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 Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and the related notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
32
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 which was filed as an exhibit to our Annual Report on Form 10-K filed on March 20, 2019.
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 negatively impact the price of our common stock.
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 Restoration Robotics, Inc., with Venus surviving the Merger as a wholly owned subsidiary of Restoration Robotics, Inc. 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.
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 condition. 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. Additionally, 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 restrictions and uncertainties could have a material adverse effect on our business, results of operations and financial condition.
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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 $7.4 million for the three months ended March 31, 2019 and $28.7 million for the year ended December 31, 2018. As of March 31, 2019, we had an accumulated deficit of $200.7 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
®
System
s
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
®
System
s
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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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.
35
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 Quarterly 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 March 31, 2019, we had capital resources
consisting
of cash
and cash
equivalents
of $15.0 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.
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:
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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;
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delay
or curtail
our plans
to increase
and expand our sales
and marketing
efforts;
or
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delay
or curtail
our plans
to enhance
our customer
support
and marketing
activities.
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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
36
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:
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the
perceived
advantages
or disadvantages
of the
ARTAS
®
and ARTAS
®
iX Systems
compared
to other
hair
restoration products
and treatments;
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the
safety
and efficacy
of the
ARTAS
®
and ARTAS
®
iX Systems
relative
to other
hair
restoration
products
and treatments;
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the
price
of the
ARTAS
®
and ARTAS
®
iX Systems
relative
to other
hair
restoration
products
and treatments;
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our success
in expanding
our sales
and marketing
organization;
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the
effectiveness
of our marketing,
advertising,
and commercialization
initiatives;
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our success
in adding
new functionalities
to the
ARTAS
®
and ARTAS
®
iX Systems
and enhancing
existing
functions;
and
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our ability
to obtain
regulatory
clearance
to market
the
ARTAS
®
and ARTAS
®
iX Systems
for
additional
treatment indications
in the
U.S.
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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.
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:
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the
success
of our sales
and marketing
programs;
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the
extent
to which our physician
customers
recommend
the
ARTAS
procedures
to their
patients;
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our success
in attracting
consumers
who have not previously
undergone
hair
restoration
treatment;
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the
extent
to which the
ARTAS
procedure
satisfies
patient
expectations;
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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;
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the
cost,
safety,
and effectiveness
of the
ARTAS
®
and ARTAS
®
iX Systems
versus
other
aesthetic
treatments;
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consumer
sentiment
about
the
benefits
and risks
of aesthetic
procedures
generally
and the
ARTAS
®
and ARTAS
®
iX Systems
in particular;
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the
success
of any direct-to-consumer
marketing
efforts
we may
initiate;
and
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general
consumer
confidence,
which may
be impacted
by economic
and political
conditions
outside
of our control.
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37
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 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.
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:
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therapeutic
options
including
Rogaine, which is
applied
topically,
and Propecia,
which is
ingested,
both of which have been approved
by the
FDA;
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non-surgical
options,
such as wigs, hair-loss
concealer
sprays
and similar
products;
and
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•
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other
surgical
alternatives,
including
hair
transplantation
surgery
using
the
strip
surgery
method
or using
hand-held
devices.
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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.
38
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.
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
surger
y
. 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.
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:
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hire
qualified
individuals
as needed;
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•
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generate
sufficient
leads
within
our target
physician
group for
our sales
force;
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•
|
provide
adequate
training
for
the
effective
sale
and marketing
of the
ARTAS
®
System or ARTAS
®
iX System;
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retain
and motivate
our direct
sales
and marketing
professionals;
and
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effectively
oversee
geographically
dispersed
sales
and marketing
teams.
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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:
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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;
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third-party
distributors
may
emphasize
the
sale
of third-party
products
over
our products;
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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.
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39
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.
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% of our revenue
for
the
year
ended December
31, 2018 and 41% and 54% of our revenue
for
the three
months
ended March 31, 2019 and 2018, 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:
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difficulties
in staffing
and managing
our international
operations;
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increased
competition
as a result
of more
products
and procedures
receiving
regulatory
approval
or otherwise
free
to market
in international
markets;
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longer
accounts
receivable
payment
cycles
and difficulties
in collecting
accounts
receivable;
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reduced
or varied
protection
for
intellectual
property
rights
in some
countries;
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export
restrictions,
trade
regulations,
and foreign
tax
laws;
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fluctuations
in currency
exchange
rates;
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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;
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difficulties
in developing
effective
marketing
campaigns
in unfamiliar
foreign
countries;
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customs
clearance
and shipping
delays;
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political,
social,
and economic
instability
abroad,
terrorist
attacks,
and security
concerns
in general;
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preference
for
locally
produced
products;
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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;
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the
burdens
of complying
with a wide variety
of foreign
laws and different
legal
standards;
and
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increased
financial
accounting
and reporting
burdens
and complexities.
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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.
40
Hair
transplantation
surgery
has been a treatment
option
for
hair
restoration
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
t
hat
our competitors
have or are
generating,
and we may
be subject
to greater
regulatory
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.
In addition, our reliance on NPI involves a number of other risks, including, among other things, that:
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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;
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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;
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we may be subject to price fluctuations when a supply contract is renegotiated or if our exis
ting contract is not renewed;
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NPI may wish to discontinue manufacturing and supplying products to us for risk management reasons; and
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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.
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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 manner.
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.
If we are unable to manufacture our next generation ARTAS
®
System, called the ARTAS
®
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.
42
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:
|
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•
|
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;
|
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|
•
|
production
delays
related
to the
evaluation
and testing
of products
from
alternative
suppliers,
and corresponding
regulatory
qualifications;
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•
|
delay
in delivery
due to our suppliers
prioritizing
other
customer
orders
over
ours;
|
|
|
•
|
damage
to our reputation
caused
by defective
components
produced
by our suppliers;
|
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|
•
|
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.
43
Even though t
he 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 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:
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|
•
|
decreased
demand
for
the
ARTAS
®
System
and ARTAS
®
iX System,
or any future
products;
|
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|
•
|
damage
to our reputation;
|
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|
•
|
withdrawal
of clinical
trial
participants;
|
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|
•
|
costs
to defend
the
related
litigation;
|
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|
•
|
a diversion
of management’s
time
and our resources;
|
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|
•
|
substantial
monetary
awards
to physician
customers,
patients
or clinical
trial
participants;
|
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|
•
|
regulatory
investigations,
product
recalls,
withdrawals
or labeling,
marketing
or promotional restrictions;
|
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•
|
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 March 31, 2019, 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.
44
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.
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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•
|
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.
45
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.
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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•
|
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:
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the
ability
to raise
any additional
required
capital
on acceptable
terms,
or at
all;
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•
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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;
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46
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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
indication
s
, 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.
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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.
The Solar Agreement contains
restrictions
that
limit
our flexibility
in operating
our business.
In May 2018, we entered
into
the Solar Agreement with Solar and other lenders, which was subsequently amended in June 2018, November 2018, January 2019 and in February 2019. We borrowed
$20.0 million
under
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 March 31, 2019, we had 99 employees,
with 37 employees
in sales
and marketing,
26 employees
in customer
support,
19 employees
in research
and development,
including
clinical,
regulatory
and certain
quality control
functions,
five
employees
in manufacturing
operations
and 12 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.
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:
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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.
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47
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.
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. During the course of our review and testing, we may identify deficiencies and be unable to remediate them before we must provide the required 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.
48
Further, for so long as we remain an emerging growth company as defined in the JOBS Act, we int
end 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 require
ments 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 re
port 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 wh
ich 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.
If
a natural
disaster,
power outage
or other
event
occurred
that
prevented
us from
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 disrup
t
ed 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 prove
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
49
intrusions
from
around
the
world h
ave 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
interru
ptions
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
Po
rtability
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 clinical
trials,
the
creation
of fraudulent
data
in our nonclinical
studies
or clinical
trials,
or illegal
misappropriation
of product,
which could
result
in regulatory sanctions
and cause
serious
harm
to our reputation.
It
is
not always
possible
to identify
and deter
misconduct
by employees
and other
third-parties,
and the
precautions
we take
to detect
and prevent
this
activity
may
not be effective
in controlling
unknown or unmanaged
risks
or losses
or in protecting
us from
governmental investigations
or other
actions
or lawsuits
stemming
from
a failure
to be in compliance
with such laws or regulations.
In addition,
we are
subject
to the
risk
that
a person
or government
could
allege
such fraud
or other misconduct,
even if
none occurred.
If
any such actions
are
instituted
against
us, and we are
not successful
in defending
ourselves
or asserting
our rights,
those
actions
could
have a significant
impact
on our business
and financial
results,
including,
without
limitation,
the
imposition
of significant
civil,
criminal
and administrative penalties,
damages,
monetary
fines,
disgorgements,
individual
imprisonment,
other
sanctions,
contractual damages,
reputational
harm,
diminished
profits
and future
earnings
and curtailment
of our operations,
any of which could
adversely
affect
our ability
to operate
our business
and our results
of operations.
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.
50
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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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;
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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
51
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 prope
rty
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-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
developed 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
applications
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
Associatio
n
fo
r
Molecula
r
Patholog
y
v
.
Myria
d
Genetics
,
Inc
.
(Myriad I),
May
o
Collaborativ
e
Service
s
v
.
Prometheu
s
Laboratories
,
Inc.
,
and
Alic
e
Corporatio
n
Pty
.
Ltd
.
v
.
CL
S
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.
52
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
countr
ies
products
that
are
the
same
as or
similar
to
our products,
and our competitive
position
in the
international
market
would be harmed.
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.
53
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 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 trademark 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
recognition
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
countries.
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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54
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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.
|
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)
clearanc
e
; 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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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.
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.
55
W
e
als
o
canno
t
predic
t
th
e
likelihood
,
natur
e
o
r
exten
t
o
f
governmen
t
regulatio
n
tha
t
ma
y
aris
e
fro
m
future legislatio
n
o
r
administrativ
e
action
,
eithe
r
i
n
th
e
U.S
.
o
r
abroad
.
Fo
r
example
,
certai
n
policie
s
o
f
th
e
Trump administratio
n
ma
y
impac
t
ou
r
busines
s
an
d
industry
.
Namely
,
th
e
Trum
p
administratio
n
ha
s
take
n
several executiv
e
actions
,
includin
g
th
e
issuanc
e
o
f
several
Executiv
e
Orders
,
tha
t
coul
d
impos
e
significan
t
burdens on
,
o
r
otherwis
e
materiall
y
delay
,
th
e
FDA’
s
abilit
y
t
o
engag
e
i
n
routin
e
regulator
y
an
d
oversigh
t
activitie
s
suc
h
a
s
implementin
g
statute
s
throug
h
rulemaking
,
issuanc
e
o
f
guidance
,
an
d
revie
w
an
d
approva
l
o
f
marketing
applications
.
Notably
,
o
n
Januar
y
30
,
2017
,
Presiden
t
Trum
p
issue
d
a
n
Executiv
e
Order
,
applicabl
e
t
o
al
l
executive agencie
s
includin
g
th
e
FDA
,
requirin
g
tha
t
fo
r
eac
h
notic
e
o
f
propose
d
rulemakin
g
o
r
fina
l
regulatio
n
t
o
b
e
issue
d
in fisca
l
yea
r
2017
,
th
e
agenc
y
mus
t
identif
y
a
t
leas
t
tw
o
existin
g
regulation
s
t
o
b
e
repealed
,
unles
s
prohibite
d
b
y
law. Thes
e
requirement
s
ar
e
referre
d
t
o
a
s
th
e
“two-for-one
”
provisions
.
Thi
s
Executiv
e
Orde
r
include
s
a
budget neutralit
y
provisio
n
tha
t
require
s
th
e
tota
l
incrementa
l
cos
t
o
f
al
l
ne
w
regulation
s
i
n
th
e
201
7
fisca
l
year
,
including repeale
d
regulations
,
t
o
b
e
n
o
greate
r
tha
n
zero
,
excep
t
i
n
limite
d
circumstances
.
Fo
r
fisca
l
year
s
201
8
an
d
beyond, th
e
Executiv
e
Orde
r
require
s
agencie
s
t
o
identif
y
regulation
s
t
o
offse
t
an
y
incrementa
l
cos
t
o
f
a
ne
w
regulatio
n
and approximat
e
th
e
tota
l
cost
s
o
r
saving
s
associate
d
wit
h
eac
h
ne
w
regulatio
n
o
r
repeale
d
regulation
.
I
n
interim guidanc
e
issue
d
b
y
th
e
Offic
e
o
f
Informatio
n
an
d
Regulator
y
Affair
s
withi
n
OM
B
o
n
Februar
y
2
,
2017
,
the administratio
n
indicate
s
tha
t
th
e
“two-for-one
”
provision
s
ma
y
appl
y
no
t
onl
y
t
o
agenc
y
regulations
,
bu
t
als
o
to significan
t
agenc
y
guidanc
e
documents
.
I
n
addition
,
o
n
Februar
y
24
,
2017
,
Presiden
t
Trum
p
issue
d
a
n
executive orde
r
directin
g
eac
h
affecte
d
agenc
y
t
o
designat
e
a
n
agenc
y
officia
l
a
s
a
“Regulator
y
Refor
m
Officer
”
an
d
establish
a
“Regulator
y
Refor
m
Tas
k
Force
”
t
o
implemen
t
th
e
two-for-on
e
provision
s
an
d
othe
r
previousl
y
issue
d
executive order
s
relatin
g
t
o
th
e
revie
w
o
f
federa
l
regulations
,
howeve
r
i
t
i
s
difficul
t
t
o
predic
t
ho
w
thes
e
requirement
s
wil
l
be implemented
,
an
d
th
e
exten
t
t
o
whic
h
the
y
wil
l
impac
t
th
e
FDA’
s
abilit
y
t
o
exercis
e
it
s
regulator
y
authority
.
I
f
these executiv
e
action
s
impos
e
constraint
s
o
n
FDA’
s
abilit
y
t
o
engag
e
i
n
oversigh
t
an
d
implementatio
n
activitie
s
i
n
the norma
l
course
,
ou
r
busines
s
ma
y
b
e
negativel
y
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;
|
|
|
•
|
delays
in the
introduction
of products
into
the
market;
|
|
|
•
|
total
or partial
suspension
of production;
|
|
|
•
|
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.
|
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.
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.
56
Depending on the
relevant
conformity
assessment
procedure,
the
Notified
Body would au
dit
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;
|
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•
|
improve
the
traceability
of medical
devices
throughout
the
supply
chain
to the
end-user
or patient through
a unique
identification
number;
|
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•
|
set
up a central
database
to provide
patients,
healthcare
professionals
and the
public
with comprehensive
information
on products
available
in the
EU; and
|
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•
|
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.
|
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 United 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.
57
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 th
an 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 processin
g, provides more robust rights for data subjects, introduces mandatory
data breach notification through the EU, imposes additional obligations
on
us
when contracting
with service providers and
requires us to adopt appropriate privacy governance including p
olicies, procedures, training
and data
audit
. If we do not comply with our obligations 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 bre
ach. 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 tra
nsfer 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
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
products
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.
58
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.
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, labeling
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
59
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.
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:
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•
|
warning
letters
or untitled
letters;
|
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|
•
|
fines,
injunctions
or civil
penalties;
|
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|
•
|
suspension
or withdrawal
of approvals
or clearances;
|
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|
•
|
seizures
or recalls
of our products;
|
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|
•
|
total
or partial
suspension
of production
or distribution;
|
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|
•
|
administrative
or judicially
imposed
sanctions;
|
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|
•
|
the
FDA’s refusal
to grant
pending
or future
clearances
or approvals
for
our products;
|
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|
•
|
refusal
to permit
the
import
or export
of our products;
and
|
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|
•
|
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.
60
Re
cently
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.
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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61
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 direc
tors, certain of our investors and certain 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, i
f more of our stockholders were to bring 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 busin
ess.
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 (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, (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. Further, on March 15, 2019, we received a letter indicating that for 30 consecutive business days we did not maintain a minimum market value of publicly held shares (MVPHS) of $15.0 million. In accordance with the Listing Rules, we have 180 calendar days, or until September 11, 2019, to regain compliance with the MVPHS rule.
In accordance with the applicable Listing Rules, if we are unable to regain compliance with any of the above 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.
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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 March 31, 2019, 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.
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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.
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.