We have revised our discussion of the risk
factors affecting our business since those presented in our Annual Report on Form 10-K, Part I, Item 1A, for the fiscal year ended December 31, 2015. We have denoted with an asterisk (*) those risk factors that have been materially
revised or added. If any of the following risks actually occurs, our business, financial condition, results of operations and cash flows could be materially adversely affected. This section contains forward-looking statements. You should refer to
the explanation of the qualifications and limitations on forward-looking statements beginning on page 14.
Risks Related to Our Business and Industry
We have incurred net losses in prior periods.
Although we were profitable in the first three quarters of 2016 and for the full 2015 and 2014 years, we incurred losses in the first quarter
of 2015 and in 2013. If we are unable to maintain profitability, the market value of our stock may decline, and an investor could lose all or a part of their investment.
If there is not sufficient consumer demand for the procedures performed with our products, practitioner demand for our products could
decline, which would adversely affect our operating results.
The aesthetic laser and light-based treatment system industry in
which we operate is particularly vulnerable to economic trends. Most procedures performed using our aesthetic treatment systems are elective procedures that are not reimbursable through government or private health insurance. The cost of these
elective procedures must be borne by the patient. As a result, the decision to undergo a procedure that uses our products may be influenced by the cost.
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Consumer demand, and therefore our business, is sensitive to a number of factors that affect
consumer spending, including political and macroeconomic conditions, health of credit markets, disposable consumer income levels, consumer debt levels, interest rates, consumer confidence and other factors. For example, consumer demand for the
procedures performed with our products, and practitioner demand for our products, decreased dramatically during 2009 as a result of turmoil in the financial markets, which contributed to a significant decrease in our total product revenues during
that year. If there is not sufficient consumer demand for the procedures performed with our products, practitioner demand for our products would decline, and our business would suffer.
Our financial results may fluctuate from quarter to quarter, which makes our results difficult to predict and could cause our results to
fall short of expectations.
Our financial results may fluctuate as a result of a number of factors, many of which are outside of
our control. For these reasons, comparing our financial results on a period-to-period basis may not be meaningful, and our past results should not be relied upon as an indication of our future performance. Our future quarterly and annual expenses as
a percentage of our revenues may be significantly different from those we have recorded in the past or which we expect for the future. Our financial results in some quarters may fall below our expectations or the expectations of market analysts or
investors. Any of these events could cause our stock price to fall. Each of the risk factors listed in this “Risk Factors” section, and the following factors, may adversely affect our financial results:
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our inability to introduce new products to the market in a timely fashion, or at all;
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our inability to quickly address and resolve reliability issues in our products and/or meet warranty and service obligations to our customers;
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continued availability of attractive equipment leasing terms for our customers, which may be negatively influenced by interest rate increases or lack of available credit;
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increases in the length of our sales cycle; and
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reductions in the efficiency of our manufacturing processes.
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In addition, we may be subject
to seasonal fluctuations in our results of operations, because our customers may be more likely to make equipment purchasing decisions near year-end, and because practitioners may be less likely to make purchasing decisions in the summer months.
Our competitors may prevent us from achieving further market penetration or improving operating results.
Competition in the aesthetic device industry is intense. Our products compete against products offered by public companies, such as Cutera,
Syneron Medical, and ZELTIQ Aesthetics, as well as several smaller specialized private companies, such as Alma Lasers (acquired in 2013 by Shanghai Fosun Pharmaceutical) and Lumenis. Additional competitors may enter the market, and we are likely to
compete with new companies in the future.
We also face competition against non-laser and non-light-based medical products, such as
BOTOX
®
and collagen injections, and surgical and non-surgical aesthetic procedures, such as face lifts, chemical peels, abdominoplasty, liposuction, microdermabrasion, sclerotherapy and
electrolysis. We may also face competition from manufacturers of pharmaceutical and other products that have not yet been developed. As a result of competition with these companies, products and procedures, we could experience loss of market share
and decreasing revenue as well as reduced prices and profit margins, any of which would harm our business and operating results.
Our
ability to compete effectively depends upon our ability to distinguish our company and our products from our competitors and their products. Factors affecting our competitive position include:
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product performance, reliability and design;
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ability to sell products tailored to meet the applications needs of clients and patients;
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quality of customer support;
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sales, marketing and distribution capabilities;
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success and timing of new product development and introductions; and
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intellectual property protection.
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We face exposure to credit risk of customers.
In the event of deterioration of general business conditions or the availability of credit, the financial strength and stability
of our customers and potential customers may deteriorate over time, which may cause them to cancel or delay their purchase of our products. In addition, we may be subject to increased risk of non-payment of our accounts receivables. We may also be
adversely affected by bankruptcies or other business failures of our customers and potential customers. A significant delay in the collection of funds or a reduction of funds collected may impact our liquidity or result in bad debts.
If we do not continue to develop and commercialize new products and identify new markets for our products and technology, we may not
remain competitive, and our revenues and operating results could suffer.
The aesthetic laser and light-based treatment system
industry is subject to continuous technological development and product innovation. If we do not continue to innovate and develop new products and applications, our competitive position will likely deteriorate as other companies successfully design
and commercialize new products and applications. Accordingly, our success depends in part on developing or acquiring new and innovative applications of laser and other light-based technology and identifying new markets for and applications of
existing products and technology. If we are unable to develop and commercialize new products, identify and acquire complementary businesses, products or technologies, and identify new markets for our products and technology, our product and
technology offerings could become obsolete and our revenues and operating results could be adversely affected.
To remain competitive, we
must:
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develop or acquire new technologies that either add to or significantly improve our current products;
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convince our target practitioner customers that our new products or product upgrades would be attractive revenue-generating additions to their practices;
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sell our products to non-traditional customers, including primary care physicians, gynecologists and other specialists;
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identify new markets and emerging technological trends in our target markets and react effectively to technological changes;
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preserve goodwill and brand value with customers; and
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maintain effective sales and marketing strategies.
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If our new products do not gain
market acceptance, our revenues and operating results could suffer, and our newer generation product sales could cause earlier generation product sales to suffer.
The commercial success of the products and technology we develop will depend upon the acceptance of these products by providers of aesthetic
procedures and their patients and clients. It is difficult for us to predict how successful recently introduced products, or products we are currently developing, will be over the long term. If the products we develop do not gain market acceptance
or meet customer expectations, our revenues and operating results could suffer.
We expect that many of the products we develop will be
based upon new technologies or new applications of existing technologies. It may be difficult for us to achieve market acceptance of some of our products, particularly the first products that we introduce to the market based on new technologies or
new applications of existing technologies.
As we introduce new technologies to the market, our earlier generation product sales could
suffer, which may result in write-offs of those earlier generation products.
If demand for our aesthetic treatment systems by
physician customers does not increase, our revenues will suffer and our business will be harmed.
We market our aesthetic treatment
systems to physicians and other practitioners. We believe, and our growth expectations assume, that we and other companies selling lasers and other light-based aesthetic treatment systems have not fully penetrated these markets and that we will
continue to receive a significant percentage of our revenues from selling to these markets. If our expectations as to the size of these markets and our ability to sell our products to participants in these markets are not correct, our revenues will
suffer and our business will be harmed.
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We sell our products and services through subsidiaries and distributors in numerous
international markets. Our operating results may suffer if we are unable to manage our international operations effectively.
We
sell our products and services through subsidiaries and distributors in approximately 120 foreign countries, and we therefore are subject to risks associated with having international operations. We derived 32% of our product revenues from sales
outside North America for the nine months ended September 30, 2016. We derived 39%, 48%, and 48% of our product revenues from sales outside North America for the years ended December 31, 2015, 2014, and 2013, respectively.
Our international sales are subject to a number of risks, including:
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foreign certification and regulatory requirements;
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difficulties in staffing and managing our foreign operations;
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import and export controls; and
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political and economic instability.
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If we are unsuccessful at managing these risks, our
results of operations may be adversely affected.
We may incur foreign currency conversion charges as a result of changes in
currency exchange rates, which could cause our operating results to suffer.
The U.S. dollar is our functional currency. Although
we sell our products and services through subsidiaries and distributors in approximately 120 foreign countries, approximately 38% of our revenues outside of North America for the nine months ended September 30, 2016 and 46% of our revenues
outside of North America for the year ended December 31, 2015 were denominated in or linked to the U.S. dollar. Substantially all of our remaining revenues and all of our operating costs outside of North America are recognized in euros, British
pounds, Moroccan dirham, Japanese yen, Chinese yuan, South Korean won and Australian dollars. We have not historically engaged in hedging activities relating to our non-U.S. dollar operations. Fluctuations in exchange rates between the currencies in
which such revenues are realized or costs are incurred and the U.S. dollar may have a material adverse effect on our results of operations and financial condition. We incurred a loss on foreign currency of $1.8 million in 2015, which was recorded as
other expense, net within our consolidated statement of operations. This was primarily due to the strengthening of the U.S. dollar against the euro, British pound, Japanese yen, Australian dollar and Chinese yuan.
We may not receive revenues from our current research and development efforts for several years, if at all.
Investment in product development often involves a long payback cycle and risks associated with new technology. For example, our
SculpSure
laser system, which we launched in the second half of 2015, was in development for five years. Our
PicoSure
laser system, which we launched in 2013, was in development for several years. We have made and expect to continue
making significant investments in research and development and related product opportunities. Accelerated product introductions and short product life cycles require high levels of expenditures for research and development that could adversely
affect our operating results if not offset by revenue increases. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we may not
generate anticipated revenues from these investments for several years, if at all.
Because we do not require training for users of
our non-invasive products, and we sell these products to non-physicians, there exists an increased potential for misuse of these products, which could harm our reputation and our business.
Federal regulations allow us to sell our products to or on the order of practitioners licensed by law to use or order the use of a prescription
device. The definition of “licensed practitioners” varies from state to state. As a result, our products may be purchased or operated by physicians with varying levels of training and, in many states, by non-physicians, including nurse
practitioners, chiropractors and technicians. Outside the United States, many jurisdictions do not require specific qualifications or training for purchasers or operators of our products. We do not supervise the procedures performed with our
products, nor can we require that direct medical supervision occur. We and our distributors offer product training sessions, but neither we nor our distributors require purchasers or operators of our non-invasive products to attend training
sessions. The lack of required training and the purchase and use of our non-invasive 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.
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We may be unable to attract and retain management and other personnel we need to succeed.
Our success depends on the services of our senior management and other key research and development, manufacturing, sales and
marketing employees. The loss of the services of one or more of these employees could have a material adverse effect on our business. We consider retaining Michael R. Davin, our chief executive officer, key to our efforts to develop, sell and market
our products and remain competitive. We have entered into an employment agreement with Mr. Davin; however, the employment agreement is terminable by him on short notice and may not ensure his continued service with our company. Our future
success will depend in large part upon our ability to attract, retain and motivate highly skilled employees. We cannot be certain that we will be able to do so.
We may seek to acquire companies or technologies, which could disrupt our ongoing business, divert the attention of our management and
employees and adversely affect our results of operations.
We may, from time to time, evaluate potential strategic acquisitions of
other complementary businesses, products or technologies, as well as consider joint ventures and other collaborative projects. We may not be able to identify suitable future acquisition candidates, consummate acquisitions on favorable terms or
complete otherwise favorable acquisitions because of antitrust or other regulatory concerns. We cannot be certain that the acquisitions we have completed, including our 2014 acquisition of substantially all of the assets of Ellman International,
Inc., or any future acquisitions that we may make, will enhance our products or strengthen our competitive position. In particular, we may encounter difficulties assimilating or integrating the acquired businesses, technologies, products, personnel
or operations of the acquired companies, and in retaining and motivating key personnel from these businesses. The integration of these businesses may not result in the realization of the full benefits of synergies, cost savings, innovation and
operational efficiencies that may be possible from this integration and these benefits may not be achieved within a reasonable period of time.
Our stock price has fluctuated substantially, and we expect it will continue to do so.
Our Class A common stock price has fluctuated substantially in recent years, and we expect it will continue to do so. From January 1,
2012 through November 1, 2016, our Class A common stock has traded as high as $55.94 per share and as low as $11.64 per share. The stock market in general has experienced extreme volatility that has often been unrelated to the operating
performance of particular companies. The market price for our Class A common stock may be influenced by many factors, including:
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the success of competitive products or technologies;
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regulatory developments in the United States and foreign countries;
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developments or disputes concerning patents or other proprietary rights;
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the recruitment or departure of key personnel;
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variations in our financial results or those of companies that are perceived to be similar to us;
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activism by any single large stockholder or combination of stockholders;
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securities or other litigation;
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market conditions in our industry and issuance of new or changed securities analysts’ reports or recommendations;
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purchases or sales of our stock by our officers and directors;
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repurchases of shares of our Class A common stock; and
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general economic, industry and market conditions.
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In addition, if the stock market in general
experiences a loss of investor confidence, the trading price of our Class A common stock could decline for reasons unrelated to our business, financial condition or results of operations.
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Our common stock could be further diluted by the conversion of outstanding options,
restricted stock units and performance-based stock units.
In the past, we have issued and still have outstanding convertible
securities in the form of options, restricted stock units and performance-based stock units. We may continue to issue options, restricted stock units, performance-based stock units and other equity rights as compensation for services and
incentive compensation for our employees, directors and consultants or others who provide services to us. We have a substantial number of shares of common stock reserved for issuance upon the conversion and exercise of these securities. Such a
conversion would dilute our stockholders and could adversely affect the market price of our common stock.
We may not be able to
successfully continue collecting licensing royalties.
Since 2013, portions of our revenues have consisted of royalties from
sub-licensing patents, including patents licensed to us on an exclusive basis by MGH. These patents expired in the United States on February 1, 2015 and their foreign counterparts expired in several foreign jurisdictions on January 31,
2016. Though we receive royalty revenues on other patents, our revenues have decreased as a result of the expiration of the MGH patents because we will no longer receive any royalties from such patents, and such license revenues may not be replaced.
We face risks associated with product warranties.
We could incur substantial costs as a result of product failures for which we are responsible under warranty obligations.
If we are unable to protect our information technology infrastructure against service interruptions, data corruption, cyber-based
attacks or network security breaches, our reputation, business and operating results may suffer.
We rely on information technology
networks and systems, including the Internet, to process and transmit sensitive electronic information and to manage or support a variety of business processes and activities, including procurement and supply chain, manufacturing, distribution, and
invoicing and collection of payments for our products. We use enterprise information technology systems to record, process, and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory
financial reporting, legal, and tax requirements. Our information technology systems, some of which are managed by third parties, are susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing
software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors or catastrophic events. If our information technology systems are damaged, disrupted
or shutdown and we are unable to effectively resolve the issues in a timely manner, our reputation, business and operating results may suffer.
Risks
Related to Our Reliance on Third Parties
If we fail to obtain key components of our products from our sole source or limited
source suppliers or service providers, our ability to manufacture and sell our products would be impaired and our business could be materially harmed.
We depend on sole or limited suppliers of certain components and systems that are critical to the products that we manufacture and sell, and to
which the significant majority of our revenues are attributable. We depend on a single contract manufacturer, Columbia Electrical Contractors, Inc., in the United States for the subassembly of certain products that we manufacture and sell, and for
the manufacturing of certain products that we sell, and to which a significant portion of our revenues are attributable to these products. We depend on El.En. S.p.A., or El.En., for the
SLT II
laser system that we integrate with our own
proprietary software and delivery systems into our
SmartLipo Triplex, Cellulaze,
and
PrecisionTx
systems. We also depend on El.En. for the
MonaLisa Touch
laser system. For further information regarding our distribution
agreements with El.En., please see the discussion on page 19 of our Annual Report on Form 10-K for the year ended December 31, 2015. We use Alexandrite rods to manufacture the lasers for our
Elite
and
PicoSure
products and Nd:YAG
rods to manufacture the lasers for our
RevLite
/
MedLite C6
products. We depend exclusively on Northrop Grumman SYNOPTICS to supply both the Alexandrite and Nd:YAG rods to us, and we are aware of no alternative supplier of Alexandrite
rods meeting our quality standards. We offer our
SmartCool
treatment cooling systems for use with our laser aesthetic treatment systems, and we depend exclusively on Zimmer Elektromedizin GmbH to supply
SmartCool
systems to us. In
addition, one third party supplier assembles and tests many of the components and subassemblies for our
Elite
and
Cynergy
product families. We use diode laser bars from Coherent to manufacture our
Vectus
laser, and we use diode
laser modules from Dilas to manufacture our
SculpSure
laser system. Although alternative suppliers exist for the diode laser subassemblies and diode laser bars, they could take months to qualify and implement.
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Other than with El.En., we do not have long-term arrangements with any of our suppliers or our
contract manufacturer for the supply of these components or systems or with the assembly and test service provider referenced above, but instead purchase from them on a purchase order basis. Northrop Grumman SYNOPTICS, Zimmer Elektromedizin, Dilas
and Coherent are not required, and may not be able or willing, to meet our future requirements at current prices, or at all.
Under our
agreements with El.En. and our purchase order arrangements with our other suppliers and service providers, we are vulnerable to supply shortages and cessations and price fluctuations with respect to these critical components and systems and
services. Such shortages or cessations could occur either as a result of breach by El.En. or us of our distribution agreements, or as a result of other types of business decisions made by El.En. or other suppliers and service providers. Any extended
interruption in our supplies of these components or systems or in the assembly and test services could materially harm our business.
We rely on third party distributors to market, sell and service a significant portion of our products. If these distributors do not
commit the necessary resources to effectively market, sell and service our products or if our relationships with these distributors are disrupted, our business and operating results may be harmed.
In the United States, Canada, France, Morocco, Germany, Spain, the United Kingdom, Australia, China, Japan and Korea, we sell our products
through our internal sales organization. Outside of these markets, we sell our products through third party distributors. Our sales and marketing success in these other markets depends on these distributors, in particular their sales and service
expertise and relationships with the customers in the marketplace. Sales of our aesthetic treatment systems by third party distributors represented 12% of our product revenue for the nine months ended September 30, 2016. Sales of our aesthetic
treatment systems by third party distributors represented 17%, 21% and 25% of our product revenue for 2015, 2014 and 2013, respectively.
We do not control our distributors, and these parties may not be successful in marketing our products. These parties may fail to commit the
necessary resources to market and sell our products to the level of our expectations. Currently, we have written distributor agreements in place with most of our third party distributors. We cannot be sure that our distributors will agree with our
interpretation of the terms of the agreements or that we will receive payments under the agreements. The third party distributors with which we do not have written distributor agreements may also disagree with the terms of our relationship. Our
distributors may terminate their relationships with us and stop selling and servicing our products with little or no notice. If current or future third party distributors or other parties that sell our products do not perform adequately, or if we
fail to maintain our existing relationships with these parties or fail to recruit and retain distributors in particular geographic areas, our revenue from international sales may be adversely affected and our operating results could suffer.
Risks Related to Our Relationship with El.En. and Our Corporate Structure
El.En. and its subsidiaries market and sell products that compete with our products, and any increased competition from El.En. could have
a material adverse effect on our business.
El.En. is a leading laser manufacturer in Europe and a leading light-based medical
device manufacturer worldwide. El.En. and its subsidiaries develop and produce laser systems with scientific, industrial, commercial and medical applications. Under exclusive distribution agreements with El.En., we purchase from El.En. its
proprietary
SmartLipo MPX
system and its
SLT II
laser system. The
SLT II
laser system is an essential component of our
SmartLipo Triplex
and
Cellulaze
systems, which also incorporate our proprietary software and
delivery systems. We also depend on El.En. for the
MonaLisa Touch
laser system. For further information regarding our distribution agreements with El.En., please see the discussion on page 19 of our Annual Report on Form 10-K for the year
ended December 31, 2015.
El.En. markets, sells, promotes and licenses other products that compete with our products, both in North
America and elsewhere throughout the world and our agreements with El.En. do not prevent El.En. from competing with us by selling products that we purchased in the past from El.En., including earlier generation
SmartLipo
systems. Our business
could be materially and adversely affected by increased competition from El.En.
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*Provisions in our corporate charter documents and under Delaware law may delay or prevent
attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us.
Several
provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which our stockholders might otherwise
receive a premium for their shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:
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the classification of the members of our board of directors until our 2019 annual meeting of stockholders, at which point the full board of directors will be declassified and each director will be elected on an annual
basis;
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limitations on the removal of our directors until our 2019 annual meeting of stockholders, after which our directors may be removed with or without cause by the affirmative vote of the holders of a majority of our
shares of capital stock entitled to vote;
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advance notice requirements for stockholder proposals and nominations;
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the inability of stockholders to act by written consent or to call special meetings; and
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the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute
the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors.
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Absent approval of our board of directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least 75%
of the voting power of our shares of capital stock entitled to vote.
In addition, Section 203 of the Delaware General Corporation
Law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns or within the last three years has owned 15% of our voting stock,
for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a
change in control of our company.
Risks Related to Intellectual Property
If we infringe or are alleged to infringe intellectual property rights of third parties, our business could be adversely affected.
Our products may infringe, or it may be claimed that they infringe, patents or patent applications under which we do not hold
licenses or other rights. Third parties may own or control these patents and patent applications in the United States and abroad. These third parties could bring claims against us that would cause us to incur substantial expenses and, if
successfully asserted against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay manufacturing or sales of the product that is the subject of the suit.
As a result of patent infringement claims, or in order to avoid potential claims, we may choose or be required to seek a license from the
third party and be required to pay license fees or royalties or both, as we did in a 2006 patent license agreement with Palomar Medical Technologies, Inc. Such licenses may not be available on acceptable terms, or at all. Even if we were able to
obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be forced to cease some aspect of our business operations if, as a result of actual or
threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. This could harm our business significantly.
There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in our industry. In
addition to infringement claims against us, we may become a party to other types of patent litigation and other proceedings, including reexamination proceedings, inter partes or post-grant review or interference proceedings declared by the U.S.
Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our products and technology. The cost to us of any patent litigation or other proceeding, even if resolved
in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and
continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.
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If we are unable to obtain or maintain intellectual property rights relating to our
technology and products, the commercial value of our technology and products will be adversely affected and our competitive position could be harmed.
Our success and ability to compete depends in part upon our ability to obtain protection in the United States and other countries for our
products by establishing and maintaining intellectual property rights relating to or incorporated into our technology and products. We own numerous patents and patent applications in the United States and corresponding patents and patent
applications in many foreign jurisdictions. We do not know how successful we would be in any instance in which we asserted our patents against suspected infringers. Our pending and future patent applications may not issue as patents or, if issued,
may not issue in a form that would be advantageous to us. Even if issued, our patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of
term of patent protection we may have for our products. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent
protection.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our
technology and products could be adversely affected.
In addition to patented technology, we rely upon unpatented proprietary
technology, processes and know-how. We generally seek to protect this information in part by confidentiality agreements with our employees, consultants and third parties. These agreements may be breached, and we may not have adequate remedies for
any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors.
Risks Related to Government
Regulation and Other Legal Compliance Matters
If we fail to obtain and maintain necessary FDA clearances and approvals for our
products and indications or if clearances and approvals for future products and indications are delayed or not issued, our business would be harmed.
Our products are classified as medical devices and are subject to extensive regulation by the U.S. Food and Drug Administration, or FDA, and
other federal, state and local authorities. These regulations relate to manufacturing, design, labeling, sale, promotion, distribution, importing and exporting and shipping of our products. In the United States, before we can market a new medical
device, or a new use of, or claim for, an existing product, we must first receive either 510(k) clearance or premarket approval from the FDA, unless an exemption applies. Both of these processes can be expensive and lengthy and entail significant
user fees, unless exempt. The FDA’s 510(k) clearance process often takes from three to 12 months. The FDA may require us to withdraw an application if they cannot make a determination that the device is substantially equivalent according to the
regulations. In such situations, we may re-submit the 510(k) application with additional data for reconsideration or we may determine not to commercialize the device or the new indication for use. The process of obtaining premarket approval is
much more costly and uncertain than the 510(k) clearance process. It generally takes from one to three years, or even longer, from the time the premarket approval application, or PMA, is submitted to the FDA until an approval is obtained.
In order to obtain premarket approval and, in some cases, a 510(k) clearance, a product sponsor must conduct well controlled clinical trials
designed to test the safety and effectiveness of the product. Conducting clinical trials generally entails a long, expensive and uncertain process that is subject to delays and failure at any stage. The data obtained from clinical trials may be
inadequate to support approval or clearance of a submission. In addition, the occurrence of unexpected findings in connection with clinical trials may prevent or delay obtaining approval or clearance. If we conduct clinical trials, they may be
delayed or halted, or be inadequate to support approval or clearance, for numerous reasons, including:
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the FDA, other regulatory authorities or an institutional review board may place a clinical trial on hold;
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patients may not enroll in clinical trials, or patient follow-up may not occur, at the rate we expect;
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patients may not comply with trial protocols;
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institutional review boards and third party clinical investigators may delay or reject our trial protocol;
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third party clinical investigators may decline to participate in a trial or may not perform a trial on our anticipated schedule or consistent with the clinical trial protocol, good clinical practices, or other FDA
requirements;
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third party organizations may not perform data collection and analysis in a timely or accurate manner;
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regulatory inspections of our clinical trials or manufacturing facilities may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials, or invalidate our clinical
trials;
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changes in governmental regulations or administrative actions; and
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the interim or final results of the clinical trials may be inconclusive or unfavorable as to safety or effectiveness.
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Medical devices may be marketed only for the indications for which they are approved or cleared. The FDA may not approve or clear indications
that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance or premarket approval of new products, new intended uses or modifications to existing products. Our clearances can be
revoked if safety or effectiveness problems develop.
In addition, if the FDA requires us to go through a lengthier, more rigorous
examination for products or modifications to products than we expect, or at a particular time in the future had expected, our product introductions or modifications could be delayed or canceled, which could negatively affect our ability to generate
sales, or cause sales at such time to decline. For example, the FDA could demand that we obtain a PMA prior to marketing certain of our products in cases in which we did not expect to have to obtain a PMA. If we were to determine that a product we
plan to market is subject to an exemption from premarket review, the FDA could disagree with our determination and could require us to submit a 510(k) or PMA in order to continue marketing the product.
Finally, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other
actions that may prevent or delay approval or clearance of products we are developing or impact our ability to modify any of our products for which we receive regulatory clearance or approval in the future on a timely basis. Any change in the laws
or regulations that govern the clearance and approval processes relating to the products we are developing could make it more difficult and costly to obtain clearance or approval for such products, or to produce, market and distribute products for
which we receive regulatory approval or clearance in the future.
After clearance or approval of our products, we are subject to
continuing regulation by the FDA, and if we fail to comply with FDA regulations, or other regulations to which we are subject, our business could suffer.
Even after clearance or approval of a product, we are subject to continuing regulation by the FDA, including the requirements that our facility
be registered and our devices be listed with the agency. We are subject to Medical Device Reporting regulations, which require us to report to the FDA if our products may have caused or contributed to a death or serious injury or malfunction in a
way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. We must report corrections and removals to the FDA where the correction or removal was initiated to reduce a risk to health posed by the device
or to remedy a violation of the Federal Food, Drug, and Cosmetic Act, or FDCA, caused by the device that may present a risk to health, and maintain records of other corrections or removals. The FDA closely regulates promotion and advertising and our
promotional and advertising activities could come under scrutiny. If the FDA objects to our promotional and advertising activities or finds that we failed to submit reports under the Medical Device Reporting regulations, for example, the FDA may
allege our activities resulted in violations.
Violations of the FDCA and other laws and regulations to which we are subject may lead to
investigations by the FDA, Department of Justice, or DOJ, and state Attorneys General. In addition, later discovery of previously unknown adverse events or other problems with our products, manufacturers or manufacturing processes, or failure to
comply with regulatory requirements, may yield various results, including:
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restrictions on such products, manufacturers or manufacturing processes;
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restrictions on the labeling or marketing of a product;
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restrictions on product distribution or use of a product;
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requirements to conduct post-marketing studies or clinical trials;
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warning letters or untitled letters;
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withdrawal of the products from the market;
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refusing or delaying our requests for 510(k) clearance or premarket approval of new products or new intended uses;
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fines, restitution or disgorgement of profits or revenues;
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suspension or withdrawal of marketing approvals;
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operating restrictions or partial suspension or total shutdown of production;
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refusal to permit the import or export of our products;
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repair, replacement, refunds, recalls or seizure or detention of our products;
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injunctions or the imposition of civil or criminal penalties;
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damage to relationships with any potential contributors;
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unfavorable press coverage and damage to our reputation; or
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litigation involving patients using our products.
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Non-compliance with European Union
requirements can also result in significant financial penalties.
We may be subject to enforcement action if we engage in improper
marketing or promotion of any of our products for which we receive regulatory clearance or approval. Any such enforcement action could result in significant fines, costs and penalties and could result in damage to our reputation.
Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition of the
promotion of unapproved use. Use of a device outside its cleared or approved diseases or conditions is known as “off-label” use. Despite our efforts to comply with such laws and regulations, physicians may use our products for which we
receive regulatory clearance or approval off-label, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. If the FDA determines that our promotional materials or other product labeling
constitute promotion of an unapproved, or off-label, use, it could request that we modify our materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, recall, injunction, seizure,
civil fine or criminal penalties.
Other federal, state and foreign regulatory agencies, including the U.S. Federal Trade Commission, have
issued guidelines and regulations that govern how we will be required to promote products for which we receive regulatory clearance or approval, including how we may use endorsements and testimonials. If our promotional materials are inconsistent
with these guidelines or regulations, we could be subject to enforcement actions, which could result in significant fines, costs and penalties. Our reputation could also be damaged and the adoption of our products could be impaired. In addition, the
off-label use of our products may increase the risk of product liability claims. Product liability claims are expensive to defend and could divert our management’s attention, result in substantial damage awards against us and harm our
reputation.
In the EU, our medical devices may be promoted only for the intended purpose for which the devices have been CE marked.
Failure to comply with this requirement could lead to the imposition of penalties by the competent authorities of the EU Member States. The penalties could include warnings, orders to discontinue the promotion of the medical device, seizure of the
promotional materials and fines. The promotional materials related to any of our products that may be CE marked in the future must also comply with various laws and codes of conduct developed by medical device industry bodies in the EU governing
promotional claims, comparative advertising, advertising of medical devices reimbursed by the national health insurance systems and advertising to the general public. If we do not comply with these laws and industry codes, we could be subject to
penalties which could include significant fines. Our reputation could also be damaged and the adoption of our products after receipt of a CE mark could be impaired.
We have modified some of our products without FDA clearance. Modifications to any FDA-cleared or approved products may require new
regulatory clearances or approvals or require us to recall or cease marketing such products until clearances or approvals are obtained.
We have made modifications to our devices in the past and may make additional modifications in the future that we believe do not or will not
require additional clearances or approvals. Any modification to one of our 510(k)-cleared products that would constitute a major change in its intended use or any change that could significantly affect the safety or effectiveness of the device would
require us to obtain a new 510(k) marketing clearance and may even, in some circumstances, require the submission of a PMA, if the change raises complex or novel scientific issues or the product has a new intended use. We may be required to submit
extensive pre-clinical and clinical data depending on the nature of the changes. We may not be able to obtain additional 510(k) clearances or premarket approvals for modifications to, or additional diseases or conditions for, any products for which
we receive regulatory clearance or approval in a timely fashion, or at all. Delays in obtaining future clearances or approvals would adversely affect our ability to introduce enhanced products in a timely manner, which in turn would harm our revenue
and operating results.
The FDA requires every manufacturer to make the determination regarding the need for a new 510(k) submission in
the first instance, but the FDA may review any manufacturer’s decision. If the FDA disagrees with our determination and requires us to seek new 510(k) clearances or PMA approval 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 distribution of the products or to recall the modified product until we obtain clearance or approval, and we may be subject to significant
regulatory fines or penalties.
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Furthermore, potential changes to the 510(k) program may make it more difficult for us to make
modifications to any of our then-previously-cleared products, by either imposing more strict requirements on when a new 510(k) clearance for a modification to a previously-cleared product must be submitted or applying more onerous review criteria to
such submissions. In 2011, respectively, the FDA issued draft guidance documents addressing when to submit a new 510(k) clearance due to modifications to 510(k)-cleared products and the criteria for evaluating substantial equivalence. The 2011 draft
guidance was ultimately withdrawn as the result of the Food and Drug Administration Safety and Innovation Act. As a result, the FDA’s original guidance document regarding 510(k) modifications, which dates back to 1997, remains in place.
However, the FDA may seek to issue new guidance on product modifications. Any efforts to do so could result in a more rigorous review process and make it more difficult to obtain clearance for device modifications.
If we or our contract manufacturers fail to comply with ongoing FDA and EU or other foreign regulatory authority requirements concerning
manufacturing operations and laser performance standards, our products could be subject to additional restrictions and withdrawal from the market, which would harm our business.
We are currently required to demonstrate and maintain compliance with the FDA’s Quality System Regulation, or QSR. The QSR is a complex
regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. Because our products involve the use of lasers, our products
also are covered by a performance standard for lasers set forth in FDA regulations. The laser performance standard imposes specific record keeping, reporting, product testing and product labeling requirements. These requirements include affixing
warning labels to laser products as well as incorporating certain safety features in the design of laser products. In the EU countries, compliance with harmonized standards is also recommended as this is interpreted as a presumption of conformity
with the relevant Essential Requirements. The FDA enforces the QSR and laser performance standards through periodic unannounced inspections. We have been, and anticipate in the future being, subject to such inspections.
These FDA regulations and EU standards cover the methods and documentation of the design, testing, production, control, quality assurance,
labeling, packaging, sterilization, storage and shipping of any products for which we may obtain regulatory clearance or approval. Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through
periodic inspections by the FDA. Compliance with harmonized standards in the EU is also subject to regular review through the conduct of inspection by Notified Bodies or other certification bodies. If we, or our contract manufacturers, fail to
adhere to QSR requirements in the United States or other harmonized standards in the EU, this could delay production of our products and lead to fines, difficulties in obtaining regulatory clearances or CE Certificates of Conformity, recalls,
enforcement actions, including injunctive relief or consent decrees, or other consequences, which could, in turn, have a material adverse effect on our financial condition or results of operations.
The FDA audits compliance with the QSR through periodic announced and unannounced inspections of manufacturing and other facilities. The
failure by us or any of our contract manufacturers to comply with applicable statutes and regulations administered by the FDA, or harmonized standards in the EU, or the failure to timely and adequately respond to any adverse inspectional
observations or product safety issues, could result in various enforcement actions, including a public warning letter, a shutdown of or restrictions on our manufacturing operations, delays in approving or clearing a product, refusal to permit the
import or export of our products, a recall or seizure of our products, fines, injunctions, civil or criminal penalties, or other sanctions, such as those described in the preceding paragraphs, any of which could cause our business and operating
results to suffer.
If any of our products for which we receive regulatory clearance or approval cause or contribute to a death or a
serious injury, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions, which could harm our business.
Under the FDA medical device reporting, or MDR, regulations, medical device manufacturers are required to report to the FDA information that a
device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or a similar device of such manufacturer were
to recur. The decision to file an MDR involves a judgment by us as the manufacturer. If and when we make such decisions in the future, the FDA may not agree with our decisions. If we fail to report MDRs to the FDA within the required timeframes, or
at all, or if the FDA disagrees with any of our determinations regarding the reportability of certain events, the FDA could take enforcement actions against us, which could have an adverse impact on our reputation and financial results.
Additionally, all manufacturers placing medical devices in the market in the EU are legally bound to report any serious or potentially serious
incidents involving devices they produce or sell to the competent authority in whose jurisdiction the incident occurred. In the EU, we must comply with the EU Medical Device Vigilance System. Under this system, incidents must be reported to the
relevant authorities of the EU countries, and manufacturers are required to take Field Safety Corrective Actions, or FSCAs, to
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reduce a risk of death or serious deterioration in the state of health associated with the use of a medical device that is already placed on the market. An incident is defined as any malfunction
or deterioration if the characteristics or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, might lead to or might have led to the death of a patient or user or of other
persons or to a serious deterioration in their state of health. An FSCA may include the recall, modification, exchange, destruction or retrofitting of the device. FSCAs must be communicated by the manufacturer or its European Authorized
Representative to its customers and to the end users of the device through Field Safety Notices.
Any such safety issues involving our
products could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, will require the dedication
of our time and capital, distract management from operating our business and may harm our reputation and financial results.
Any of
the products for which we receive regulatory clearance or approval may be subject to product recalls. A recall of such products, either voluntarily or at the direction of the FDA or another governmental authority, or the discovery of serious safety
issues with our future products, could have a significant adverse impact on our business.
The FDA and similar foreign governmental
authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. The authority to require a recall must be based on an FDA finding that there is reasonable
probability that the device would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of products in the event of material deficiencies or defects in design or manufacture. Manufacturers
may, under their own initiative, recall a product if any material deficiency in a device is found. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. A
government-mandated or voluntary recall by us, or any distributor we may have in the future, could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing errors, design or labeling defects or other
deficiencies and issues.
We are also required to follow detailed recordkeeping requirements for all company-initiated medical device
corrections and removals and to report such corrective and removal actions to the FDA if they are carried out in response to a risk to health and have not otherwise been reported under the MDR regulations. We may initiate voluntary recalls involving
our products for which we receive regulatory clearance or approval in the future that we determine do not require notification to the FDA. If the FDA disagrees with our determinations, the FDA could require us to report those actions as recalls.
Recalls of any of our products for which we receive regulatory clearance or approval in the future would divert managerial and financial resources and have an adverse effect on our reputation, results of operations and financial condition, which
could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’ demands. We may also be subject to enforcement actions or liability claims, any may be required to bear other costs, or take
other actions that may have a negative impact on our future sales and our ability to generate profits.
If we fail to comply with
state laws and regulations, or if state laws or regulations change, our business could suffer.
In addition to FDA regulations,
most of our products are also subject to state regulations relating to their sale and use. These regulations are complex and vary from state to state, which complicates monitoring compliance. In addition, these regulations are in many instances in
flux. For example, federal regulations allow our prescription products to be sold to or on the order of “licensed practitioners,” that is, practitioners licensed by law to use or order the use of a prescription device. Licensed
practitioners are defined on a state-by-state basis. As a result, some states permit non-physicians to purchase and operate our products, while other states do not. Additionally, a state could change its regulations at any time to prohibit sales to
particular types of customers. We believe that, to date, we have sold our prescription products only to licensed practitioners. However, our failure to comply with state laws or regulations and changes in state laws or regulations may adversely
affect our business.
We, or our distributors, may be unable to obtain or maintain foreign regulatory qualifications or approvals
for our current or future products and indications, which could harm our business.
Sales of our products outside the United States
are subject to foreign regulatory requirements that vary widely from country to country. In many countries, our third party distributors are responsible for obtaining and maintaining regulatory approvals for our products. We do not control our third
party distributors, and they may not be successful in obtaining or maintaining these regulatory approvals.
Complying with foreign
regulatory requirements can be an expensive and time consuming process, and approval is not certain. The time required to obtain foreign clearances or approvals may be longer than that required for FDA clearance or approval, and
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requirements for such clearances or approvals may differ significantly from FDA requirements. Foreign regulatory authorities may not clear or approve our products for the same indications cleared
or approved by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA clearance or approval in addition to other risks. Although we or our distributors have obtained regulatory approvals in the
European Union and other countries outside the United States for many of our products, we or our distributors may be unable to maintain regulatory qualifications, clearances or approvals in these countries or obtain qualifications, clearances
or approvals in other countries. If we are not successful in doing so, our business will be harmed. We may also incur significant costs in attempting to obtain and in maintaining foreign regulatory clearances, approvals or qualifications. Foreign
regulatory agencies, as well as the FDA, periodically inspect manufacturing facilities both in the United States and abroad. If we experience delays in receiving necessary qualifications, clearances or approvals to market our products outside the
United States, or if we fail to receive those qualifications, clearances or approvals, or if we fail to comply with other foreign regulatory requirements, we and our distributors may be unable to market our products or enhancements in international
markets effectively, or at all. Additionally, the imposition of new requirements may significantly affect our business and our products. We may not be able to adjust to such new requirements, which may adversely affect our business.
Federal regulatory reforms may adversely affect our ability to sell our products profitably.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the
clearance or approval, manufacture and marketing of a device. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. For example, the FDA
proposed changing its standards for determining when a medical device modification must receive premarket clearance or approval. Although Congress objected to these revised standards, it is possible that the FDA will seek to implement these or
similar changes in the future.
In addition, most of the products and systems that we sell became subject in 2013 to an excise tax on
sales of certain medical devices in the United States after December 31, 2012 by the manufacturer, producer or importer in an amount equal to 2.3% of the sale price. Under the law, additional charges, including warranties, may be deemed to be
included in the sale price for purposes of determining the amount of the excise tax. Although this excise tax has been suspended for 2016 and 2017, we believe this excise tax could harm our future sales and profitability.
The Patient Protection and Affordable Care Act includes reporting and disclosure requirements, commonly referred to as the “Sunshine
Act”, for “applicable manufacturers” of drugs, biological, medical devices and medical supplies with regard to payments or other transfers of value made to certain physicians and teaching hospitals. The final rules implementing the
Sunshine Act are complex, ambiguous, and broad in scope. Sales related to the Ellman surgical product line are subject to the reporting requirements under the Sunshine Act. We believe that sales related to our aesthetic product lines fall under a
reporting exception under this law and, accordingly, reporting related to those sales is not required.
There are a number of federal and
state laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services
promulgated patient privacy rules under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. These privacy rules protect medical records and other personal health information by limiting their use and disclosure, giving
individuals the right to access, amend and seek accounting of their own health information and limiting most use and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose. If we or any of our
service providers are found to be in violation of the promulgated patient privacy rules under HIPAA, we could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation and have a material adverse effect on
our business, financial condition and operating results. Similarly, failure to comply with the European Union’s requirements regarding the protection of personal information can also lead to significant penalties and sanctions.
Our compliance with applicable legal and regulatory requirements is, and will continue to be, costly and time consuming. It is impossible to
predict whether other legislative changes will be enacted or government regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. If we are found to be in violation of any of this or any other law, we may
be subject to penalties, including fines.
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Risks Related to Litigation
*If our past fax practices are shown to have violated the Telephone Consumer Protection Act, that could have a material impact on our
results of operations, cash flows and financial condition.
In the past, we have used faxes to disseminate information about our
clinical workshops to large numbers of customers and potential customers. Under the federal Telephone Consumer Protection Act, or TCPA, recipients of noncompliant fax advertisements are entitled to $500 per violation, and that amount may be
increased up to $1,500 for knowing or willful violations.
In July 2016, we were sued in federal court by ARcare, Inc., individually
and as putative representative of a purported class under the TCPA. The plaintiff alleges that we violated the TCPA by sending fax advertisements that did not comply with statutory and Federal Communications Commission requirements that senders
provide recipients with certain information about how to opt out from receiving faxed advertisements in the future, and by sending unsolicited fax advertisements.
We have answered the complaint and denied liability, but litigation is subject to numerous uncertainties and we are unable to predict the
ultimate outcome of this matter. Even if we prevail in this lawsuit, other individual or class action claims may be brought against us alleging past violations of the TCPA. Moreover, the amount of any potential liability in connection with this
lawsuit or other possible lawsuits will depend, to a large extent, on whether a class in a class action lawsuit is certified and, if one is certified, on the scope of the class, neither of which we can predict at this time. We have tendered a claim
with respect to the ARcare lawsuit to our general liability insurance carrier and the carrier has indicated that coverage is unlikely for this claim.
We have not recorded a liability in respect of this matter, and at this time we cannot estimate the loss or the range of losses that we may
incur in respect of this matter. However, we may determine in the future that an accrual is required, and we may be required to pay damages in respect of this lawsuit or other possible future lawsuits arising out of our past fax transmissions, any
of which could materially and adversely affect our results of operations, cash flows and financial condition. Regardless of the outcome, this lawsuit or other possible future lawsuits may cause us to incur significant legal expenses and divert the
attention of our management and key personnel from our business operations.
Product liability and business liability suits could be
brought against us due to defective design, material or workmanship or due to misuse of our products. These lawsuits could be expensive and time consuming and result in substantial damages to us and increases in our insurance rates.
If our products are defectively designed, manufactured or labeled, contain defective components or are misused, we may become subject to
substantial and costly litigation by our customers or their patients or clients. Misusing our products or failing to adhere to operating guidelines for our products can cause severe burns or other significant damage to the eyes, skin or other
tissue. If our products fail to function properly, we may be required to conduct product recalls and our customers may lose the ability to treat their patients or clients resulting in a loss of business for our customers. We are routinely involved
in claims related to the use of our products. Product liability and business liability claims could divert management’s attention from our core business, be expensive to defend and result in sizable damage awards against us. Our current
insurance coverage may not apply or may not be sufficient to cover these claims, and the coverage we have is subject to deductibles for which we are responsible. Moreover, in the future, we may not be able to obtain insurance in amount or scope
sufficient to provide us with adequate coverage against potential liabilities. Any product liability or other claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing
continuing coverage, could harm our reputation in the industry and reduce product sales. We would need to pay any losses in excess of our insurance coverage out of cash reserves, harming our financial condition and adversely affecting our operating
results.
Employment related lawsuits could be brought against us for improper termination of employment, sexual harassment, hostile
work environment and other claims. These lawsuits could be expensive and time consuming and result in substantial damages to us and increases in our insurance rates.
If we terminate employment for improper reasons or fail to provide an appropriate work environment or it is alleged that we did so, we may
become subject to substantial and costly litigation by our former and current employees. We are routinely involved in claims related to improper termination and other claims. Such claims could divert management’s attention from our core
business, be expensive to defend and result in sizable damage awards against us. Our current insurance coverage may not apply or may not be sufficient to cover these claims, and the coverage we have is subject to deductibles for which we are
responsible. Moreover, in the future, we may not be able to obtain insurance in amount or scope sufficient to provide us with adequate coverage against potential liabilities. Any employment related claims brought against us, with or without merit,
could increase our employment law insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry and reduce product sales. We would need to pay any losses in excess of our insurance coverage out of cash
reserves, harming our financial condition and adversely affecting our operating results.
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