Overview
We are a medical technology company developing and commercializing a robotic device, the ARTAS
®
System, that assists physicians in performing many of the repetitive tasks that are a part of a follicular unit extraction surgery, or FUE, a type of hair restoration procedure. We believe the ARTAS
®
System is the first and only physician-assisted robotic system that can identify and dissect hair follicular units directly from the scalp and create recipient implant sites. The ARTAS
®
System includes the ARTAS Hair Studio application, an interactive three-dimensional patient consultation tool that enables a physician to create a simulated hair transplant model for use in patient consultations. We received clearance from the U.S. Food and Drug Administration, or FDA, in April 2011 to market the ARTAS
®
System in the U.S., and we have sold the ARTAS
®
System into 37 other countries.
In March 2018, we received 510(k) clearance from the FDA to expand the ARTAS
®
technology to include implantation and in the third quarter of 2018, we commercially launched the next generation ARTAS
®
System, called ARTAS
®
iX System, which incorporates the implantation functionality as well as other functionalities.
As of December 31, 2018, the ARTAS
®
System and ARTAS Hair Studio application are protected by over 80 patents in the U.S. and over 110 international patents.
The ARTAS
®
System is comprised of the patient chair, the cart, which includes the robotic arm, integrated vision system, artificial intelligence algorithms and a series of proprietary end effectors, which are the various devices at the end of the robotic arm, such as the automated needle and punch, that interact with the patient’s scalp and hair follicles and perform various clinical functions.
The image below depicts the ARTAS
®
iX System cart, including the robotic arm and the needle mechanism which houses the automated needle and punch used for follicle dissection and site making.
Proposed Merger with Venus
On March 15, 2019, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Radiant Merger Sub Ltd., a company organized under the laws of Israel and a directly, wholly-owned subsidiary of the Company (“Merger Sub”), and Venus Concept Ltd., a company organized under the laws of
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Israel (“Venus”) to combine the companies in an all-stock transaction. The Merger Agreement a
nd the Merger (as defined below) have been approved by our board of directors (the “Board”) and the board of directors of Venus. The transaction is expected to close in the third quarter of 2019, subject to customary closing conditions, including the appro
val by stockholders of Restoration Robotics and Venus Concept and receipt of all necessary regulatory approvals.
The Merger Agreement provides that, upon the terms and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into Venus (the “Merger”), with Venus continuing as the surviving corporation and a direct wholly-owned subsidiary of the Company.
Under the terms of the transaction, Restoration Robotics and Venus Concept shareholders will own approximately 15% and 85% of the combined company, respectively, on a fully diluted basis, without giving effect to the shares issued in the proposed equity financing that is expected to close immediately after the merger. EW Healthcare Partners has committed to lead a $21.0 million equity investment, priced at $0.825 per share (subject to adjustment for stock splits), in the combined company’s common stock contingent on the closing of the merger transaction. Additional investors committed to participating in the proposed equity financing include HealthQuest Capital, Madryn Asset Management, Longitude Capital Management, Fred Moll and Aperture Venture Partners. In addition to the equity financing, Fred Moll and InterWest Partners previously funded a $5 million convertible note into Restoration Robotics which will convert into the combined company’s common stock at the closing of the equity financing led by EW Healthcare, at a price of $0.825 per share (subject to adjustment for stock splits).
Concurrent with closing of the transaction, the Company anticipates effecting a reverse stock split. The Company expects to have approximately 283.2 million shares outstanding (or approximately 18.9 million shares outstanding after giving effect to an anticipated 1-for-15 reverse stock split) and after taking into account shares issued to the former Venus Concept shareholders in the merger, shares issued as part of the $21.0 million equity investment, and shares issued upon conversion of the $5.0 million convertible notes issued by us in February, 2019.
Market Overview
According to data collected by the International Society of Hair Restoration Surgery, or ISHRS, the global market for hair restoration procedures was approximately $4.1 billion in 2017. We believe the global hair restoration market will continue to grow due to several factors, including:
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An aging population with disposable income and an increased acceptance of aesthetic procedures. According to data from the American Society for Aesthetic Plastic Surgery, or ASAPS, in 2016, Americans spent more than $15 billion on combined surgical and nonsurgical aesthetic procedures. Male aesthetic procedures have increased 325% since 1997.
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A market shift to less invasive hair restoration procedures such as follicular unit extraction which, according to ISHRS, have increased from less than 10% of hair restoration procedures performed in 2004 to about 52.6% in 2017.
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A greater number of physicians seeking patient direct pay procedures, such as hair restoration, due to increased government and private payor reimbursement restrictions.
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This growing market
has a significant
potential
patient
population
with approximately
35 million
males
in the United States
suffering
from
androgenic
alopecia,
or AGA,
also referred
to as male
pattern
baldness.
We have FDA
clearance
to market
the ARTAS
®
System
in the U.S.
for dissecting
hair
follicles
from
the scalp
of men diagnosed
with AGA
who
have black or brown straight
hair and to implant those follicles in the scalp of the patient.
With
this
clearance
we
can market
the ARTAS
®
System
to physicians to
treat
this
growing market.
The Hair Loss Market
According to the census conducted by ISHRS, in 2016, an estimated $4.1 billion was spent globally on surgical hair restoration treatments, representing a 64% increase over the estimated $2.5 billion spent in 2014. In general, the global market for aesthetic procedures marketed towards men is significant and growing. For example, according to ASAPS statistics, the number of aesthetic procedures performed on men in the U.S. increased 325% from 1997 to 2015, to approximately $1.3 billion. The patient market for hair loss is significant with approximately 35 million men suffering from AGA in the United States alone.
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Hair Loss Treatment Options and Their L
imitations
The treatments for hair loss can broadly be divided between non-surgical options and surgical procedures.
Non-Surgical Options
Non-surgical options for hair loss include prescription therapeutics and non-prescription remedies. In the U.S., the FDA has authorized two prescription therapeutics for hair loss: Rogaine which is applied topically, and Propecia which is ingested in pill form. Both Rogaine and Propecia have several drawbacks, including limited efficacy in some individuals and the need for strict patient compliance for the treatment to have meaningful effect. Both products require strict usage without breaks and often require a minimum of six months before meaningful effect is visible. Furthermore, while uncommon and not affecting all men, Propecia can cause multiple side-effects given its systemic administration, including impotence, swelling, dizziness and weakness. In addition to prescription therapeutics, non-surgical remedies for hair loss include wigs, hair pieces and spray-on applications, which also have significant drawbacks primarily due to an unnatural aesthetic look.
Surgical Procedures
Surgical procedures to address hair loss continue to evolve and become more popular. The first of these therapies, hair plugs, was developed in the late 1950s. Due to the size of the transplanted hair follicle groups, or plugs, the transplants resulted in an unnatural look with the patient often having a “doll-hair” like appearance, the clumping or grouping of hair follicles in a visibly uniform pattern. Because of the poor aesthetic results of hair plugs, strip surgery, or FUT, follicular unit transplantation and FUE became increasingly more popular.
FUE is significantly less invasive than strip surgery. In this procedure, the physician or technician removes individual hair follicles from the patient’s scalp without removing a strip of tissue. FUE can be performed with manual hand-held punches, automated hand-held devices or with the ARTAS
®
System. Use of manual or automated hand-held devices requires significant time, and demands that complicated, repetitive and tedious tasks be performed by a trained technician (under the supervision of a physician) or physician. We have developed the ARTAS
®
System to provide robotic assistance for many of the tedious and repetitive tasks that are part of an FUE procedure.
Strip Surgery
In an FUT procedure, or strip surgery, the physician uses a sharp scalpel to surgically remove a large strip of the patient’s scalp, approximately eight inches in length, and one-half inch in width and depth, from the donor area. The subsequent wound is sutured or stapled closed. Following the surgical removal of the strip of the scalp from the patient’s head, the follicular unit grafts, the natural groupings of hair follicles in the scalp, are removed from the strip of scalp by technicians using microscopes and scalpel blades. Following the removal of the individual hair follicles, technicians implant the individual hair follicles into hundreds to thousands of incisions in the patient’s scalp prepared by the physician.
Strip surgery results in a linear scar which may enlarge over time creating a poor aesthetic outcome in the donor area. As a result, strip surgery patients are generally unable to wear their hair short without revealing the scar. Furthermore, multiple strip surgeries can cause a significant stretching of the scalp which can exacerbate the appearance of this scar. There can also be complications from strip surgery, such as ongoing pain at the scar site, numbness, and potential nerve damage.
Follicular Unit Extraction Using Hand-Held Devices
In part as a solution to the significant scarring and other drawbacks of strip surgery, the follicular unit extraction, or FUE, procedure was developed in the early 2000s. In an FUE procedure, rather than surgically removing a portion of the patient’s scalp, each hair graft is individually dissected from the scalp for transplantation. Because a strip of the patient’s scalp is not removed, a FUE procedure avoids a long linear scar and reduces the post-operative pain and numbness associated with strip surgery. Following the dissection of the individual hair follicles, the physician uses a hand-held device to remove the hair follicles. After harvesting, the individual hair follicles are implanted in the same way as in a strip surgery procedure.
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Drawbacks of Stri
p Surgery and FUE Surgery Using Hand-Held Devices
While strip surgery and FUE surgery using a hand-held device, or manual FUE, can provide significant, long-term results in restoring hair, there are several limitations associated with these procedures.
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Technician training.
Strip surgery and manual FUE procedures require dexterity, demanding hand-eye coordination, and attention to detail by all members of the transplant team. Technicians must handle the delicate grafts carefully and place them into site incisions during implantation without damaging the grafts. For strip surgeries in particular, a technician must undergo significant training to dissect grafts under a microscope and it can take a significant period of time for a technician to become proficient.
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Labor intensive.
Both strip surgery and manual FUE procedures require a large team of technicians to perform the procedure, generally requiring between four and eight technicians. The labor intensiveness and time-consuming nature of these techniques limits the number of procedures physicians can perform.
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Long learning curve.
Both strip surgery and manual FUE procedures require a major investment of time on the part of physicians and technicians to learn the technique. A physician must commit a substantial amount of time to learn the manual FUE harvesting technique and they often report that the technique is technically and
ergonomically
challenging. Initially, a physician may only be able to harvest a limited number of grafts per hour, which may ultimately affect the size of the hair transplant procedure the physician is able to perform. In addition, the follicles harvested by a physician using the FUE technique may not be of a high quality. Even physicians and technicians who are highly experienced may have results with high transection rates while performing a manual FUE procedure. For strip surgeries, there is a significant time investment made to train each technician to dissect grafts under a microscope, handle the delicate grafts with instrumentation and to place the grafts into the site incisions during implantation.
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Surgical planning and recipient site making.
In making the recipient sites into which hair follicles are transplanted, the ability of the physician and the technician to visualize and avoid injuring existing hair is limited to what they can achieve with magnified lenses. As a result, this limited visualization may compromise the aesthetic outcome. Additionally, manual site making can present additional issues and complications, including cutting into and damaging existing healthy hair, difficulty in matching existing hair angles, successfully creating a random distribution pattern for implantation in order to create a more natural look, and creating sites with a consistent and optimal depth.
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Lack of high-quality visualization tools for the patient.
Generally, hair restoration physicians utilize before and after pictures of previous patients and grease pens to delineate the transplant area. These are typically the only available tools to assist the patient in understanding the aesthetic effect of the procedure and do not provide information to visualize the expected outcome illustrated on the actual patient.
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Inconsistency in performance
.
Both strip surgery and manual FUE procedures require either physicians or technicians to perform the repetitive and tedious tasks of dissecting grafts over a long period of time. In a strip surgery, the technicians are required to dissect the individual follicles from the harvested strip of the patient’s scalp, whereas in a manual FUE procedure the physician and technicians are required to harvest each individual follicle directly from the patient’s scalp. As a result of this lengthy and tedious process, the physician or technician may begin to fatigue and his or her ability to maintain the concentration necessary to consistently extract high-quality grafts without causing follicle damage may diminish. In addition, graft dissection productivity may decline during the long procedure due to fatigue.
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The
ARTAS
Solution
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We believe the ARTAS
®
System addresses many of the shortcomings of other hair restoration procedures. The ARTAS
®
System is capable of robotically assisting a physician through many of the most challenging steps of the hair restoration process, including the dissection of hair
follicles, site planning and recipient site making. We believe, with this assistance, the ARTAS
®
System can help shorten the often-long learning curve for both physicians and technicians to become proficient in performing hair restoration procedures. In addition, we believe that by assisting the physician and technicians with many of the repetitive and tedious tasks associated with the hair restoration procedure, the ARTAS
®
System can make hair restoration procedures less labor intensive and can reduce inconsistent results. Further, we believe the ARTAS
®
System’s Site Making functionality, which includes an enhanced imaging system and sophisticated algorithms, helps physicians avoid damaging existing follicles and enables them to create a more natural, aesthetically pleasing outcome for the patient. In March 2018, we received 510(K) clearance from the FDA to expand the ARTAS technology to include implantation of harvested hair follicles. In
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December
2018
, we
completed
the
ISO audit and
are
compliant with CE Mark requirements for the sale of the ARTAS
®
i
X
System with implantation
functionality
in Europe
. Our platform includes the ARTAS Hair Studio application which can simulate pre-procedure and post-procedure outcomes and can be utilized du
ring the patient consultation and education process.
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The ARTAS procedure provides patients with a minimally invasive, less painful alternative to strip surgery. The ARTAS
®
System has a faster recovery time and avoids the long linear scar at the back of the patient’s head. The ARTAS Hair Studio application allows patients to visualize the expected post-procedure outcome through a three-dimensional model. We believe this patient-physician interaction can provide patients more confidence and make the patient more comfortable in undergoing the procedure. Due to these advantages, we believe the ARTAS
®
System and the ARTAS Hair Studio application are appealing to potential patients considering a hair transplant or those that are using fewer effective treatments, such as prescription therapeutics or other non-surgical products.
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In addition to the advantages afforded to patients, we believe the ARTAS
®
System and the ARTAS Hair Studio application provide compelling benefits for physicians. The ARTAS
®
System’s image-guided robotic capabilities allow physicians to perform procedures with fewer staff than what might be required for a traditional strip surgery or a FUE procedure using hand-held devices. With the robotic assistance provided by the ARTAS
®
System, we believe physicians and technicians will be able to perform the complicated, repetitive and tedious task of dissecting hair grafts with less fatigue and greater productivity than would be possible in a manual FUE procedure. In addition, we believe the ARTAS
®
System, through its ergonomic and easy-to-use platform, in tandem with the high-quality
training we provide, can significantly shorten the learning curve for physicians and technicians.
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We strategically market the ARTAS
®
System to hair restoration surgeons, dermatologists, plastic surgeons and aesthetic physicians. We believe we
can
reach our target physician customers effectively through focused marketing efforts. These efforts include participation in trade shows, scien
tific meetings, educational symposiums, webinars, online advertising and other activities. For physicians who purchase the ARTAS
®
System, we provide comprehensive clinical training, practice-based marketing support, as well as patient leads. For example, w
e believe we help our physician customers increase the number of procedures performed by assigning a practice success manager, or PSM, to
aid
in building the physician-customer’s hair restoration practice. Support from a PSM includes the deployment of pati
ent marketing materials, assisting with social media and digital marketing strategies, and other marketing and sales support.
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Advantages of the ARTAS
®
Procedure
Patient
Value
. We believe the ARTAS
®
System and the ARTAS
®
Hair Studio application significantly improve the patient experience and outcome in hair transplantation procedures in the following ways:
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Through the ARTAS
®
System, the dissection of grafts is performed in a manner that leaves only small pinpoint scars that heal faster and are less detectable than the larger post-operative linear scar that would be produced from strip surgery. As a result, an ARTAS procedure can, in many cases, offer a shorter recovery time and can enable patients to resume their daily lifestyle faster than with strip surgery. In addition, the ARTAS procedure allows patients to wear their hair short without a noticeable scar.
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The ARTAS Hair Studio application enables patients to interact with their physician to make educated decisions on graft numbers and implant placements to achieve their desired aesthetic outcome and to view a simulation of their potential result. We believe this process and interaction give patients more confidence in undergoing a procedure since they have direct input into their treatment and can preview the expected outcome.
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The ARTAS Site Making functionality translates the physician-patient site design onto the patient’s recipient area. The ARTAS
®
System’s enhanced imaging system and sophisticated algorithms enable the ARTAS
®
System to rapidly create recipient sites at precise depths, replicate pre-existing hair angles, avoid damaging the healthy pre-existing hair and adjust the distribution of the recipient sites to optimally fill in the transplantation area. We believe these elements can contribute to a superior aesthetic outcome
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Physician Value.
We believe
the ARTAS
®
System
provides
physicians
compelling
economic
benef
its
and enables physicians
to achieve
consistent
reproducible
results.
As
a result,
we
believe
the ARTAS
procedure
also offers
an attractive
addition
to existing
dermatology,
plastic
surgery
or aesthetics
practices
whether they
do or do not provide
hair
restoration
procedures.
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Hair restoration procedures are generally paid for by the patient and do not involve the complexity of securing reimbursement from third-party payors.
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We believe the ARTAS
®
System’s image-guided robotic capabilities allow physicians to perform hair restoration procedures with fewer staff required than a traditional strip surgery or a manual FUE procedure - procedures can also be performed with less physician and technician fatigue.
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Because we provide high quality training for physicians and their clinical teams on the use of the ARTAS
®
System and because the robotic system and its intelligent algorithms assist these teams in performing hair restoration procedures, we believe we can significantly shorten the learning curve necessary for hair transplantation procedures using the ARTAS
®
System. This shorter learning curve can reduce barriers to entry for a new hair restoration practice. It can also ease the adoption of a new technology into existing practices.
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Clinically-Established Results.
Four peer-reviewed clinical publications have demonstrated the quality and consistency of grafts produced by the ARTAS
®
System. One published study indicated average damage rates for the hair follicles, or transection rates, with the ARTAS
®
System were as low as 6.6%, with a second study documenting average transection rates as low as 4.9% in a Korean population of patients. The third study documented that the ARTAS
®
System can be programmed by the physician to select follicular units with larger groupi
ngs of hairs while skipping single hair grafts, which allows physicians to choose particular follicular units depending on the hair density they are trying to achieve, providing a clinical benefit as measured by the increase in hairs per harvest of 17% and as measured by the increase in hairs per graft of 11.4%. Results were statistically significant with a p-value less than 0.01. This study also demonstrates the ability of robotic follicular unit graft selection to increase the amount of hairs a physician can extract for each incision made in the donor area. The fourth study demonstrated that FUE cases larger than 2,500 grafts, or mega-sessions, are possible using the ARTAS
®
System. These peer-reviewed publications demonstrate the reproducibility and consistency of dissection results from the ARTAS
®
System in a diverse group of patients, even as the system is used by different clinicians. To our knowledge, there are no other peer-reviewed clinical publications that demonstrate the reproducibility of results utilizing other products in FUE or strip surgery procedures. We intend to encourage scientific research in the study of hair restoration to improve our technology, solutions, enhance understanding of our industry and educate physicians on the capabilities of the ARTAS
®
System.
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The ARTAS
®
and
ARTAS
®
iX
System
s
and Procedure
We believe the ARTAS
®
and ARTAS
®
iX Systems with the ARTAS Hair Studio application have improved multiple phases of the hair transplantation procedure, which include patient consultation, harvesting, recipient site making and implantation.
Patient Consultation
During the initial consultation process, potential patients want to understand their hair restoration procedure and visualize its aesthetic outcome. Traditionally, physicians have used pre-procedure and post-procedure pictures of previous patients to illustrate how a new patient’s results might look, requiring a patient to use their imagination to visualize the potential results. Physicians may also use a grease pen to draw the areas directly on the patient’s head to show where grafts could be implanted.
We introduced the ARTAS Hair Studio application in 2014 to make the consultation more informative, interactive and easy for physicians to utilize. The ARTAS Hair Studio application produces a three-dimensional rendering of the recipient area viewable on a tablet device. The physician can draw on the tablet to simulate alternative cosmetic outcomes. A patient can, in real-time, visualize the simulation and look at various outcomes based on the number of grafts to be implanted and placements of the graphs. Since hair transplantation prices charged by physicians often vary based on the number of grafts, this aids both the physician and patient in arriving at a site plan that balances outcome expectations and patient price sensitivities.
The following is an example of an ARTAS Hair Studio pre-procedure and post-procedure simulation:
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Harvesting
During the harvesting phase of the hair restoration procedure, the robotic arm and integrated vision system work in tandem to identify the optimal hair follicles to be used in the procedure. The ARTAS vision system uses proprietary algorithms to identify individual hair follicles, growth angle, density, thickness, length and follicle grouping and to determine which grafts to dissect and the optimal order in which they should be dissected. The algorithms recalculate 60 times per second, accommodating patient movement, to provide the physician with accurate up-to-date information during the course of the procedure. We believe these assessments directly correlate to the quality of the outcome and the state of the donor area. This is important as we believe it affects how the donor area will appear following the procedure, and the potential viability for subsequent harvesting for future transplantation procedures.
The ARTAS
®
System harvesting user interface provides
the physician with enhanced control during the procedure. An example of the harvesting user interface appears as follows:
Following the vision system’s identification of the optimal hair follicles for transplant, the ARTAS
®
System dissects these follicles using a sharp needle to score the epidermis and a punch, coaxial with the needle, to separate the graft from the surrounding tissue. In the final step of the harvesting phase, the grafts are removed manually with forceps by the physician or the technician. The grafts are then cleaned, inspected and prepared for implantation.
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During the procedure, the physician
can
customize the dissection incisions by choosing a needle and punch that will
produce 0.8mm, 0.9mm or 1.0mm incisions. The image below illustrates a typical ARTAS
®
System punch and needle:
The needle travels at speeds such that, when it contacts the skin, it provides targeted precision and a cleanly scored incision. The punch then spins between 3,000 and 5,000 rpm and loosens the grafts from the surrounding tissue. In a clinical setting, we have observed that the dissection cycle takes between one to two seconds per graft, depending on the length of the graft. In a clinical setting, the ARTAS
®
System has been shown to move from graft to graft at a rate of approximately one to three seconds, thereby enabling the ARTAS
®
System to dissect a graft every two to five seconds, or approximately 720 to over 1,800 grafts per hour. The ARTAS
®
System enables the physicians to adjust dissection parameters to accommodate for different types of skin and manipulate graft selection algorithms based on patient needs. The ARTAS
®
System can be programmed to dissect as many grafts as appropriate thus maximizing the use of the donor area. It can also be programmed to dissect grafts with more than two hairs each, thereby increasing the hair yield or the number of hairs per graft.
During the harvesting phase of the hair transplantation procedure, the patient may be lightly sedated, and the integrated vision system can track patient movement and pause if excessive movement is detected.
Recipient Site Making
Sites, or incisions, are created to receive the harvested grafts. This task is generally performed by the physician. Prior to the ARTAS
®
System, site making was performed manually using a hand-held tool or needle to create hundreds to thousands of tiny incisions in the scalp. This is a critical step as it creates the hair pattern in which the harvested grafts will grow. From communications with physicians we have found that, typically, a physician can manually create approximately 1,500 sites per hour. Precision and consistency, however, can be affected by experience, hand-eye coordination and fatigue.
The ARTAS
®
System Site Making functionality incorporates artificial intelligence and robotics precision to strategically make surgical incision sites for implanting hair follicles, while also identifying and avoiding injuring healthy follicles in proximity of the implantation sites. This allows the patient’s hair to look more natural and prevents damaging existing healthy hair in the transplant area which we believe would result in patients with more hair than if the sites were made manually.
Robotic recipient Site Making, introduced in 2015, is performed by the physician, who develops the ARTAS
®
System treatment plan, or map, identifying where to make the incisions on the patient. The treatment plan is prepared using three-dimension modeling software that takes one picture of the patient’s recipient area and generates a three-dimensional map that is utilized by the ARTAS
®
System. With entry angle accuracy, consistency and precise depth control, the ARTAS
®
System creates the recipient sites using a small solid core needle or a blade at a rate of approximately 2,500 to 3,000 sites per hour, which is significantly faster than the approximately 1,500 sites per hour achieved manually.
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Implantation
Following the site making phase of the hair transplantation procedure, the physician and/or technicians utilizing an ARTAS
®
System without the implantation functionality will manually implant the grafts in the robotically created sites made by the ARTAS
®
System. Physicians and technicians utilizing an ARTAS
®
iX System
can utilize the robotic functionality of the system to assist in implanting the dissected follicles. We believe this robotic implantation functionality will help further shorten the learning curve, improve the consistency and reproducibility of results by protecting permanent hair and reducing inconsistencies associated with manual implantation, and could potentially reduce the amount of time each graft spends outside of the scalp and decrease the overall time required for implantation.
ARTAS
®
Kits for Harvesting and Site Making
The ARTAS
®
System utilizes a set of disposable and reusable kits for our Harvesting and Site Making functionality. Each system comes with a set of reusable items. The disposable kits are included with the purchase of procedures.
Our Growth Strategy
Our goal is to expand the commercialization of the ARTAS
®
System so that it becomes the standard of care for hair transplantation. The key elements of our strategy to achieve this goal are to:
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Broaden Our Physician Customer Base
. In addition to continuing to market the ARTAS
®
System to traditional hair restoration practices, we continue to expand our direct sales efforts to include other physician specialties, such as dermatology and plastic surgery. In both the traditional hair restoration practices and other customer bases, we will be selective in identifying those practitioners who have a track record of successful integration of new technologies and a strong desire to build a hair restoration practice around the ARTAS
®
System.
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Increa
se Sales and Marketing Investments in the United States.
We have made certain strategic changes to and investments in our U.S. sales and global marketing organizations, which included terminating certain personnel and hiring new personnel and realigning our reporting and leadership structure in the sales organization. For example, throughout 2018 we are increasing the size of our U.S. sales force by hiring sales professionals with experience selling capital equipment and equipment to physicians in the aesthetic market. In addition, we invested significantly in our sales and marketing efforts related to the launch of the ARTAS
®
iX System. Strategically, we have been focused on our branding and have consolidated our regional marketing teams to standardize our messaging and focus of our marketing spending with an aim to be more efficient and cost-effective.
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Continue to Innovate.
Since the introduction of the ARTAS
®
System in 2011, we have regularly introduced new innovations and updates to the ARTAS
®
System, and we intend to continue this innovation going forward. For example, we are developing a robotic implantation functionality to the ARTAS
®
System which is in clinical development. We also intend to continue to refine our harvesting technology and user interface, while making ongoing investments in research and development driven by customer feedback and market demands. Furthermore, we may pursue expanding the cleared indications of use beyond men with a specific hair type so that the ARTAS
®
System can be more broadly utilized.
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Drive Increased Utilization
. In addition to revenue from system sales and servicing, we also generate revenue from procedure-based fees. We will continue to work collaboratively with our physician customers to increase utilization by introducing new functionalities, technology and innovations. In addition, we believe we can increase procedure revenue by helping physicians build their practice through our marketing and training support. To achieve all of these goals, we intend to utilize our teams of clinical training managers, or CTMs, PSMs and field service engineers to work with and to support our physician customers in developing profitable ARTAS practices.
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Research and Development
Since we started selling the ARTAS
®
System in 2011, we have introduced several new functionalities and enhancements designed to make the use of the ARTAS
®
System more intuitive for clinicians and more comfortable for patients with the ultimate goal of improving clinical outcomes.
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Our research and d
evelopment efforts are focused on improvements which continue to refine our Harvesting and Site Making functions
, as well as the
recently
develop
ed
implantation functionality for the ARTAS
®
iX
System. We also intend to continue to improve our user interface, while making ongoing investments in research and development driven by customer feedback and market demands. For the years ended December 31,
2018
,
2017
and
2016
, we incurred research and de
velopment expenses of $
8.4
million, $
7.1
million and $
7.5
million, respectively.
Intellectual Property
Patents and Proprietary Technology
We rely on a combination of patent, copyright, trademark and trade secret laws, and confidentiality and invention assignment agreements to protect our intellectual property rights.
As of December 31, 2018, we had 86 issued U.S. patents, primarily covering the ARTAS System and methods of use, the earliest of which expire in 2021, 20 pending U.S. patent applications, 112 issued foreign patents, some of which preserve an opportunity to pursue patent rights in multiple countries, and 33 pending foreign patent applications.
Our patents cover the ARTAS Hair Studio and ARTAS
®
System’s robotic mechanism, vision system, methods and algorithms of harvesting and making recipient sites, industrial designs and hardware. Our pending patent applications may not result in issued patents, and we cannot provide assurance that any current or subsequently issued patents will protect our intellectual property rights. Third parties may challenge certain patents issued to us as invalid, may independently develop similar or competing technologies or may design around any of our patents. We cannot be certain that any of the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights in these countries as fully as in the U.S.
There is no active patent litigation involving us and we have not received any notices of patent infringement.
License Agreement
with HSC
Development
LLC
and
James A.
Harris,
MD
In July 2006, we
entered
into a license
agreement,
or the HSC
license
agreement,
with HSC
Development
LLC, or HSC,
and James
A.
Harris,
M.D.,
as amended,
pursuant
to which we
received
an exclusive,
worldwide license to develop, manufacture
and commercialize
products
covered
by any of the licensed
patent
rights
or that incorporate
the licensed
technology
in the field
of performance
of hair
removal
and implantation,
including transplantation,
procedures
using a computer
controlled
system
in which a needle
or other
device
carried
on a mechanized
arm
is oriented
to a follicular
unit for extraction
of same,
or to an implant
site
for implantation
of a follicular
unit, or some combination
thereof.
Under the HSC
license
agreement,
we
are developing
the ARTAS
®
System
to be utilized
as a robotic
system
to assist
a physician
in performing
hair
restoration
procedures.
In consideration
for the license,
we
issued
to HSC
25,000 shares
of our common
stock, prior to the Company’s 1-for-10 reverse stock split, and paid HSC
a one-time payment
of $25,000. The license
grant
is perpetual,
and the license
agreement
does not provide
a right
for HSC or Dr. Harris
to terminate
the HSC
license
agreement.
The licensed
patents
cover, in general,
a method
and device
for the extraction
of follicular
units
from
a donor area
on a patient.
The method
includes
scoring
the outer skin layers
with a sharp punch, and then inserting
a blunt punch into the incision
to separate
the hair
follicle
from the surrounding
tissue
and fatty
layer.
The method
and device
significantly
decrease
the amount
of follicular transection
and increase
the rate
at which follicular
units
can be extracted.
There are other
embodiments
not herein
disclosed.
The licensed
patents
will expire
from
2025 through 2030.
Sales and Marketing
We generate revenue from the sale and service of ARTAS
®
Systems and procedure-based fees. Generally, our physician customers either purchase their procedures online or through distributors. In the U.S., physician customers generally pay on a per hair follicle basis for the hair follicles to be harvested or, and on a per procedure basis for hair follicle harvesting and site making, and implantation, if they operate an ARTAS
®
iX System. Outside of the U.S., physician customers generally pay on a per procedure basis for both hair follicle harvesting and site making, and implantation where ARTAS
®
iX System has been approved for use. Customers generally either purchase their ARTAS
®
System directly or finance their purchase through third parties. We do not provide long-term financing to our customers.
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We sell the ARTAS
®
System, provide service and generate
procedure-based
fees. In the U.S. we generate revenue through our direct sales force. Outside of the U.S. we utilize our direct sales force as well as third-par
ty distributors. As of December 31,
2018
, we have sold the ARTAS
®
System in 37 countries
and the ARTAS
®
iX System in two countries
.
U.S. Sales
We sell the ARTAS
®
System, provide service and generate procedure-based revenue by helping our physician customers build their hair restoration practice, through a direct sales force in the U.S. which, as of December 31, 2018, included ten regional sales managers, or RSMs, eight Clinical Training Managers, or CTMs and six Practice Success Managers, or PSMs.
Regional Sales Managers
Our RSMs are responsible for coordinating and executing the direct sales of the ARTAS
®
Systems. We target potential customers through marketing events and programs, and we leverage longstanding RSM relationships with dermatologists, plastic surgeons and cosmetic aesthetic surgeons.
Clinical Training Managers
Our CTMs provide high quality, comprehensive training and education to physicians on the use of the ARTAS
®
System and on how to build their hair restoration practices. Our CTM team is comprised of highly-skilled professionals with an average of over 10 years of experience in training physician practices in hair restoration or other aesthetics procedures and surgery. We provide this initial training to assist physicians and their staffs in performing the ARTAS
®
procedure in accordance with the product’s cleared instructions for use. Prior to the installation of the ARTAS
®
System, the CTMs meet with the physician and their technicians to assess the level of training that will be required.
Our CTM training programs involve product and procedure training. During this initial training, we typically have one to three CTMs on site. We have found that a key to adoption and utilization of the ARTAS
®
System is clinical confidence in the ARTAS
®
System technology and procedure. We often conduct onsite physician training when we introduce innovations, such as the ARTAS
®
Hair Studio application and our Site Making functionality.
Practice Success Managers
Our PSMs are responsible for helping our physician customers build awareness and market the ARTAS procedure and increase ARTAS brand-awareness. Our PSMs average over five years of experience in developing hair restoration practices and aesthetics practices. They form strong relationships with our customers and consult on how to integrate the ARTAS
®
System into their practices, while raising awareness of the procedure among potential patients. This process often begins before the ARTAS
®
System is installed at the customer site. Our PSMs work closely with the team that will manage the ARTAS business at the practice level to establish goals and develop detailed strategies to achieve these goals. This includes extensive training and coaching with respect to the patient consultation process. We provide easily implemented marketing tools allowing practices to create individually tailored website content, dire
ct mail advertisements, print ads for magazines and newspapers and brochures. In addition, PSMs consult on methods to raise awareness of the ARTAS procedure through practice events, public relations, television, and radio advertising and other channels.
International Sales
We are developing selected markets outside the U.S. through a combination of direct selling and a network of distribution partners. As of December 31, 2018, we have three regional directors overseeing Asia, Europe, the Middle East, Africa and Latin America. These regional directors are responsible for coordinating direct sales, as well as the management of our distribution partners within these regions. We require our distributors to provide technical service, clinical education, training and practice development.
In international markets, we utilize a variety of tools to market to physicians. We have employees supporting marketing-related activities dedicated to international regions. We provide market support for our existing international ARTAS
®
System owners that is substantially like the support we provide to owners in the U.S., either directly or indirectly through our distributors. We also market at major medical and scientific meetings, as well as tradeshows. Furthermore, we sponsor the ARTAS Symposia where physicians can view live ARTAS procedures and attend physician lectures and panel discussions led by key opinion leaders to learn how to develop successful ARTAS practices.
15
Competition
We compete directly in the surgical hair restoration market. We consider our direct competition to be strip surgeries and FUE procedures using hand-held devices. Among FUE procedures, we face specific competition from the manufacturers of hand-held devices, such as NeoGraft, which is a 510(k) exempt Class I device for use in hair transplantation procedures. We believe there are less than a dozen manufacturers of hand-held devices for FUE procedures. NeoGraft, similar to certain other hand-held FUE devices, consists of a hand-held sharp punch that is motorized to dissect and to use suction to remove grafts from the scalp.
We believe that the primary competitive factors in this market are:
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company and product brand recognition;
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effective marketing and education;
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sales force experience and access;
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product support and service;
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technological innovation, product enhancements and speed of innovation;
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pricing and revenue strategies;
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product reliability, safety and durability;
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consistency, predictability and durability of aesthetic results;
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procedure costs to patients; and
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dedicated practice development teams; and dedicated clinical training teams.
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Many of our surgical device and equipment competitors have greater capital resources, sales and marketing operations and service infrastructures than we do, as well as longer commercial histories and more extensive relationships with physicians.
Strip
surgery
and some manual
FUE
procedures
have a greater
penetration
into the hair
restoration
market.
We face
resistance
from
some established
hair
restoration
practices
in converting
to ARTAS
procedures
due to workflow and staffing
changes required,
even though we
believe
that
staffing
requirements
are reduced
with the adoption
of ARTAS
procedures.
We face
competition
to recruit
and retain
qualified
sales,
training
and other
personnel.
We face
competition
for attention
from
our distributors
as they may also sell
other
non-competing
products.
Our indirect
competition
includes
non-surgical
treatments
for hair
loss, such as prescription
therapeutics, including
Propecia,
and non-prescription
remedies,
such as wigs, hair
pieces
and spray-on
applications.
We also face
competition
from
other
aesthetic
devices
that
physicians
may consider
adding to their
practice
in lieu
of building
a hair
restoration
practice.
Manufacturing
During the second half of 2018, we began to assemble the ARTAS
®
iX System in San Jose, California, while reusable and disposable kits are assembled exclusively for us by NPI Solutions, Inc., or NPI based in Morgan Hill, California.
The components that make up the ARTAS
®
iX System are manufactured by many different providers, including major components manufactured by sole source suppliers, such as the robotic arm, which is manufactured by Kuka Robotics, Inc., the cameras, which are manufactured by FLIR Integrated Imaging Solutions Inc. and the product casing, which is manufactured by 3D-Cam International Corporation. Each of the ARTAS
®
Systems undergoes testing at multiple interim stages during the manufacturing process and is tested during one last time prior to delivery.
16
We may also have difficulty maintaining sufficient production requirements in the event
that our relationship with any of our sole source suppliers or manufacturers terminates in the future. Where practicable, we are seeking, or intending to seek second-source manufacturers for certain of our components. We believe that existing third-party f
acilities will be adequate to meet our current and anticipated manufacturing needs. In the last three years, we have not experienced any material delays in obtaining any of our products, nor has the ready supply of finished product to our customers been ad
versely affected.
In the U.S., we are required to manufacture our products in compliance with the FDA’s Quality System Regulation, or QSR. The QSR covers the methods and documentation used in, and the facilities used for the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. In international markets, we also maintain various quality assurance and quality management certifications. We have obtained the following certifications that enable us to market our products in the European Union member states: Quality Management System ISO 13485 certificate. We have additionally obtained and maintain our product registration in several other foreign markets such as Canada and China.
Our current facilities are adequate to support our near-term operations; however, they may not be sufficient in the long term. Leases for our manufacturing and warehouse locations expire in April 2019.
Services and Support
We provide a warranty that typically has a term of one year and covers all the components of the system. Once the warranty expires, customers have the option of purchasing a service contract, which is typically for a term of one or two years. The service contracts that we offer cover preventative and corrective maintenance visits for all components of the system as well as system updates.
For both warranties and service contracts, the customer’s typical first point of contact for system failures or other technical issues is our customer support line. If the problem cannot be resolved over the phone or by directly connecting to the customer’s system electronically, a field service engineer will be dispatched to the customer site. We generally have a 24-hour response time or less for service calls. Our goal is to minimize the disruption caused by a service event.
We strive to provide highly responsive service and support for the ARTAS
®
System and the ARTAS
®
iX System. Our disposable and reusable kits are shipped from Legacy Transportation Services Inc. All kits are identified with lot numbers and date codes that indicate the expiration date of the product and are fully warranted until the date of expiration. We mainta
in a staff of customer service personnel in our San Jose, California facility that is available by phone to answer questions regarding the use of the ARTAS
®
System and ARTAS iX
®
System. In addition, in the U.S. and certain international territories, our direct service organization provides on-site support and training to our customers in the use of the ARTAS
®
System and the ARTAS
®
iX System.
In the U.S. and certain international territories, the ARTAS
®
System and ARTAS
®
iX System is shipped to a customer’s site for installation by one of our Field Service Engineers and training by one of our CTM’s. Our Field Service Engineers, CTMs and PSMs provide post-installation support and service.
In markets where we utilize distributors, the ARTAS
®
System is serviced and supported through our independent distributors. We typically provide distributors with a warranty for each ARTAS
®
System during the warranty period. Once the warranty period ends, the distributors have the option to continue providing support to the end-user customer by purchasing parts through our Parts and Services program or on an as-needed basis.
Government Regulation
Our products and our operations are subject to extensive regulation by the FDA and other federal and state authorities in the U.S., as well as comparable authorities in foreign jurisdictions. Our products are subject to regulation as medical devices in the U.S. under the Federal Food, Drug, and Cosmetic Act, or FDCA, as implemented and enforced by the FDA. The FDA regulates the development, design, non-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, servicing, recordkeeping, premarket clearance or approval, import, export, adverse event reporting, advertising, promotion, marketing and distribution, and import and export of medical devices to ensure that medical devices distributed domestically are safe and effective for their intended uses and otherwise meet the requirements of the FDCA.
17
FDA Premarket Clearance and Approval Re
quirements
Unless an exemption
applies,
each medical
device
commercially
distributed
in the U.S.
requires
either
FDA clearance
of a 510(k) premarket
notification,
or approval
of a premarket
approval
application,
or PMA.
Under the FDCA,
medical
devices
are classified
into one of three
classes—Class
I, Class II or Class III—depending
on the degree
of risk
associated
with each medical
device
and the extent
of manufacturer
and regulatory
control
needed to ensure
its
safety
and effectiveness.
Class I includes
devices
with the lowest risk
to the patient,
and Class I devices
are those for which safety
and effectiveness
can be assured
by adherence
to the FDA’s
General
Controls for medical
devices,
which include
compliance
with the applicable
portions
of the Quality
System
Regulation,
or QSR,
facility
registration
and product
listing,
reporting
of adverse
medical
events,
and truthful
and non-misleading
labeling,
advertising,
and promotional
materials.
Class II devices
are subject
to the FDA’s
General Controls,
and special
controls
as deemed
necessary
by the FDA
to ensure
the safety
and effectiveness
of the device.
These special
controls
can include
performance
standards,
post market
surveillance,
patient
registries
and FDA
guidance
documents.
While
most
Class I devices
are exempt
from
the 510(k) premarket
notification requirement,
manufacturers
of most
Class II devices
are required
to submit
to the FDA
a premarket
notification under Section
510(k) of the FDCA
requesting
permission
to commercially
distribute
the device.
The FDA’s permission
to commercially
distribute
a device
subject
to a 510(k) premarket
notification
is generally
known
as 510(k) clearance.
Devices deemed
by the FDA
to pose the greatest
risks,
such as life-sustaining,
life-supporting or some implantable
devices,
or devices
that
have a new
intended
use, or use advanced technology
that
is not substantially
equivalent
to that
of a legally
marketed
device,
are placed
in Class III,
requiring
approval
of a PMA. Some pre-amendment
devices
are unclassified but are subject
to the FDA’s
premarket
notification
and clearance process
in order
to be commercially
distributed.
To
date, our products
have been subject
to the 510(k)-clearance process.
510(k)
Marketing
Clearance Pathway
To
obtain
510(k) clearance,
we
must
submit
to the FDA
a premarket
notification
submission
demonstrating
that the proposed device
is ‘‘substantially
equivalent’’
to a predicate
device
already
on the market.
A
predicate
device is a legally
marketed
device
that
is not subject
to premarket
approval,
i.e.
, a device
that
was legally
marketed prior
to May 28, 1976 (pre-amendments
device)
and for which a PMA
is not required,
a device
that
has been reclassified
from
Class III
to Class II or I, or a device
that
was found substantially
equivalent
through the 510(k) process.
The FDA’s
510(k) clearance
process
usually
takes
from
nine to twelve months but may take significantly
longer.
The FDA
may require
additional
information,
including
clinical
data, to make a determination
regarding
substantial
equivalence.
If the FDA
agrees
that
the device
is substantially
equivalent
to a predicate
device
on the market,
it will grant 510(k) clearance
to commercially
market
the device.
If the FDA
determines
that
the device
is “not substantially equivalent”
to a previously
cleared
device,
the device
is automatically
designated
as a Class III
device.
The device
sponsor must
then fulfill
more
rigorous
PMA
requirements,
or can request
a risk-based
classification determination
for the device
in accordance
with the “de novo” process,
which is a route
to market
for novel medical
devices
that
are low to moderate
risk
and are not substantially
equivalent
to a predicate
device.
After
a device
receives
510(k) marketing
clearance,
any modification
that
could significantly
affect
its
safety
or effectiveness,
or that
would constitute
a major
change or modification
in its
intended
use, will require
a new 510(k) marketing
clearance
or, depending on the modification,
a de novo classification
or PMA
approval.
The FDA
requires
each manufacturer
to determine
whether the proposed change requires
submission
of a 510(k) or a PMA
in the first
instance,
but the FDA
can review any such decision
and disagree
with a manufacturer’s determination.
Many minor
modifications
today are accomplished
by a letter-to-file
in which the manufacture documents
the change in an internal
letter-to-file.
The letter-to-file
is in lieu
of submitting
a new
510(k) to obtain clearance
for every change. The FDA
may review these
letters-to-file
during an inspection.
If the FDA
disagrees with a manufacturer’s
determination
that
no 510(k) was required
for the change, the FDA
can require
the manufacturer
to cease
marketing
and/or
request
the recall
of the modified
device
until
510(k) marketing clearance
or PMA
approval
is obtained.
Also, in these
circumstances,
we
may be subject
to significant
regulatory fines
or penalties.
The FDA
has issued
guidance,
originally
in 1997, to assist
device
manufacturers
in making
the determination
as to whether a modification
to a device
requires
a new
510(k).
18
PMA Approval Pathway
Class III
devices
require
PMA
approval
before
they can be marketed
although
some pre-amendment
Class III devices
for which the FDA
has not yet required
a PMA
are cleared
through the 510(k) process.
The PMA
process is more
demanding
than the 510(k) premarket
notification
process.
In a PMA,
the manufacturer
must demonstrate
that
the device
is safe
and effective,
and the PMA
must
be supported
by extensive
data, including data from
preclinical
studies
and human clinical
trials.
The PMA
must
also contain
a full
description
of the device
and its
components,
a full
description
of the methods,
facilities
and controls
used for manufacturing,
and proposed labeling.
Following receipt
of a PMA,
the FDA
determines
whether the application
is sufficiently complete
to permit
a substantive
review. If the FDA
accepts
the application
for review, it has 180 days under the FDCA
to complete
its
review of a PMA,
although
in practice,
the FDA’s
review often
takes
significantly
longer, and can take up to several
years.
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 applicant
or its
third-party
manufacturers’
or suppliers’
manufacturing
facility
or facilities
to ensure
compliance
with the Quality
System
Regulation,
or QSR.
The FDA will approve the new device for commercial distribution if it determines that the data and information in the PMA constitute valid scientific evidence and that there is reasonable assurance that the device is safe and effective for its intended use(s). The FDA may approve a PMA with post-approval conditions intended to ensure the safety and effectiveness of the device, including, among other things, restrictions on labeling, promotion, sale and distribution, and collection of long-term follow-up data from patients in the clinical study that supported PMA approval or requirements to conduct additional clinical studies post-approval. The FDA may condition PMA approval on some form of post-market surveillance when deemed necessary to protect the public health or to provide additional safety and efficacy data for the device in a larger population or for a longer period of use. In such cases, the manufacturer might be required to follow certain patient groups for several years and to make periodic reports to the FDA on the clinical status of those patients. Failure to comply with the conditions of approval can result in material adverse enforcement action, including withdrawal of the approval.
Certain changes to an approved device, such as changes in manufacturing facilities, methods, or quality control procedures, or changes in the design performance specifications, which affect the safety or effectiveness of the device, require submission of a PMA supplement. 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. Certain other changes to an approved device require the submission of a new PMA, such as when the design change causes a different intended use, mode of operation, and technical basis of operation, or when the design change is so significant that a new generation of the device will be developed, and the data that were submitted with the original PMA are not applicable for the change in demonstrating a reasonable assurance of safety and effectiveness.
Clinical Trials
Clinical
trials
are almost
always required
to support
a PMA
and are sometimes
required
to support
a 510(k) submission.
All clinical
investigations
of investigational
devices
to determine
safety
and effectiveness
must
be conducted
in accordance
with the FDA’s
investigational
device
exemption,
or IDE,
regulations
which govern investigational
device
labeling,
prohibit
promotion
of the investigational
device,
and specify
an array
of recordkeeping,
reporting
and monitoring
responsibilities
of study sponsors
and study investigators.
If the device presents
a “significant
risk” to human health,
as defined
by the FDA,
the FDA
requires
the device
sponsor to submit
an IDE
application
to the FDA,
which must
become
effective
prior
to commencing
human clinical
trials. A
significant
risk
device
is one that
presents
a potential
for serious
risk
to the health,
safety
or welfare
of a patient
and either
is implanted,
used in supporting
or sustaining
human life,
substantially
important
in diagnosing,
curing,
mitigating
or treating
disease
or otherwise
preventing
impairment
of human health,
or otherwise
presents
a potential
for serious
risk
to a subject.
An
IDE
application
must
be supported
by appropriate data, such as animal
and laboratory
test
results,
showing that
it is safe
to test
the device
in humans and that
the testing
protocol
is scientifically
sound. The IDE
will automatically
become
effective
30 days after
receipt
by the FDA
unless
the FDA
notifies
the company that
the investigation
may not begin. If the FDA
determines
that
there are deficiencies
or other
concerns
with an IDE
for which it requires
modification,
the FDA
may permit
a clinical trial
to proceed
under a conditional
approval.
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In addition,
the study must
be approved by, and conducted
under the oversight
of, an Institutional
Review Board,
or IRB,
for each clinical
site.
The IRB
is responsible
for the initial
and continuing
review of the
IDE and
may pose additional
requirements
for the conduct of the study. If an IDE
application
is approved by the FDA
and one or more
IRBs,
human clinical
tr
ials
may begin at a specific
number
of investigational
sites
with a specific number
of patients,
as approved by the FDA.
If the device
presents
a non-significant
risk
to the patient,
a sponsor may begin the clinical
trial
after
obtaining
approval
for the
trial
by one or more
IRBs
without separate
approval from
the FDA,
but must
still
follow abbreviated
IDE
requirements,
such as monitoring
the investigation,
ensuring that
the investigators
obtain
informed
consent,
and labeling
and record-keeping
requirement
s.
Acceptance
of an IDE
application
for review does not guarantee
that
the FDA
will allow the IDE
to become
effective
and, if it does become
effective,
the FDA
may or may not determine
that
the data derived
from
the trials
support
the safety
and effectiven
ess
of the device
or warrant
the continuation
of clinical
trials.
An
IDE
supplement
must
be submitted to, and approved by, the FDA
before
a sponsor or investigator
may make a change to the investigational
plan that may affect
its
scientific
soundness,
study plan or the rights,
safety
or welfare
of human subjects.
During a study, the sponsor is required to comply with the applicable FDA requirements, including, for example, trial monitoring, selecting clinical investigators and providing them with the investigational plan, ensuring IRB review, adverse event reporting, record keeping and prohibitions on the promotion of investigational devices or on making safety or effectiveness claims for them. The clinical investigators in the clinical study are also subject to FDA regulations and must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of the investigational device, and comply with all reporting and recordkeeping requirements. Additionally, after a trial begins, we, the FDA or the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits.
Post-market Regulation
After
a device
is cleared
or approved for marketing,
numerous
and pervasive
regulatory
requirements
continue
to apply. These include:
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establishment
registration
and device
listing
with the FDA;
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QSR
requirements,
which require
manufacturers,
including
third-party
manufacturers,
to follow stringent
design, testing,
control,
documentation
and other
quality
assurance
procedures
during all aspects
of the design and manufacturing
process;
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labeling
and marketing
regulations,
which require
that
promotion
is truthful,
not misleading,
fairly balanced
and provide
adequate
directions
for use and that
all
claims
are substantiated,
and prohibit the promotion
of products
for unapproved or “off-label”
uses and impose
other
restrictions
on labeling;
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clearance
or approval
of product
modifications
to 510(k)-cleared
devices
that
could significantly
affect safety
or effectiveness
or that
would constitute
a major
change in intended
use of one of our cleared devices;
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medical
device
reporting
regulations,
which require
that
a manufacturer
report
to the FDA
if a device
it markets
may have caused or contributed
to a death or serious
injury,
or has malfunctioned
and the device
or a similar
device
that
it markets
would be likely
to cause or contribute
to a death or serious injury,
if the malfunction
were to recur;
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correction,
removal
and recall
reporting
regulations,
which require
that
manufacturers
report
to the FDA
field
corrections
and product
recalls
or removals
if undertaken
to reduce
a risk
to health
posed by the device
or to remedy
a violation
of the FDCA
that
may present
a risk
to health;
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|
complying
with the federal
law and regulations
requiring
Unique Device Identifiers
(UDI) on devices
and requiring
the submission
of certain
information
about each device
to the FDA’s Global Unique Device Identification
Database,
or GUDID;
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|
the FDA’s
recall
authority,
whereby the agency can order
device
manufacturers
to recall
from
the market
a product
that
is in violation
of governing
laws and regulations;
and
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|
post-market
surveillance
activities
and regulations,
which apply when
deemed
by the FDA
to be necessary
to protect
the public
health
or to provide
additional
safety
and effectiveness
data for the device.
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20
We may be subject
to similar
foreign
laws that
may include
applicable
post-marketing
requirements
such as safety
surveillance.
Our manufacturing
processes
are required
to comply
with the applicable
portions
of the QSR, which cover the methods
and the facilities
and controls
for the design, manufacture,
testing,
production, processes,
contr
ols,
quality
assurance,
labeling,
packaging,
distribution,
installation
and servicing
of finished devices
intended
for human use. The QSR
also requires,
among other
things,
maintenance
of a device
master
file, device
history
file,
and complaint
files.
As
a
manufacturer,
we
are subject
to periodic
scheduled
or unscheduled inspections
by the FDA.
A
failure
to maintain
compliance
with the QSR
requirements
could result
in the shut-down
of, or restrictions
on, manufacturing
operations
and the recall
or seizure
o
f products.
The FDA
has broad regulatory
compliance
and enforcement
powers. If the FDA
determines
that
we
failed
to comply
with applicable regulatory
requirements,
it can take a variety
of compliance
or enforcement
actions,
which may result
in any of the
following
sanctions:
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•
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warning letters,
untitled
letters,
fines,
injunctions,
consent
decrees
and civil
penalties;
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•
|
recalls,
withdrawals,
or administrative
detention
or seizure
of our products;
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•
|
operating
restrictions
or partial
suspension
or total
shutdown of production;
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|
refusing
or delaying
requests
for 510(k) marketing
clearance
or PMA
approvals
of new
products
or modified
products;
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•
|
withdrawing
510(k) clearances
or PMA
approvals
that
have already
been granted;
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|
refusal
to grant
export
or import
approvals
for our products;
or
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Other Health Care Laws
In addition
to FDA
restrictions
on the marketing
and promotion
of medical
devices,
other
federal
and state healthcare
laws and regulations
could restrict
our business
practices.
Although none of the procedures
using our products
are covered
by any federal
or state
government
healthcare
program
or any other
third-party
payor, applicable
agencies
and regulators
may nonetheless
interpret
that
we
are subject
to numerous
federal
healthcare anti-fraud
laws, which include
the federal
Anti-Kickback
Statute,
False Claims
Act and physician
payment transparency
laws that
are intended
to reduce
waste, fraud
and abuse in the healthcare
industry,
and analogous state
laws that
may apply to healthcare
items
and services
paid for by any payors, including
private
insurers.
In addition,
we
are subject
to certain
state
reporting
requirements
in states
with physician
payment
transparency laws that
apply regardless
of payor. Violations
of any of these
health
regulatory
laws may result
in potentially significant
penalties,
including
criminal
and civil
and administrative
penalties,
damages,
fines,
disgorgement, imprisonment,
exclusion
from
participation
in government
healthcare
programs,
contractual
damages, reputational
harm,
administrative
burdens, diminished
profits
and future
earnings,
and the curtailment
or restructuring
of our operations.
To
the extent
that
any of our products
are sold in a foreign
country,
we
may be subject
to similar
foreign
laws, which may include,
for instance,
applicable
post-marketing
requirements, including
safety
surveillance,
anti-fraud
and abuse laws and implementation
of corporate
compliance
programs and reporting
of payments
or transfers
of value to healthcare
professionals.
Healthcare Reform
The U.S.
and some foreign
jurisdictions
are considering
or have enacted
several legislative
and regulatory proposals
to change the healthcare
system
in ways that
could affect
our ability
to sell
our products
profitably.
For example,
the implementation
of the Patient
Protection
and Affordable
Care Act, as amended
by the Healthcare and Education
Reconciliation
Act, or the Affordable
Care Act, has changed healthcare
financing
and delivery
by both governmental
and private
insurers
substantially
and has affected
medical
device
manufacturers
significantly. The Affordable
Care Act imposed,
among other
things,
a new
federal
excise
tax on the sale
of certain
medical devices,
which is suspended but, absent
further
legislative
action,
will be reinstated
starting
January
1, 2020. In addition,
the Affordable
Care Act provided
incentives
to programs
that
increase
the federal
government’s comparative
effectiveness
research and implemented
payment
system
reforms
including
a national
pilot
program on payment
bundling to encourage
hospitals,
physicians
and other
providers
to improve
the coordination,
quality and efficiency
of certain
healthcare
services
through bundled payment
models.
Since its
enactment,
there
have been judicial
and Congressional
challenges
to certain
aspects
of the Affordable
Care Act, and we
expect
there will be additional
challenges
and amendments
to the Affordable
Care Act in the future.
The current
Presidential Administration
and U.S.
Congress will likely
continue
to seek to modify,
repeal,
or otherwise
invalidate
all,
or certain
provisions
of, the Affordable
Care Act. It is uncertain
the extent
to which any such changes may impact our business
or financial
condition.
We expect
additional
state
and federal
healthcare
reform
measures
to be adopted in the future,
any of which could result
in reduced
demand for our products
or additional
pricing pressure.
21
Employees
As of December 31, 2018, we had 102 employees, with 39 employees in sales and marketing, 26 employees in training and customer support, 20 employees in research and development, including clinical, regulatory and certain quality control functions, three employees in manufacturing operations and 14 employees in general management and administration. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.
Financial Information
We manage our operations and allocate resources as a single reporting segment. Financial information regarding our operations, assets and liabilities, including our net loss for the years ended December 31, 2018, 2017 and 2016, and our total assets as of December 31, 2018 and 2017, is included in our Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
Corporate Information
We were founded on November 22, 2002 as a Delaware corporation under the name Restoration Robotics, Inc. Our principal executive offices are located at 128 Baytech Drive, San Jose, CA 95134, and our telephone number is
(408) 883-6888.
You may find on our website at www.restorationrobotics.com
electronic copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Such filings are placed on our website as soon as reasonably possible after they are filed with the SEC. Our most recent charter for our audit, compensation, and nominating and corporate governance committees and our Code of Business Conduct and Ethics are available on our website as well. Any waiver of our Code of Business Conduct and Ethics may be made only by our board of directors. Any waiver of our Code of Business Conduct and Ethics for any of our directors or executive officers must be disclosed on a Current Report on Form 8-K within four business days, or such shorter period as may be required under applicable regulation. Information contained on, or that can be accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K, and you should not consider information on our website to be part of this Annual Report on Form 10-K. We have included our website address as an inactive textual reference only.
Available Information
We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other information with the Securities and Exchange Commission (SEC). Our filings with the SEC are available free of charge on the SEC’s website at www.sec.gov and on our website under the “Investors” tab as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. You may also read and copy, at SEC prescribed rates, any document we file with the SEC at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington D.C. 20549. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room.
Item
1A. Risk Factors.
Our operations and financial results are subject to various risk and uncertainties, including those
described
below, any of which could
adversely
affect our business,
results
of operations,
financial
condition
and prospects.
In such an event,
the
market
price
of our common
stock
could
decline,
and you may lose
all
or part
of your investment.
Additional
risks
and uncertainties
not presently
known to us or that
we currently
deem immaterial
may also
impair
our business
operations. You should carefully consider the risk described below and the other information in this Annual Report on Form 10-K, including our audited consolidated financial statements and the related notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Risks Related to the Proposed Merger
On March 15, 2019, we entered into the Merger Agreement with Venus and Merger Sub, pursuant to which, among other things, the Merger will occur. In connection with the proposed Merger, we are subject to certain risks including, but not limited to, those set forth below. The description of each of the Merger Agreement and the Merger herein is qualified in its entirety by reference to the full text of the Merger Agreement filed as an exhibit to this Annual Report on Form 10-K.
22
We may fail to consummate the Merger, and uncertainties related to the consummation of the Merger may have a material adverse effect on our business, results of operations and financial condition and negativel
y impact the price of our common stock.
As previously discussed, on March 15, 2019, we entered into the Merger Agreement with Venus and Merger Sub. Pursuant to the Merger Agreement, Merger Sub will merge with and into the Company, with Venus surviving the Merger as a wholly owned subsidiary of the Company. The Merger is subject to the satisfaction of a number of conditions beyond our control, including receiving stockholder approval and other customary closing conditions. Failure to satisfy the conditions to the Merger could prevent or delay the completion of the Merger. Further, regulators may impose conditions, obligations or restrictions on the Merger that may have the effect of delaying or preventing its completion.
The efforts and costs to satisfy the closing conditions of the Merger, may place a significant burden on management and internal resources, and the Merger and related transactions, whether or not consummated, may result in a diversion of management’s attention from day-to-day operations. Any significant diversion of management’s attention away from ongoing business and difficulties encountered in the Merger process could have a material adverse effect on our business, results of operations and financial condition.
There also is no assurance that the Merger and the other transactions contemplated by the Merger Agreement will occur on the terms and timeline currently contemplated or at all.
The Merger Agreement also contains certain customary termination rights, including the right of each of the Company and Venus to terminate the Merger Agreement if the Merger is not consummated by October 31, 2019, subject to one (1) sixty-day extension in the event that the registration statement on Form S-4 that will contain a proxy statement/prospectus to register our common stock to be issued pursuant to the Merger Agreement (the “S-4”) is still under review by the SEC, or if we have not received stockholder approval of the Merger within seventy (70) days of the date of the effectiveness of the S-4. If the Merger Agreement is terminated under certain circumstances, including termination by us to enter into a superior alternative transaction or termination by Venus upon a change of the Board’s recommendation to the Company’s stockholders, we will be obligated to pay to Venus a termination fee equal to $1,115,000 in cash. In addition, if the Merger Agreement is terminated under other circumstances, including termination as a result of our failure to obtain the required approvals of our stockholders or a material breach of the Merger Agreement by us, we will be obligated to reimburse Venus for its reasonable out-of-pocket fees and expenses, up to a maximum of $200,000 in cash.
If the proposed Merger is not completed or the Merger Agreement is terminated, the price of our common stock may decline, including to the extent that the current market price of our common stock reflects an assumption that the Merger and the other transactions contemplated by the Revised Merger Agreement will be consummated without further delays, which could have a material adverse effect on our business, results of operations and financial condition.
If the Merger Agreement is terminated and we determine to seek another business combination, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the Merger.
We are subject to various uncertainties and restrictions on the conduct of our business while the Merger is pending, which could have a material adverse effect on our business, results of operations and financial condition.
23
Uncertainty about the pendency of the Merger and the effect of the Merger on employees, customers, vendors, communities and other third parties who deal with us may have a material adverse effect on our business, results of operations and financial conditi
on. These uncertainties may impair our ability to attract, retain and motivate key personnel pending the consummation of the Merger, as such personnel may experience uncertainty about their future roles following the consummation of the Merger. Additionall
y, these uncertainties could cause customers,
distributors,
vendors and other third parties who deal with us to seek to change existing business relationships with us or fail to extend an existing relationship with us,
including, but not limited to direct
customers and distributors delaying their purchases and/or payments of the ARTAS
®
and ARTAS
®
iX Systems,
all of which could have a material adverse effect on our business, results of operations, financial condition and market price of our common stock. In
addition, the Merger Agreement restricts us from taking certain actions without Venus’ consent while the Merger is pending. These restrictions may, among other matters, prevent us from pursuing otherwise attractive business opportunities, buying or selling
assets, making certain capital expenditures, refinancing or incurring additional indebtedness, entering into transactions, or making other changes to our business prior to consummation of the Merger or termination of the Merger Agreement. These restrictio
ns and uncertainties could have a material adverse effect on our business, results of operations and financial condition.
24
We and our directors and officers may be subject to lawsuits relating to the Merger.
Litigation is very common in connection with the sale of public companies, regardless of whether the claims have any merit. One of the conditions to consummating the Merger is that no order preventing or otherwise prohibiting the consummation of the Merger shall have been issued by any court. Consequently, if any lawsuit challenging the Merger is successful in obtaining an order preventing the consummation of the Merger, that order may delay or prevent the Merger from being completed. While we will evaluate and defend against any lawsuits, the time and costs of defending against litigation relating to the Merger may adversely affect our business.
We will continue to incur substantial transaction-related costs in connection with the Merger.
We have incurred significant legal, advisory and financial services fees in connection with Merger. We have incurred, and expect to continue to incur, additional costs in connection with the satisfaction of the various conditions to closing of the Merger, including seeking approval from our stockholders and from applicable regulatory agencies. If there is any delay in the consummation of the Merger, these costs could increase significantly.
Risks Related to Our Business
We have limited
commercial
history
and we have incurred
significant
losses
since
our inception.
We anticipate that
we will
continue
to incur losses
for
the foreseeable
future,
which, together
with our limited
operating history,
makes
it
difficult
to assess
our future
viabilit
y
.
We have a limited
commercial
history
and have focused
primarily
on research
and development,
product
design and engineering,
establishing
supply
and manufacturing
relationships,
seeking
regulatory
clearances
and approvals
to market
the
ARTAS
®
and
ARTAS
®
iX
System,
and selling
and marketing.
We have incurred
losses
in each
year
since
our inception
in 2002. Our net
losses were approximately $28.7 million, $17.8 million, and $21.8 million for the years ended December 31, 2018, 2017,
and 2016,
respectively.
As of December 31, 2018, we had an accumulated
deficit
of $193.2 million.
We will
continue
to incur
significant
expenses
for
the foreseeable
future
as we expand our sales
and marketing,
research
and development,
and clinical
and regulatory activities.
We may
never
generate
enough
revenue
to achieve
or sustain
profitability.
Even if
we do achieve profitability,
we may
not be able
to sustain
or increase
profitability.
Furthermore,
because
of our limited operating
history
and because
the
market
for
aesthetic
products
is
rapidly
evolving,
we have limited
insight
into the
trends
or competitive
products
that
may
emerge
and affect
our business.
Before
investing,
you should consider
an investment
in our common
stock
considering the
risks,
uncertainties,
and difficulties
frequently encountered
by early-stage
medical
technology
companies
in rapidly
evolving
markets
such as ours.
We may
not be able
to successfully
address
any or all of these
risks,
and the
failure
to adequately
do so could
cause
our business,
results
of operations,
and financial
condition
to suffer.
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:
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the
cost
of growing our ongoing commercialization
and sales
and marketing
activities;
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|
the
costs
of manufacturing
and maintaining
enough
inventories
of our products
to meet
anticipated demand and inventory write-offs related to obsolete products or components;
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•
|
the
costs
of enhancing
the
existing
functionality
and development
of new functionalities
for
the ARTAS
®
and ARTAS
®
iX System;
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|
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;
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the variability of ARTAS procedures being performed between periods if particular high-volume practitioners perform a smaller number of procedures in each period as a result of the concentration of procedures performed by certain practitioners;
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|
any product
liability
or other
lawsuits
and the
costs
associated
with defending them
or the
results
of such lawsuits;
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•
|
the
costs
associated
with conducting
business
and maintaining
subsidiaries
in foreign
jurisdictions;
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|
customers in jurisdictions where the
ARTAS
®
iX System is not approved delaying their purchase, and not purchasing an ARTAS
®
System, until the ARTAS
®
iX System is approved or cleared for use in their market;
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|
the
costs
to attract
and retain
personnel
with the
skills
required
for
effective
operations;
and
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|
the
costs
associated
with being
a public
company.
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Our budgeted
expense
levels
are
based
in part
on our expectations
concerning
future
revenue
from
ARTAS
®
Systems
sales,
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
the
ARTAS
®
Systems
and procedures
could
have an immediate
and material
adverse impact
on our business
and financial
condition.
It
is
difficult
to forecast
our future
performance
and our financial
results
may
fluctuate
unpredictably.
Our limited
commercial
history
and 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:
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physician demand for the ARTAS
®
and ARTAS
®
iX Systems and procedure usage may vary from quarter to quarter;
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•
|
customers in jurisdictions where the ARTAS
®
iX System is not approved delaying their purchase, and not purchasing an ARTAS
®
System, until the ARTAS
®
iX System is approved or cleared for use in their market;
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|
the inability of physicians to obtain the necessary financing to purchase the ARTAS
®
System or the ARTAS
®
iX System;
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•
|
changes in the length of our sales process for the ARTAS
®
and ARTAS
®
iX Systems;
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•
|
performance of new functionalities and system updates, such as the robotic implantation functionality in the new ARTAS
®
iX System;
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•
|
performance of our international distributors;
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•
|
positive or negative media coverage of the ARTAS
®
System or ARTAS
®
iX System, the procedures or products of our competitors, or our industry generally;
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•
|
our ability to maintain our current, or obtain further, regulatory clearances or approvals such as the regulatory clearances and approvals necessary to market the ARTAS
®
iX System outside the U.S.;
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•
|
delays in, or failure of, product and component deliveries by our third-party manufacturers or suppliers;
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•
|
seasonal or other variations in patient demand for aesthetic procedures;
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•
|
introduction of new aesthetic procedures or products that compete with the ARTAS
®
System or ARTAS
®
iX System;
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•
|
changes in accounting rules that may cause restatement of our consolidated financial statements or have other adverse effects; and
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|
adverse changes in the economy that reduce patient demand for elective aesthetic procedures.
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26
The long sales
cycl
e
, low unit volume
for
sales
of the ARTAS
®
System
and ARTAS
®
iX System
and the historic
seasonality
of our industry,
each may
contribute
to substantial
fluctuations
in our operating
results
and stock
price
and make
it
difficult
to compare
our results
of operations
to prior
periods
and predict
future
financial
results.
We sell
a relatively
small
number
of ARTAS
®
and ARTAS
®
iX Systems
at
a relatively
high price,
with each
sale
of an ARTAS
®
System
or ARTAS
®
iX System typically
involving
a significant
amount
of time.
Because
of the
relatively
small
number
of ARTAS
®
and ARTAS
®
iX Systems
we expect
to sell
in any period,
each
sale
of a system
could
represent
a significant
percentage of our revenue
for
a period.
Furthermore,
due to the
significant
amount
of time
it
can take
to finalize
the
sale
of a system,
it
is
likely
that
a sale
could
be recognized
in a subsequent
period
which could have a material
effect
on our results
from
quarter
to quarter
and increase
the
volatility
of quarterly
results.
In addition,
our industry
is
characterized
by seasonally
lower
demand
during
the
third
quarter
of the
calendar
year, generally
when both physicians
and prospective
patients
take
summer
vacation.
As a result
of these
factor
s
, future
fluctuations
in quarterly
results
could
cause
our revenue
and cash
flows
to be below analyst
and investor expectations,
which could
cause
decline
in our stock
price.
Due to future
fluctuations
in revenue
and costs,
as well as other
potential
fluctuations,
you should
not rely
upon our operating
results
in any period
as an indication
of future
performance.
If
we do not sell
ARTAS
®
and
ARTAS
®
iX Systems
as anticipated,
our operating
results
will
vary significantly
from
our expectations.
In addition,
selling
the
ARTAS
®
and ARTAS
®
iX Systems
requires
significant
marketing
effort and expenditure
in advance
of the
receipt
of revenue
and our efforts
may
not result
in a sale.
Our recurring
losses
from
operations
and negative
cash flows
have raised
substantial
doubt regarding
our ability
to continue
as a going concern.
Our independent
registered
public
accounting
firm
included
an explanatory paragraph
in its
report
on our consolidated
financial
statements
as of, and for
the
year
ended, December
31, 2018 that our recurring losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern. As of the filing date of this Annual Report, we believe our current cash and cash equivalents will not be sufficient to fund our operations for the next twelve months. Our ability
to continue
as a going concern
will
require
us to obtain
additional
financing
to fund our operations. The perception
of our ability
to continue
as a going concern
may
make
it
more
difficult
for
us to obtain
financing for
the
continuation
of our operations
and could
result
in the
loss
of confidence
by investors,
suppliers
and employees.
We will
require
substantial
additional
financing
to achieve
our goals,
and a failure
to obtain
this
necessary capital
when
needed on acceptable
terms,
or at all,
could force
us to delay,
limit,
reduce
or terminate
our product
development,
commercialization
and other
operations
or efforts.
Since
our inception,
we have invested
a significant
portion
of our efforts
and financial
resources
in research
and development
and sales
and marketing
activities.
Research
and development,
clinical
trials,
product
engineering, ongoing product
upgrades
and other
enhancements
such as software-updates
for
the
ARTAS
®
and ARTAS
®
iX Systems
and seeking regulatory
clearances
and approvals
to market
future
products will
require
substantial
funds
to complete.
As of December 31, 2018, we had capital resources
consisting
of cash
and cash
equivalents
of $16.1 million.
We believe
that
we will
continue
to expend substantial
resources
for
the
foreseeable
future
in connection
with the
ongoing commercializing
of the
ARTAS
®
and ARTAS
®
iX System,
increasing
our sales
and marketing
efforts,
and continuing
research
and development
and product enhancements
activities.
We believe
our existing
cash
and cash
equivalents and cash expected to be generated from the sale of our products will not be enough for us to fund our planned operations for
the
next
twelve
months.
Therefore, we will need additional capital to fund our future operations. In addition, our operating
plans
may
change as a result
of many
factors
some of which may be
unknown to us, and we may
need to seek
additional
funds
sooner
than
planned, through
public
or private
equity
or debt
financings
or other
sources,
such as strategic
collaborations.
Such financing
may
result
in dilution
to stockholders,
imposition
of burdensome
debt
covenants
and repayment obligations,
the
licensing
of rights
to our technology
or other
restrictions
that
may
affect
our business.
In addition,
we may
seek
additional
capital
due to favorable
market
conditions
or strategic
considerations
even if
we believe
we have enough
funds
for
our current
or future
operating
plans.
27
Additional
funds
may
not be available
when we need them,
on terms
that
are
acceptable
to us, or at
all.
If adequate
funds
are
not available
to us on a timely
basis,
we may
be required
to:
|
•
|
delay
or curtail
our efforts
to develop
enhancements
to the
ARTAS
®
and ARTAS
®
iX Systems,
including
any clinical
trials that
may
be required
to market
such enhancements;
|
|
•
|
delay
or curtail
our plans
to increase
and expand our sales
and marketing
efforts;
or
|
|
•
|
delay
or curtail
our plans
to enhance
our customer
support
and marketing
activities.
|
We are
restricted
by covenants
in the Solar Agreement. These covenants
restrict,
among
other
things,
our ability
to incur
additional
debt
without
Solar’s
consent,
which may limit
our ability
to obtain
additional
funds. In addition, the Solar Agreement contains certain minimum liquidity and minimum revenue covenants, which, if we fail to maintain or achieve, will result in a default under the agreement and the requirement for us to repay all outstanding principal amounts and accrued interest repay all amounts outstanding
We are dependent upon the success of the ARTAS
®
System and ARTAS
®
iX System, which has a limited commercial history. If we are unsuccessful in developing the market for robotic hair restoration or the market acceptance for the ARTAS
®
System and ARTAS
®
iX System fails to grow significantly, our business and future prospects will be harmed.
We commenced
commercial
sales
of the
ARTAS
®
System
for
hair
follicle
dissection
in the
U.S.
in 2011 and expect
that
the
revenue
we generate
from
both system
sales
and servicing
as well
as recurring
procedure-based fees
will
account
for
all our revenue
for
the
foreseeable
future.
Accordingly,
our success
depends
on the acceptance
among
physicians
and patients
of the
ARTAS
®
and ARTAS
®
iX Systems
as the
preferred
system
for
performing
hair restoration
surger
y
. Acceptance
of the
ARTAS
®
and ARTAS
®
iX Systems
by physicians
is
significantly
dependent
on our ability
to convince
physicians
of the
benefits
of the
ARTAS
®
and ARTAS
®
iX Systems
to their
practices
and, accordingly,
develop
the
market for
robotic-assisted
hair
restoration
surgery.
Acceptance
of the
ARTAS
procedure
by patients
is
equally important
as patient
demand
will
influence
physicians
to offer
the
ARTAS
procedure,
and
the
degree
of market
acceptance
of the
ARTAS
®
and ARTAS
®
iX Systems
by physicians
and patients
is
unproven.
We believe
that
market acceptance
of the
ARTAS
®
and ARTAS
®
iX Systems
will
depend on many
factors,
including:
|
•
|
the
perceived
advantages
or disadvantages
of the
ARTAS
®
and ARTAS
®
iX Systems
compared
to other
hair
restoration products
and treatments;
|
|
•
|
the
safety
and efficacy
of the
ARTAS
®
and ARTAS
®
iX Systems
relative
to other
hair
restoration
products
and treatments;
|
|
•
|
the
price
of the
ARTAS
®
and ARTAS
®
iX Systems
relative
to other
hair
restoration
products
and treatments;
|
|
•
|
our success
in expanding
our sales
and marketing
organization;
|
|
•
|
the
effectiveness
of our marketing,
advertising,
and commercialization
initiatives;
|
|
•
|
our success
in adding
new functionalities
to the
ARTAS
®
and ARTAS
®
iX Systems
and enhancing
existing
functions;
and
|
|
•
|
our ability
to obtain
regulatory
clearance
to market
the
ARTAS
®
and ARTAS
®
iX Systems
for
additional
treatment indications
in the
U.S.
|
Further, the ARTAS
®
iX System, which was launched in June 2018, includes our recently approved robotic implantation functionality. As this functionality is new, it is possible that it could include defaults, “bugs” or present other technical issues which could prompt potential physician customers to delay their purchase of the ARTAS
®
iX System or could prompt physicians that have purchased the ARTAS
®
iX System to either return or not utilize the system.
We cannot
assure
you that
the
ARTAS
®
System or ARTAS
®
iX System
will
achieve
broad
market
acceptance
among
physicians
and patients.
Because
we expect
to derive
substantially
all our revenue
for
the
foreseeable
future
from
ARTAS
®
and ARTAS
®
iX Systems
sales,
servicing
and procedure
-based
fees,
any failure
of this
product
to satisfy
physician
or patient demand
or to achieve
meaningful
market
acceptance
will
harm
our business
and future
prospects.
28
If there is not sufficient
patient
demand for ARTAS
procedures,
our financial
results
and
future prospects
will be harmed.
The ARTAS
procedure
is an elective
aesthetic
procedure,
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 the ARTAS
procedure
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
the
ARTAS
procedures
to their
patients;
|
|
•
|
our success
in attracting
consumers
who have not previously
undergone
hair
restoration
treatment;
|
|
•
|
the
extent
to which the
ARTAS
procedure
satisfies
patient
expectations;
|
|
•
|
our ability
to properly
train
our physician
customers
in the
use of the
ARTAS
®
and ARTAS
®
iX Systems
so that
their patients
do not experience
excessive
discomfort
during
treatment
or adverse
side
effects;
|
|
•
|
the
cost,
safety,
and effectiveness
of the
ARTAS
®
and ARTAS
®
iX Systems
versus
other
aesthetic
treatments;
|
|
•
|
consumer
sentiment
about
the
benefits
and risks
of aesthetic
procedures
generally
and the
ARTAS
®
and ARTAS
®
iX 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 materially
harmed
in the
event
we cannot
generate
significant
patient
demand for
procedures
performed
with the
ARTAS
®
System.
Our success depends in part upon patient satisfaction with the effectiveness of the ARTAS
®
and ARTAS
®
iX Systems.
In order
to generate
repeat
and referral
business,
patients
must
be satisfied
with the
effectiveness
of the
ARTAS
®
Systems.
If
the
ARTAS
®
System
or ARTAS
®
iX System 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 the
ARTAS
®
System or ARTAS
®
iX System.
Furthermore,
if the
transplanted
hair
follicles
do not grow or survive
the
transplant,
the
patient
will
likely
not view the
procedure as having
a satisfactory
outcome.
If
patients
are
not satisfied
with the
aesthetic
benefits
of the
ARTAS
®
System, ARTAS
®
iX System or feel
that
it
is
too expensive
for
the
results
obtained,
our reputation
and future
sales
will
suffer.
Our success depends on growing physician adoption and use of the ARTAS
®
System and the ARTAS
®
iX System.
Our ability
to increase
the
number
of physicians
willing
to make
a significant
capital
expenditure
to purchase
the ARTAS
®
System, or ARTAS
®
iX System
and make
it
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 the
ARTAS
®
and ARTAS
®
iX Systems
and the
revenue
that
a physician
can derive
from
performing
ARTAS
procedures
are
compelling
when compared
to the
costs
and revenue
associated
with alternative
aesthetic
treatments
the
physician
can offer.
In addition,
we believe
our marketing
programs,
including
clinical
and practice
development
support,
will
be critical
to increasing
utilization and awareness
of the
ARTAS
®
and ARTAS
®
iX Systems,
but these
programs
require
physician
commitment
and involvement
to succeed.
If
we are
unable
to increase
physician
adoption
and use of the
ARTAS
®
System,
or ARTAS
®
iX System our financial performance
will
be adversely
affected.
29
Our inability to effectively compete with competitive hair restoration treatments or procedures may prevent us from achieving significant market penetration or improving our operating results.
The medical
technology
and aesthetic
product
markets
are
highly
competitive
and dynamic and are
characterized by rapid
and substantial
technological
development
and product
innovations.
We designed
the
ARTAS
®
System
to assist
physicians
in performing
follicular
unit
extraction
surgery.
Demand for
the
ARTAS
®
Systems
and ARTAS procedures
could
be limited
by other
products
and technologies.
Competition
to address
hair
loss
comes
from various
sources,
including:
|
•
|
therapeutic
options
including
Rogaine, which is
applied
topically,
and Propecia,
which is
ingested,
both of which have been approved
by the
FDA;
|
|
•
|
non-surgical
options,
such as wigs, hair-loss
concealer
sprays
and similar
products;
and
|
|
•
|
other
surgical
alternatives,
including
hair
transplantation
surgery
using
the
strip
surgery
method
or using
hand-held
devices.
|
Surgical
alternatives
to the
ARTAS
®
and ARTAS
®
iX Systems
may
be able
to compete
more
effectively
than
the
ARTAS
procedure in established
practices
with trained
staff
and workflows
built
around
performing
these
surgical
alternatives. Practices
experienced
in offering
strip
surgery
or follicular
unit
extractions
using
hand-held
devices
may
be reluctant
to incorporate or convert
their
practices
to offer
ARTAS
procedures
due to the
effort
involved
to make such changes.
Many options
may
be able
to provide
satisfactory
results
for
male
hair
loss, generally
at
a lower
cost
to the patient
than
the
ARTAS
®
and ARTAS
®
iX Systems.
As a result,
if
patients
choose
these
competitive
alternatives,
our results
of operation
could
be adversely
affected.
We also face competition from other aesthetic devices that physicians may consider adding to their practice in lieu of building a hair restoration practice, for instance CoolSculpting, which is utilized for body contouring or cosmetic fat reduction. As a result, if physicians choose these competitive products over building a hair restoration practice with the ARTAS
®
System or ARTAS
®
iX System, our results of operation could be adversely affected.
Some of our competitors
have a broad
range
of product
offerings,
large
direct
sales
forces,
and long-term customer
relationships
with our target
physicians,
which could
inhibit
our market
penetration
efforts.
Our potential
physician
customers
also
may
need to recoup
the
cost
of expensive
products
that
they
have already purchased
from
our competitors,
and thus
they
may
decide
to delay
purchasing,
or not to purchase,
the
ARTAS
®
System or ARTAS
®
iX System.
Many of our competitors
are
large,
experienced
companies
that
have substantially
greater
resources
and brand recognition
than
we do. Competition
could
result
in price-cutting,
reduced
profit
margins,
and limited
market share,
any of which would harm
our business,
financial
condition,
and results
of operations.
For additional information regarding our competition, see the section of this Annual Report on Form 10-K captioned “Business— Competition.”
We may not be able to establish or strengthen our brand.
We believe
that
establishing
and strengthening
the Restoration
Robotics and ARTAS
brand is critical
to achieving
widespread
acceptance
of the ARTAS
®
Systems,
particularly
because
of the highly competitive
nature
of the market
for aesthetic
treatments
and procedures
to address
male
hair
loss. Promoting
and positioning
our brand will depend largely
on the success
of our marketing
efforts
and our ability
to provide
physicians
with a reliable
product
to assist
them
in performing
hair
restoration
surgery. Given the established
nature
of our
competitors,
and our limited
commercialization
in the U.S., it is likely
that
our future
marketing
efforts
will require
us to incur
significant
additional
expenses.
These brand promotion
activities
may not yield
increased sales
and, even if they do, any sales
increases
may not offset
the expenses
we
incur
to promote
our brand. If we fail
to successfully
promote
and maintain
our brand, or if we
incur
substantial
expenses
in an unsuccessful attempt
to promote
and maintain
our brand, our ARTAS
®
Systems
may not be accepted
by physicians,
which would adversely
affect
our business,
results
of operations
and financial
condition.
30
We have limited experience with our direct sales and marketing force and any failure to build and manage our direct sales and marketing force effectively could have a
material adverse effect on our business.
We rely
on a direct
sales
force
to sell
the ARTAS
®
and ARTAS
®
iX
Systems
in the U.S.
and certain
markets
outside
the U.S. In order
to meet
our anticipated
sales
objectives,
we
expect
to grow our direct
sales
and marketing
organization significantly
over the next several
years
and intend
to opportunistically
build a direct
sales
and marketing
force
in certain
international
markets
where we
do not have a direct
sales
force.
There are significant
risks
involved
in building
and managing
our sales
and marketing
organization,
including
risks
related
to our ability
to:
|
•
|
hire
qualified
individuals
as needed;
|
|
•
|
generate
sufficient
leads
within our target
physician
group for our sales
force;
|
|
•
|
provide
adequate
training
for the effective
sale
and marketing
of the ARTAS
®
System or ARTAS
®
iX System;
|
|
•
|
retain
and motivate
our direct
sales
and marketing
professionals;
and
|
|
•
|
effectively
oversee
geographically
dispersed
sales
and marketing
teams.
|
Our failure to adequately address these risks could have a material adverse effect on our ability to increase sales and use of the ARTAS
®
and ARTAS
®
iX Systems, which would cause our revenue to be lower than expected and harm our results of operations.
To market and sell the ARTAS
®
and/or ARTAS
®
iX System in certain markets outside of the U.S., we depend on third-party distributors.
We depend on third-party distributors to sell, market, and service the ARTAS
®
Systems in certain markets outside of the U.S. and to train our physician customers in such markets. Furthermore, we may need to engage additional third-party distributors to expand into new markets outside of the U.S. where we do not have a direct sales force. We are subject to a number of risks associated with our dependence on these third-parties, including:
|
•
|
the lack of day-to-day
control
over the activities
of third-party
distributors;
|
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•
|
third-party
distributors
may not commit
the necessary
resources
to market,
sell,
train,
support
and service
our systems
to the level
of our expectations;
|
|
•
|
third-party
distributors
may emphasize
the sale
of third-party
products
over our products;
|
|
•
|
third-party
distributors
may not be as selective
as we
would be in choosing physicians
to purchase
the ARTAS
®
System
or as effective
in training
physicians
in marketing
and patient
selection;
|
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•
|
third-party
distributors
may violate
applicable
laws and regulations
which may expose us to potential liability
or limit
our ability
to sell
products
in certain
markets
|
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•
|
third-party
distributors
may terminate
their
arrangements
with us on limited,
or no, notice
or may change the terms
of these
arrangements
in a manner
unfavorable
to us; and
|
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•
|
disagreements
with our distributors
that
could require
or result
in costly
and time-consuming
litigation or arbitration
which we
could be required
to conduct in jurisdictions
with which we
are not familiar.
|
If we fail to establish and maintain satisfactory relationships with our third-party distributors, our revenue and market share may not grow as anticipated, and we could be subject to unexpected costs which would harm our results of operations and financial condition.
31
To successfully market and sell the ARTAS
®
and ARTAS
®
iX
System in markets outside of the
U.S., we must address many international business risks with which we have limited experience.
Sales in markets outside of the U.S. accounted for approximately 40%, 58%, and 57% of our revenue for the year ended December 31, 2018, 2017, and 2016, respectively. We believe that a significant percentage of our business will continue to come from sales in markets outside of the U.S. through increased penetration in countries where we market and sell the ARTAS
®
or ARTAS
®
iX System. However, international sales are subject to a number of risks, including:
|
•
|
difficulties
in staffing
and managing
our international
operations;
|
|
•
|
increased
competition
as a result
of more
products
and procedures
receiving
regulatory
approval
or otherwise
free
to market
in international
markets;
|
|
•
|
longer
accounts
receivable
payment
cycles
and difficulties
in collecting
accounts
receivable;
|
|
•
|
reduced
or varied
protection
for intellectual
property
rights
in some countries;
|
|
•
|
export
restrictions,
trade
regulations,
and foreign
tax laws;
|
|
•
|
fluctuations
in currency
exchange rates;
|
|
•
|
foreign
certification
and regulatory
clearance
or approval
requirements, including receiving regulatory approval and clearance for the robotic implantation functionality included in our ARTAS
®
iX System;
|
|
•
|
difficulties
in developing
effective
marketing
campaigns
in unfamiliar
foreign
countries;
|
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•
|
customs
clearance
and shipping
delays;
|
|
•
|
political,
social,
and economic
instability
abroad, terrorist
attacks,
and security
concerns
in general;
|
|
•
|
preference
for locally
produced products;
|
|
•
|
potentially
adverse
tax consequences,
including
the complexities
of foreign
value-added
tax systems, tax inefficiencies
related
to our corporate
structure,
and restrictions
on the repatriation
of earnings;
|
|
•
|
the burdens of complying
with a wide variety
of foreign
laws and different
legal
standards;
and
|
|
•
|
increased
financial
accounting
and reporting
burdens and complexities.
|
If one or more
of these
risks
were realized,
our results
of operations
and financial
condition
could be adversely affected.
We expect that our revenue from international markets may decrease in the near term as we have received regulatory approval or clearance for the implantation function outside of the U.S., which may result in purchasing delays in international markets as customers await the availability of that function. In addition, the number of ARTAS
®
Systems previously sold to distributors that have not yet been placed with an end user has increased in recent periods, which, in combination with the launch of ARTAS
®
iX, System may further exaggerate delays in international system sales.
While traditional hair transplantation surgery has been available for many years, the ARTAS
®
System has only been commercially available since 2011. As a result, we have a limited track record compared to traditional hair transplantation surgery and the safety and efficacy of the ARTAS
®
System is not yet supported by long-term clinical data, which could limit sales, and the ARTAS
®
System could prove to be less safe or effective than initially thought.
The ARTAS
®
System
that
we
market
in the U.S.
is regulated
as a medical
device
by the U.S.
Food
and Drug Administration,
or the FDA,
and has received
premarket
clearance
under Section
510(k) of the U.S.
Federal Food,
Drug and Cosmetic
Act, or FDCA.
In the 510(k) clearance
process,
before
a device
may be marketed,
the FDA
must
determine
that
a proposed device
is “substantially
equivalent”
to a legally-marketed
“predicate” device,
which includes
a device
that
has been previously
cleared
through the 510(k) process,
a device
that
was legally
marketed
prior
to May 28, 1976 (pre-amendments
device),
a device
that
was originally
on the U.S.
market pursuant
to an approved premarket
approval,
or PMA,
application
and later
down-classified,
or a 510(k)-exempt device.
This process
is typically
shorter
and generally
requires
the submission
of less
supporting
documentation than the FDA’s
PMA
process
and does not always require
long-term
clinical
studies.
32
Hair transplantation
surgery
has been a treatment
option for hair
re
storation
for many years,
while we
only began commercializing
the ARTAS
®
System
in 2011. Consequently,
we
lack the breadth
of published
long-term
clinical data supporting
the safety
and efficacy
of the ARTAS
®
System
and the benefits
it offers
that
might
have been generated
in connection
with other
hair
restoration
techniques.
As
a result,
physicians
may be slow to adopt the ARTAS
®
System,
we
may not have comparative
data that
our competitors
have or are generating,
and we
may be subject
to greater
regulat
ory
and product
liability
risks.
Furthermore,
future
patient
studies
or clinical
experience may indicate
that
treatment
with the ARTAS
®
System
does not improve
patient
outcomes
compared
to other
hair restoration
techniques.
Such results
would slow the
adoption
of the ARTAS
®
System
by physicians,
would significantly
reduce
our ability
to achieve
expected
sales
and could prevent
us from
achieving
and maintaining profitability.
We have limited
complication
or patient
success
rate
data with respect
to treatment
using the ARTAS
®
System.
If future
patient
studies
or clinical
testing
do not support
our belief
that
our system
offers
a more
advantageous treatment
for hair
restoration,
market
acceptance
of the ARTAS
®
System
could fail
to increase
or could decrease and our business
could be harmed.
Moreover,
if future
results
and experience
indicate
that
our implant
products cause unexpected
or serious
complications
or other
unforeseen
negative
effects,
we
could be subject
to mandatory
product
recalls,
suspension
or withdrawal
of FDA
or other
governmental
clearance
or approval
or, CE Certificates
of Conformity,
significant
legal
liability
or harm
to our business
reputation.
Furthermore,
if patients that
receive
traditional
hair
transplantation
surgery,
such as strip
surgery,
were to experience
unexpected
or serious
complications
or other
unforeseen
effects,
the market
for the ARTAS
®
System
may be adversely
affected, even if such effects
are not applicable
to the ARTAS
®
System.
If we
choose to, or are required
to, conduct additional
studies,
such studies
or experience
could, slow the market adoption
of the ARTAS
®
System
by physicians,
significantly
reduce
our ability
to achieve
expected
revenue
and prevent
us from
becoming
profitable.
We were the subject of purported class action lawsuits, and additional litigation may be brought against us in the future.
In May and June 2018, a number of purported stockholder class action complaints were filed against us, the members of our board of directors (and affiliated venture funds), as well as certain of our current and former officers and the underwriters in our IPO. The complaints all allege, among other things, that our Registration Statement filed with the SEC on September 1, 2017 and the Prospectus filed with the SEC on October 13, 2017 in connection with our IPO were inaccurate and misleading, contained untrue statements of material facts, omitted to state other facts necessary to make the statements made not misleading and omitted to state material facts required to be stated therein. The complaints seek unspecified money damages, other equitable relief and attorneys’ fees and costs. While we believe these claims to be without merit, we cannot assure you that additional claims alleging the same or similar facts will not be filed. Any litigation could result in substantial costs and a diversion of management’s attention and resources.
We rely on a single third-party manufacturer for the manufacturing of the reusable procedure kits, disposable procedure kits and spare procedures kits used with the ARTAS
®
System and the ARTAS
®
iX System.
NPI Solutions
,
Inc.,
or NPI, produces
reusable procedure
kits,
disposable
procedure
kits
and spare
kits
used with the
ARTAS
®
System
and
ARTAS
®
iX
System.
If
the operations
of NPI are
interrupted
or if
it
is
unable
or unwilling
to meet
our delivery
requirements
due to capacity
limitations
or other
constraints,
we may
be limited
in our ability
to fulfill
new customer
kit
orders
required
for
use with existing
ARTAS
®
System
and
ARTAS
®
iX
System. Any change
to another
contract
manufacturer
would likely
entail
significant
delay,
require
us to devote substantial
time
and resources,
and could
involve
a period
in which our products
could
not be produced
in a timely
or consistently
high-quality
manner,
any of which could
harm
our reputation
and results
of operations.
We have
a
manufacturing agreement for consumables
with NPI for
the
supply
of consumable
products, including
reusable
procedure
kits,
disposable
procedure
kits
and spare
procedure
kits
used with the
ARTAS
®
System
and ARTAS
®
iX
System,
pursuant
to both of which we make
purchases
on a purchase
order
basis.
The agreement
is
effective
for
an initial
term
of two years
and will continue
to automatically
renew for
additional
twelve
-month
periods,
subject
to either
party’s
right
to terminate the
agreement
upon 180 days advance
notice
during
the
initial
term
if
our quarterly
forecasted
demand
falls below 75% of our historical
forecasted
demand
for
the
same
period
in the
previous
year
or upon 120 days’ advance
notice
after
the
initial
term.
33
In addition,
our reliance
on
NPI
involves
a number of other
risks,
including,
among
other
things,
that:
|
•
|
our various procedure kits
may
not be manufactured
in accordance
with agreed
upon specifications
or in compliance with regulatory
requirements,
or its
manufacturing
facilities
may
not be able
to maintain
compliance with regulatory
requirements,
which could
negatively
affect
the
safety
or efficacy
of our procedure kits, cause
delays
in shipments
of our procedure kits,
or require
us to recall
procedure kits
previously
delivered
to customers;
|
|
•
|
we may
not be able
to timely
respond
to unanticipated
changes
in customer
orders,
and if
orders
do not match
forecasts,
we may
have excess
or inadequate
inventory
of materials
and components;
|
|
•
|
we may
be subject
to price
fluctuations
when a supply
contract
is
renegotiated
or if
our existing contract
is
not renewed;
|
|
•
|
NPI may
wish to discontinue
manufacturing
and supplying
products
to us for
risk
management reasons;
and
|
|
•
|
NPI may
encounter
financial
or other
hardships
unrelated
to our demand
for
products,
which could inhibit
its
ability
to fulfill
our orders
and meet
our requirements.
|
If
any of these
risks
materialize,
it
could
significantly
increase
our costs,
our ability
to generate
net
sales
would be impaired,
market
acceptance
of our products
could
be adversely
affected,
and customers
may
instead
purchase or use our competitors’
products,
which could
have a materially
adverse
effect
on our business,
financial condition
and results
of operations.
Furthermore,
if
we are
required
to change
the
manufacturing
of our various procedure kits, we will
be required
to verify
that
the
new manufacturer
maintains
facilities,
procedures
and operations
that
comply with our quality
and applicable
regulatory
requirements,
which could
further
impede
our ability
to manufacture the
procedure kits
in a timely
manner.
Transitioning
to a new supplier
could
be time-consuming
and expensive, may
result
in interruptions
in our operations
and product
delivery.
The occurrence
of these
events
could
harm
our ability
to meet
the
demand
for
our products
in a timely
or cost-effective
manne
r
.
We cannot
assure
you that
we will
be able
to secure
alternative
equipment
and materials
and utilize
such equipment
and materials
without
experiencing
interruptions
in our workflow. If
we should
encounter
delays
or difficulties
in securing,
reconfiguring
or revalidating
the
equipment
and components
we require
for
the
ARTAS
®
System
and ARTAS
®
iX
System,
including the related consumables,
our reputation,
business,
financial
condition
and results
of operations
could
be negatively
impacted.
If NPI is unable to manufacture the reusable procedure kits, disposable procedure kits and spare procedures kits used with the ARTAS
®
System and the ARTAS
®
iX System in high-quality commercial quantities successfully and consistently to meet demand, our growth will be limited.
To
manufacture
our reusable procedure kits, disposable procedure kits and spare procedure kits
in the quantities
that
we
believe
will be required
to meet
anticipated
market demand, NPI will need to increase
manufacturing
capacity,
which will involve
significant
challenges.
In addition,
the development
of commercial-scale
manufacturing
capabilities
will require
us and NPI to invest substantial
additional
funds and hire
and retain
the technical
personnel
who
have the necessary
manufacturing experience.
Neither
we
nor NPI
may successfully
complete
any required
increase
to existing
manufacturing
processes
in a timely
manner,
or at all.
If NPI is unable to produce the reusable
procedure
kits,
disposable
procedure
kits
and spare
kits
in sufficient
quantities
to meet
anticipated
customer
demand, our revenue,
business,
and financial prospects
would be harmed.
The limited
experience
NPI has in producing
larger
quantities
of the procedure kits
may also result
in quality
issues,
and possibly
result
in product
recalls.
Manufacturing delays
related
to quality
control
could harm
our reputation and decrease
our revenue. Any
recall
could be expensive
and generate
negative
publicity,
which could impair
our ability
to market
the ARTAS
®
System
and the ARTAS
®
iX System
and procedures
and further
affect
our results
of operations.
34
If we are unable to manufacture our next generation ARTAS
®
System, called the ARTA
S
®
iX System
,
in high-quality commercial quantities successfully and consistently to meet demand, our growth will be limited, and our reputation could be harmed.
To manufacture our ARTAS
®
iX System in the quantities that we believe will be required to meet anticipated market demand, we will need to develop and maintain sufficient manufacturing capacity, which will involve significant challenges. Historically, we have not manufactured any of our other products (e.g. ARTAS
®
System) in-house or without the contract manufacturer involvement. Over the next 12 months, we will manufacture the ARTAS
®
iX System without a third-party contract manufacturer’s involvement. The development of commercial-scale manufacturing capabilities will require us (or our contract manufacturer for ARTAS
®
iX System, if we decide to utilize one on a long-term basis) to invest substantial additional funds and hire and retain the technical personnel who have the necessary manufacturing experience. Neither we nor a third-party manufacturer, if one is utilized, may successfully complete any required increase to existing manufacturing processes in a timely manner, or at all.
If we or a contract manufacturer, if one is utilized, are unable to produce the ARTAS
®
iX System in sufficient quantities to meet anticipated customer demand, our revenue, business, financial prospects, and reputation would be harmed. The limited experience we or a third-party manufacturer, if one is utilized, in producing the ARTAS
®
iX System may also result in quality issues, and possibly result in product recalls. Manufacturing delays related to quality control could harm our reputation and decrease our revenue. Any recall could be expensive and generate negative publicity, which could impair our ability to market the ARTAS
®
iX System and procedures and further affect our results of operations.
Both our manufacturing of the ARTAX
®
iX System and NPI’s manufacturing of the procedure kits are dependent upon third-party suppliers and, in some cases, sole suppliers, for the majority of our components, subassemblies and materials, making us vulnerable to supply shortages and price fluctuations, which could harm our business.
We and NPI, as the case may be, rely
on several
sole source
suppliers,
including
Kuka Robotics, Inc.
,
FLIR
Integrated
Imaging
Solutions Inc. and 3D-CAM International Corporation, for certain
components
of the ARTAS
®
iX
System,
reusable
procedure
kits, disposable
procedure
kits
and spare
procedure
kits.
These sole suppliers,
and any of our other
suppliers,
may be unwilling
or unable to supply components
of these
systems
to us or NPI reliably
and at the levels
we
anticipate or are required
by the market.
For us to be successful,
our suppliers
must
be able to provide
products
and components
in substantial
quantities,
in compliance
with regulatory
requirements,
in accordance
with agreed
upon specifications,
at acceptable
costs
and on a timely
basis.
An
interruption
in our commercial
operations
could occur if we
encounter
delays
or difficulties
in securing
these
components, and if we
cannot then obtain
an acceptable
substitute.
If we
are required
to transition
to new
third-party
suppliers for certain
components
of the ARTAS
®
iX
System or our procedure kits,
we
believe
that
there
are only a few such suppliers
that
can supply
the necessary
components.
A
supply interruption,
price
fluctuation
or an increase
in demand beyond our current
suppliers’
capabilities
could harm
our
ability
to manufacture
the ARTAS
®
iX
System
and NPI’s ability to manufacture our procedure kits
until new
sources
of supply are identified
and qualified.
In addition,
the use of components
or materials
furnished
by these
alternative
suppliers
could require
us to alter
our operations.
Our reliance
on these
suppliers
subjects
us to a number
of risks
that
could harm
our reputation,
business,
and financial
condition,
including,
among other
things:
|
•
|
interruption
of supply resulting
from
modifications
to or discontinuation
of a supplier’s
operations;
|
|
•
|
delays
in product
shipments
resulting
from
uncorrected
defects,
reliability
issues,
or a supplier’s variation
in a component;
|
|
•
|
a lack of long-term
supply arrangements
for key components
with our suppliers;
|
|
•
|
inability
to obtain
adequate
supply in a timely
manner,
or to obtain
adequate
supply on commercially reasonable
terms;
|
|
•
|
difficulty
and cost associated
with locating
and qualifying
alternative
suppliers
for our components
in a timely
manner;
|
|
•
|
production
delays
related
to the evaluation
and testing
of products
from
alternative
suppliers,
and corresponding
regulatory
qualifications;
|
|
•
|
delay in delivery
due to our suppliers
prioritizing
other
customer
orders
over ours;
|
35
|
•
|
damage
to our reputation
caused by defective
components
produce
d by our suppliers;
|
|
•
|
increased
cost of our warranty
program
due to product
repair
or replacement
based upon defects
in components
produced by our suppliers;
and
|
|
•
|
fluctuation
in delivery
by our suppliers
due to changes in demand from
us or their
other
customers.
|
Where
practicable,
we
are seeking,
or intending
to seek, second-source
manufacturers
for certain
of our components.
However, we
cannot provide
assurance
that
we
will be successful
in establishing
second-source manufacturers
or that
the second-source
manufacturers
will be able to satisfy
commercial
demand for the ARTAS
®
System and ARTAS
®
iX
System.
If any of these
risks
materialize,
costs
could significantly
increase
and our ability
to meet
demand for our products
could be impacted.
If we
are unable to satisfy
commercial
demand for the ARTAS
®
System and ARTAS
®
iX
System
in a timely manner,
our ability
to generate
revenue
would be impaired
and market
acceptance
of our products
could be adversely
affected.
We forecast sales to determine requirements for components and materials used in the ARTAS
®
System and ARTAS
®
iX System, reusable procedure kits, disposable procedure kits, upgrade kits and spare kits and if our forecasts are incorrect, we may experience delays in shipments or increased inventory costs.
We keep limited
finished
products
on hand. To
manage
our operations,
we
forecast
anticipated
product
orders and material
requirements
to predict
our inventory
needs and enter
into purchase
orders
on the basis
of these requirements.
Several
components
of the ARTAS
®
and ARTAS
®
iX
Systems
require
significant
order
lead time.
Our limited historical
commercial
experience
and anticipated
growth may not provide
us with enough data to consistently and accurately
predict
future
demand. If our business
expands and our demand for components
and materials increases
beyond our estimates,
our manufacturers
and suppliers
may be unable to meet
our demand. In addition, if we
underestimate
our component
and material
requirements,
we
may have inadequate
inventory,
which could interrupt,
delay, or prevent
delivery
of the ARTAS
®
System or the ARTAS
®
iX System
and related
products
to our customers.
In contrast,
if we
overestimate
our requirements,
we
may have excess
inventory,
which would increase
use of our working capital.
Any
of these
occurrences
would negatively
affect
our financial
condition
and the level
of satisfaction
our physician
customers
have with our business.
Even though the ARTAS
®
System and ARTAS
®
iX System are marketed to physicians, there exists a potential for misuse by the operator of the systems by physicians, non-physicians or individuals who are not sufficiently trained, which could harm our reputation and our business.
We and our independent
distributors
market
and sell
the
ARTAS
®
System
and ARTAS
®
iX System
to physicians.
Under state
law in the U.S., our physician
customers
can generally
allow
nurse
practitioners,
technicians,
and other
non-physicians
to perform
the
ARTAS
procedures
under
their
direct
supervision.
Similarly,
in markets
outside
of the
U.S., physicians
can allow
non-physicians
to perform
the
ARTAS
procedures
under
their
supervision.
Although we and our distributors
provide
training
on the
use of the
ARTAS
®
System
and ARTAS
®
iX System,
we do not supervise
the
procedures performed
with the
ARTAS
®
System
and ARTAS
®
iX System,
nor can we be assured
that
direct
physician
supervision
of procedures
occurs according
to our recommendations.
The potential
misuse
of the
ARTAS
®
System
or ARTAS
®
iX System by physicians
and non- physicians
may
result
in adverse
treatment
outcomes,
which could
harm
our reputation
and expose
us to costly product
liability
litigation.
We and our distributors
offer
product
training
sessions,
but neither
we
nor our distributors
require
purchasers
or operators
of our products
to attend
training
sessions.
The lack of required
training
for operators
of our product and the use of our products
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.
Product liability
suits
could be brought against
us for
defective
design,
labeling,
material,
or workmanship, or misuse
of the ARTAS
®
System
or ARTAS® iX System,
and could result
in expensive
and time-consuming
litigation,
payment
of substantial
damages,
an increase
in our insurance
rates
and substantial
harm to our reputation.
If
the
ARTAS
®
System or ARTAS
®
iX System
are
defectively
designed,
manufactured,
or labeled,
contains
defective
components,
or is misused,
we may
become
subject
to substantial
and costly
litigation
by our physician
customers
or their
patients. Misuse
of the
ARTAS
®
System or ARTAS
®
iX System
or failure
to adhere
to operating
guidelines
can cause
skin
damage
and underlying tissue
damage
and, if
our operating
guidelines
are
found to be
36
inadequate,
we may
be subject
to liability. Furthermore,
if
a patient
is
injured
in an unexpected
manner
or suffers
unanticipated
adverse
events
after undergoing
the
ARTAS
procedure,
even if
the
procedure
was performed
in accordance
with our operating guidelines,
we may
be subject
to product
liability
claims.
Claims
could
also
be asserted
under
state
consumer protection
acts.
If
we cannot
successfully
defend
ourselves
against
product
liability
claims,
we may
incur substantial
liabilities.
Even successful
defense
would require
significant
financial
and management
resources. Regardless
of the
merits
or eventual
outcome,
liability
claims
may
result
in:
|
•
|
decreased
demand
for
the
ARTAS
®
System
and ARTAS
®
iX System,
or any future
products;
|
|
•
|
damage
to our reputation;
|
|
•
|
withdrawal
of clinical
trial
participants;
|
|
•
|
costs
to defend
the
related
litigation;
|
|
•
|
a diversion
of management’s
time
and our resources;
|
|
•
|
substantial
monetary
awards
to physician
customers,
patients
or clinical
trial
participants;
|
|
•
|
regulatory
investigations,
product
recalls,
withdrawals
or labeling,
marketing
or promotional restrictions;
|
|
•
|
the
inability
to commercialize
any future
products.
|
Our inability
to obtain
and maintain
sufficient
product
liability
insurance
at an acceptable
cost and scope of coverage
to protect
against
potential
product
liability
claims
could inhibit
commercialization
of the ARTAS
®
and ARTAS
®
iX Systems.
As of December 31, 2018,
we carry
product
liability
insurance
in the amount
of $4.0 million
in the aggregate.
Although we maintain
such insurance,
any claim
that
may be brought against
us could result
in a court
judgment
or settlement in an amount
that
is not covered,
in whole or in part,
by our insurance
or that
is in excess
of the limits
of our insurance
coverage.
Our insurance
policies
also have various
exclusions
and deductibles,
and we
may be subject to a product
liability
claim
for which we
have no coverage.
We will have to pay any amounts
awarded by a court or negotiated
in a settlement
that
exceed our coverage
limitations
or that
are not covered
by our insurance,
and we
may not have, or be able to obtain,
sufficient
funds to pay such amounts.
Moreover,
in the future,
we
may not be able to maintain
insurance
coverage
at a reasonable
cost or in sufficient
amounts
to protect
us against
losses.
The clinical trial process required to obtain regulatory clearances or approvals is lengthy and expensive with uncertain outcomes and could result in delays in new product introductions.
In order
to obtain
510(k) clearance
for the ARTAS
®
System,
we
were required
to conduct a clinical
trial,
and we expect
to conduct clinical
trials
in support
of marketing
authorization
for future
products
and product enhancements.
Conducting clinical
trials
is a complex
and expensive
process,
can take many years,
and outcomes are inherently
uncertain.
We may suffer
significant
setbacks
in clinical
trials,
even after
earlier
clinical
trials showed promising
results,
and failure
can occur at any time
during the clinical
trial
process.
Any
of our products may malfunction
or may produce undesirable
adverse
effects
that
could cause us or regulatory
authorities
to interrupt,
delay or halt
clinical
trials.
We, the FDA,
or another
regulatory
authority
may suspend or terminate clinical
trials
at any time
to avoid exposing trial
participants
to unacceptable
health
risks.
Successful
results
of pre-clinical
studies
are not necessarily
indicative
of future
clinical
trial
results,
and predecessor
clinical
trial
results
may not be replicated
in subsequent
clinical
trials.
Additionally,
the FDA
may disagree
with our interpretation
of the data from
our pre-clinical
studies
and clinical
trials,
or may find the clinical
trial
design, conduct or results
inadequate
to prove safety
or efficacy,
and may require
us to pursue additional
pre-clinical
studies
or clinical
trials,
which could further
delay the clearance
or approval
of our products.
The data we
collect
from
our pre-clinical
studies
and clinical
trials
may not be sufficient
to support FDA
clearance
or approval,
and if we
are unable to demonstrate
the safety
and efficacy
of our future
products
in our clinical
trials,
we
will be unable to obtain
regulatory
clearance
or approval
to market
our products.
37
In addition,
we
may estimate
and publicly
announce the anticipated
timing
of the
accomplishment
of various clinical,
regulatory
and other
product
development
goals, which are often
referred
to as milestones.
These
milestones
could include
the obtainment
of the right
to affix
the CE
Mark in the European Union; the submission to the FDA
of an investigational
device
exemption,
or IDE,
application
to commence
a pivotal
clinical
trial
for a new
product;
the enrollment
of patients
in clinical
trials;
the release
of data from
clinical
trials;
and other
clinical and regulatory
events.
The
actual
timing
of these
milestones
could vary dramatically
compared
to our estimates, in some cases
for reasons
beyond our control.
We cannot assure
you that
we
will meet
our projected
milestones and if we
do not meet
these
milestones
as publicly
announced,
the commercialization
of our products
may be delayed
and, as a result,
our stock price
may decline.
Delays in the commencement
or completion
of clinical
testing
could significantly
affect
our product
development costs.
We do not know
whether planned clinical
trials
will begin on time,
need to be redesigned,
enroll
an adequate
number
of patients
in a timely
manner
or be completed
on schedule,
if at all.
The commencement
and completion
of clinical
trials
can be delayed
or terminated
for a number
of reasons,
including
delays
or failures related
to:
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•
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the FDA
or comparable
foreign
regulatory
authorities
disagreeing
as to the design or implementation
of our clinical
studies;
|
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•
|
obtaining
regulatory
approval
to commence
a clinical
trial;
|
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•
|
reaching
agreement
on acceptable
terms
with prospective
clinical
research
organizations,
or CROs,
and trial
sites,
the terms
of which can be subject
to extensive
negotiation
and may vary significantly
among different
CROs
and trial
sites;
|
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•
|
manufacturing
sufficient
quantities
of a product
for use in clinical
trials;
|
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•
|
obtaining
institutional
review board, or IRB,
or ethics
committees’
approval
to conduct a clinical
trial
at each prospective
site;
|
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•
|
recruiting
and enrolling
patients
and maintaining
their
participation
in clinical
trials;
|
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•
|
having clinical
sites
observe
trial
protocol
or continue
to participate
in a trial;
|
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•
|
addressing
any patient
safety
concerns
that
arise
during the course
of a clinical
trial;
|
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•
|
addressing
any conflicts
with new
or existing
laws or regulations;
and
|
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•
|
adding a sufficient
number
of clinical
trial
sites.
|
Patient
enrollment
in clinical
trials
and completion
of patient
follow-up
depend on many factors,
including
the size
of the patient
population,
the nature
of the trial
protocol,
the proximity
of patients
to clinical
sites,
the eligibility
criteria
for the clinical
trial,
patient
compliance,
competing
clinical
trials
and clinicians’
and patients’ perceptions
as to the potential
advantages
of the product
being studied
in relation
to other
available
therapies, including
any new
treatments
that
may be cleared
or approved for the indications
we
are investigating.
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 efficacy
of a product,
or they may be persuaded
to participate
in contemporaneous
clinical
trials
of a competitor’s
product.
In addition,
patients participating
in our clinical
trials
may drop out before
completion
of the trial
or suffer
adverse
medical
events unrelated
to our products.
Delays in patient
enrollment
or failure
of patients
to continue
to participate
in a clinical trial
may delay commencement
or completion
of the clinical
trial,
cause an increase
in the costs
of the clinical trial
and delays,
or result
in the failure
of the clinical
trial.
We could also encounter
delays
if the FDA
concluded
that
our financial
relationships
with our principal investigators
resulted
in a perceived
or actual
conflict
of interest
that
may have affected
the interpretation
of a study, the integrity
of the data generated
at the applicable
clinical
trial
site
or the utility
of the clinical
trial
itself. Principal
investigators
for our clinical
trials
may serve
as scientific
advisors
or consultants
to us from
time
to time
and receive
cash compensation
and/or
stock options
in connection
with such services.
If these
relationships and any related
compensation
to or ownership interest
by the clinical
investigator
carrying
out the study result
in perceived
or actual
conflicts
of interest,
or the FDA
concludes
that
the financial
relationship
may have affected interpretation
of the study, the integrity
of the data generated
at the applicable
clinical
trial
site
may be questioned
and the utility
of the clinical
trial
itself
may be jeopardized,
which could result
in the delay or rejection
of our marketing
application
by the FDA.
Any
such delay or rejection
could prevent
us from commercializing
any of our products
in development.
38
Furthermore,
clinical
trials
may also be delayed
because
of ambiguous
or negative
interim
results.
In addition, a clinical
trial
may be suspended or terminated
by us, the FDA,
the IRB
overseeing
the clinical
trial
at issue,
the Data
Safety
Monitoring
Board for such trial,
any of our clinical
trial
sites
with respect
to that
site,
or other regulatory
authorities
due to
several
factors,
including:
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•
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failure
to conduct the clinical
trial
in accordance
with applicable
regulatory
requirements
or our clinical protocols;
|
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•
|
inspection
of the clinical
trial
operations
or trial
sites
by the FDA
or other
regulatory
authorities resulting
in the imposition
of a clinical
hold;
|
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•
|
inability
of a clinical
investigator
or clinical
trial
site
to continue
to participate
in the clinical
trial;
|
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•
|
unforeseen
safety
issues
or adverse
side effects;
|
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•
|
failure
to demonstrate
a benefit
from
using the product;
and
|
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•
|
lack of adequate
funding to continue
the clinical
trial.
|
Additionally,
changes in regulatory
requirements
and guidance
may occur and we
may need to amend clinical trial
protocols
to reflect
these
changes. Amendments
may require
us to resubmit
our clinical
trial
protocols
to IRBs
for reexamination,
which may impact
the costs,
timing
or successful
completion
of a clinical
trial.
If we experience
delays
in completion
of, or if we
terminate,
any of our clinical
trials,
the commercial
prospects
for our products
may be harmed
and our ability
to generate
product
revenue
from
these
products
will be delayed
or not realized
at all.
In addition,
any delays
in completing
our clinical
trials
will increase
our costs,
slow down
our product
development
and approval
process
and jeopardize
our ability
to commence
product
sales
and generate revenue.
Any
of these
occurrences
may significantly
harm
our business,
financial
condition
and prospects significantly.
In addition,
many of the factors
that
cause, or lead to, a delay in the commencement
or completion of a clinical
trial
may also ultimately
lead to the denial
of regulatory
approval
of the subject
product.
Our business could be adversely affected if we are unable to extend the cleared uses of the ARTAS
®
System and ARTAS
®
iX System or successfully pursue the development, regulatory clearance or approval and commercialization of future products.
The
ARTAS
®
System
and ARTAS
®
iX
System for
hair
follicle
dissectio
n
, which has been cleared
for
use in the
U.S. only for
dissecting
hair
follicles
from
the
scalp
in men
diagnosed
with AGA
who have black
or brown straight hair, recipient
site
making
for the follicle transplantation sites and, in our ARTAS
®
iX System, robotic implantation in which hair follicles are robotically transplanted, which recently has been approved for commercial marketing in the U.S., are our only products.
Our business
could
be adversely
affected
if
we are
unable
to extend
the
cleared
uses
of the
ARTAS
®
System
and ARTAS
®
iX System
or successfully
pursue
the
development,
regulatory
clearance
or approval
and commercialization
of future
products. In the
future,
we may
also
become
dependent
on other
products
that
we may
develop
or acquire.
The clinical
and commercial
success
of our products
will
depend on several factors,
including
the
following:
|
•
|
the ability
to raise
any additional
required
capital
on acceptable
terms,
or at all;
|
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•
|
timely
completion
of our nonclinical
studies
and clinical
trials,
which may be significantly
slower, or cost more
than we
anticipate
and will depend substantially
upon the performance
of third-party contractors;
|
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•
|
whether we
are required
by the FDA
or similar
foreign
regulatory
agencies
to conduct additional clinical
trials
or other
studies
beyond those planned to support
the clearance
or approval
and commercialization
of any future
indications
or products;
|
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•
|
our ability
to demonstrate
to the satisfaction
of the FDA
and similar
foreign
regulatory
authorities
the safety,
efficacy
and acceptable
risk
to benefit
profile
of any future
indications
or products;
|
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•
|
the prevalence,
duration
and severity
of potential
side effects
or other
safety
issues
experienced
with our future
approved products,
if any;
|
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•
|
the timely
receipt
of necessary
marketing
approvals
or clearances
from
the FDA
and foreign
regulatory authorities;
|
39
|
•
|
achieving
and maintaining,
and, where applicable,
ensuring
that
our third-party
contractors
achieve
and maintain,
compliance
with our contractual
obligations
and with all
regulatory
requirements
applicable to any future
products
or additional
approved indications, if any;
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•
|
acceptance
by physicians
and patients
of the benefits,
safety
and efficacy
of any future
products,
if approved or cleared,
including
relative
to alternative
and competing
treatments;
|
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•
|
our ability
to establish
and enforce
intellectual
property
rights
in and to our products
or any future indications
or products;
and
|
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•
|
our ability
to avoid third-party
patent
interference,
intellectual
property
challenges
or intellectual property
infringement
claims.
|
Even if regulatory
approvals
or clearances
are obtained,
we
may never be able to successfully
commercialize
any future
indications
or products.
Accordingly,
we
cannot provide
assurances
that
we
will be able to generate sufficient
revenue
through the sale
of any future
products
to continue
our business.
Our loan and security agreement contains restrictions that limit our flexibility in operating our business.
In May 2018, we entered
into
a loan
and security
agreement
with Solar Capital Ltd. and other lenders, which was subsequently amended in June 2018, November 2018 and in January 2019. We borrowed
$20.0 million
under
the
loan and security agreement
with Solar, the Solar Agreement. The Solar Agreement also
contains
various
covenants
that
limit
our ability
to engage
in specified
types
of transactions.
Subject
to limited
exceptions,
these
covenants
limit
our abilit
y
, without
Solar’s
consent,
to, among
other
things:
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•
|
sell,
lease,
transfer,
exclusively
license
or dispose
of our assets;
|
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•
|
create,
incur,
assume
or permit
to exist
additional
indebtedness
or liens, which may limit our ability to raise additional capital;
|
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•
|
make
restricted
payments,
including
paying
dividends
on, repurchasing
or making
distributions
with respect
to our capital
stock;
|
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•
|
pay any cash
dividend
or make
any other
cash
distribution
or payment
in respect
of our capital
stock
more than $150,000 in aggregate
per
calendar
year;
|
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•
|
make
specified
investments
(including
loans
and advances);
|
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•
|
make
changes
to certain
key personnel
including
our President
and Chief
Executive
Officer;
|
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•
|
merge,
consolidate
or liquidate;
and
|
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•
|
enter
into
certain
transactions
with our affiliates.
|
In addition, the Solar Agreement contains certain covenants that require us to achieve certain revenue and liquidity thresholds. These covenants under the agreement require us to meet certain minimum liquidity and minimum revenue covenants, which, if we fail to maintain or achieve, will result in a default and require us to repay all outstanding principal amounts and accrued interest repay all amounts outstanding. In the event of a default, if we are unable to repay all outstanding amounts Solar
may foreclose
on the
collateral
granted
to it
to collateralize
such indebtedness and will significantly affect our ability to operate our business.
We will need to increase the size of our organization, and we may experience difficulties in managing growth.
As
of December 31, 2018, we
had 102 employees,
with 39 employees
in sales
and marketing,
26 employees
in customer
support,
20 employees
in research
and development,
including
clinical,
regulatory
and certain
quality control
functions,
three
employees
in manufacturing
operations
and 14 employees
in general
management
and administration.
We will need to continue
to expand our sales,
marketing,
managerial,
operational,
finance
and administrative
resources
for the ongoing commercialization
of the ARTAS
®
System and ARTAS
®
iX
System and continue
our development
activities
of any future
products.
40
Our existing
management,
personnel,
systems
and facilities
may not be adequate
to support
our future
growth. Our need to effectively
execute
our growth strategy
requires
that
we:
|
•
|
identify,
recruit,
retain,
incentivize
and integrate
additional
employees,
including
sales
personnel;
|
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•
|
manage
our internal
development
and operational
efforts
effectively
while carrying
out our contractual obligations
to third
parties;
and
|
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•
|
continue
to improve
our operational,
financial
and management
controls,
reports
systems
and procedures.
|
If we fail to attract and retain senior management and key personnel, we may be unable to successfully grow our business.
Our success
depends in part
on our continued
ability
to attract,
retain
and motivate
highly qualified
management, clinical
and other
personnel.
We are highly dependent
upon our senior
management,
particularly
our President and Chief Executive
Officer,
our management
team
and other
key personnel.
The loss of services
of any of these individuals
could delay or prevent
enhancement
of the ARTAS
®
System and ARTAS
®
iX
System,
the expansion
of the ARTAS
®
System and ARTAS
®
iX
System
to new
indications,
or the development
of any future
products.
Although we
have entered
into employment agreements
with our senior
management
team,
these
agreements
do not provide
for a fixed
term
of service.
Competition
for qualified
personnel
in the medical
device
field
is intense
due to the limited
number
of individuals
who
possess
the skills
and experience
required
by our industry.
We will need to hire
additional personnel
and we
may not be able to attract
and retain
quality
personnel
on acceptable
terms,
or at all.
In addition,
to the extent
we
hire
personnel
from
competitors,
we
may be subject
to allegations
that
they have been improperly
solicited
or that
they have divulged
proprietary
or other
confidential
information,
or that
their
former employers
own
their
research
output.
Because we have opted to take advantage of the JOBS Act provision which allows us to delay implementing new accounting standards, our consolidated financial statements may not be directly comparable to other public companies.
Pursuant
to the Jumpstart
Our Business Startups
Act of 2012, or the JOBS
Act, emerging
growth companies
can delay adopting
new
or revised
accounting
standards
issued
after the enactment
of the JOBS
Act until such time
as those standards
apply to private
companies.
We have elected
to use this
extended
transition
period for complying
with new
or revised
accounting
standards
that
have different
effective
dates
for public
and private companies
until
the earlier
of the date we
(i)
are no longer
an emerging
growth company or (ii)
affirmatively
and irrevocably
opt out of the extended
transition
period
provided
in the JOBS
Act. Because we
have elected
to take advantage
of this
provision
of the JOBS
Act, our consolidated
financial
statements
and the reported
results
of operations
contained
therein
may not be directly
comparable
to other
public
companies.
We incur significant costs because of operating as a public company, and our management devotes substantial time to new compliance initiatives. We may fail to comply with the rules that apply to public companies, including Section 404 of the Sarbanes-Oxley Act of 2002, which could result in sanctions or other penalties that would harm our business.
We incur
significant
legal,
accounting
and other
expenses
as a public
company, including
costs
resulting from
public
company reporting
obligations
under the Securities
Exchange Act of 1934, as amended,
and regulations
regarding
corporate
governance
practices.
The listing
requirements
of The Nasdaq
Global Market and the rules
of the Securities
and Exchange Commission,
or SEC,
require
that
we
satisfy
certain
corporate governance
requirements
relating
to director
independence,
filing
annual and interim
reports,
stockholder meetings,
approvals
and voting, soliciting
proxies,
conflicts
of interest
and a code of conduct. Our management and other
personnel
devote a substantial
amount
of time
to ensure
that
we
comply
with all
of these requirements.
Moreover,
the reporting
requirements,
rules
and regulations
will continue to increase
our legal
and financial compliance
costs
and will make some activities
more
time-consuming
and costlier.
Any
changes we
make to comply
with these
obligations
may not be sufficient
to allow us to satisfy
our obligations
as a public
company on a timely
basis,
or at all.
These reporting
requirements,
rules
and regulations,
coupled with the increase
in potential
litigation
exposure
associated
with being a public
company, could also make it more
difficult
for us to attract
and retain
qualified
persons
to serve
on our board of directors
or board committees
or to serve
as executive
officers,
or to obtain
certain
types of insurance,
including
directors’
and officers’
insurance,
on acceptable
terms.
41
We
are subject
to Section
404 of The Sarbanes-Oxley
Act of 2002, or Section
404, and
the related
rules
of the SEC,
which generally
require
our management
and independent
registered
public
accounting firm
to report
on the effectiveness
of our internal
control
over financial
reporting.
Beginning with
this Annual Report on Form 10-K, we are
r
equired
to file
an annual management assessment
of the effectiveness
of our internal
control
over financial
reporting.
During the course of our review and testing, we may identify deficiencies and be unable to remediate them before we must provide the requ
ired reports.
If we
have a material
weakness in our internal
controls
over financial
reporting,
we
may not detect
errors
on a timely
basis
and our consolidated financial
statements
may be materially
misstated.
We or our independent
registered
public
accounting
firm
may not be able to conclude
on an ongoing basis
that
we
have effective
internal
control
over financial
reporting, which could harm
our operating
results,
cause investors
to lose confidence
in our reported
financial
information and cause the market
price
of our stock to decline.
In addition,
as a public
company we
are required
to file accurate
and timely
quarterly
and annual reports
with the SEC
under the Securities
Exchange Act of 1934, as amended.
Any
failure
to report
our financial
results
on an accurate
and timely
basis
could result
in sanctions, lawsuits,
delisting
of our shares
from
The Nasdaq
Global Market
or other
adverse
consequences
that
would materially
harm
to our business
and cause the market
price
of our common
stock to decline.
Further, for so long as we remain
an emerging
growth company as defined
in the JOBS
Act, we
intend
to take advantage
of certain exemptions
from
various
reporting
requirements
that
are applicable
to 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. Once we
are no longer
an emerging
growth company or, if prior
to such date, we opt to no longer
take advantage
of the applicable
exemption, our independent
registered
public
accounting
firm will be engaged to provide
an attestation
report
on the effectiveness
of our internal
control
over financial reporting.
We will remain
an emerging
growth company until
the earlier
of (1) the last
day of the fiscal
year (a)following
the fifth
anniversary
of our IPO,
(b) in which we
have total
annual gross revenue
of at least
$1.07 billion,
or (c)
in which we
are deemed
to be a large
accelerated
filer,
which means
the market
value of our common
stock that
is held by non-affiliates
exceeds
$700.0 million
as of the prior
June 30th, and (2) the date on which we
have issued
more
than $1.0 billion
in non-convertible
debt during the prior
three-year period.
Unfavorable global economic conditions 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 market
for aesthetic
medical
procedures
may be particularly vulnerable
to unfavorable
economic
conditions.
In particular,
the ARTAS
procedures
will not receive
coverage and reimbursement
and, as a result,
demand for this
product
will be tied
to discretionary
spending levels
of our targeted
patient
population.
The recent
global
financial
crisis
caused extreme
volatility
and disruptions
in the capital
and credit
markets.
A
severe
or prolonged
economic
downturn, such as the recent
global
financial
crisis, could result
in a variety
of risks
to our business,
including
weakened demand for the ARTAS
®
and ARTAS
®
iX
Systems,
ARTAS procedures
or any future
products,
if approved, and our ability
to raise
additional
capital
when
needed on acceptable
terms,
if at all.
A
weak or declining
economy could also strain
our manufacturers
or suppliers, possibly
resulting
in supply disruption,
or cause our customers
to delay making
payments
for our services.
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
could adversely
impact
our business.
We or the third parties upon whom we depend may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.
Our corporate
headquarters
and other
facilities
are located
in San Jose, California,
which in the past has experienced
both severe
earthquakes
and floods.
We do not carry
earthquake
or flood insurance.
Earthquakes
or other
natural
disasters
could severely
disrupt
our operations,
and have a material
adverse
effect
on our business, results
of operations,
financial
condition
and prospects.
42
If a natural
disaster,
power outage or other
event occurred
that
prevented
us fr
om
using all
or a significant
portion of our headquarters,
that
damaged
critical
infrastructure,
such as our ARTAS
enterprise
system,
enterprise financial
systems
and records,
manufacturing
resource
planning
and enterprise
quality
systems,
or that
otherwise disrupted operations,
it may be difficult
or, in certain
cases,
impossible,
for us to continue
our business
for a
substantial
period
of time.
The disaster
recovery
and business
continuity
plan
we
have in place
are limited
and are unlikely
to prov
e adequate
in the event of a serious
disaster
or similar
event. We may incur
substantial expenses
because
of the limited
nature
of our disaster
recovery
and business
continuity
plans, which, particularly
when
taken together
with our lack of earthquake
or
flood insurance,
could have a material
adverse effect
on our business.
Furthermore,
integral
parties
in our supply chain are similarly
vulnerable
to natural
disasters
or other
sudden, unforeseen
and severe
adverse
events.
If such an event were to affect
our supply chain, it could have a material adverse
effect
on our business.
Significant disruptions of information technology systems or breaches of data security could materially adversely affect our business, results of operations and financial condition.
We collect
and maintain
information
in digital
form
that
is necessary
to conduct our business,
and we
are increasingly
dependent
on information
technology
systems
and infrastructure
to operate
our business.
In the ordinary
course
of our business,
we
collect,
store
and transmit
large
amounts
of confidential
information, including
intellectual
property,
proprietary
business
information
and personal
information.
It is critical
that
we
do so in a secure
manner
to maintain
the confidentiality
and integrity
of such confidential
information.
We have established
physical,
electronic,
and organizational
measures
to safeguard
and secure
our systems
to prevent
a data compromise,
and rely
on commercially
available
systems,
software,
tools,
and monitoring
to provide security
for our information
technology
systems
and the processing,
transmission
and storage
of digital information.
We have also outsourced
elements
of our information
technology
infrastructure,
and as a result
a few third-party
vendors may or could have access
to our confidential
information.
Our internal
information technology
systems
and infrastructure,
and those of our current
and any future
collaborators,
contractors
and consultants
and other
third
parties
on which we
rely,
are vulnerable
to damage
from
computer
viruses,
malware, natural
disasters,
terrorism,
war, telecommunication
and electrical
failures,
cyber-attacks
or cyber-intrusions
over the Internet,
attachments
to emails,
persons
inside
our organization,
or persons
with access
to systems
inside
our organization.
The risk
of a security
breach
or disruption,
particularly
through cyber-attacks
or cyber intrusion, including
by computer
hackers,
foreign
governments,
and cyber terrorists,
has generally
increased
as the number, intensity
and sophistication
of attempted
attacks
and intrusions
from
around the world have increased.
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 product
development
programs.
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. We would 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.
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
43
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 i
nvestigations
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 sig
nificant
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.
Risks Related to Intellectual Property
We may in the future become involved in lawsuits to defend ourselves against intellectual property disputes, which could be expensive and time consuming, and ultimately unsuccessful, and could result in the diversion of significant resources, and hinder our ability to commercialize our existing or future products.
Our success
depends in part
on not infringing
the patents
or violating
the other
proprietary
rights
of others. Intellectual
property
disputes
can be costly
to defend and may cause our business,
operating
results
and financial condition
to suffer.
Significant
litigation
regarding
patent
rights
occurs
in the medical
industry.
Whether
merited or not, it is possible
that
U.S.
and foreign
patents
and pending patent
applications
controlled
by third
parties
may be alleged
to cover our products.
We may also face
allegations
that
our employees
have misappropriated
the intellectual
property
rights
of their
former
employers
or other
third
parties.
Our competitors
in both the U.S.
and abroad, many of which have substantially
greater
resources
and have made substantial
investments
in patent portfolios
and competing
technologies,
may have applied
for or obtained
or may in the future
apply for and obtain,
patents
that
will prevent,
limit,
or otherwise
interfere
with our ability
to make, use, sell,
and/or
export
our products.
Our competitors
may have one or more
patents
for which they can threaten
and/or
initiate
patent infringement
actions
against
us and/or
any of our third-party
suppliers.
Our ability
to defend ourselves
and/or
our third-party
suppliers
may be limited
by our financial
and human resources,
the availability
of reasonable defenses,
and the ultimate
acceptance
of our defenses
by the courts
or juries.
Furthermore,
if such patents
are successfully
asserted
against
us, this
may result
in an adverse
impact
on our business,
including
injunctions, damages,
and/or
attorneys’
fees.
From time
to time
and in the ordinary
course
of business,
we
may develop noninfringement
and/or
invalidity
positions
with respect
to third-party
patents,
which may or not be ultimately adjudicated
as successful
by a judge or jury if such patents
were asserted
against
us.
We may receive
in the future,
particularly
as a public
company, communications
from
patent
holders,
including non-practicing
entities,
alleging
infringement
of patents
or other
intellectual
property
rights
or misappropriation of trade
secrets,
or offering
licenses
to such intellectual
property.
Any
claims
that
we
assert
against
perceived infringers
could also provoke these
parties
to assert
counterclaims
against
us alleging
that
we
infringe
their intellectual
property
rights.
At any given time,
we
may be involved
as either
a plaintiff
or a defendant
in a number
of patent
infringement
actions,
the outcomes
of which may not be known
for prolonged
periods
of time.
The large
number
of patents,
the rapid
rate
of new
patent
applications
and issuances,
the complexities
of the technologies
involved,
and the uncertainty
of litigation
significantly
increase
the risks
related
to any patent litigation.
Any
potential
intellectual
property
litigation
also could force
us to do one or more
of the following:
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•
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stop selling,
making,
using, or exporting
products
that
use the disputed
intellectual
property;
|
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•
|
obtain
a license
from
the intellectual
property
owner to continue
selling,
making,
exporting,
or using products,
which license
may require
substantial
royalty
payments
and may not be available
on reasonable
terms,
or at all;
|
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•
|
incur
significant
legal
expenses;
|
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•
|
pay substantial
damages
or royalties
to the party
whose intellectual
property
rights
we
may be found to be infringing,
potentially
including
treble
damages
if the court
finds
that
the infringement
was willful;
|
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•
|
if a license
is available
from
a third-party,
we
may have to pay substantial
royalties,
upfront
fees
or grant
cross-licenses
to intellectual
property
rights
for our products
and services;
|
44
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•
|
pay the attorney
fees
and costs
of litigation
to the party
whose intellectual
property
rights
we
may be found to be infringing;
|
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•
|
find non-infringing
substitute
products,
which could be costly
and create
significant
delay due to the need for FDA
regulatory
clearance;
|
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•
|
find alternative
supplies
for infringing
products
or processes,
which could be costly
and create significant
delay due to the need for FDA
regulatory
clearance;
and/or
|
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•
|
redesign
those products
or processes
that
infringe
any third-party
intellectual
property,
which could be costly,
disruptive,
and/or
infeasible.
|
From time
to time,
we
may be subject
to legal
proceedings
and claims
in the ordinary
course
of business
with respect
to intellectual
property.
Even if resolved
in our favor,
litigation
or other
legal
proceedings
relating
to intellectual
property
claims
may cause us to incur
significant
expenses and could distract
our technical
and management
personnel
from
their
normal
responsibilities.
In addition,
there
could be public
announcements
of the results
of hearings,
motions
or other
interim
proceedings
or developments,
and if securities
analysts
or investors
perceive
these
results
to be negative,
it could have a material
adverse
effect
on the price
of our common stock. Finally,
any uncertainties
resulting
from
the initiation
and continuation
of any litigation
could have a material
adverse
effect
on our ability
to raise
the funds necessary
to continue
our operations.
If any of the foregoing
occurs,
we
may have to withdraw existing
products
from
the market
or may be unable to commercialize
one or more
of our products,
all
of which could have a material
adverse
effect
on our business, results
of operations
and financial
condition.
Any
litigation
or claim
against
us, even those without merit,
may cause us to incur
substantial
costs,
and could place
a significant
strain
on our financial
resources,
divert
the attention
of management
from
our core business
and harm
our reputation.
Furthermore,
as the number
of participants
in the robotic
hair
restoration
surgery
market
grows, the possibility
of intellectual
property infringement
claims
against
us increases.
In addition,
we
may indemnify
our customers,
suppliers
and international
distributors
against
claims
relating
to the infringement
of the intellectual
property
rights
of third
parties
relating
to our products,
methods,
and/or manufacturing
processes.
Third parties
may assert
infringement
claims
against
our customers,
suppliers,
or distributors.
These claims
may require
us to initiate
or defend protracted
and costly
litigation
on behalf
of our customers,
suppliers
or distributors,
regardless
of the merits
of these
claims.
If any of these
claims
succeed,
we may be forced
to pay damages
on behalf
of our customers,
suppliers,
or distributors
or may be required
to obtain licenses
for the products
they use. If we
cannot obtain
all
necessary
licenses
on commercially
reasonable
terms, our customers
may be forced
to stop using our products,
or our suppliers
may be forced
to stop providing
us with products.
Similarly,
interference
or derivation
proceedings
provoked by third
parties
or brought by the United Stated
Patent and Trademark
Office,
or USPTO,
or any foreign
patent
authority
may be necessary
to determine
the priority
of inventions
or other
matters
of inventorship
with respect
to our patents
or patent
applications.
We may also become
involved
in other
proceedings,
such as re-examination
or opposition
proceedings,
before
the USPTO
or its
foreign
counterparts
relating
to our intellectual
property
or the intellectual
property
rights
of others.
An unfavorable
outcome
in any such proceedings
could require
us to cease
using the related
technology
or to attempt to license
rights
to it from
the prevailing
party or could cause us to lose valuable
intellectual
property
rights.
Our business
could be harmed
if the prevailing
party
does not offer
us a license
on commercially
reasonable
terms,
if any license
is offered
at all.
Litigation
or other
proceedings
may fail
and, even if successful,
may result
in substantial
costs
and distract
our management
and other
employees.
We may also become
involved
in disputes with others
regarding
the ownership of intellectual
property
rights.
For example,
we
jointly
develop intellectual property
with certain
parties,
and disagreements
may therefore
arise
as to the ownership of the intellectual property
developed
pursuant
to these
relationships.
If we
are unable to resolve
these
disputes,
we
could lose valuable
intellectual
property
rights.
Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our existing and future products.
Recent patent
reform
legislation
could increase
the uncertainties
and costs
surrounding
the prosecution
of our patent
applications
and the enforcement
or defense
of our issued
patents.
On
September
16, 2011, the Leahy-Smith
America
Invents
Act, or the Leahy-Smith
Act, was signed into law. The Leahy-Smith
Act includes
a number
of significant
changes to U.S.
patent
law. These include
provisions
that
affect
the way
patent
applications are prosecuted,
redefine
prior
art,
may affect
patent
litigation,
and switched
the U.S.
patent
system
from
a “first-to-
45
invent”
system
to a “first-to-file”
system.
Under a “first-to-file”
system,
assuming
the other
requirements
for patentability
are met,
the first
inventor
to file
a patent
application
generally
will be entitled
to the patent
on an invention
regardless
of whether another
inventor
had made the invention
earlier.
The USPTO
recently
d
eveloped new
regulations
and procedures
to govern administration
of the Leahy-Smith
Act, and many of the substantive
changes to patent
law associated
with the Leahy-Smith
Act, in particular,
the first-to-file
provisions,
only became effective
on March
16,
2013. Accordingly,
it is not clear
what, if any, impact
the Leahy-Smith
Act will have on the operation
of our business.
The Leahy-Smith
Act and its
implementation
could increase
the uncertainties
and costs
surrounding
the prosecution
of our patent
applicat
ions
and the enforcement
or defense
of our issued
patents, all
of which could have a material
adverse
effect
on our business
and financial
condition.
In
addition,
patent
reform
legislation
may
pass
in
the
future
that
could
lead
to
additional
uncertainties
and
increased
costs
surrounding
the
prosecution,
enforcement
and
defense
of
our
patents
and
applications.
Furthermore,
the
U.S. Supreme
Court
and
the
U.S.
Court
of
Appeals
for
the
Federal
Circuit
have
made,
and
will
likely
continue
to
make,
changes
in
how
the
patent
laws
of
the
U.S.
are
interpreted.
For
example,
the
U.S.
Supreme
Court
has
ruled
on
several
patent
cases
in
recent
years,
such
as
Association
for
Molecular
Pathology
v.
Myriad
Genetics,
Inc.
(Myriad
I),
Mayo
Collaborative
Services
v.
Prometheus
Laboratories,
Inc.,
and
Alice
Corporation
Pty.
Ltd.
v.
CLS
Bank
International,
either
narrowing
the
scope
of
patent
protection
available
in
certain
circumstances
or
weakening
the
rights
of
patent
owners
in
certain
situations.
Similarly,
foreign
courts
have
made,
and
will
likely
continue
to
make,
changes
in
how
the
patent
laws
in
their
respective
jurisdictions
are
interpreted.
We
cannot
predict
future
changes
in
the
interpretation
of
patent
laws
or
changes
to
patent
laws
that
might
be
enacted
into
law
by
U.S.
and
foreign
legislative
bodies.
Those
changes
may
materially
affect
our
patents
or
patent
applications
and
our
ability
to
obtain
additional
patent
protection
in
the
future.
Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The USPTO
and various
foreign
governmental
patent
agencies
require
compliance
with a number
of procedural, documentary,
fee payment,
and other
similar
provisions
during the patent
application
process.
In addition, periodic
maintenance
fees
on issued
patents
often
must
be paid to the USPTO
and foreign
patent
agencies
over the lifetime
of the patent.
While
an unintentional
lapse
can in many cases
be cured by payment
of a late
fee or by other
means
in accordance
with the applicable
rules,
there
are situations
in which noncompliance
can result
in abandonment
or lapse
of the patent
or patent
application,
resulting
in partial
or complete
loss of patent
rights
in the relevant
jurisdiction.
Non-compliance
events
that
could result
in abandonment
or lapse
of a patent
or patent application
include,
but are not limited
to, failure
to respond to official
actions
within prescribed
time
limits,
non-payment
of fees
and failure
to properly
legalize
and submit
formal
documents.
If we
fail
to maintain
the patents and patent
applications
covering
our products
or procedures,
we
may not be able to stop a competitor
from marketing
products
that
are the same
as or similar
to our own,
which would have a material
adverse
effect
on our business.
We may not be able to adequately protect our intellectual property rights throughout the world.
Filing,
prosecuting
and defending
patents
on our products
in all
countries
throughout
the world would be prohibitively
expensive.
The requirements
for patentability
may differ
in certain
countries,
particularly developing
countries,
and the breadth
of patent
claims
allowed can be inconsistent.
In addition,
the laws of some foreign
countries
may not protect
our intellectual
property
rights
to the same
extent
as laws in the U.S. Consequently,
we
may not be able to prevent
third
parties
from
practicing
our inventions
in all
countries
outside the U.S. Competitors
may use our technologies
in jurisdictions
where we
have not obtained
patent
protection
to develop their
own
products
and, furthermore,
may export
otherwise
infringing
products
to territories
in which we have patent
protection
that
may not be sufficient
to terminate
infringing
activities.
We do not have patent
rights
in certain
foreign
countries
in which a market
may exist.
Moreover,
in foreign jurisdictions
where we
do have patent
rights,
proceedings
to enforce
such rights
could result
in substantial
costs and divert
our efforts
and attention
from
other
aspects
of our business,
could put our patents
at risk
of being invalidated
or interpreted
narrowly,
and our patent
applications
at risk
of not issuing.
Additionally,
such proceedings
could provoke third
parties
to assert
claims
against
us. We may not prevail
in any lawsuits
that
we initiate,
and the damages
or other
remedies
awarded, if any, may not be commercially
meaningful.
Thus, we
may not be able to stop a competitor
from
marketing
and selling
in foreign
countries
products
that
are the same
as or similar
to our products,
and our competitive
position
in the international
market
would be harmed.
46
We depend on certain technologies
that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us from selling our products.
We are dependent
on licenses
from
HSC
Development
LLC
and James
A.
Harris,
M.D.
for some of our key technologies.
We do not own
the patents
that
underlie
these
licenses.
Our rights
to use the technology
we
license are subject
to the negotiation
of, continuation
of and compliance
with the terms
of those licenses.
In some cases, we
do not control
the prosecution,
maintenance,
or filing
of the patents
to which we
hold licenses,
or the enforcement
of these
patents
against
third
parties.
These patents
and patent
applications are
not written
by us or our attorneys,
and we did not have control
over the drafting
and prosecution.
Our licensors
might
not have given the same
attention
to the drafting
and prosecution
of these
patents
and applications
as we
would have if we
had been the owners of the patents
and applications
and had control
over the drafting
and prosecution.
We cannot be certain
that
drafting
and/or
prosecution
of the licensed
patents
and patent
applications
by the licensors
have been or will be conducted
in compliance
with applicable
laws and regulations
or will result
in valid
and enforceable patents
and other
intellectual
property
rights.
Our intellectual property agreements with third parties may be subject to disagreements over contract interpretation, which could narrow the scope of our rights to the relevant intellectual property or technology or increase our financial or other obligations to our licensors.
Certain
provisions
in our intellectual
property
agreements
may be susceptible
to multiple
interpretations.
The resolution
of any contract
interpretation
disagreement
that
may arise
could affect
the scope of our rights
to the relevant
intellectual
property
or technology or affect
financial
or other
obligations
under the relevant
agreement, either
of which could have a material
adverse
effect
on our business,
financial
condition,
results
of operations and prospects.
In addition,
while it is our policy
to require
our employees
and contractors
who
may be involved
in the conception
or development
of intellectual
property
to execute
agreements
assigning
such intellectual
property
to us, we
may be unsuccessful
in executing
such an agreement
with each party
who
in fact
conceives
or develops intellectual
property
that
we
regard
as our own.
Our assignment
agreements
may not be self-executing
or may be breached,
and we
may be forced
to bring claims
against
third
parties,
or defend claims
they may bring against
us, to determine
the ownership of what we
regard
as our intellectual
property.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of our competitors or are in breach of non-competition or non-solicitation agreements with our competitors.
We could in the future
be subject
to claims
that
we
or our employees
have inadvertently
or otherwise
used or disclosed
alleged
trade
secrets
or other
proprietary
information
of former
employers
or competitors.
Although we have procedures
in place
that
seek to prevent
our employees
and consultants
from
using the intellectual
property, proprietary
information,
know-how
or trade
secrets
of others
in their
work for us, we
may in the future
be subject to claims
that
we
caused an employee
to breach
the terms
of his or her non-competition
or non-solicitation agreement,
or that
we
or these
individuals
have, inadvertently
or otherwise,
used or disclosed
the alleged
trade secrets
or other
proprietary
information
of a former
employer
or competitor.
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 could be a distraction
to management.
If our defense
to those claims
fails,
in addition
to paying monetary
damages,
a court
could prohibit
us from
using technologies
or functionalities
that
are essential to our products,
if such technologies
or functionalities
are found to incorporate
or be derived
from
the trade secrets
or other
proprietary
information
of the former
employers.
An
inability
to incorporate
technologies
or functionalities
that
are important
or essential
to our products
would have a material
adverse
effect
on our business and may prevent
us from
selling
our products
or from
practicing
our processes.
In addition,
we
may lose valuable
intellectual
property
rights
or personnel.
Moreover,
any such litigation
or the threat
thereof
may adversely
affect
our ability
to hire
employees
or contract
with independent
sales
representatives.
A
loss of key personnel
or their
work product
could hamper
or prevent
our ability
to commercialize
our products,
which could have an adverse
effect
on our business,
results
of operations
and financial
condition.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.
We hold various
trademarks
for our products
and services.
Many of these
trademarks
are registered
with the USPTO
and corresponding
government
agencies
in numerous
other
countries,
and we
hold trademark applications
for these marks
in a number
of foreign
countries,
although
the laws of many countries
may not protect
our trademark
rights
to
47
the same
extent
as the laws of the U.S. Actions taken by us to establish
and protect
our trademarks
might
not prevent
imitation
of our products
or services,
infringement
of our tra
demark rights
by unauthorized
parties
or other
challenges
to our ownership or validity
of our trademarks.
If any of these events
occur, we
may not be able to protect
and enforce
our rights
in these
trademarks,
which we
need in order
to build name recogniti
on
with potential
partners
or customers
in our markets
of interest.
In addition,
unauthorized third-parties
may have registered
trademarks
similar
and identical
to our trademarks
in foreign
jurisdictions
or may in the future
file
for registration
of such
trademarks.
If they succeed
in registering
or developing
common law rights
in such trademarks,
and if we
were not successful
in challenging
such third-party
rights,
we
may not be able to use such trademarks
to market
our products
and services
in those coun
tries.
If we
are unable to register our trademarks,
enforce
our trademarks,
or bar a third-party
from
registering
or using a trademark,
our ability
to establish
name recognition
based on our trademarks
and compete
effectively
in our markets
of interest
may
be adversely
affected.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position may be harmed.
In addition
to patent
and trademark
protection,
we
also rely
on trade
secrets,
including
unpatented
know-how, technology
and other
proprietary
information,
to maintain
our competitive
position.
We seek to protect
our trade secrets,
in part,
by entering
into non-disclosure
and confidentiality
agreements
with parties
who
have access
to them,
such as our consultants
and vendors, or our former
or current
employees.
We also enter
into confidentiality and invention
or patent
assignment
agreements
with our employees
and consultants.
Despite
these
efforts, however, any of these
parties
may breach
the agreements
and disclose
our trade
secrets
and other
unpatented
or unregistered
proprietary
information,
and once disclosed,
we
are likely
to lose trade
secret
protection.
Monitoring unauthorized
uses and disclosures
of our intellectual
property
is difficult,
and we
do not know
whether the steps we
have taken to protect
our intellectual
property
will be effective.
In addition,
we
may not be able to obtain adequate
remedies
for any such breaches.
Enforcing
a claim
that
a party
illegally
disclosed
or misappropriated
a trade
secret
is difficult,
expensive
and time-consuming,
and the outcome
is unpredictable.
In addition,
some courts
inside
and outside
the U.S.
are less
willing
or unwilling
to enforce
trade
secret
protection.
Furthermore,
our
competitors
may
independently
develop
knowledge,
methods
and
know-how
similar,
equivalent,
or
superior
to
our
proprietary
technology.
Competitors
could
purchase
our
products
and
attempt
to
replicate
some
or
all
of
the
competitive
advantages
we
derive
from
our
development
efforts,
willfully
infringe
our
intellectual
property
rights,
design
around
our
protected
technology,
or
develop
their
own
competitive
technologies
that
fall
outside
of
our
intellectual
property
rights.
In
addition,
our
key
employees,
consultants,
suppliers
or
other
individuals
with
access
to
our
proprietary
technology
and
know-how
may
incorporate
that
technology
and
know-how
into
projects
and
inventions
developed
independently
or
with
third
parties.
As
a
result,
disputes
may
arise
regarding
the
ownership
of
the
proprietary
rights
to
such
technology
or
know-how,
and
any
such
dispute
may
not
be
resolved
in
our
favor.
If
any
of
our
trade
secrets
were
to
be
lawfully
obtained
or
independently
developed
by
a
competitor,
we
would
have
no
right
to
prevent
them,
or
those
to
whom
they
communicate
it,
from
using
that
technology
or
information
to
compete
with
us
and
our
competitive
position
could
be
adversely
affected.
If
our
intellectual
property
is
not
adequately
protected
so
as
to
protect
our
market
against
competitors’
products
and
methods,
our
competitive
position
could
be
adversely
affected,
as
could
our
business.
Risks Related to Government
Regulation
The ARTAS
®
and ARTAS
®
iX Systems and our operations are subject to extensive government regulation and oversight both in the U.S. and abroad, and our failure to comply with applicable requirements could harm our business.
The ARTAS
®
and ARTAS
®
iX Systems
and related
products
and services
are
regulated
as medical
devices
subject
to extensive regulation
in the
U.S.
and elsewhere,
including
by the
FDA
and its
foreign
counterparts.
The FDA
and foreign regulatory
agencies
regulate,
among
other
things,
with respect
to medical
devices:
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design, development
and manufacturing;
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testing,
labeling,
content
and language
of instructions
for use and storage;
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marketing,
sales
and distribution;
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|
premarket
clearance
and approval;
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48
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record
keeping procedures;
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|
advertising
and promotion;
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|
recalls
and field
safety
corrective
actions;
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|
post-market
surveillance,
including
reporting
of deaths
or serious
injuries
and malfunctions
that,
if they were to recur,
could lead to death or serious
injury;
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post-market
approval
studies;
and
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product
import
and export.
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The regulations
to which we
are subject
are complex
and have tended to become
more
stringent
over time. Regulatory
changes could result
in restrictions
on our ability
to carry
on or expand our operations,
higher
than anticipated
costs
or lower than anticipated
sales.
In the U.S., before
we
can market
a new
medical
device,
or a new
use of, new
claim
for or significant modification
to an existing
product,
we
must
first
receive
either
clearance
under Section
510(k) of the FDCA
or approval
of a PMA
application
from
the FDA,
unless
an exemption
applies.
In the 510(k) clearance
process, before
a device
may be marketed,
the FDA
must
determine
that
a proposed device
is “substantially
equivalent”
to a legally-marketed
“predicate”
device,
which includes
a device
that
has been previously
cleared
through the 510(k) process,
a device
that
was legally
marketed
prior
to May 28, 1976 (pre-amendments
device),
a device
that was originally
on the U.S.
market
pursuant
to an approved premarket
approval,
or PMA,
application
and later down-classified,
or a 510(k)-exempt
device.
To
be “substantially
equivalent,”
the proposed device
must
have the same
intended
use as the predicate
device,
and either
have the same
technological
characteristics
as the predicate device
or have different
technological
characteristics
and not raise
different
questions
of safety
or effectiveness than the predicate
device.
Clinical
data are sometimes
required
to support
substantial
equivalence.
In the PMA process,
the FDA
must
determine
that
a proposed device
is safe
and effective
for its
intended
use based, in part, on extensive
data, including,
but not limited
to, technical,
pre-clinical,
clinical
trial,
manufacturing
and labeling data. The PMA
process
is typically
required
for devices
that
are deemed
to pose the greatest
risk,
such as life- sustaining,
life-supporting
or implantable
devices.
Modifications
to products
that
are approved through a PMA
application
generally
require
FDA
approval. Similarly,
certain
modifications
made to products
cleared
through a 510(k) may require
a new
510(k) clearance. Both the PMA
approval
and the 510(k)-clearance
process
can be expensive,
lengthy
and uncertain.
The FDA’s 510(k) clearance
process
usually
takes
from
three
to 12 months but can last
longer.
The process
of obtaining
a PMA
is much costlier and more uncertain
than the 510(k)-clearance
process
and generally
takes
from
one to three years,
or even longer,
from
the time
the application
is filed
with the FDA.
In addition,
a PMA
generally
requires, and the 510(k)-clearance
process
sometimes
requires,
the performance
of one or more
clinical
trials.
Despite
the time,
effort
and cost, we
cannot assure
you that
any particular
device
will be approved or cleared
by the FDA. Any
delay or failure
to obtain
necessary
regulatory
approvals
could harm
our business.
In the U.S., we
have obtained
510(k) premarket
clearance
from
the FDA
to market
the ARTAS
®
and ARTAS
®
iX
System
for harvesting
hair
follicles
from
the scalp
in men diagnosed
with AGA
who
have black or brown straight
hair.
An element
of our strategy
is to continue
to add new
functionalities
and enhance existing
functionalities
to the ARTAS
®
and ARTAS
®
iX
Systems.
We expect
that
certain
modifications
we
may make to the ARTAS
®
and ARTAS
®
iX
Systems
may require
new 510(k) clearance; however, future
modifications
may be subject
to the substantially
more
costly,
time-consuming
and uncertain
PMA
process.
If the FDA
requires
us to go through a lengthier,
more
rigorous
examination
for future
products
or modifications
to existing
products
than we
had expected,
product
introductions
or modifications
could be delayed
or canceled,
which could cause our sales
to decline.
The FDA
can delay, limit
or deny clearance
or approval
of a device
for many reasons,
including:
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•
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we
may not be able to demonstrate
to the FDA’s
satisfaction
that
the product
or modification
is substantially
equivalent
to the proposed predicate
device
or safe
and effective
for its
intended
use;
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the data from
our pre-clinical
studies
and clinical
trials
may be insufficient
to support
clearance
or approval,
where required;
and
|
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the manufacturing
process
or facilities
we
use may not meet
applicable
requirements.
|
The FDA’s
and other
regulatory
authorities’
policies
may change, and additional
government
regulations
may be enacted
that
could prevent,
limit
or delay regulatory
approval
of our products.
For example,
in December
2016, the 21st Century Cures Act, or Cures Act, was signed into law. The Cures Act, among other
things,
is intended
to modernize
the regulation
of medical
devices
and spur innovation,
but its
ultimate
implementation
remains unclear.
49
If we
are slow or unable to adapt to changes in existing
requirements
or the adoption
of new requirements
or policies,
or if we
are not able
to maintain
regulatory
compliance,
we
may fail
to obtain
any marketing
clearances
or approvals,
lose any marketing
clearance
or approval
that
we
may have
obtained,
and we may not achieve
or sustain
profitability.
We
also
cannot
predict
the
likelihood,
nature
or
extent
of
government
regulation
that
may
arise
from
future legislation
or
administrative
action,
either
in
the
U.S.
or
abroad.
For
example,
certain
policies
of
the
Trump administration
may
impact
our
business
and
industry.
Namely,
the
Trump
administration
has
taken
several executive
actions,
including
the
issuance
of
several
Executive
Orders,
that
could
impose
significant
burdens on,
or
otherwise
materially
delay,
the
FDA’s
ability
to
engage
in
routine
regulatory
and
oversight
activities
such
as implementing
statutes
through
rulemaking,
issuance
of
guidance,
and
review
and
approval
of
marketing applications.
Notably,
on
January
30,
2017,
President
Trump
issued
an
Executive
Order,
applicable
to
all
executive agencies
including
the
FDA,
requiring
that
for
each
notice
of
proposed
rulemaking
or
final
regulation
to
be
issued
in fiscal
year
2017,
the
agency
must
identify
at
least
two
existing
regulations
to
be
repealed,
unless
prohibited
by
law. These
requirements
are
referred
to
as
the
“two-for-one”
provisions.
This
Executive
Order
includes
a
budget neutrality
provision
that
requires
the
total
incremental
cost
of
all
new
regulations
in
the
2017
fiscal
year,
including repealed
regulations,
to
be
no
greater
than
zero,
except
in
limited
circumstances.
For
fiscal
years
2018
and
beyond, the
Executive
Order
requires
agencies
to
identify
regulations
to
offset
any
incremental
cost
of
a
new
regulation
and approximate
the
total
costs
or
savings
associated
with
each
new
regulation
or
repealed
regulation.
In
interim guidance
issued
by
the
Office
of
Information
and
Regulatory
Affairs
within
OMB
on
February
2,
2017,
the administration
indicates
that
the
“two-for-one”
provisions
may
apply
not
only
to
agency
regulations,
but
also
to significant
agency
guidance
documents.
In
addition,
on
February
24,
2017,
President
Trump
issued
an
executive order
directing
each
affected
agency
to
designate
an
agency
official
as
a
“Regulatory
Reform
Officer”
and
establish a
“Regulatory
Reform
Task
Force”
to
implement
the
two-for-one
provisions
and
other
previously
issued
executive orders
relating
to
the
review
of
federal
regulations,
however
it
is
difficult
to
predict
how
these
requirements
will
be implemented,
and
the
extent
to
which
they
will
impact
the
FDA’s
ability
to
exercise
its
regulatory
authority.
If
these executive
actions
impose
constraints
on
FDA’s
ability
to
engage
in
oversight
and
implementation
activities
in
the normal
course,
our
business
may
be
negatively
impacted.
Even after
we
have obtained
the proper
regulatory
clearance
or approval
to market
a product,
we
have ongoing responsibilities
under FDA
regulations.
The failure
to comply
with applicable
regulations
could jeopardize
our ability
to sell
the ARTAS
®
and ARTAS
®
iX
Systems
and result
in enforcement
actions
such as:
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termination
of distribution;
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|
recalls
or seizures
of products;
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|
delays
in the introduction
of products
into the market;
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total
or partial
suspension
of production;
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refusal
to grant
future
clearances
or approvals;
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withdrawals
or suspensions
of current
clearances
or approvals,
resulting
in prohibitions
on sales
of our product
or products;
and
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in the most
serious
cases,
criminal
penalties.
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Any
of these
sanctions
could result
in higher
than anticipated
costs
or lower than anticipated
sales
and harm
our reputation,
business,
financial
condition
and results
of operations.
We are subject to extensive governmental regulation in foreign jurisdictions, such as Europe, and our failure to comply with applicable requirements could cause our business to suffer.
We must
maintain
regulatory
approval
in foreign
jurisdictions
in which we
plan to market
and sell
the ARTAS
®
System.
50
In the European Economic
Area or EEA,
manufacturers
of medical
devices
need to
comply
with the Essential Requirements
laid
down
in Annex
II to the EU
Medical
Devices Directive
(Council
Directive
93/42/EEC).
Compliance
with these
requirements
is a prerequisite
to be able to affix
the CE
mark
to medical
devices,
without which they cannot be marketed
or sold in the EEA.
To
demonstrate
compliance
with the Essential
Requirements and obtain
the right
to affix
the CE
Mark, manufacturers
of medical
devices
must
undergo a conformity assessment
procedure,
which varies
according
to the type of medical
device
and its
classification.
Except for low risk
medical
devices
(Class
I with no measuring
function
and which are not sterile),
where the manufacturer
can issue
an EC
Declaration
of Conformity
based on a self-assessment
of the conformity
of its
products
with the Essential Requirements,
a conformity
assessment
procedure
requires
the intervention
of a Notified
Body,
which is an organization
designated
by a competent
authority
of an EEA
country
to conduct conformity
assessments.
Depending on the relevant
conformity
assessment
procedure,
the Notified
Body
would audit
and examine
the Technical
File and the quality
system
for the manufacture,
design and final
inspection
of our devices.
The Notified
Body
issues
a CE
Certificate
of Conformity
following
successful
completion
of a conformity
assessment procedure
conducted
in relation
to the medical
device
and its
manufacturer
and their
conformity
with the Essential
Requirements.
This Certificate
entitles
the manufacturer
to affix
the CE
mark
to its
medical
devices after
having prepared
and signed a related
EC
Declaration
of Conformity.
As
a rule,
demonstration
of conformity
of medical
devices
and their
manufacturers
with the Essential Requirements
must
be based, among other
things,
on the evaluation
of clinical
data supporting
the safety
and performance
of the products
during normal
conditions
of use. Specifically,
a manufacturer
must
demonstrate
that the device
achieves
its
intended
performance
during normal
conditions
of use and that
the known
and foreseeable risks,
and any adverse
events,
are minimized
and acceptable
when
weighed against
the benefits
of its
intended performance,
and that
any claims
made about the performance
and safety
of the device
(e.g., product
labeling
and instructions
for use) are supported
by suitable
evidence.
This assessment
must
be based on clinical
data, which can be obtained
from
(1) clinical
studies
conducted
on the devices
being assessed,
(2) scientific
literature
from similar
devices
whose equivalence
with the assessed
device
can be demonstrated
or (3) both clinical
studies
and scientific
literature.
With
respect
to active
implantable
medical
devices
or Class III
devices,
the manufacturer must
conduct clinical
studies
to obtain
the required
clinical
data, unless
reliance
on existing
clinical
data from equivalent
devices
can be justified.
The conduct of clinical
studies
in the EEA
is governed by detailed
regulatory obligations.
These may include
the requirement
of prior
authorization
by the competent
authorities
of the country in which the study takes
place
and the requirement
to obtain
a positive
opinion from
a competent
Ethics Committee.
This process
can be expensive
and time-consuming.
On
April 5, 2017, the European Parliament
passed the Medical
Devices Regulation,
which repeals
and replaces the EU
Medical
Devices Directive.
Unlike directives,
which must
be implemented
into the national
laws of the EEA
member
States,
the regulations
would be directly
applicable,
i.e., without the need for adoption
of EEA member
State
laws implementing
them,
in all
EEA
member
States
and are intended
to eliminate
current differences
in the regulation
of medical
devices
among EEA
member
States.
The Medical
Devices Regulation, among other
things,
is intended
to establish
a uniform,
transparent,
predictable
and sustainable
regulatory framework
across
the EEA
for medical
devices
and in vitro
diagnostic
devices
and ensure
a high level
of safety and health
while supporting
innovation.
The Medical
Devices Regulation
will however only become
applicable
three
years
after
publication.
Once applicable,
the new
regulations
will among other
things:
|
•
|
strengthen
the rules
on placing
devices
on the market
and reinforce
surveillance
once they are available;
|
|
•
|
establish
explicit
provisions
on manufacturers’
responsibilities
for the follow-up
of the quality, performance
and safety
of devices
placed
on the market;
|
|
•
|
improve
the traceability
of medical
devices
throughout
the supply chain to the end-user
or patient through a unique identification
number;
|
|
•
|
set up a central
database
to provide
patients,
healthcare
professionals
and the public
with comprehensive
information
on products
available
in the EU;
and
|
|
•
|
strengthen
rules
for the assessment
of certain
high-risk
devices,
such as implants,
which may have to undergo an additional
check by experts
before
they are placed
on the market.
|
51
These modifications
may have an impact
on the way
we
conduct our business
in the EEA.
We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection and information security. Our actual or perceived failure to comply with such obligations could harm our business.
We are subject to diverse laws and regulations relating to data privacy and security, including, in the U
nited States, the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, and, in the European Union (EU) and shortly in the European Economic Area (EEA), Regulation 2016/679, known as the General Data Protection Regulation, or GDPR. New global privacy rules are being enacted and existing ones are being updated and strengthened
. Complying with these numerous, complex and often changing regulations is expensive and difficult, and failure to comply with any privacy laws or data security laws or any security incident or breach involving the misappropriation, loss or other unauthorized use or disclosure of sensitive or confidential patient or consumer information, whether by us, one of our business associates or another third-party, could have a material adverse effect on our business, reputation, financial condition and results of operations, including but not limited to: material fines and penalties; damages; litigation; consent orders; and injunctive relief.
Furthermore, these rules are
constantly changing; for example, the GDPR came into effect in May this year reforming the European regime. The GDPR implements more stringent operational requirements than its predecessor legislation. For example, the GDPR requires us to make more detailed disclosures to data subjects, requires disclosure of the legal basis on which we can process personal data, makes it harder for us to obtain valid consent for processing, provides more robust rights for data subjects, introduces mandatory data breach no
tification through the EU, imposes additional obligations on
us when contracting
with service providers and requires us to adopt appropriate privacy governance including policies, procedures, training
and data audit. If we do not comply with our obligation
s under the GDPR
, we could be exposed to fines of up to the higher of
20,000,000 Euros or up to 4% of our
total worldwide annual turnover in the event of a significant breach. In addition, we may be the subject of litigation and/or adverse publicity, which could have material adverse effect on our reputation and business.
We are also subject to evolving European laws on data export and electronic marketing. The rules on data export will apply when we transfer personal data to group companies or third parties outside of the EEA. For example, in 2015, the
Court of Justice of the EU
ruled that the U.S.-EU
Safe Harbor framework, one compliance method by which companies could transfer personal data regarding citizens of the EU
to the United States, was invalid and
could no longer be relied upon. The U.S.-EU Safe Harbor framework was replaced with the U.S.-EU Privacy Shield framework, which is now under review and there is currently litigation challenging another EU mechanism for adequate data transfers, the standard contractual clauses. It is uncertain whether the Privacy Shield framework and/or the standard contractual clauses will be similarly invalidated by the European courts
. These changes may require us to find alternative bases for the compliant transfer of
personal data from the EEA
to the U.S and we are monitoring developments in this area. The EU is also in the process of replacing the e-Privacy Directive with a new set of rules taking the form of a regulation, which will be directly implemented in the laws of each European member state, without the need for further enactment. The current draft of the e-Privacy Regulation retains strict op-in for electronic marketing and the penalties for contravention have significantly increased with fining powers to the same levels as GDPR (i.e. the greater of 20,000,000 Euros or 4% of total global annual revenue).
Modifications
to the ARTAS
®
System
or ARTAS
®
iX System and any future
products
that
receive
510(k)
clearances
may
require
new 510(k)
clearances
or PMA approvals,
and if
we make
such modifications
without seeking
new clearances
or approvals,
the FDA
may
require
us to cease
marketing
or recall
the modified
products
until
clearances
or approvals
are obtained.
The ARTAS
®
and ARTAS
®
iX Systems
have received
510(k)
clearances
from
the
FDA.
Any modification
to a 510(k)-cleared
device that
could
significantly
affect
its
safety
or effectiveness,
or that
would constitute
a major
change
in its
intended use, design
or manufacture,
requires
a new 510(k)
clearance
or, possibly,
approval
of a PMA. The FDA
requires every
manufacturer
to make
this
determination
in the
first
instance,
but the
FDA
may
review
any manufacturer’s decision.
The FDA
may
not agree
with our decisions
regarding
whether
new clearances
or approvals
are necessary.
We have made
modifications
to the
ARTAS
®
System
in the
past
and have determined
based
on our review
of the
applicable
FDA
regulations
and guidance
that
in certain
instances
new 510(k)
clearances
or PMA approvals
were not required.
We may
make
similar
modifications
or add additional
functionalities
in the
future that
we believe
do not require
a new 510(k)
clearance
or approval
of a PMA. The FDA
has issued
a guidance document
intended
to assist
manufacturers
in determining
whether
modifications
to cleared
devices
require
the submission
of a new 510(k),
and such guidance
has come
under
scrutiny
in recent
years,
the
practical
impact
of which is
unclear.
If
52
the
FDA
disagrees
with our determination
and requires
us to submit
new 510(k)
notifications
or PMA applications
for
modifications
to our previously
cleared
products
for
which we have concluded
that
new clearances
or approvals
are
unnecessary,
we may
be required
to cease
marketing
or to recall
the
modified
product until
we obtain
clearance
or
approval,
which could
require
us to redesign
our products,
conduct
clinical
trials
to support
any modifications,
and pay significant
regulatory
fines
or penalties.
In addition,
the
FDA
may
not approve
or clear
our products
for
the
indications
that
are
necessary
or desirable
for
successful
commercialization or could
require
clinical
trials
to support
any modifications.
Any delay
or failure
in obtaining
required
clearances or approvals
would adversely
affect
our ability
to introduce
new or enhanced
produc
ts
in a timely
manner,
which in turn
would harm
our future
growth. Any of these
actions
would harm
our operating
results.
We are subject to restrictions on the indications for which we are permitted to market our products, and any violation of those restrictions, or marketing of the ARTAS
®
System or ARTAS
®
iX System for off-label uses, could subject us to regulatory enforcement action.
The FDA’s 510(k)
clearance
for
the
ARTAS
®
and ARTAS
®
iX Systems
specifies
the
cleared
indication
for
use of the
product
is disse
c
ting
hair
follicles
from
the
scalp
in men
diagnosed
with AGA
who have black
or brown straight
hair.
The ARTAS
®
and ARTAS
®
iX Systems
are
intended
to assist
physicians
in identifying
and extracting
hair
follicular
units
from
the
scalp during
hair
transplantation.
We train
our marketing
and direct
sales
force
to not promote
the
ARTAS
®
System
or ARTAS
®
iX System for
uses
outside
of the
FDA-cleared
indications
for
use, known as “off-label
uses.”
We cannot,
however, prevent
a physician
from
using
the ARTAS
®
System
or ARTAS
®
iX System off-label
when, in the
physician’s
independent
professional
medical
judgment,
he or she deems it
appropriate.
There
may
be increased
risk
of injury
to patients
if
physicians
attempt
to use the
ARTAS
®
System or ARTAS
®
iX System off-label.
Furthermore,
the
use of the
ARTAS
®
System or ARTAS
®
iX System
for
indications
other
than
those
cleared
by the
FDA
or approved
by any foreign
regulatory
body may
not effectively
treat
such conditions,
which could
harm
our reputation
in the
marketplace
among
physicians
and patients.
If the FDA
or any foreign
regulatory
body determines
that
our promotional
materials
or training
constitute promotion
of an off-label
use, it could request
that
we
modify
our training
or promotional
materials
or subject
us to regulatory
or enforcement
actions,
including,
among other
things,
the issuance
or imposition
of an untitled letter,
a warning letter,
injunction,
seizure,
refusal
to issue
new
510(k)s
or PMAs,
withdrawal
of existing
510(k)s or PMAs,
refusal
to grant
export
approvals,
and civil
fines
or criminal
penalties.
It is also possible
that
other federal,
state
or foreign
enforcement
authorities
might
take action
under other
regulatory
authority,
such as false claims
laws, if they consider
our business
activities
to constitute
promotion
of an off-label
use, which could result
in significant
penalties,
including,
but not limited
to, criminal,
civil
and administrative
penalties,
damages, fines,
disgorgement,
exclusion
from
participation
in government
healthcare
programs
and the curtailment
of our operations.
The ARTAS
®
System or ARTAS
®
iX System
may
cause or contribute
to adverse
medical
events
that
we are required
to report
to the FDA,
and if
we fail
to do so, we would be subject
to sanctions
that
could harm our reputation,
business, financial
condition
and results
of operations.
The discovery
of serious
safety
issues
with the ARTAS
®
System or ARTAS
®
iX System, or a recall
of the ARTAS
®
System
or ARTAS
®
iX System either
voluntarily
or at the direction
of the FDA
or another governmental authority,
could have a negative
impact
on us.
We are
subject
to the
FDA’s medical
device
reporting
regulations
and similar
foreign
regulations.
The FDA’s medical
device
reporting
regulations
require
us to report
to the
FDA
when we receive
or become
aware
of information
that
reasonably
suggests
that
the
ARTAS
®
System
or ARTAS
®
iX System may
have caused
or contributed
to a death
or serious
injury
or malfunctioned
in a way that,
if
the
malfunction
were to recur,
it
could
cause
or contribute
to a death
or serious
injury.
The timing
of our obligation
to report
is
triggered
by the
date
we become
aware
of the adverse
event
as well
as the
nature
of the
event.
We may
fail
to report
adverse
events
of which we become
aware within
the
prescribed
timeframe.
We may
also
fail
to recognize
that
we have become
aware
of a reportable adverse
event,
especially
if
it
is
not reported
to us as an adverse
event
or if
it
is
an adverse
event
that
is unexpected
or removed
in time
from
the
use of the
ARTAS
®
System ARTAS
®
iX System, as the case may be.
If
we fail
to comply
with our reporting obligations,
the
FDA
could
act,
including
warning
letters,
untitled
letters,
administrative
actions,
criminal prosecution,
imposition
of civil
monetary
penalties,
revocation
of our device
clearance,
seizure
of our products
or delay
in clearance
of future
products.
53
The FDA
and foreign
regulatory
bodies
have the
authority
to require
the
recall
of commercialized
products
in the event
of material
deficiencies
or defects
in design
or manufacture
of a product
or if
a product
poses an unacceptable
risk
to health.
The FDA’s authority
to require
a recall
must
be based
on a finding
that
there
is reasonable
probability
that
the
device
could
cause
serious
injury
or
death.
We may
also
choose
to voluntarily recall
a product
if
any material
deficiency
is
found. A government-mandated
or voluntary
recall
by us could occur
because of an unacceptable
risk
to health,
component
failures,
malfunctions,
manufacturing
defects, l
abeling
or design
deficiencies,
packaging
defects
or other
deficiencies
or failures
to comply
with applicable regulations.
We cannot
assure
you that
product
defects
or other
errors
will
not occur
in the
future.
Recalls involving
the
ARTAS
®
System
or ARTAS
®
iX System could
be particularly
harmful
to our business,
financial
condition
and results
of operations
because
it
is
our only product.
Companies
are
required
to
maintain
certain
records
of
recalls
and
corrections,
even
if
they
are
not
reportable
to
the FDA.
We
may
initiate
voluntary
withdrawals
or
corrections
for
the
ARTAS
®
System
or ARTAS
®
iX System in
the
future
that
we
determine do
not
require
notification
of
the
FDA.
If
the
FDA
disagrees
with
our
determinations,
it
could
require
us
to
report those
actions
as
recalls
and
we
may
be
subject
to
enforcement
action.
A
future
recall
announcement
could
harm
our reputation
with
customers,
potentially
lead
to
product
liability
claims
against
us
and
negatively
affect
our
sales.
If we or our distributors do not obtain and maintain international regulatory registrations or approvals for the ARTAS
®
System, our ability to market and sell the ARTAS
®
System outside of the U.S. will be diminished.
Sale of the ARTAS
®
System
outside
the U.S.
are subject
to foreign
regulatory
requirements
that
vary widely from country
to country.
In addition,
the FDA
regulates
exports
of medical
devices
from
the U.S. While
the regulations
of some countries
may not impose
barriers
to marketing
and selling
the ARTAS
®
System
or only require
notification,
others
require
that
we
or our distributors
obtain
the approval
of a specified
regulatory
body. Complying with foreign
regulatory
requirements,
including
obtaining
registrations
or approvals,
can be expensive
and time-consuming,
and we
cannot be certain
that
we
or our distributors
will receive
regulatory approvals
in each country
in which we
plan to market
the ARTAS
®
System
or that
we
will be able to do so on a timely
basis.
The time
required
to obtain
registrations
or approvals,
if required
by other
countries,
may be longer than that
required
for FDA
clearance,
and requirements
for such registrations,
clearances,
or approvals
may significantly
differ
from
FDA
requirements.
If we
modify
the ARTAS
®
System,
we
or our distributors
may need to apply for additional
regulatory
approvals
or other
authorizations
before
we
are permitted
to sell
the modified product.
In addition,
we
may not continue
to meet
the quality
and safety
standards
required
to maintain
the authorizations
that
we
or our distributors
have received.
If we
or our distributors
are unable to maintain
our authorizations
in a particular
country,
we
will no longer
be able to sell
the applicable
product
in that
country, which could harm
our business.
Regulatory
clearance
or approval
by the FDA
does not ensure
clearance
or approval
by regulatory
authorities
in other
countries,
and clearance
or approval
by one or more
foreign
regulatory
authorities
does not ensure clearance
or approval
by regulatory
authorities
in other
foreign
countries
or by the FDA.
However, a failure
or delay in obtaining
regulatory
clearance
or approval
in one country
may have a negative
effect
on the regulatory process
in others.
We must manufacture our products in accordance with federal and state regulations, and we could be forced to recall our installed systems or terminate production if we fail to comply with these regulations.
The methods
used in, and the facilities
used for, the manufacture
of the ARTAS
®
and ARTAS
®
iX
Systems
and related
products must
comply
with the FDA’s
Quality
System
Regulation,
or QSR,
which is a complex
regulatory
scheme
that covers
the procedures
and documentation
of the design, testing,
production,
process
controls,
quality
assurance, labeling,
packaging,
handling,
storage,
distribution,
installation,
servicing
and shipping
of medical
devices.
Furthermore,
we
are required
to verify
that
our suppliers
maintain
facilities,
procedures
and operations
that comply
with our quality
and applicable
regulatory
requirements.
The FDA
enforces
the QSR
through periodic announced or unannounced inspections
of medical
device
manufacturing
facilities,
which may include
the facilities
of subcontractors.
The ARTAS
®
and ARTAS
®
iX
Systems
are also subject
to similar
state
regulations
and various
laws and regulations
of foreign
countries
governing
manufacturing.
54
We cannot guarantee
that
we
or any subcontractors
will take the necessary
steps
to comply
with applicable regulations,
which could cause delays
in the delivery
of the ARTAS
®
System or ARTAS
®
iX
System.
In addition,
failure
to comply
with applicable
FDA
requirements
or later
discovery
of previously
unknown
problems
with the ARTAS
®
System
or
ARTAS
®
iX System
manufacturing
processes
could result
in, among other
things:
|
•
|
warning letters
or untitled
letters;
|
|
•
|
fines,
injunctions
or civil
penalties;
|
|
•
|
suspension
or withdrawal
of approvals
or clearances;
|
|
•
|
seizures
or recalls
of our products;
|
|
•
|
total
or partial
suspension
of production
or distribution;
|
|
•
|
administrative
or judicially
imposed
sanctions;
|
|
•
|
the FDA’s
refusal
to grant
pending or future
clearances
or approvals
for our products;
|
|
•
|
refusal
to permit
the import
or export
of our products;
and
|
|
•
|
criminal
prosecution
to us or our employees.
|
Any
of these
actions
could significantly
and negatively
impact
supply of our products.
If any of these
events occurs,
our reputation
could be harmed,
we
could be exposed to product
liability
claims
and we
could lose customers
and suffer
reduced
revenue
and increased
costs.
We may be subject to various federal and state laws pertaining to healthcare fraud and abuse, and any violations by us of such laws could result in fines or other penalties.
While
procedures
utilizing
the ARTAS
®
and ARTAS
®
iX
Systems
are not currently
covered
or reimbursed
by any third-party
payor, our commercial,
research
and other
financial
relationships
with healthcare
providers
and others
may be subject
to various
federal
and state
laws intended
to prevent
healthcare
fraud
and abuse. Such laws include
the U.S.
federal Anti-Kickback
Statute
and similar
laws that
apply to state
healthcare
programs,
private
payors and self-pay patients;
the U.S.
federal
civil
and criminal
false
claims
laws, such as the civil
False Claims
Act, and civil monetary
penalties
laws; state
and federal
data privacy
and security
laws and regulations;
state
and federal physician
payment
transparency
laws; and state
and federal
consumer
protection
and unfair
competition
laws.
Further,
these
laws may impact
any sales,
marketing
and education
programs
we
currently
have or may develop in the future
and the way we
implement
any of those programs.
Penalties
for violations
of these
laws can include
exclusion
from
federal
healthcare
programs
and substantial
civil
and criminal
penalties.
Recently enacted and future legislation may increase the difficulty and cost for us to sell our products.
In the U.S.
and some non-U.S.
jurisdictions,
there
have been, and we
expect
there
will continue
to be, a number of legislative
and regulatory
changes and proposed changes regarding
the healthcare
system
that
could, among other
things,
restrict
or regulate
post-approval
activities
and affect
our ability
to profitably
sell
our products.
For example,
in March
2010, the Patient
Protection
and Affordable
Care Act, as amended
by the Health Care and Education
Reconciliation
Act, collectively
the Affordable
Care Act, was enacted.
The Affordable
Care Act, imposed,
among other
things,
an annual excise
tax of 2.3% on any entity
that
manufactures
or imports
medical devices
offered
for sale
in the U.S.,
which, due to subsequent
legislative
amendments,
has been suspended from January
1, 2016 to December
31, 2019, and, absent
further
legislative
action,
will be reinstated
starting
January
1, 2020. It is uncertain
the extent
to which any challenges,
amendments
and attempts
to repeal
and replace
the Affordable
Care Act in the future
may impact
our business
or financial
condition.
We expect
that
the Affordable Care Act, as well as other
healthcare
reform
measures
that
may be adopted in the future,
may potentially
increase our costs
to sell
our product
and decrease
our profitability.
55
Recent U.S. tax legislation and future changes to applicable U.S. or foreign tax laws and regulations may have a material adverse effect on our business, financial condition
and results of operations.
We are subject to income and other taxes in the U.S. and foreign jurisdictions. Changes in laws and policy relating to taxes or trade may have an adverse effect on our business, financial condition and results of operations. For example, the U.S. government recently enacted significant tax reform, and certain provisions of the new law may adversely affect us. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a more generally territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections and will be subject to interpretations and implementing regulations by the Treasury and Internal Revenue Service, any of which could mitigate or increase certain adverse effects of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation. Generally, future changes in applicable U.S. or foreign tax laws and regulations, or their interpretation and application could have an adverse effect on our business, financial conditions and results of operations.
Risks Related to Our Common Stock
Our stock
price
may
be volatile,
and you may
not be able
to resell
shares
of our common
stock
at or above the price
you paid.
The market
price
of our common
stock
could
be highly
volatile
and could
be subject
to wide fluctuations
in response
to various
factors,
some
of which are
beyond our control.
These factors
include those
discussed
in this
“Risk Factors”
section
and others
such as:
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any delays in the consummation of the Merger, or the Merger failing to occur;
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the
continued
growth in demand
for
the
ARTAS
®
Systems
and ARTAS
procedures;
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our commercialization,
marketing
and manufacturing capabilities;
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the
continuing
productivity
and effectiveness
of our commercial
infrastructure
and salesforce;
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our financial
performance;
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our intentions
and our ability
to establish
collaborations
and/or
partnerships;
|
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|
the timing or likelihood of regulatory filings and approvals for the ARTAS
®
Systems for expanded indications and functionality;
|
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our commercialization,
marketing
and manufacturing
capabilities;
|
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|
our expectations
regarding
the
potential
market
size
and the
size
of the
patient
populations
for
the ARTAS
®
Systems;
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|
the
effective
pricing
of the
ARTAS
®
Systems,
services
and procedures;
|
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|
the
implementation
of our business
model
and strategic
plans
for
our business
and technology;
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|
the
scope
of protection
we can establish
and maintain
for
intellectual
property
rights
covering the
ARTAS
®
Systems,
along
with any product
enhancements;
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estimates
of our expenses,
future
revenue,
capital
requirements,
our needs
for
additional
financing
and our ability
to obtain
additional
capital;
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our financial
performance;
and
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developments
and projections
relating
to our competitors
and our industry,
including
competing therapies
and procedures.
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56
In addition,
the
stock
markets
in general,
and the
markets
for
medical
device
and aesthetic
stocks
in particular, have experienced
extreme
volatility
that
may
have
been unrelated
to the
operating
performance
of the
issuer. These broad
market
fluctuations
may
adversely
affect
the
market
price
or liquidity
of our common
stock.
In the past,
when the
market
price
of a stock
has been volatile,
holders
of that
stock
have
sometimes
instituted
securities class
action
litigation
against
the
issuer.
Recently, several securities class action complaints have been filed against us, certain of our current and former executive officers and directors, certain of our investors and ce
rtain underwriters in our IPO. These complaints allege violations of Sections 11, 12(a)(2) and 15 of the Securities Act due to allegedly false and misleading statements made in connection with our IPO. While we believe that these lawsuits are without merit
and we intend to vigorously defend against these claims, we could incur substantial costs in defending these lawsuits and the attention of our management could be diverted from the operation of our business. Further, if more of our stockholders were to br
ing additional lawsuits on similar or unrelated grounds, we could incur substantial costs defending these additional lawsuits and the attention of our management would be further diverted from the operation of our business.
An active market for our common stock may not be maintained.
Prior
to our IPO,
there had been no public
market
for
shares
of our common
stock
. Our stock only recently began trading on the Nasdaq Global Market, but we can provide no assurance that we will be able to maintain an active trading market on the Nasdaq Global Market or any other exchange in the future. If an active market for our common stock does not develop or is not maintained, it may be difficult for our stockholders to sell shares without depressing the market price for the shares or at all.
An inactive
market may
also
impair
our ability
to raise
capital
by selling
shares
and may
impair
our ability
to acquire
other businesses,
applications,
or technologies
using
our shares
as consideration.
If we fail to adhere to the listing requirements of the Nasdaq Global Market, including maintaining a minimum market value our listed securities of $50.0 million, our common stock could be delisted.
Our common stock is listed on the Nasdaq Global Market and as such is subject to various requirements for continued listing under the rules of the Nasdaq Global Stock Market or Listing Rules. On January 18, 2019, we received a letter indicating that for 30 consecutive business days we did not maintain a minimum market value of listed securities, or MVLS of $50.0 million as required by the Listing Rules. In accordance with the Listing Rules, we have 180 calendar days, or until July 17, 2019, to regain compliance with the minimum MVLS rule. Additionally, on March 14, 2019, we received a letter indicating that for 30 consecutive business days we did not maintain a minimum closing bid price of $1.00 per share as required by the Listing Rules. In accordance with the Listing Rules, we have 180 calendar days, or until September 10, 2019, to regain compliance with the minimum bid price rule.
In accordance with the applicable Listing Rules, if we are unable to regain compliance prior to the expiration of the applicable grace period, we will be required to transfer to the Nasdaq Capital Market, subject to our ability to meet the listing standards of the Nasdaq Capital Market. If we are unable to meet the listing standards of the Nasdaq Capital Market, our common stock will be delisted. If our common stock is delisted from Nasdaq, we could be required to list on the over-the-counter, or OTC, market, which may adversely affect the price and trading liquidity of our common stock. Delisting from the Nasdaq may have other negative results, including the potential loss of confidence in us by suppliers, customers and employees, the loss of institutional investor interest, fewer business development opportunities and greater difficulty in obtaining financing on favorable terms or at all.
If securities or industry analysts issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.
The trading
market
for
our common
stock
is influenced
by the
research
and reports
that
industry
or securities
analysts
publish
about
us or our business.
We currently have very limited research
coverage
by securities
and industry
analysts.
If
no additional securities
or industry
analysts
commence
coverage
of us, the
market price or trading volume
of
our stock
could be negatively
impacted.
If
any of the
analysts
who cover
us issue
an adverse
or misleading
opinion
regarding
us, our business
model,
our intellectual
property
or our stock
performance,
or if
our operating
results
fail
to meet
the
expectations
of analysts, our stock
price
would likely
decline.
If
one or more
of these
analysts
cease
coverage
of us or fail
to publish reports
on us regularly,
we could
lose
visibility
in the
financial
markets,
which in turn
could
cause
our stock
price or trading
volume
to decline.
57
We are an “emerging growth company” and as a
result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.
We are
an “emerging
growth company,”
as defined
in the
JOBS
Act, and we intend
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, reduced
disclosure
obligations
regarding
executive
compensation
in our periodic
reports
and proxy statements,
and exemptions
from
the
requirements
of holding
a nonbinding
advisory vote
on executive
compensation,
stockholder
approval
of any golden
parachute
payments
not previously approved
and delayed
adoption
of new or revised
accounting
standards
issued
subsequent
to the
enactment
of the JOBS
Act until
such time
as those
standards
apply
to private
companies.
We cannot
predict
if
investors
will
find our common
stock
less
attractive
because
we will
rely
on these
exemptions.
If
some
investors
find
our common stock
less
attractive
as a result,
there
may
be a less
active
trading
market
for
our common
stock
and our stock price
may
be more
volatile.
We may
take
advantage
of these
reporting
exemptions
until
we are
no longer
an emerging
growth company.
We will
remain
an emerging
growth company
until
the
earlier
of (1)
the
last
day of the
fiscal
year
(a)
following
the
fifth
anniversary
of the
completion
of our IPO,
(b)
in which we have total annual
gross
revenue
of at
least
$1.07 billion,
or (c)
in which we are
deemed
to be a large
accelerated
filer,
which means
the
market
value
of our common
stock
that
is
held
by non-affiliates
exceeds
$700.0 million
as of the
prior June 30th, and (2)
the
date
on which we have issued
more
than
$1.0 billion
in non-convertible
debt
during
the prior
three-year
period.
If we sell shares of our common stock in future financings, stockholders may experience immediate dilution and, as a result, our stock price may decline.
We may
from
time
to time
issue
additional
shares
of common
stock
at
a discount
from
the
current
market
price
of our common
stock.
As a result,
our stockholders
would experience
immediate
dilution
upon the
purchase
of any shares
of our common
stock
sold
at
such discount.
In addition,
as opportunities
present
themselves,
we may
enter into
financing
or similar
arrangements
in the
future,
including
the
issuance
of debt
securities,
preferred
stock
or common
stock.
If
we issue
common
stock
or securities
convertible
into
common
stock,
our common
stockholders would experience
additional
dilution
and, as a result,
our stock
price
may
decline.
Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
Based on the number of shares outstanding as of December 31, 2018, our executive
officers,
directors,
holders
of 5% or more
of our capital stock
and their
respective
affiliates
beneficially
owned approximately
40.0% of our voting
stock. These
stockholders
will
have the
ability
to influence
us through
this
ownership position.
These stockholders
may
be able
to determine
all
matters
requiring
stockholder
approval.
For example, these
stockholders
may
be able
to control
elections
of directors,
amendments
of our organizational
documents,
or approval
of any merger,
sale
of assets,
or other
major
corporate
transaction.
This may
prevent
or discourage unsolicited
acquisition
proposals
or offers
for
our common
stock
that
you may
feel
are
in your best
interest
as one of our stockholders.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
We have incurred
substantial
losses
during
our history
and do not expect
to become
profitable
in the
near
future, and we may
never
achieve
profitability.
To the
extent
that
we continue
to generate
taxable
losses,
unused losses will
carry
forward
to offset
future
taxable
income,
if
any, until
such unused losses
expire.
Under Sections
382 and 383 of the
Internal
Revenue Code of 1986, as amended,
if
a corporation
undergoes
an “ownership
change,” generally
defined
as a greater
than
50 percentage
point
change
(by value)
in its
equity
ownership
by certain stockholders
over
a three-year
period,
the
corporation’s
ability
to use its
pre-change
net
operating
loss carryforwards,
or NOLs,
and other
pre-change
tax
attributes
(such
as research
and development
tax
credits)
to offset
its
post-change
income
or taxes
may
be limited.
We may
have experienced
ownership
changes
in the
past and may
experience
ownership
changes
in the
future
and/or
subsequent
shifts
in our stock
ownership
(some
of which shifts
are
outside
our control).
As a result,
if
we earn
net
taxable
income,
our ability
to use our pre-change
NOLs
to offset
such taxable
income
could
be subject
to limitations.
Similar provisions
of state
tax
law may
also
apply.
As a result,
even if
we attain
profitability,
we may
be unable
to use a material
portion
of our NOLs
and other
tax
attributes.
58
Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management.
Our amended
and restated
certificate
of incorporation
and amended
and restated
bylaws contain
provisions
that
could
delay
or prevent changes
in control
or changes
in our management
without
the
consent
of our board
of directors.
These provisions will
include
the
following:
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a classified
board
of directors
with three-year
staggered
terms,
which may
delay
the
ability
of stockholders
to change
the
membership
of a majority
of our board
of directors;
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no cumulative
voting
in the
election
of directors,
which limits
the
ability
of minority
stockholders
to elect
director
candidates;
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the
exclusive
right
of our board
of directors
to elect
a director
to fill
a vacancy
created
by the
expansion of the
board
of directors
or the
resignation,
death
or removal
of a director,
which prevents
stockholders from
being
able
to fill
vacancies
on our board
of directors;
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the
ability
of our board
of directors
to authorize
the
issuance
of shares
of preferred
stock
and to determine
the
price
and other
terms
of those
shares,
including
preferences
and voting
rights,
without stockholder
approval,
which could
be used to significantly
dilute
the
ownership
of a hostile
acquirer;
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the
ability
of our board
of directors
to alter
our bylaws without
obtaining
stockholder
approval;
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the
required
approval
of at
least
66 2/3%
of the
shares
entitled
to vote
at
an election
of directors
to adopt,
amend
or repeal
our bylaws or repeal
the
provisions
of our amended
and restated
certificate
of incorporation
regarding
the
election
and removal
of directors;
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a prohibition
on stockholder
action
by written
consent,
which forces
stockholder
action
to be taken
at an annual
or special
meeting
of our stockholders;
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the
requirement
that
a special
meeting
of stockholders
may
be called
only by the
chairman
of the
board of directors,
the
chief
executive
officer,
the
president
or the
board
of directors,
which may
delay
the ability
of our stockholders
to force
consideration
of a proposal
or to act,
including
the
removal of directors;
and
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advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.
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In addition, these provisions would apply even if we were to receive an offer that some stockholders may consider beneficial.
We are also subject to the anti-takeover provisions contained in Section 203 of the Delaware General Corporation Law. Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other exceptions, the board of directors has approved the transaction.
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.
Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law.
59
In addition, as permitted by Section 145 of the Delaware General
Corporation Law, our amended and restated bylaws and our indemnification agreements that we have entered into with our directors and officers provide that:
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we will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful;
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we may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law;
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we are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification;
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we will not be obligated pursuant to our amended and restated bylaws to indemnify a person with respect to proceedings initiated by that person against us or our other indemnitees, except with respect to proceedings authorized by our board of directors or brought to enforce a right to indemnification;
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the rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons; and
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we may not retroactively amend our amended and restated bylaw provisions to reduce our indemnification obligations to directors, officers, employees and agents.
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Our certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws, any action to interpret, apply, enforce, or determine the validity of our certificate of incorporation or bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
We do not intend to pay dividends on our common stock, and, consequently, our stockholders’ ability to achieve a return on their investment will depend on appreciation in the price of our common stock.
We do not intend
to pay any cash
dividends
on our common
stock
for
the
foreseeable
future.
We intend
to invest our future
earnings,
if
any, to fund our growth. Furthermore,
pursuant
to the
loan
and the
security
agreement between
us and Solar, we are
not permitted
to pay cash
dividends
more than $150,000
in aggregate
per
fiscal year
without
its
prior
written
consent.
Therefore,
our stockholders are
not likely
to receive
any dividends
on their common stock
for
the
foreseeable
future.
Since
we do not intend
to pay dividends,
our stockholders’ ability
to receive
a return
on their investment
will
depend on any future
appreciation
in the
market
value
of our common
stock.
There is no guarantee that our common stock will appreciate or even maintain the price at which our stockholders have purchased it.