
Our financial statements have been prepared assuming that we will continue as a going concern. We have not generated any revenue from our main operations since inception and have accumulated losses. Our ability to continue our operations depends on our ability to complete equity or debt financings or generate profitable operations. Such financings may not be available or may not be available on reasonable terms. Our financial statements do not include any adjustments that could result from the outcome of this uncertainty. If we are unable to raise sufficient capital when needed, our business, financial condition and results of operations will be materially and adversely affected, and we will need to significantly modify our operational plans to continue as a going concern. If we are unable to continue as a going concern, we might have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. The inclusion of a material uncertainty explanatory paragraph by our auditors, our lack of positive cash flows and our potential inability to continue as a going concern may materially adversely affect our share price and our ability to raise new capital or to enter into critical contractual relations with third parties.
We anticipate needing additional financing over the longer term to execute our business plan and fund operations, which additional financing may not be available on reasonable terms or at all.
As of December 31, 2020, we had total assets of $33.8 million, including cash, cash equivalents and restricted cash of $31.8 million. We have an accumulated deficit as of December 31, 2020, of $70.6 million. Our cash on hand of $29.1 million at February 12, 2021 is expected to fund our operations into the third quarter of 2022 but not beyond. We believe that we will require additional capital to mount a national sales and marketing effort and execute our business plan. We cannot give any assurance that we will be able to obtain all the necessary funding that we may need. We may pursue additional funding through various financing sources, including additional public offerings, the issuance of debt securities, fees associated with licensing some or all of our technology, joint ventures with capital partners and project type financing. There can be no assurance that funds will be available on commercially reasonable terms, if at all. If financing is not available on satisfactory terms, we may be unable to further pursue our business plan and we may be unable to continue operations, in which case you may lose some or all of your investment. Alternatively, we may consider changes in our business plan that might enable us to achieve aspects of our business objectives and lead to some commercial success with a smaller amount of capital, but we cannot assure that changes in our business plan will result in revenues or maintain any value in your investment.
We have a limited operating history and we expect a number of factors to cause our operating results to fluctuate on an annual basis, which may make it difficult to predict our future performance.
We formed our corporation in 2012 without a working RAP prototype. During the first five years of operations, we focused on research and development of a fully-integrated working prototype of the RAP device to remove tattoos. During the past three years, we have focused our efforts on developing a commercial device that would receive FDA clearance to sell and the additional clearance of our product to treat cellulite. We received FDA clearance in May 2019 for tattoo removal and for our 501(k) application for cellulite in January 2021; after such applications our efforts have been focused on refining our commercial device to improve ease of use features necessary for adoption in dermatological and plastic surgery settings. Developing the commercial device for our market launch is expected to be completed in the first half of 2021 in time for our initial launch. Further refinement to the device to develop the Generation 2.3 device, which we plan to roll out nationally in 2022, is anticipated to cost at least an additional $2.5 million and take another year of additional work. Additionally, a high percentage of our expenses will be associated with pre-launch marketing activities as well as fixed costs. We have not yet sold any products, and we may never achieve commercial success with RAP technology. We have limited historical financial data upon which we may base our projected revenue and operating expenses. Our limited operating history makes it difficult for potential investors to evaluate our technology or prospective operations and business prospects. As a pre-commercial stage company, we are subject to all the risks inherent in business development, financing, unexpected expenditures, and complications and delays that often occur in a new business. Investors should evaluate an investment in us in light of the uncertainties encountered by developing companies in a competitive environment. There can be no assurance that our efforts will be successful or that we will ultimately be able to attain profitability.
RAP utilizes potentially dangerous energy levels and we could face liability for claims related to the RAP device that would be costly and would damage our reputation.
The acoustic shockwaves generated by our RAP device are the result of producing and directing electrical energy within the device's hand piece approaching 3,000 volts at 3,000 amps of current. Although the RAP device has been designed in accordance, and has been independently tested and found to comply, with the electrical and other safety requirements for comparable medical devices, we cannot be certain that such design and testing measures have identified every possible mode of failure. An unanticipated failure mode or misuse of the RAP device could potentially expose the operator or patient to
hazardous and potentially lethal electrical shock and we could face liability for claims of injury or death and our ability to commercialize the RAP device could be materially harmed. In addition, such claims would damage our reputation and hinder our ability to commercialize the RAP device.
We cannot assure you that we will generate revenue or become profitable in the future.
All of our intended indications may not be cleared by the FDA or become commercially viable or accepted for use. We have incurred significant losses since our inception and expect to experience operating losses and negative cash flow for the foreseeable future. We expect to expend significant resources on hiring of personnel, continued scientific and product research and development, product testing and pre-clinical and clinical investigation, intellectual property development and prosecution, marketing and promotion, capital expenditures, working capital, general and administrative expenses, and fees and expenses associated with our capital raising efforts. We expect to incur costs and expenses related to consulting costs, hiring of scientists, engineers, science and other operational personnel, and the continued development of relationships with strategic partners.
The use of lasers to remove tattoos has inherent dangers and our device will be used in conjunction with lasers for tattoo removal.
Our RAP device uses rapid pulses of designed acoustic shockwaves to dramatically accelerate the removal of tattoos when used in conjunction with existing lasers. Specifically, our technology allows a doctor to treat a patient multiple times in a single office visit and significantly reduce the overall time it takes to remove a tattoo. Recognized and published (see "Complications of Tattoos and Tattoo Removal: Stop and Think Before you ink;" Khunger, Molpariya, & Khunger, 2015) adverse events of Q-switched laser tattoo removal include: pain; blistering; crusting; pinpoint hemorrhage; urticarial reaction; hypopigmentation; hyperpigmentation; leukotrichia; local-papule; plaques; darkening of tattoos; photoallergic reactions; systemic reactions; residual pigmentation; ghost images; scarring; and textural changes. These adverse events may be increased when multiple laser passes are used to remove a tattoo in a single session.
Because we have not yet launched the RAP device, we have been using our available capital resources for development of the commercial units and have not yet generated any revenues; therefore, we may not be able to continue as a going concern.
We are a pre-revenue stage medical device company, and do not expect to generate any revenues until our commercial RAP device (Generation 2.0), cleared by the FDA, has been updated for use in the field as Generation 2.2, had those updates cleared by the FDA, and are sold. Our ability to continue as a going concern is dependent upon our generating cash flow from sales that are sufficient to fund operations or finding adequate financing to support our operations. To date, we have had no revenues and have relied onthe proceeds from our IPO and subsequent equity offerings. Our sales plan may not be successful in achieving a sustainable business and revenues. We have no arrangements in place for all the anticipated required financing to be able to fully implement our business plan through cash flow breakeven. If we are unable to continue as planned currently, we may have to curtail some or all of our business plan and operations. In such case, investors may lose some or all of their investment.
Our clinical experience with the RAP device for tattoos is limited to black tattoos with one type of laser, and future trials may not result in similar outcomes.
To date, our clinical trial data for tattoo removal is limited to the use of the RAP device in conjunction with Q-Switched lasers treating primarily black tattoos. We do not have clinical data indicating the efficacy of the RAP device in conjunction with shorter pulse “Pico-Switched” lasers or in treating tattoo ink colors other than black. Although, based on animal and theoretical models, we believe RAP has the potential to be similarly effective in such instances, we cannot be certain. If it is not as effective in such instances, our ability to successfully commercialize the RAP device could be materially harmed.
Our clinical experience with the RAP device for cellulite is limited to a single treatment session, and future trials may not result in similar outcomes.
To date, our clinical trial data for cellulite is limited to the use of the RAP device in a single treatment session and our business plan assumes that patients will seek subsequent maintenance treatments. We do not have clinical data indicating the efficacy of the RAP device for use in multiple treatment sessions. Although, based on theoretical models, we believe the RAP device has the potential to be more effective in such instances, we cannot be certain. If it is not as effective in such instances, our ability to successfully commercialize the RAP device could be materially limited.
Clinical trials may be necessary to support future product submissions to the FDA. These clinical trials will be expensive and will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing any modified or new products and will adversely affect our business, operating results and prospects.
Initiating and completing clinical trials necessary to support any future FDA applications, and additional safety and efficacy data required for a clearance, for our possible future product candidates, will be time-consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product we advance into clinical trials may not have favorable results in later clinical trials.
Conducting successful clinical studies will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites and ability to comply with the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our products or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts.
Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy are required and we may not adequately develop such protocols to support clearance and approval. Further, the FDA may require us to submit data on a greater number of patients than we originally anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis applicable to our clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our products or result in the failure of the clinical trial. In addition, despite considerable time and expense invested in our clinical trials, the FDA may not consider our data adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects.
If the third parties on which we rely to conduct our clinical trials and to assist us with pre-clinical development do not perform as contractually required or expected, we may not be able to obtain regulatory clearance or approval for or commercialize our products.
We do not have the ability to independently conduct our pre-clinical and clinical trials for our product candidates and future products and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct such trials. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize, our products on a timely basis, if at all, and our business, operating results and prospects may be adversely affected. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control.
The results of our clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects.
Even though our first clinical trials are completed, we cannot be certain that their results will support our product candidate claims or that the FDA will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our product candidates and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the product candidate’s profile.
We may be required to suspend or discontinue clinical trials due to side effects or other safety risks that could preclude approval of our products.
Our clinical trials may be suspended at any time for a number of reasons. We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants. In addition, regulatory agencies
may order the temporary or permanent discontinuation of our clinical trials at any time if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements or that they present an unacceptable safety risk to participants.
We utilize a single manufacturer, Sanmina Corporation, for the manufacture of the RAP device and expect to continue to do so for commercial devices. Risks associated with the manufacturing of our products could reduce our gross margins and negatively affect our operating results.
We do not have any manufacturing facilities or direct manufacturing personnel. We currently rely, and expect to continue to rely, on Sanmina Corporation for the manufacture of the RAP device for commercial manufacture. Although Sanmina is a large contract manufacturer of medical devices, we are subject to numerous risks relating to our reliance on their manufacturing capabilities. If they encounter problems in manufacturing the RAP device, then our business could be significantly impacted. These problems include:
•inability to secure product components in a timely manner, in sufficient quantities or on commercially reasonable terms;
•failure to increase production of the RAP device to meet demand;
•inability to modify production lines to enable us to efficiently produce future products or implement changes in current products in response to regulatory requirements;
•difficulty identifying and qualifying alternative manufacturers in a timely manner;
•inability to establish agreements with future third-party manufacturers or to do so on acceptable terms; or
•potential damage to or destruction of our manufacturers' equipment or facilities.
As demand for our products increases, our manufacturer will need to invest additional resources to purchase components, hire and train employees, and enhance their manufacturing processes. If they fail to increase production capacity efficiently, our sales may not increase in line with our expectations and our operating margins could fluctuate or decline. The RAP device has many parts that are specialized high-voltage components and many of these components are only produced by one supplier and the loss of any of these suppliers, or their inability to provide Sanmina with an adequate supply of materials, could harm our business. For our business strategy to be successful, Sanmina must be able to provide us with components in sufficient quantities, in compliance with regulatory requirements and quality control standards, in accordance with agreed-upon specifications, at acceptable costs and on a timely basis. Future increases in sales of the RAP device could strain the ability of Sanmina to deliver an increasingly large supply of components and RAP systems in a manner that meets these various requirements. We do not have a long-term agreement with Sanmina and contract with Sanmina on a project-to-project basis utilizing a separate purchase order for each engineering project. As such, there is no assurance that Sanmina will continue to provide us with engineering and manufacturing services in the future.
We rely on a contract manufacturer, Sanmina Corporation, and our agreement with them requires us to place purchase orders with significant lead times that are noncancellable under the agreement. We may ultimately have to pay for inventory that we don't need if we can't accurately forecast demand.
Our agreement with our contract manufacturer, Sanmina, requires us to place purchase orders six months in advance and significant portions of these purchase orders are noncancellable once placed. If we are unable to accurately predict demand for our products and place purchase orders that are larger than necessary for actual demand, we will build inventory levels that may ultimately be written off.
We have limited experience in assembling and testing our products and may encounter problems or delays in the assembly of our products or fail to meet certain regulatory requirements which could result in an adverse effect on our business and financial results.
We have limited experience in assembling and testing our RAP device, and no experience in doing so on a commercial scale. To become profitable, we must assemble and test the RAP device in commercial quantities in compliance with regulatory requirements and at an acceptable cost. Increasing our capacity to assemble and test our products on a commercial scale will require us to improve internal efficiencies. We may encounter a number of difficulties in increasing our assembly and testing capacity, including:
•managing production yields;
•maintaining quality control and assurance;
•providing component and service availability;
•maintaining adequate control policies and procedures;
•hiring and retaining qualified personnel; and
•complying with state, federal and foreign regulations.
If we are unable to satisfy commercial demand for our RAP device due to our inability to assemble and test our RAP device, our ability to generate revenue would be impaired, market acceptance of our products could be adversely affected and customers may instead purchase or use our competitors’ products.
Certain parts used in the manufacturing of our equipment may experience shortages in global supply which could impact our ability to manufacture our device for customers or maintain research and development timelines.
There are a number of component parts used in the manufacture of our device that are used by many manufacturers in a variety of products. We will compete with other manufacturers for the supply of these components. Additionally, certain parts that are currently in our design may be discontinued by our supplier requiring us to find alternative parts. This issue may require us to change the design of our device or purchase significant inventories of these parts in order to protect against manufacturing delays. We may not be able to procure alternative components or adequate raw material inventories which would result in an inability to produce our device.
We have limited sales, marketing, and distribution capabilities or arrangements, and will need to substantially build-out these capabilities as we move towards commercialization of our products.
We do not yet have full sales, marketing, and distribution capabilities or arrangements. To be able to commercialize our potential products, we will need to develop all of the foregoing. We have limited experience in establishing these capabilities, and therefore, we may be unsuccessful in achieving commercialization and earning revenues. We believe that setting up the commercialization parts of the Company will take substantial capital and commitment of time and effort. We may seek development and marketing partners for RAP technology and license technology that is complementary, but not directly associated with RAP technology to others in order to avoid our having to provide the marketing, manufacturing and distribution capabilities within our organization. There can be no assurance that we will find any development and marketing partners or companies that are interested in licensing our technology. If we are unable to establish and maintain adequate sales, marketing, manufacturing and distribution capabilities, independently or with others, we will not be able to generate product revenue, and may not become profitable.
Achieving and maintaining market acceptance of the RAP device for tattoo removal and cellulite could be negatively impacted by many factors, which may prevent us from successfully commercializing the RAP device.
Even though the RAP device is cleared by the FDA, we may not be successful achieving market acceptance of the RAP device for tattoo removal or cellulite. Many factors could negatively impact our ability to achieve or maintain market acceptance, including:
•the failure of the RAP device to achieve wide acceptance among people who regret having one or more tattoos or have a tattoo they would like to modify (prospective clients), dermatologists, and key opinion leaders in the tattoo removal community;
•the failure of the RAP device to achieve wide acceptance among women who would like to treat their cellulite (prospective patients), dermatologists, plastic surgeons, and key opinion leaders in the aesthetic marketplace;
•possible reluctance by dermatologists to change their current practices because of perceived liability risks arising from the use of new products;
•perceived risks associated with the use of the RAP device or similar products or technologies generally;
•our marketing efforts or physician consultations with patients could drive unrealistic expectations of treatment outcome by patients and result in dissatisfaction;
•the introduction of competitive products and the rate of acceptance of those products as compared to the RAP device;
•adverse results of future clinical trials relating to the RAP device or similar competitive products; and
•adverse publicity or other adverse events including any product liability lawsuits.
If we are not successful in convincing prospective clients and dermatologists of the benefits of the RAP device then our sales potential, strategic objectives and profitability could be negatively impacted, which would adversely affect our business, financial condition and operating results.
If important assumptions we have made about what prospective clients want and are willing to purchase are inaccurate, our business and operating results may be adversely affected.
Our business strategy was developed based on a number of important assumptions about prospective clients, including their desire to have one or more tattoos removed, their reasons for not taking action to remove those tattoos to date and their willingness to pay for an improved method of removing their tattoos. These assumptions were based on published secondary research, as well as primary research commissioned by us. This research may be flawed and/or any of the resulting assumptions may prove to be inaccurate. If so, our efforts to commercialize the RAP device, even though cleared by the FDA, may fall short of expectations and you could lose some or all of your investment.
The sizes of the markets for our RAP device have not been established with precision, and may be smaller than we estimate.
Our estimates of the annual total addressable markets for our products, including those under development, are based on a number of internal and third-party estimates. While we believe our assumptions and the data underlying our estimates are reasonable, these assumptions and estimates may not be correct and the conditions supporting our assumptions or estimates may change at any time, thereby reducing the predictive accuracy of these underlying factors. If the actual number of people who would benefit from our products, the price at which we can sell our products, or the annual total addressable market for our products is smaller than we have estimated, it may impair our sales growth and have an adverse impact on our business.
All of our near-term indications are elective procedures that will be not be reimbursable and to the extent there is a general reduction in discretionary spending that could result in a reduction in the demand for these services.
The decision to undergo a procedure from our systems will be driven by consumer demand. Procedures performed using our systems will be elective procedures, the cost of which must be borne by the patient and are not reimbursable through government or private health insurance. In times of economic uncertainty or recession, individuals often reduce the amount of money that they spend on discretionary items, including aesthetic procedures. The general economic difficulties being experienced and the lack of availability of consumer credit for some of our customers' patients could adversely affect the markets in which we will operate.
We expect to operate in a highly competitive market, we may face competition from large, well-established medical device and product manufacturers with significant resources, and we may not be able to compete effectively.
A method for facilitating multiple laser passes in a single office visit by applying a PFD Patch to the skin was introduced to the market within the last several years. Although we believe, based on currently available published clinical data for the PFD Patch, that the Soliton method is more effective than the PFD Patch, the company that owns the PFD Patch, Merz Pharma, has substantially more resources than Soliton. Furthermore, we have made this assessment based on separate clinical trials with differing protocols, not on a direct head-to-head comparison between the PFD Patch and the Soliton method, so we cannot be certain that the Soliton method is more effective. Also, there are currently a number of laser companies such as Lumenis, Cynosure, Candela and Cutera that market their lasers for tattoo removal and all of these companies have substantially more resources than Soliton. Furthermore, our clinical trials have demonstrated clinically significant improvement in tattoo fading over laser alone. Since we are pursuing FDA clearance for the RAP device to treat tattoos in conjunction with lasers, some of these companies may view our product as a competitive threat. The cellulite removal market is highly competitive and has numerous device companies in the space. The technologies currently being used vary significantly in approach, efficacy and invasiveness to the patient. Endo Pharmaceuticals is launching Qwo®, a prescription injectible treatment for moderate to severe cellulite dimples in the buttocks. The drug is a collegenase formula that is used to dissolve collagen structures, such as septa. A technology called Cellfina, owned by Merz Pharma, is currently being marketed as a long-term solution for the dimples caused by cellulite. The treatment requires injected anesthesia be given to the patient prior to the portion of the skin to be treated being pulled upward utilizing a suctioning plate. A lance is inserted into the side of the treatment area which is used to slice through the septa that are causing the dimple(s). Cellulaze, a technology owned by Cynosure, delivers a therapy similar to Cellfina using laser energy. A very small cannula (or tube about the size of the tip of a pen) is inserted under the skin. The laser fiber delivers energy directly under the skin. This is intended to increase the thickness and quality of the patient's skin, while simultaneously releasing the septa. BTL Aesthetics owns a technology called Emtone™, which is intended to provide a temporary reduction in the appearance of cellulite. Emtone simultaneously emits both radiofrequency and targeted pressure energy. There are a number of other radiofrequency devices in the market intended to
provide a temporary improvement in the appearance of cellulite. Also, there may be numerous companies of which we are not aware that may be working on separate technology for tattoo fading or removal or cellulite treatment. As well, the broader market for energy-based devices in the aesthetic market is becoming more competitive. Over time, we believe this field will become subject to more rapid change and new devices and products will emerge. We may find ourselves in competition with companies that have competitive advantages over us, such as:
•greater name recognition;
•established relations with dermatologists;
•established distribution networks;
•additional lines of products, and the ability to offer rebates, higher discounts or incentives to gain a competitive advantage; and
•greater financial and human resources for product development, sales and marketing, and patent litigation.
As a result, we may not be able to compete effectively against these companies or their devices and products.
Rapidly changing technology in life sciences could make the products we are developing obsolete.
The medical device and life-science industry in general is characterized by rapid and significant technological changes, frequent new product introductions and enhancements and evolving industry standards. Our future success will depend on our ability to continually develop and then improve the products that we design and to develop and introduce new products that address the evolving needs of our customers on a timely and cost-effective basis.
If we do not enhance our product offerings through our research and development efforts on a timely basis, we may fail to effectively compete or become profitable.
In order to capture and grow market share in the tattoo removal market, we will need to enhance and broaden our product offerings to meet the evolving demands of patients and dermatologists, as well as compete against new technologies. The success of the RAP device or future versions of the RAP device will depend on numerous factors, including our ability to:
•identify product enhancements that improve performance of tattoo removal and clinicians’ ability to use the device and successfully incorporate those features into our products;
•develop and introduce future generations of the RAP device in a timely manner;
•offer products at a price that is competitive with other products then available; and
•adequately protect our intellectual property and avoid infringing upon the intellectual property rights of third parties.
We have in the past experienced, and we may in the future experience, delays in various phases of product development and commercial launch, including engineering, manufacturing, and clinical. Any delays in our anticipated product launches may significantly impede our ability to successfully compete in our markets. In particular, such delays could cause customers to delay or forego purchases of our products. Even if we are able to successfully develop the RAP device or future versions of the RAP device when anticipated, these products may not produce sales in excess of the costs of development, and they may be quickly rendered obsolete by the changing preferences of dermatologists and patients, or the introduction by our competitors of products embodying new technologies or features.
Potential complications from the RAP device or future versions of the RAP device may not be revealed by our clinical experience or other testing. Undetected errors or defects in the RAP device or future versions of the RAP device could harm our reputation, decrease the market acceptance of the RAP device or expose us to product liability claims.
Our RAP device is a highly complex device with many potential areas for undetected errors, defects or other complications. We cannot be certain that our clinical and other safety and efficacy testing has revealed all such complications. If such complications emerge in the future, we may not have sufficient resources to address them and our commercialization plans could be materially adversely affected.
If we lose key management personnel, or if we fail to recruit additional highly skilled personnel, our ability to expand our operations and increase the size of our company will be impaired, and we may experience loss of markets or market share and we may become less competitive.
As of December 31, 2020, we had 14 employees, including 13 full-time employees and 1 part-time employee. Because of our small size, growth in accordance with our business plan will place a significant strain on our financial, technical, operational and management resources. As we advance our product candidates through commercial development, launch and post-launch activities, we will need to increase our product development, clinical and administrative headcount to manage these programs.
We are highly dependent upon the principal members of our management team, scientific advisory board and consultants. These persons have significant experience not only in development, regulatory, commercialization and business development activities, but also with the RAP system, acoustic energy and the biology of tattoos and cellulite. If we lose one or more of our executive officers or key employees or consultants, our ability to implement our business strategy successfully could be seriously harmed. Any of our executive officers or key employees or consultants may terminate their employment at any time. Replacing executive officers, key employees and consultants may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize products successfully. Competition to hire and retain employees and consultants from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key personnel and consultants. Our failure to retain key personnel or consultants could materially harm our business.
In addition, we have scientific and clinical advisors and consultants who assist us in formulating our regulatory and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us and typically they will not enter into non-compete agreements with us. If a conflict of interest arises between their work for us and their work for another entity, we may lose their services. In addition, our advisors may have arrangements with other companies to assist those companies in developing products or technologies that may compete with ours.
In addition, to meet our obligations as a public company, we may need to increase our general and administrative capabilities. Our management, personnel and systems currently in place may not be adequate to support this future growth. If we are unable to successfully manage this growth and increased complexity of operations, our business may be adversely affected.
If we are unable to establish good relationships with physicians, our business could be negatively affected.
Our business model will depend on the distribution of our RAP device into the offices of practicing dermatologists and other physicians. This will require us to build and maintain good relationships with physicians who will have a significant source of patients that will generate treatment revenues for both the physician and the Company. If we are unable to establish good relationships with physicians and maintain them, it will jeopardize both device and replaceable component revenues.
We have limited brand awareness and there is no assurance that we will be able to achieve brand awareness.
We have achieved limited brand awareness with respect to our RAP technology. There is no assurance that we will be able to achieve brand awareness. In addition, we must develop a successful market for our products in order to complete sales. If we are not able to develop successful markets for our products, then such failure will have a material adverse effect on our business, financial condition and operating results.
We may expend our limited resources to pursue a particular product or indication and fail to capitalize on products or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we focus on specific products, indications and discovery programs. As a result, we may forgo or delay pursuit of other opportunities with others that could have had greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs for specific indications may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular potential product, we may relinquish valuable rights to that potential product through future collaborations, licenses and other similar arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such potential product.
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or man-made disasters or business interruptions, for which we are predominantly self-insured. We rely on third-party manufacturers to produce our products. Our ability to obtain clinical supplies of our products could be disrupted if the operations of these suppliers were affected by a man-made or natural disaster or other business interruption. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses.
The outbreak of the novel strain of coronavirus, SARS-CoV-2, which causes COVID-19, has adversely impacted our business, including our commercial launch plans, pre-clinical studies and clinical trials.
Public health crises such as pandemics or similar outbreaks could adversely impact our business. In response to the spread of COVID-19, we have closed our executive offices with our administrative employees continuing their work outside of our offices. We have also revised our commercial launch plans as a result of the overall impact on the aesthetic market, and we may be required to further revise our plans in the future based on the final impact of COVID-19.
As a result of the COVID-19 outbreak, or similar pandemics, we have and may in the future experience disruptions that could severely impact our business, pre-clinical studies and clinical trials, including:
•delays or difficulties in enrolling patients in our clinical trials;
•delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;
•increased rates of patients withdrawing from our clinical trials following enrollment as a result of contracting COVID-19, being forced to quarantine;
•increased rates of non-compliance with follow-up visits with patients failing to attend their clinical trial follow-up visits or clinics closing during the scheduled visit;
•interruption of key clinical trial activities, such as clinical trial site data monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others or interruption of clinical trial subject visits and study procedures (particularly any procedures that may be deemed non-essential), which may impact the integrity of subject data and clinical study endpoints;
•interruption or delays in the operations of the FDA and comparable foreign regulatory agencies, which may impact approval timelines;
•interruption of, or delays in receiving, supplies of components for our device and cartridge to our contract manufacturing organization, delays in device manufacturing completion due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems;
•limitations on employee resources that would otherwise be focused on the conduct of our pre-clinical studies and clinical trials, including because of sickness of employees or their families, the desire of employees to avoid contact with large groups of people, an increased reliance on working from home or travel disruptions; and
•general economic pressure on the aesthetic industry that has impacted our ability to launch our products and could further impact our ability to launch our products in the future.
These and other factors arising from the COVID-19 pandemic could worsen in countries that are already afflicted with COVID-19, could continue to spread to additional countries, or could return to countries where the pandemic has been partially contained, each of which could further adversely impact our ability to conduct clinical trials and our business generally, and could have a material adverse impact on our operations and financial condition and results.
In addition, the trading prices for our common stock and other medical device companies have been highly volatile as a result of the COVID-19 epidemic. As a result, we may face difficulties raising capital through sales of our common stock or such sales may be on unfavorable terms. The COVID-19 outbreak continues to rapidly evolve. The extent to which the outbreak may impact our business, pre-clinical studies and clinical trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and actions to contain the outbreak or treat its impact, such as social distancing and quarantines or lock-downs in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.
Although we actively train our customers on the use of our system, if customers are not trained and/or our products are used by non-physicians, it could result in product misuse and adverse treatment outcomes, which could harm our reputation, result in product liability litigation, distract management and result in additional costs, all of which could harm our business.
We market and sell our systems to physicians. In the U.S. and certain international markets, subject to local regulations, physician customers can generally allow nurse practitioners, technicians and other non-physicians to perform aesthetic procedures using our systems under their direct supervision. Although we provide training on the use of our systems as well as the proper post-treatment care, we do not supervise the procedures performed with our systems, nor can we be certain that physicians are directly supervising procedures according to our recommendations. The potential misuse of our systems or failing to adhere to operating guidelines could potentially cause skin damage or underlying tissue damage, which could harm the reputation of our systems and expose us to costly product liability litigation. In addition, patients may not comply with post-treatment guidelines, which could also lead to adverse results and subject us to liability.
We offer system training sessions, but we do not require purchasers or operators of our systems to attend training sessions prior to using the device. The lack of required training for operators of our systems and the use of our systems by non-physicians may result in product misuse and adverse treatment outcomes, which could harm our reputation and expose us to costly product liability litigation.
To date, all of our experience operating the RAP device has been in a clinical or research and development setting and we have had no experience operating in a practitioner's office without supervision by our personnel.
We are introducing the Generation 2.2 device into commercial use by physicians in 2021. To date, utilization of the device on patients has been limited to clinical trials and has not been used by practitioners in a commercial setting. We may encounter issues with the devices that require the physicians to return the device to us for service. We may discover issues with the technology that need to be resolved in the design of the Generation 2.3 device. Should we encounter any material changes to be made, this could delay the planned timing of our national rollout.
We may not be able to correctly estimate or control our future operating expenses, which could lead to cash shortfalls.
Our operating expenses may fluctuate significantly in the future because of a variety of factors, many of which are outside of our control. These factors include:
•the cost of growing our ongoing commercialization and sales and marketing activities;
•the costs of manufacturing and maintaining enough inventories of our systems to meet anticipated demand and inventory write-offs related to obsolete products or components;
•the costs of enhancing the existing functionality and development of new functionalities for our systems;
•the costs of preparing, filing, prosecuting, defending, and enforcing patent claims and other patent related costs, including litigation costs and the results of such litigation;
•the variability of RAP procedures being performed between periods;
•any product liability or other lawsuits and the costs associated with defending them or the results of such lawsuits;
•the costs to attract and retain personnel with the skills required for effective operations; and
•the costs associated with being a public company.
Our budgeted expense levels are based in part on our expectations concerning future revenue from systems sales, products sales and servicing and procedure-based fees. We may be unable to reduce our expenditures in a timely manner to compensate for any unexpected shortfalls in revenue. Accordingly, a significant shortfall in market acceptance or demand for our systems and procedures could have a material adverse impact on our business and financial condition.
Downturns in the economy or economic uncertainty may reduce patient and customer demand for our systems and services, which could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. Furthermore, the aesthetic industry in which we operate is particularly vulnerable to unfavorable economic trends. Treatments using our systems involve elective procedures, the cost of which must be borne by patients, and is not reimbursable through government or private health insurance. Economic uncertainty may reduce patient demand for the procedures performed using our systems; if there is not sufficient patient demand for the procedures for which our systems are used, practitioner demand for these systems could drop, further negatively impacting operating results. The decision to undergo a procedure using our systems is driven by consumer demand. In times of economic uncertainty or recession, individuals generally reduce the amount of money that they spend on discretionary items, including aesthetic procedures. If our customers’ patients face economic hardships, our business would be negatively impacted, and our financial performance would be materially harmed in the event that any of the above factors discourage patients from seeking the procedures for which our systems are used. A weak or declining economy could also strain our manufacturers or suppliers, possibly resulting in supply disruption, or cause our customers to delay or stop making payments for our systems or services. As a result of the COVID-19 pandemic and the economic turmoil that has resulted, we expect that some of our customers may experience difficulty in making timely payments or payments at all. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the economic climate and financial market conditions, including the effect of the COVID-19 pandemic, could adversely impact our business. The impact of economic uncertainty on our industry may vary from region to region.
It is difficult to forecast our future performance and our financial results may fluctuate unpredictably.
The rapid evolution of the markets for medical technologies and aesthetic products make it difficult for us to predict our future performance. Several factors, many of which are outside of our control, may contribute to fluctuations in our financial results, such as:
•variations in market demand for our systems and services from quarter to quarter;
•the inability of physicians to obtain the necessary financing to purchase the RAP Device;
•performance of new indications and system updates, or time required to achieve FDA clearance for new indications;
•positive or negative media coverage of our systems, positive or negative patient experiences, the procedures or products of our competitors, or our industry generally;
•our ability to maintain our current, or obtain further, regulatory clearances, approvals or CE Certificates of Conformity;
•delays in, or failure of, product and component deliveries by our third-party manufacturers or suppliers;
•seasonal or other variations in patient demand for aesthetic procedures;
•introduction of new medical aesthetic procedures or products and services that compete with our products and services;
•changes in accounting rules that may cause restatement of our consolidated financial statements or have other adverse effects; and
•adverse changes in the economy that reduce patient demand for elective aesthetic procedures.
Our success depends on growing physician adoption and use of our systems and adoption by physicians in cosmetic dermatology and plastic surgery.
Tattoo removal and cellulite treatment procedures are performed primarily by physicians who practice dermatology or plastic surgery. Our success depends on the willingness of these physicians to adopt our technology and on the growth of tattoo removal and cellulite treatment procedures performed by these physicians within their practice. Our ability to increase the number of physicians willing to make a significant capital expenditure to purchase our systems and make them a significant part of their practices depends on the success of our sales and marketing programs. We must be able to demonstrate that the cost of our systems and the revenue that a physician can derive from performing procedures are compelling when compared to the costs and revenue associated with alternative aesthetic treatments the physician can offer and persuade physicians to purchase our systems instead of those of our competitors, many of whom already have existing relationships with our target physicians. In addition, we believe our marketing programs, including clinical and practice development support, will be critical to increasing utilization and awareness of our systems, but these programs require physician commitment and involvement to
succeed. If we are unable to drive adoption and use of our systems by physicians in their practices, our growth and prospects may be adversely affected.
Our success depends in part upon patient satisfaction with the effectiveness of our tattoo removal and cellulite treatments.
In order to generate repeat and referral business, patients must be satisfied with the effectiveness of a tattoo removal or cellulite procedure using one of our RAP devices. If the tattoo removal or cellulite procedure is not done correctly, and/or the patient suffers from complications and other adverse effects, the patient may not be satisfied with the benefits of our RAP device. If patients are not satisfied with the aesthetic benefits of their procedure using one of our systems or feel that it is too expensive for the results obtained, our reputation and future sales will suffer.
If there is not sufficient patient demand for our procedures, our financial results and future prospects will be negatively impacted.
Our procedures are elective aesthetic procedures, the cost of which must be borne by the patient and is not covered by or reimbursable through government or private health insurance. The decision to undergo one of our procedures is thus driven by patient demand, which may be influenced by a number of factors, such as:
•the success of our sales and marketing programs;
•the extent to which our physician customers recommend our procedures to their patients;
•the extent to which our procedures satisfy patient expectations;
•our ability to properly train our physician customers in the use of our systems so that their patients do not experience excessive discomfort during treatment or adverse side effects;
•the cost, safety, and effectiveness of our systems versus other aesthetic treatments;
•consumer sentiment about the benefits and risks of aesthetic procedures generally and our systems in particular;
•the success of any direct-to-consumer marketing efforts we may initiate; and
•general consumer confidence, which may be impacted by economic and political conditions outside of our control.
Our financial performance will be negatively impacted in the event we cannot generate significant patient demand for procedures performed with our systems.
We offer credit terms to some qualified customers. In the event that any of these customers default on the amounts payable to us, our financial results may be adversely affected.
We may offer credit terms of 30 to 60 days to qualified customers. In the event that there is a default by any of the customers to whom we have provided credit terms, we may recognize bad debt expenses in our general and administrative expenses. If this bad debt expense is material, it could negatively affect our future results of operations and cash flows. Additionally, in the event of deterioration of general business conditions, we may be subject to increased risk of non-payment of our accounts receivables. We may also be adversely affected by bankruptcies or other business failures of our customers, distributors, and potential customers. A significant delay in the collection of accounts receivables or a reduction of accounts receivables collected may impact our liquidity or result in bad debt expenses.
The aesthetic equipment market is characterized by rapid innovation. To compete effectively, we must develop and/or acquire new products and services, seek regulatory clearance and maintain regulatory compliance, market new products successfully, and identify new markets for our technology.
The aesthetic energy-based treatment equipment market is subject to continuous technological development and product innovation. If we do not continue to innovate and develop new products, services and applications, our competitive position will likely deteriorate as other companies successfully design and commercialize new products, applications and services or enhancements to current products. To continue to grow in the future, we must continue to develop and/or acquire new and innovative aesthetic and medical products, services and applications, identify new markets, and successfully launch any newly developed or acquired product offerings.
To successfully expand our product and service offerings, we must, among other things:
•develop or otherwise acquire new products that either add to, or significantly improve, our current product offerings;
•obtain regulatory clearance for and adhere to regulatory requirements relating to new products;
•convince existing and prospective customers that our product offerings are an attractive revenue-generating addition to their practice;
•sell our product offerings to a broad customer base;
•identify new markets and alternative applications for our technology;
•protect existing and future products with defensible intellectual property; and
•satisfy and maintain all regulatory requirements for commercialization.
Historically, product introductions have been a significant component of our financial performance. To be successful in the medical aesthetics industry, we believe we need to continue to innovate. Our business strategy is based, in part, on our expectation that we will continue to increase or enhance our product offerings. We need to continue to devote substantial research and development resources to introduce new products, which can be costly and time-consuming to our organization.
We also believe that, to increase revenue from sales of new products, we need to continue to develop our clinical support, further expand and nurture relationships with industry thought leaders, and increase market awareness of the benefits of our new products. However, even with a significant investment in research and development, we may be unable to continue to develop, acquire or effectively launch and market new products and technologies regularly, or at all. If we fail to successfully commercialize new products or enhancements, our business may be harmed.
We may be unsuccessful in expanding and managing our direct sales and marketing forces effectively.
We will rely on our own direct sales force and in-house marketing organization to sell our systems and services in North America. In order to meet our anticipated sales objectives, we expect to continue to grow our sales and marketing organization over the next several years. There are significant risks involved in building and managing a sales and marketing organization, including risks related to our ability to:
• hire qualified individuals as needed;
• generate sufficient leads within our target customer group for our sales force;
• provide adequate training for the effective sale and marketing of our systems and services;
• retain and motivate our direct sales and marketing professionals;
• effectively oversee geographically dispersed sales and marketing teams; and
• work successfully with local partners.
Our failure to adequately address these risks could have a material adverse effect on our ability to increase sales and use of our systems and services, which would cause our revenues to be lower than expected and harm our results of operations.
Our expanded use of social media platforms presents new risks and challenges, which, if not managed properly, could have a material adverse effect on our business, financial condition and results of operations.
We will implement a robust public relations outreach strategy that incorporates digital media. In addition, as part of our practice-enhancing services, we will provide customers with digital marketing services, including social media strategies, to support the growth of their practices. Negative posts or comments about us or any of our brands on any social networking website could seriously damage our reputation. In addition, the inappropriate use of certain media vehicles could cause brand damage or information leakage or could lead to legal implications from the improper collection and/or dissemination of personally identifiable information.
Third parties may attempt to reverse engineer or produce counterfeit versions of our devices and cartridges which may negatively affect our revenues and our reputation, or harm patients and subject us to product liability claims.
Third parties may seek to reverse engineer or develop counterfeit devices or cartridges that are substantially similar or compatible with our systems and available to practitioners at lower prices than our own. Practitioners may be able to make unauthorized use of our systems’ technology using counterfeit cartridges. We could suffer a loss of revenue if counterfeit cartridges are successfully used on our device. In addition, if copies of products that have been reverse engineered or counterfeit products are used with or in place of our own, we could be subject to product liability claims resulting from the use of damaged or defective goods and suffer damage to our reputation.
Security breaches and other disruptions could compromise our information, interrupt our business, and expose us to liability.
We are currently making, and expect to continue to make, substantial investments in our information technology systems and infrastructure, some of which are significant. Upgrades involve replacing existing systems with successor systems, outsourcing critical information technology to third parties, making changes to existing systems, including the migration of applications to the cloud, or cost-effectively acquiring new systems with new functionality. Implementing new systems carries significant potential risks, including failure to operate as designed, potential loss or corruption of data or information, changes in security processes, cost overruns, implementation delays, disruption of operations, and the potential inability to meet business and reporting requirements. We rely on strategic partners and other service providers to help us with certain significant information technology projects and services. Information technology projects or services frequently are long-term in nature and may take longer to complete and cost more than we expect and may not deliver the benefits we project once they are complete. Furthermore, pursuing multiple initiatives simultaneously could make implementation significantly more challenging. We are aware of inherent risks associated with replacing these systems and outsourcing critical information technology functions and there can be no assurance that we will not experience significant issues with our existing systems prior to implementation, that our technology initiatives will be successfully deployed as planned or that they will be timely implemented without significant disruption to our operations. Any system implementation and transition difficulty may result in operational challenges, reputational harm, and increased costs that could materially and adversely affect our business operations and results of operations.
In the ordinary course of our business and to the extent necessary, we will rely on software to control the ongoing use of our systems, collect and aggregate diagnostic data, and collect and store sensitive data, including intellectual property and proprietary business information, and certain personally identifiable information of customers, consultants and employees in our data centers and on our networks. The secure processing, maintenance, and transmission of this information is important to our operations and business strategy. We have established physical, electronic, and policy measures to secure our systems in an attempt to prevent a system breach and the theft of data we collect, and we rely on commercially available systems, software, tools, and monitoring in our effort to provide security for our information technology systems and the digital information we collect, process, transmit and store. The third-party providers of such information technology systems and related infrastructure may have or may obtain access to our systems and data within them.
Despite our security measures, our information technology systems and related infrastructure, and those of our current and any future collaborators, contractors and consultants and other third parties on which we rely, we may be vulnerable to attacks by computer viruses, malware, hackers or breaches due to malfeasance, employee or contractor error, telecommunication or electrical failures, terrorism or other created or natural disasters. The risk of a cyber-attack or cyber intrusion by computer hackers from around the world, including those from foreign governments and terrorists, has greatly increased in number, intensity and sophistication. In addition, the prevalent use of mobile devices that access confidential information increases the risk of data security breaches, which could lead to the loss of confidential information or other intellectual property. The costs to us to mitigate network security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and while we have implemented security measures to protect our data security and information technology systems, our efforts to address these problems may not be successful, and these problems could result in unexpected interruptions, delays, cessation of service and other harm to our business and our competitive position. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our business. Moreover, if a computer security breach affects our systems or results in the unauthorized release of personally identifiable information, our reputation could be materially damaged. In addition, such a breach may require notification to governmental agencies, the media or individuals pursuant to various federal and state privacy and security laws, if applicable, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Clinical Health Act of 2009, or HITECH, and its implementing rules and regulations, as well as regulations promulgated by the Federal Trade Commission and state breach notification laws, or the laws of one or more foreign jurisdictions including the
European Union’s General Data Protection Regulation 2016/679. We could also be exposed to a risk of loss or litigation and potential liability, which could materially adversely affect our business, results of operations and financial condition.
RISK RELATED TO REGULATORY ISSUES
There is no guarantee that the FDA will grant 510(k) or de novo clearance or PMA approval of our future products and failure to obtain necessary clearances or approvals for our future products would adversely affect our ability to grow our business.
Most of our future products will require FDA clearance of a 510(k) or de novo application or may require FDA approval of a PMA. The FDA may not approve or clear these products for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for premarket clearance or PMA of new products, new intended uses or modifications to existing products. Failure to receive clearance or approval for our products would have an adverse effect on our ability to continue or expand our business.
If we fail to obtain and maintain regulatory approvals and clearances, or are unable to obtain, or experience significant delays in obtaining FDA clearances or approvals for our future products or product enhancements, our ability to commercially distribute and market these products could suffer.
Our products are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. The FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which have the lowest level of risk associated with them, are subject to general controls. Class II devices are subject to general controls and special controls, including performance standards. Class III devices, which have the highest level of risk associated with them, are subject to general controls and PMA. Most Class I devices and some Class II devices are exempt from a requirement that the manufacturer submit a premarket notification, or 510(k), and receive clearance from the FDA which is otherwise a premarketing requirement for a Class II device. Class III devices may not be commercialized until a PMA application is submitted to and approved by the FDA.
The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time-consuming, and we may not be able to obtain these clearances or approvals on a timely basis, if at all. The FDA will clear marketing of a lower risk medical device through the 510(k) process if the manufacturer demonstrates that the new product is substantially equivalent to other 510(k)-cleared products or through a de novo process if substantial equivalence is not available. High risk devices deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, or devices not deemed substantially equivalent to a previously cleared device, require the approval of a PMA. The PMA process is more costly, lengthy and uncertain than the 510(k) or de novo clearance processes. A PMA application must be supported by extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use. The FDA also allows the submission of a direct de novo petition. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the FDASIA, a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. The FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination.
U.S. legislative or FDA regulatory reforms or changes in internal FDA policies and procedures may make it more difficult and costly for us to obtain regulatory approval of our product candidates and to manufacture, market and distribute our products after approval is obtained.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. 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. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of future products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. Any change in the laws or regulations that govern the clearance and approval processes relating to
our current and future products could make it more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute existing products. Significant delays in receiving clearance or approval, or the failure to receive clearance or approval for our new products would have an adverse effect on our ability to expand our business.
Modifications to our products may require new regulatory clearances or approvals or may require us to recall or cease marketing our products until clearances or approvals are obtained.
Modifications to our products may require new regulatory approvals or clearances, including 510(k) clearances or PMA's, or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use, so that no new 510(k) clearance is necessary. However, the FDA can review a manufacturer's decision and may disagree. The FDA may also, on its own initiative, determine that a new 510(k) clearance, de novo submission or PMA approval is required. Once we have a commercialized product, we may make modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees and requires new clearances or approvals for these modifications, we may be required to recall and to stop marketing our products as modified, which could require us to redesign our products and harm our operating results. In these circumstances, we may be subject to significant enforcement actions.
Where we determine that modifications to our products require a new 510(k) or de novo clearance or PMA application, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. Obtaining clearances and approvals can be a time-consuming process, and delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth.
The Generation 2.0 device, which has been cleared by the FDA for tattoo removal and cellulite, has been modified for commercial launch as Generation 2.2 and requires a special 510(k) filing, which may not be cleared.
We conducted our clinical trials for the acceleration of tattoo removal and cellulite reduction and received premarket clearance based on a device that is not optimized for commercial launch. We have made certain modifications to the cartridge for ease of loading and made improvements in user interface, improvements to extend the life and ease of replacement of the consumable treatment head cartridges to the device (Generation 2.2) intended for limited launch. The changes made to our device from Generation 2.0 to Generation 2.2 will necessitate the filing of an additional special 510(k) before being rolled out nationally. We cannot be certain that the changes we deem appropriate to make to the future RAP device prior to that product's launch will not require another 510(k) filing. While we believe these changes will not affect the therapy delivered by our RAP device, the FDA may require a full 510(k) submission rather than a special to clear these changes or may not clear these changes in a timely manner which could delay our commercial launch.
Even if our products are cleared or approved by the FDA, if we or our suppliers fail to comply with ongoing FDA requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.
Any product for which we obtain clearance or approval, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and other domestic and foreign regulatory bodies. In particular, we and our suppliers are required to comply with the FDA’s QSR which covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any product for which we obtain clearance or approval. The FDA enforces the QSR and other regulations through periodic inspections. The failure by us or one of our suppliers to comply with applicable statutes and regulations administered by the FDA, or the failure to timely and adequately respond to any adverse inspection observations or product safety issues, could result in, among other things, any of the following enforcement actions:
•untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
•unanticipated expenditures to address or defend such actions;
•customer notifications for repair, replacement, refunds;
•recall, detention or seizure of our products;
•operating restrictions or partial suspension or total shutdown of production;
•refusing or delaying our requests for premarket clearance or PMA of new products or modified products;
•operating restrictions;
•withdrawing premarket clearances on PMA's that have already been granted;
•refusal to grant export approval for our products; or
•criminal prosecution.
If any of these actions were to occur, it would harm our reputation and cause our product sales and profitability to suffer and may prevent us from generating revenue. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements which could result in our failure to produce our products on a timely basis and in the required quantities, if at all.
Even if regulatory clearance or approval of a product is granted, such clearance or approval may be subject to limitations on the intended uses for which the product may be marketed and reduce our potential to successfully commercialize the product and generate revenue from the product. If the FDA determines that our promotional materials, labeling, training or other marketing or educational activities constitute promotion of an unapproved use, it could request that we cease or modify our training or promotional materials or subject us to regulatory enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our training or other promotional materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement.
In addition, we may be required to conduct costly post-market testing and surveillance to monitor the safety or effectiveness of our products, and we must comply with medical device reporting requirements, including the reporting of adverse events and malfunctions related to our products. Later discovery of previously unknown problems with our products, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as QSR, may result in changes to labeling, restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recalls, a requirement to repair, replace or refund the cost of any medical device we manufacture or distribute, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties which would adversely affect our business, operating results and prospects.
Our products may in the future be subject to product recalls that could harm our reputation, business and financial results.
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.
If our products cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.
Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur. If we fail to report these events to the FDA within the required time frames, or at all, the FDA could take enforcement action against us. Any such adverse event involving our products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.
RISKS RELATED TO OUR LICENSE AGREEMENT AND INTELLECTUAL PROPERTY
We have licensed certain intellectual property rights for our technology from MD Anderson, and if our license agreement with MD Anderson is terminated, our business will be materially harmed.
We are a party to a royalty-bearing, worldwide, exclusive license agreement for certain intellectual property rights, including patent rights related to RAP technology, with MD Anderson. If we become insolvent, cannot meet commercial diligence requirements contained in the license agreement, fail to make annual maintenance fee payments, or otherwise materially default without curing the default, the license agreement could be terminated. Furthermore, if we are successful in commercializing and selling the RAP device, we will owe milestone and royalty payments pursuant to this license agreement. If we fail to make those payments in accordance with the license agreement, our license could be terminated. If our license agreement with MD Anderson is terminated, our business will be materially harmed.
We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.
We may from time to time seek to enforce our intellectual property rights against infringers when we determine that a successful outcome is probable and may lead to an increase in the value of the intellectual property. The validity of our patents and the patents we have licensed may be challenged in court and in administrative proceedings before the U.S. Patent and Trademark Office (“USPTO”) and other patent offices outside the United States. These lawsuits and proceedings are expensive and would consume time and resources and divert the attention of managerial and scientific personnel even if we were successful in stopping the infringement of such patents. In addition, there is a risk that the court will decide that such patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of such patents is upheld, the court will refuse to stop the other party on the grounds that such other party's activities do not infringe our intellectual property rights.
If we are unable to protect the intellectual property used in our products, others may be able to copy our innovations which may impair our ability to compete effectively in our markets.
The strength of our patents involves complex legal and scientific questions and can be uncertain. We have nine families of patents. As of December 31, 2020, our patent portfolio was comprised of two granted and 11 pending U.S. patent applications, 29 granted and 69 pending foreign counterpart patent applications, and one pending PCT patent application, each of which we either own directly or of which we are the exclusive licensee. These patent applications may be challenged or fail to result in issued patents, or if issued, these patents and our existing patents may be too narrow to prevent third parties from developing or designing around our intellectual property and in that event, we may lose competitive advantage, which could result in harm to our business.
We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
As is common in the medical device industry, we employ individuals who were previously employed at other medical device companies, including our competitors or potential competitors. We may be subject to claims that these employees, or we, have used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.
In addition to patented technology, we rely upon, among other things, unpatented proprietary technology, processes, trade secrets and know-how. Any involuntary disclosure to or misappropriation by third parties of our confidential or proprietary information could enable competitors to duplicate or surpass our technological achievements, potentially eroding our competitive position in our market. We seek to protect confidential or proprietary information in part by confidentiality agreements with our employees, consultants and third parties. While we require all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information and technology to enter into confidentiality agreements, we cannot be certain that this know-how, information and technology will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. These agreements may be terminated or breached, and we may not have adequate remedies for any such termination or breach. Furthermore, these agreements may not provide meaningful protection for our trade secrets and know-how in the event of unauthorized use or disclosure.
If third parties claim that our products infringe their intellectual property rights, we may be forced to expend significant financial resources and management time defending against such actions and our financial condition and our results of operations could suffer.
Third parties may claim that our products infringe their patents and other intellectual property rights. Identifying third-party patent rights can be particularly difficult because, in general, patent applications can be maintained in secrecy for at least 18 months after their earliest priority date. Historically, there has been substantial litigation regarding patents and other intellectual property rights in the medical device and related industries. If a competitor were to challenge our patents, licenses or other intellectual property rights, or assert that our products infringe its patent or other intellectual property rights, we could incur substantial litigation costs, be forced to make expensive changes to our product design, pay royalties or other fees to license rights in order to continue manufacturing and selling our products, or pay substantial damages. Third-party infringement claims, regardless of their outcome, would not only consume our financial resources but also divert our management’s time and effort.
If we are unable to protect our new branding trademarks from infringement, our business prospects may be harmed.
We currently have applied for a registered trademark for the use of our product brand name in association with our commercial products to be offered in the United States. Although we may take steps to monitor the possible infringement or misuse of our brand name or other trademarks once they are obtained, it is possible that third parties may infringe, dilute or otherwise violate our trademark rights. Any unauthorized use of our trademarks could harm our reputation or commercial interests. In addition, our enforcement against third-party infringers or violators may be unduly expensive and time-consuming, and any remedy obtained may constitute insufficient redress relative to the damages we may suffer. Our business may be materially adversely affected in the event we are unable to protect our trademarks.
RISKS RELATING TO OUR COMMON STOCK
Our stock price has been and may continue to be sporadically traded and volatile, which could result in substantial losses for investors.
Since our IPO in February 2019, our stock price has ranged from a high of $29.00 to a low of $4.12, the trading volume in our stock has been limited and sporadic, and the market price of our common stock is likely to continue to be highly volatile and could fluctuate widely in response to various factors, many of which are beyond our control. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also significantly affect the market price of our common stock.
Your ownership may be diluted if additional capital stock is issued to raise capital, to finance acquisitions or in connection with strategic transactions.
We have in the past and intend in the future to raise funds, finance acquisitions or develop strategic relationships by issuing equity or convertible debt securities, which will reduce the percentage ownership of our existing stockholders. Our Board has the authority, without action or vote of the stockholders, to issue all or any part of our authorized but unissued shares of common stock. We are authorized to issue up to 100,000,000 shares of common stock. Future issuances of common stock would reduce your influence over matters on which stockholders vote and would be dilutive to earnings per share.
Shares issuable upon the exercise of outstanding options or warrants may substantially increase the number of shares available for sale in the public market and depress the price of our common stock.
As of December 31, 2020, we had a material number of outstanding options and warrants to purchase shares of common stock. To the extent any of these options or warrants are exercised and any additional options or warrants are granted and exercised, there will be further dilution to stockholders and investors. Until the options and warrants expire, these holders will have an opportunity to profit from any increase in the market price of our common stock without assuming the risks of ownership. Holders of options and warrants may convert or exercise these securities at a time when we could obtain additional capital on terms more favorable than those provided by the options or warrants. The exercise of the options and warrants will dilute the voting interest of the owners of presently outstanding shares by adding a substantial number of additional shares of our common stock.
The concentration of our common stock ownership by a single shareholder will limit your ability to influence corporate matters.
Our largest shareholder, Remeditex Ventures, LLC (Remeditex), beneficially owns and will be able to vote in the aggregate a significant percentage of our outstanding common stock. As such, Remeditex, will continue to have the ability to exert significant influence over all corporate activities, including the election or removal of directors and the outcome of tender offers, mergers, proxy contests or other purchases of common stock that could give our stockholders the opportunity to realize a premium over the then-prevailing market price for their shares of common stock. This concentrated control will limit your ability to influence corporate matters and, as a result, we may take actions that shareholders do not view as beneficial. In addition, such concentrated control could discourage others from initiating changes of control. In such cases, the perception of our prospects in the market may be adversely affected and the market price of our common stock may decline.
Certain provisions in our organizational documents could enable our Board to prevent or delay a change of control.
Our organizational documents contain provisions that may have the effect of discouraging, delaying or preventing a change of control, or unsolicited acquisition proposals, that a stockholder might consider favorable. These include provisions:
•prohibiting the stockholders from acting by written consent;
•requiring advance notice of director nominations and of business to be brought before a meeting of stockholders;
•requiring a majority vote of the outstanding shares of common stock to amend the bylaws; and
•limiting the persons who may call special stockholders’ meetings.
In addition, Delaware law makes it difficult for stockholders that recently have acquired a large interest in a corporation to cause the merger or acquisition of the corporation against the directors’ wishes. Under Section 203 of the Delaware General Corporation Law, a Delaware corporation may not engage in any merger or other business combination with an interested stockholder for a period of three years following the date that the stockholder became an interested stockholder except in limited circumstances, including by approval of the corporation’s Board.
We have no intention of declaring dividends in the foreseeable future.
The decision to pay cash dividends on our common stock rests with our Board and will depend on our earnings, unencumbered cash, capital requirements and financial condition. We do not anticipate declaring any dividends in the foreseeable future, as we intend to use any excess cash to fund our operations. Investors in our common stock should not expect to receive dividend income on their investment, and investors will be dependent on the appreciation of our common stock to earn a return on their investment.
Failure to maintain effective internal control over our financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could cause our financial reports to be inaccurate.
We are required pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, to maintain internal control over financial reporting and to assess and report on the effectiveness of those controls. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Our management concluded that our internal controls over financial reporting were, and continue to be, ineffective as of December 31, 2020. We identified material weaknesses in our internal controls due to the lack of segregation of duties, the limitations of our financial accounting system to properly segregate duties and the absence of internal staff with extensive knowledge of SEC financial and GAAP reporting. While management is working to remediate these material weaknesses, there is no assurance that such changes, when economically feasible and sustainable, will remediate the identified material weaknesses or that the controls will prevent or detect future material weaknesses. If we are not able to maintain effective internal control over financial reporting, our financial statements, including related disclosures, may be inaccurate, which could have a material adverse effect on our business.
Failure to continue improving our accounting systems and controls could impair our ability to comply with the financial reporting and internal controls requirements for publicly traded companies.
As a public company, we operate in an increasingly demanding regulatory environment, which requires us to comply with the Sarbanes-Oxley Act of 2002, and the related rules and regulations of the SEC. Company responsibilities required by the Sarbanes-Oxley Act include establishing corporate oversight and adequate internal control over financial
reporting and disclosure controls and procedures. Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud.
Management did elect to perform an annual assessment as of December 31, 2020, of the effectiveness of our internal control over financial reporting for our first annual report. Our management concluded that our internal control over financial reporting was, and continues to be, ineffective as of December 31, 2020, due to material weaknesses in our internal controls resulting from a lack of segregation of duties, the limitations of our financial accounting system, and the absence of internal staff with extensive knowledge of SEC financial and GAAP reporting. This annual assessment was performed earlier than required. Section 404(a) of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the SEC. However, for as long as we remain an emerging growth company ("EGC") as defined in the JOBS Act, we have and intend to consider to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. We may continue to take advantage of these reporting exemptions until we are no longer an EGC. If we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed and investors could lose confidence in our reported financial information.
GENERAL RISK FACTORS
We may become subject to legal proceedings that could have a material adverse impact on our business, results of operations and financial condition.
From time to time and in the ordinary course of our business, we may become involved in various legal proceedings. All such legal proceedings are inherently unpredictable and, regardless of the merits of the claims, litigation may be expensive, time-consuming and disruptive to our operations and distracting to management. If resolved against us, such legal proceedings could result in excessive verdicts, injunctive relief or other equitable relief that may affect how we operate our business. Similarly, if we settle such legal proceedings, it may affect how we operate our business. Future court decisions, alternative dispute resolution awards, business expansion or legislative activity may increase our exposure to litigation and regulatory investigations. In some cases, substantial non-economic remedies or punitive damages may be sought. Although we maintain liability insurance coverage, there can be no assurance that such coverage will cover any particular verdict, judgment or settlement that may be entered against us, that such coverage will prove to be adequate or that such coverage will continue to remain available on acceptable terms, if at all. If we incur liability that exceeds our insurance coverage or that is not within the scope of the coverage in legal proceedings brought against us, it could have a material adverse effect on our business, results of operations and financial condition.
Economic uncertainty or economic deterioration could adversely affect us.
While the global economy is improving since the initial impact of the novel strain of coronavirus, SARS-CoV-2, which causes COVID-19, there are still uncertainties surrounding the strength and duration of the recovery that may continue to drive stock market and interest rate volatility and adversely impact consumer confidence, product demand, and our ability to refinance our debt. Economic conditions, along with our operating performance, may also materially and adversely impact our ability to access the financial markets. Accordingly, our future business and financial results are subject to uncertainty. If economic conditions deteriorate in the future, our future revenues and financial results could be materially and adversely affected.
Our employees and independent contractors, including consultants, manufacturers, distributors, commercial collaborators, service providers and other vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have an adverse effect on our results of operations.
We are exposed to the risk that our employees and independent contractors, including consultants, manufacturers, distributors, commercial collaborators, service providers and other vendors may engage in misconduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or other unauthorized activities that violate the laws and regulations of the FDA and other similar regulatory bodies, including those laws that require the reporting of true, complete and accurate information to such regulatory bodies; manufacturing standards; U.S. federal and state healthcare fraud and abuse, data privacy laws and other similar non-U.S. laws; or laws that require the true, complete and accurate reporting of financial information or data. Activities subject to these laws also involve the improper use or misrepresentation of information obtained in the course of clinical trials, the creation of fraudulent data in our nonclinical studies or clinical trials, or illegal misappropriation of product, which could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter misconduct by employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from
governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations.
In addition, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and financial results, including, without limitation, the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgements, individual imprisonment, other sanctions, contractual damages, reputational harm, diminished profits and future earnings and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
As an EGC under the Jumpstart Our Business Startups Act, or JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements.
As an EGC under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. We are an EGC until the earliest of:
•the last day of the fiscal year during which we have total annual gross revenues of $1.07 billion or more;
•the last day of the fiscal year following the fifth anniversary of our IPO;
•the date on which we have, during the previous 3-year period, issued more than $1 billion in non-convertible debt; or
•the date on which we are deemed a “large accelerated issuer” as defined under the federal securities laws.
For so long as we remain an EGC, we will not be required to:
•have an auditor report on our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;
•comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis);
•submit certain executive compensation matters to shareholders advisory votes pursuant to the “say on frequency” and “say on pay” provisions (requiring a non-binding shareholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding shareholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010;
•include detailed compensation discussion and analysis in our filings under the Securities Exchange Act of 1934, as amended, and instead may provide a reduced level of disclosure concerning executive compensation;
•present more than two years of audited financial statements or two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"); and
•immediately adopt new or revised financial accounting standards under §107 of the JOBS Act; instead we are eligible to claim longer phase-in periods.
We intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. We have elected to avail ourselves of this exemption from new or revised accounting standards, and, therefore, will not be subject to the same new or revised accounting standards as public companies that are not EGCs.
Certain of these reduced reporting requirements and exemptions were already available to us due to the fact that we also qualify as a “smaller reporting company” under SEC rules. For instance, smaller reporting companies are not required to obtain an auditor attestation and report regarding management’s assessment of internal control over financial reporting; are not required to provide a compensation discussion and analysis; are not required to provide a pay-for-performance graph or CEO pay ratio disclosure; and may present only two years of audited financial statements and related MD&A disclosure.
Under the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions for up to five years after our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act of 1933, or such earlier time that we no longer meet the definition of an EGC. Further, under current SEC rules,
we will continue to qualify as a “smaller reporting company” for so long as we have a public float (i.e., the market value of common equity held by non-affiliates) of less than $250 million as of the last business day of our most recently completed second fiscal quarter.
We cannot predict if investors will find our securities less attractive due to our reliance on these exemptions.
Techniques employed by short sellers have in the past and may in the future drive down the market price of our common stock.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third-party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s best interests for the price of the stock to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. These short attacks have led to selling of shares in the market. Issuers such as Soliton, that have common stock with limited trading volumes and/or have been susceptible to relatively high volatility levels, can be particularly vulnerable to such short seller attacks. In May 2019, our common stock was the subject of a report by a short seller that contained incorrect and misleading information, which report led to a severe decline in our stock price. Although we timely responded to these false and misleading allegations, we cannot assure you that such similar false and misleading articles will not be published again in the future. The publication of any such articles regarding us in the future may bring about a temporary, or possibly long term, decline in the market price of our common stock. If we continue to be the subject of unfavorable allegations, we may have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the relevant short seller by applicable state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could be distracting for our management team.
We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which could cause our stock price to decline.
The Company may provide financial guidance about its business and future operating results. In developing this guidance, the Company’s management must make certain assumptions and judgments about its future operating performance, including but not limited to projected hiring of sales professionals, growth of revenue in the aesthetic device market, increase or decrease of its market share, costs of production of its recently introduced products, and stability of the macro-economic environment in the Company’s key markets. Furthermore, analysts and investors may develop and publish their own projections of the Company’s business, which may form a consensus about the Company’s future performance. The Company’s business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of the Company’s control, and which could adversely affect its operations and operating results. Furthermore, if the Company makes downward revisions of the Company’s previously announced guidance, or if the Company’s publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of the Company’s common stock could decline.