Risks
Related to Our Business
Economic uncertainty has reduced and may continue to reduce patient demand for our products; if there is not
sufficient patient demand for the procedures for which our products are used, practitioner demand for these systems could drop, resulting in unfavorable operating results.
The aesthetic industry in which we operate is particularly vulnerable to economic trends. The decision to undergo a procedure from one our systems is driven by consumer demand. Most procedures performed
using our systems are elective procedures, the cost of which must be borne by the patient, and are not reimbursable through government or private health insurance. In times of economic uncertainty or recession, individuals often reduce the amount of
money that they spend on discretionary items, including aesthetic procedures. The general economic difficulties being experienced by our customers and the lack of availability of consumer credit for some of our customers are adversely affecting the
market in which we operate.
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If the economic hardships our customers face continue or worsen, our business would be
negatively impacted and our financial performance would be materially harmed in the event that any of the above factors discourage patients from seeking the procedures for which our products are used.
We are totally dependent upon the success of our systems, which have a limited commercial history. If our products fail to achieve sufficient market
acceptance, our business will suffer.
We expect that sales of our systems, including our treatment tips, will account for
substantially all of our revenue for the foreseeable future. We expect to continue to expand our line of systems and treatment tips. This may not occur when expected, or at all, which would negatively affect our anticipated revenue. Our systems may
not significantly penetrate current or new markets. If demand for our systems does not increase as we anticipate, or declines, our business, financial condition and results of operations will be harmed.
Our financial results may fluctuate unpredictably, making it difficult to forecast future performance.
Our limited operating history makes it difficult for us to predict future performance. Historically, the demand for our systems has varied
from quarter to quarter. A number of factors, over which we have limited or no control, may contribute to fluctuations in our financial results, such as:
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delays in receipt of anticipated purchase orders;
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seasonal variations in patient demand for aesthetic procedures;
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the impact of general economic conditions on the demand for aesthetic procedures;
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performance of our independent distributors;
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the lack of credit available to physicians to finance capital equipment purchases;
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positive or negative media coverage of our products or products of our competitors or our industry;
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our ability to obtain further regulatory clearances or approvals;
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delays in, or failure of, product and component deliveries by our subcontractors and suppliers;
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changes in the length of the sales process;
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the costs of litigation claims or adverse outcomes from legal proceedings;
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customer response to the introduction of new product offerings;
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fluctuations in foreign currency; and
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excess or obsolete inventory charges.
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Our success depends on growing physician adoption of our systems and continued use of our treatment tips.
Our target physician customers typically already own one or more aesthetic device products. Our ability to grow our business and convince physicians to purchase our systems and products depends on the
success of our clinical and sales and marketing efforts. Our business model involves both a capital equipment purchase of our systems and continued purchases by our customers of our treatment tips. This may be a novel business model for many
potential customers who may be used to competing products that are either exclusively capital equipment, such as many laser-based systems, or that are exclusively single-use products, such as Botox or dermal fillers. In addition, the lack of credit
available to physicians to finance the purchase of systems may also impact the adoption of these systems. We must be able to demonstrate that the cost of our systems and the revenue that the physician can derive from performing procedures using our
products are compelling when compared to the cost and revenue associated with alternative products. When marketing to plastic surgeons, we must also, in some cases, overcome a bias against non-invasive or minimally invasive aesthetic procedures. If
we are unable to increase physician adoption of our systems and use of our treatment tips, our financial performance will be adversely affected.
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We may not be able to achieve or sustain profitability even if we are able to generate significant
revenue.
We incurred a loss of $38.0 million and income of $1.2 million for the year ended December 31, 2012 and for
the six months ended June 30, 2013, respectively, despite revenue growth during these two periods. In the past, we have expanded our business and increased our expenses in order to grow revenue. We will have to increase our revenue while
effectively managing our expenses in order to achieve sustained profitability. Our failure to achieve or sustain profitability could negatively impact the market price of our common stock.
We may be required to raise additional capital and/or debt financing on unfavorable terms.
We substantially increased our outstanding indebtedness, and reduced our available cash balances, with our acquisition of Liposonix, and we expect to make substantial future cash payments in respect of
that transaction. In addition, we borrowed $10 million under a new subordinated debt facility in August 2012, and we commenced the repayment of this facility and related fees on June 1, 2013 and will continue to make payments through
April 1, 2015. Further, if we fail to achieve sustained profitability and positive cash flow or if unanticipated expenses or other uses of cash arise, our liquidity needs may exceed our cash and cash equivalents and available credit facilities.
We have very few authorized and unissued, or unreserved, shares of capital stock, so our ability to raise capital through the issuance of equity securities is extremely limited. Other forms of financing may not be available on a timely basis on
terms acceptable to us, or at all. The availability of financing will depend, in part, on market conditions, and the outlook for our company. If we raise additional funds by issuing debt, we may not be able to obtain such debt with favorable terms,
and we may be subject to limitations on our operations, through debt covenants or other restrictions. If adequate funds are not available with favorable terms, we may have to delay development of new products or reduce marketing, customer support or
other resources devoted to our products. In addition, if we are unable to obtain financing as needed, we may come into breach of our outstanding loan covenants. Any of these factors could harm our business and financial condition.
We are subject to fluctuations in the exchange rate of the U.S. dollar and foreign currencies.
As a result of recent fluctuations in currency markets, our products priced in U.S. dollars may be more expensive relative to products of
our foreign competitors, which could result in lower revenue and profit margins. We do not actively hedge our exposure to currency rate fluctuations. While we transact business primarily in U.S. dollars, and a significant proportion of our revenue
is denominated in U.S. dollars, a growing proportion of our revenue and costs is denominated in other currencies, such as the Australian dollar, Euro, Japanese Yen, and British Pound Sterling. In addition, the functional currency of our foreign
subsidiaries is the U.S. dollar. As a result, our financial performance could be adversely affected by changes in the exchange rates of these currencies to the U.S. dollar.
We may not be successful in selling and marketing our new products.
The
commercial success of the products and technologies we develop will depend upon the acceptance of these products by physicians and their patients. It is difficult for us to predict how successful recently introduced products and procedures or
products we are currently developing, will be over the long term. If the products we develop do not gain market acceptance, our revenues and operating results will suffer. In addition, we expect to face significant competition, in some cases from
companies that are more established, market more widely known products and have greater resources than we do. We may not be able to differentiate our new products sufficiently from our competitors products to achieve significant market
penetration. As a result of these factors, we may incur significant sales and marketing expenses for our new products without achieving commercial success, which could harm our business and our competitive position.
In addition, as new or enhanced products are introduced, we must successfully manage the transition from older products in order to
minimize disruption in customers ordering patterns, avoid excessive levels of older product inventories, and ensure that enough supplies of new products can be delivered to meet customer demand.
The failure of our systems to meet patient expectations or the occurrence of unpleasant side effects from the procedures for which our products are
used could impair our financial performance.
Our future success depends upon patients having a positive experience with
the procedures for which our products are used in order to increase physician demand for our products, as a result of both individual patients repeat business and as a result of word-of-mouth referrals. We believe that patients may be
dissatisfied with these procedures if they find them to be too painful. Furthermore, patients may experience temporary swelling or reddening of the skin as a procedural side effect. In rare instances, patients may receive burns, blisters, skin
discoloration or skin depressions. Experiencing excessive pain or any of these side effects or adverse events could discourage a patient from having one of the procedures for which our products are used or discourage a patient from having additional
procedures or referring these procedures to others. In order to generate repeat and referral business, we also believe that patients must be satisfied with the effectiveness of the procedures. Results obtained from the procedures for which our
products are used are subjective and may be subtle. A product treatment may produce results that may not meet patients expectations. If patients are not satisfied with the procedure or feel that it is too expensive for the results obtained,
our reputation and future sales will suffer.
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The conditions of our secured term loan contain certain financial covenants with respect to our
performance and other covenants that restrict our activities. If we are unable to comply with these covenants, we would have to negotiate an amendment to the loan agreement or the lender could accelerate the repayment of our indebtedness.
Our secured term loan contains certain financial covenants which require us to maintain a certain liquidity ratios and
specified levels of EBITDA (as defined in the loan agreement) each fiscal quarter. We are also subject to restrictive covenants, including among others covenants that restrict our ability to incur additional indebtedness, to dispose of assets, to
effect certain corporate transactions, including specified mergers or acquisitions, and to pay dividends. The loan agreement generally provides for customary events of default, including among others non-payment defaults, covenant defaults, and a
default in the event a material adverse change occurs. There is no assurance that we will be able to comply with our financial covenants. Upon the occurrence of an event of default under the term loan, the lender will be entitled to acceleration of
all obligations under the loan agreement and an obligation to repay all obligations in full and such event of default could result in an increase to the applicable interest rate of 5.00%. Any acceleration in the repayment of our indebtedness could
adversely affect our business and financial condition.
We may face problems with our acquisition of Sound Surgical Technologies.
In February 2013, we completed our acquisition of Sound Surgical, a developer, manufacturer and marketer of surgical and
non-invasive body shaping products utilizing ultrasound technology.
We cannot be certain that this acquisition will be
successful or that we will realize the anticipated benefits of the acquisition. In particular, we may not be able to realize the strategic and operational benefits and objectives we had anticipated, including greater revenue and market
opportunities, maintaining industry leadership and consistent profitability. In addition, the demand for our combined product offerings may fluctuate and we may face increased competition in the markets for our products. Any of the following
factors, as well as the inability to realize the long-term anticipated efficiencies and synergies of the acquisition of Sound Surgical, may have a material adverse effect on our business, operating results and financial condition. These factors may
include:
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the potential disruption of the combined companys ongoing business and diversion of management resources;
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the difficulty of incorporating acquired products, technology and rights into the combined companys products and services;
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the inability to scale up the manufacturing of recently introduced products rapidly enough to satisfy demand;
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unanticipated expenses related to integration of operations;
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the possibility that we are unsuccessful in marketing the acquired products;
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the impairment of relationships with customers as a result of any integration of new personnel;
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potential settlement of product liability litigation and claims that exceed available insurance coverage;
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the impairment of relationships with key suppliers and their ability to meet our demand;
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potential unknown liabilities associated with the acquired business and technology;
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potential periodic impairment of goodwill and intangible assets acquired; and
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potential inability to retain, integrate and motivate key personnel.
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We have grown, and may continue to grow, through acquisitions, which gives rise to risks and challenges that could adversely affect our future financial results.
We have in the past acquired, and we expect to acquire in the future, other businesses, business units, and technologies. Acquisitions can
involve a number of special risks and challenges, including:
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complexity, time, and costs associated with the integration of acquired business operations, workforce, products, and technologies;
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diversion of management time and attention;
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loss or termination of employees, including costs associated with the termination or replacement of those employees;
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assumption of liabilities of the acquired business, including litigation related to the acquired business;
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addition of acquisition-related debt as well as increased expenses and working capital requirements;
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dilution of stock ownership of existing stockholders; and
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substantial accounting charges for restructuring and related expenses, write-off of in-process research and development, amortization of intangible
assets, and stock-based compensation expense.
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If integration of our acquired businesses is not successful,
we may not realize the potential benefits of an acquisition or may suffer other adverse effects. To integrate acquired businesses, we must implement our technology systems in the acquired operations and integrate and manage the personnel of the
acquired operations. We also must effectively integrate the different cultures of acquired business organizations into our own in a way that aligns various interests, and may need to enter new markets in which we have no or limited experience and
where competitors in such markets have stronger market positions.
We have substantial amounts of goodwill and purchased
intangible assets from prior acquisitions. We test goodwill for impairment at least annually and more frequently if events or changes in circumstances indicate that this asset may be impaired and we review purchased intangible assets for impairment
whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. We may be required to record impairment charges in the future with respect to these assets recorded from past or
future acquisitions.
Any of the foregoing, and other factors, could harm our ability to achieve anticipated levels of
profitability from acquired businesses or to realize other anticipated benefits of acquisitions.
As a result of the
acquisition of Medicis Technologies Corporation, we may be required to make additional cash payments for attainment of certain targets. We recorded a liability for the contingent consideration payments with a fair value of $37.1 million at
June 30, 2013 based upon a discounted cash flow model that uses significant estimates and assumptions. Any changes to these estimates and assumptions could significantly impact the fair values recorded for this liability resulting in
significant charges to our condensed consolidated statements of operations.
We may incur goodwill impairment charges that would adversely
affect our operating results.
We review goodwill for impairment annually and more frequently if events and circumstances
indicate that impairment possibly exists. Factors we would consider important that could trigger an impairment review include, but are not limited to, a significant decline in our stock price for a sustained period and decreases in our market
capitalization below the recorded amount of our net assets for a sustained period. Our stock price is highly volatile and has experienced significant declines in the past. We performed our annual review of goodwill as of December 31, 2012 and
we determined that an impairment charge was not required. If we have indicators of impairment and assess that the fair value of the company is below the carrying value, an impairment of goodwill may result. The balance of goodwill was $103.7
million as of June 30, 2013. There can be no assurance that future goodwill impairments will not occur.
We may fail to effectively
build and manage our sales force or to market and distribute our products.
We rely on a direct sales force to sell our
products in the United States and in certain international regions. As the Company grows, we expect to grow or realign our sales organization to meet our anticipated sales objectives. There are significant risks involved in building and managing our
sales organization, including risks related to our ability to:
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hire qualified individuals as needed;
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provide adequate training for the effective sale of our products; and
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retain and motivate our sales employees.
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In addition, sales to non-traditional practitioners of aesthetic procedures are a key element of our growth strategy. However, our sales force historically has sold primarily to dermatologists and plastic
surgeons. Also, our systems compete with products that are well-established in the market. Accordingly, it is difficult for us to predict how well our sales force will perform. Our failure to adequately address these risks could have a material
adverse effect on our ability to sell our products, causing our revenue to be lower than expected and harming our results of operations.
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We may be involved in intellectual property litigation, which could be costly and time consuming, and may
impact our future business and financial performance.
Litigation related to infringement and other intellectual property
claims, with or without merit, is unpredictable, can be expensive and time-consuming and could divert managements attention from our core business. If we lose this kind of litigation, a court could require us to pay substantial damages, and
prohibit us from using technologies essential to our products, any of which would have a material adverse effect on our business, results of operations and financial condition. We do not know whether necessary licenses would be available to us on
satisfactory terms, or whether we could redesign our products or processes to avoid infringement.
Our industry has been
characterized by frequent intellectual property litigation. Our competitors or other patent holders may assert that our products and the methods we employ are covered by their patents, and we have, from time to time, received notices of potential
infringement by us of other parties patents. If our products or methods are found to infringe, we could be prevented from marketing them. In addition, we do not know whether our competitors or potential competitors have applied for, or will
apply for or obtain, patents that will prevent, limit or interfere with our ability to make, use, sell, import or export our products. Competing products may also appear in other countries in which our patent coverage might not exist or be as
strong. If we lose a foreign patent lawsuit, we could be prevented from marketing our products in one or more countries.
In
addition, we may hereafter become involved in litigation to protect our trademark rights associated with our company name or the names used with our products. Names used with our products and procedures may be claimed to infringe names held by
others or to be ineligible for proprietary protection. If we have to change the name of our company or products, we may experience a loss in goodwill associated with our brand name, customer confusion and a loss of sales.
We are involved in litigation relating to our acquisition of Reliant Technologies, Inc., which could be costly and time consuming.
On December 21, 2009, a complaint was filed in the Santa Clara County Superior Court by three former stockholders of Reliant
Technologies, Inc (Reliant) against Reliant and certain former officers and directors of Reliant in connection with the Companys acquisition of Reliant, which closed on December 23, 2008. The complaint purports to be brought
on behalf of the former common stockholders of Reliant. As a result of the acquisition, a successor entity to Reliant, Reliant Technologies, LLC, became our wholly-owned subsidiary. One member of our Board of Directors and our former Chief
Technology Officer and former member of our Board of Directors are among the defendants named in the complaint. The principal claim, among others, is that Reliant violated the California Corporations Code by failing to obtain the vote from a
majority of holders of Reliants common stock prior to the consummation of the acquisition. The complaint also purports to challenge disclosures made by Reliant in connection with its entry into the acquisition and alleges that the defendants
failed to maximize the value of Reliant for the benefits of Reliants common stockholders. On August 2, 2010, defendants filed a motion to dismiss or stay the entire action based on a mandatory forum selection clause in the merger
agreement which requires that claims related to the merger be litigated in Delaware. On September 28, 2010, the Court granted the defendants motion to dismiss or stay, and stayed the action indefinitely. On January 20,
2012, the Court dismissed plaintiffs case without prejudice. On July 11, 2013, the court of appeals affirmed the dismissal. Plaintiffs have not filed a complaint against the defendants in Delaware. We believe that the plaintiffs
claims are without merit.
From time to time we are a party to lawsuits, which often require significant management time and attention and
result in significant legal expenses, and which could, if not determined favorably, negatively impact our business, financial condition, results of operations, and cash flows.
From time to time, including at the present time, we are a party to litigation with respect to the conduct of our business, including the
conduct of business by companies we have acquired. The expense of defending such litigation may be costly and divert managements attention from the day-to-day operations of our business, which could adversely affect our business, results of
operations, and cash flows. In addition, an unfavorable outcome in such litigation could result in significant monetary damages or injunctive relief that could negatively impact our ability to conduct our business, results of operations, and cash
flows.
Intellectual property rights may not provide adequate protection for our products, which may permit third parties to compete
against us more effectively.
We rely on a combination of patent, copyright, trademark and trade secret laws and
confidentiality and invention assignment agreements to protect our intellectual property rights. As of June 30, 2013, we had 142 issued U.S. patents, 80 pending U.S. patent applications, 142 issued foreign patents and 122 pending foreign patent
applications, some of which foreign applications preserve an opportunity to pursue patent rights in multiple countries. Some of our system components are not, and in the future may not be, protected by patents. Additionally, our patent applications
may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Any patents we obtain may be challenged, invalidated or legally circumvented by third parties. Consequently, competitors could market products and use
manufacturing processes that are substantially similar to, or superior to, ours. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors, former employees or current
employees, despite the existence generally of confidentiality agreements and other contractual restrictions. 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. Moreover, we do not have patent rights in all foreign countries in which a market may exist, and where we have applied for foreign patent rights, the laws of many foreign countries will not
protect our intellectual property rights to the same extent as the laws of the United States.
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In addition, competitors could purchase our systems 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. 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.
Performing clinical studies on, and collecting data from the procedures for which our products are used is inherently subjective, and we have limited
data regarding the efficacy of our systems. If future data is not positive or consistent with our prior experience, rates of physician adoption will likely be harmed.
We believe that in order to significantly grow our business, we will need to continue to conduct future clinical studies of the effectiveness of our systems. Clinical studies of aesthetic treatments are
subject to a number of limitations. First, these studies may not involve well-established objective standards for measuring the effectiveness of treatment. Subjective, before and after, evaluation of the extent of change in the patients
appearance, performed by a medical professional or by the patient, is one of the most common methods of evaluating effectiveness. A clinical study may conclude that a treatment is effective even if the change in appearance is subtle and not
long-lasting. Second, as with other non-invasive or minimally invasive energy-based devices, the effects of the procedures for which our products are used vary from patient to patient and can be influenced by a number of factors, including the area
of the body being treated, the age and skin laxity of the patient and operator technique.
We have conducted a minimal number
of head-to-head clinical studies that compare results from treatment with our systems to surgery or treatment with other aesthetic devices. Without additional head-to-head studies against competing alternative treatments, potential customers may not
find clinical studies of our technology sufficiently compelling to purchase our systems. If we decide to pursue additional studies in the future, they could be expensive and time consuming, and the data collected may not produce favorable or
compelling results. If the results of such studies do not meet physicians expectations, our systems may not become widely adopted, physicians may recommend alternative treatments for their patients, and our business may be harmed.
To successfully market and sell our systems internationally, we must address many issues with which we have limited experience.
Sales outside of North America accounted for 51%, 55% and 55% of our revenue for the years ended December 31, 2012, 2011 and 2010. We
believe that a significant portion of our business will continue to come from international sales through increased penetration in countries where we currently sell our products, combined with expansion into new international markets. 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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difficulties in penetrating markets in which our competitors products are more established;
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reduced or no protection for intellectual property rights in some countries;
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export restrictions, trade regulations and foreign tax laws;
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regulation of the sale of the hydroflurocarbon used with our Thermage and Isolaz systems;
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fluctuating foreign currency exchange rates;
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foreign certification and regulatory clearance or approval requirements;
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difficulties in developing effective marketing campaigns for unfamiliar, foreign countries;
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dependence on third-party distributors in some territories;
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customs clearance and shipping delays;
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political and economic instability;
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natural disasters (such as earthquakes, hurricanes, tsunamis, floods or storms);
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preference for locally produced products;
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business interruption resulting from transitioning to direct sales from international distributors in certain international regions; and
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difficulties in getting distributors to relinquish regulatory documentation.
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If one or more of these risks were realized, it could require us to dedicate significant resources to remedy the situation, and if we are
unable to find a solution, our revenue may decline.
To market and sell our products internationally, we depend on distributors, and they
may not be successful.
Our sales in the international markets have increased in the past year. We currently depend
primarily on third-party distributors to sell and service our products internationally and to train our international customers, and if these distributors terminate their relationships with us or under-perform we may be unable to maintain or
increase our level of international revenue. We will also need to engage additional international distributors to grow our business and expand the territories in which we sell our systems. Distributors may not commit the necessary resources to
market, sell and service our products to the level of our expectations. If current or future distributors do not perform adequately, or if we are unable to engage distributors in particular geographic areas, our revenue from international operations
will be adversely affected. Also, as the international mix of our revenues increases, we have a greater exposure to the ability to collect receivables from our international distributors. In addition, from time to time, legal disputes arise when we
wish to discontinue a distributor relationship in a given territory or otherwise feel a distributor is not performing adequately. Such disputes have led to legal proceedings that are costly to litigate and that could result in outcomes that are not
favorable to us.
We face significant uncertainty in the industry due to government healthcare reform.
Political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. The Patient Protection and
Affordable Care Act (the Healthcare Act) signed into law in March 2010 enacted sweeping reforms to the U.S. healthcare industry, including mandatory health insurance, reforms to Medicare and Medicaid, the creation of large insurance
purchasing groups, new taxes on medical equipment manufacturers and other significant modifications to the healthcare delivery system. Due to uncertainties regarding the ultimate features of the new federal legislation and its implementation, we
cannot predict what impact the Healthcare Act may have on us, our customers or our industry. A material amount of our sales are subject to the medical device excise tax included in the Healthcare Act, which is a 2.3% tax to be levied on a
significant portion of our total domestic sales of medical devices. The tax is calculated using sales price, irrespective of a companys profitability. The excise tax provisions went into effect January 1, 2013.
We compete against companies that have more established products, longer operating histories and greater resources, which may prevent us from
achieving significant market penetration or increased operating results.
The aesthetics market is highly competitive and
dynamic, and is marked by rapid and substantial technological development and product innovations. Demand for our products could be diminished by equivalent or superior products and technologies offered by competitors. Specifically, our products
compete against a variety of offerings in the aesthetics market, including laser and other light-based medical devices, pharmaceutical products such as Botox, filler injections, chemical peels, microdermabrasion, liposuction, cosmetic surgical
procedures and less invasive surgical solutions such as implanted sutures. We compete against products and procedures using laser, light-based, RF, ultrasound, and other aesthetic energy modalities for skin resurfacing and rejuvenation, skin
tightening, body contouring, and acne treatment from companies such as Alma Laser, Cutera, Cynosure, Erchonia, Lumenis, Lutronic, Palomar, MedixSysteme, Real Aesthetics, Sciton, Sybaritic, Syneron, Ulthera, Ultrashape, and Zeltiq. Our consumer
device competes against companies that offer laser, LED and other aesthetic energy devices for skin rejuvenation and acne treatment such as Clarisonic, Palomar, PhotoMedex, Syneron, Tria Beauty and Zeno.
Competition in the aesthetics market could result in price-cutting, reduced profit margins and loss of market share, any of which would
harm our business, financial condition and results of operations. Our ability to compete effectively depends upon our ability to distinguish our company and our products from our competitors and their products, and on such factors as:
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safety and effectiveness;
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success of our marketing initiatives;
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compelling clinical data;
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intellectual property protection;
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quality of customer support; and
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development of successful distribution channels, both domestically and internationally.
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Some of our competitors have more established products and customer relationships than we do, which could inhibit our market penetration
efforts. For example, we have encountered, and expect to continue to encounter, situations where, due to pre-existing relationships, potential customers decided to purchase additional products from our competitors. Potential customers also may need
to recoup the cost of expensive products that they have already purchased from our competitors and thus may decide not to purchase our products, or to delay such purchase. If we are unable to achieve continued market penetration, we will be unable
to compete effectively and our business will be harmed.
In addition, some of our current and potential competitors have
significantly greater financial, research and development, manufacturing, and sales and marketing resources than we have. Our competitors could utilize their greater financial resources to acquire other companies to gain enhanced name recognition
and market share, as well as new technologies or products that could effectively compete with our existing product lines. Given the relatively few competitors currently in the market, any business combination could exacerbate any existing
competitive pressures, which could harm our business.
Competition among providers of devices for the aesthetics market is characterized by
rapid innovation, and we must continuously develop new products or our revenue may decline.
While we attempt to protect
our products through patents and other intellectual property rights, there are few barriers to entry that would prevent new entrants or existing competitors from developing products that compete directly with ours. If we continue to create market
demand for non-surgical, non-invasive or minimally invasive treatments, competitors will enter the market with other products making similar or superior claims. We expect that any competitive advantage we may enjoy from our current and future
innovations may diminish over time, as companies successfully respond to our, or create their own, innovations. Consequently, we believe that we will have to continuously innovate and improve our products and technology to compete successfully. If
we are unable to innovate successfully, our systems could become obsolete and our revenue will decline as our customers purchase competing products.
Our products may have undetected and unforeseen design flaws, and may experience failures particularly when first introduced, or at any time during their lifecycle. Any product recall as a result of flaws
or failures could result in the loss of or delays in market acceptance of our products and adversely affect our business and reputation. Correcting defects can be time consuming. Any significant returns or warranty claims could result in significant
additional costs to us and could adversely affect our results of operations.
Negative publicity regarding our current or future products
and procedures could harm demand, which would adversely affect sales and our financial performance.
We have in the past
experienced, and expect that in the future we will experience, negative media exposure. Such publicity may present negative individual physician or patient experience regarding the safety or effectiveness of our procedures. Competitors could attempt
to use such publicity to harm our reputation and disrupt current or potential future customer relationships. While, to date, we have not observed a material impact on our quarterly financial results of operations from negative publicity, future
results could be negatively impacted. Additionally, while we believe that obtaining positive publicity is important to our success, and it is an important component of our marketing efforts, we have also not observed a material impact on our
quarterly financial results of operations from positive publicity.
Our reputation and competitive position may be harmed not
only by negative media exposure, but also by other publicly-available information suggesting that our procedures are not safe. For example, we file reports with the FDA that are publicly available on the FDAs website if our products may have
caused or contributed to a serious injury or malfunctioned in a way that would likely cause or contribute to a serious injury if it were to recur. Competitors may attempt to harm our reputation by pointing to isolated injuries that have been
reported or publicized, or by claiming that their product is superior because they have not filed as many reports with the FDA. Such negative publicity and competitor behavior could harm our reputation and our future sales.
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Our manufacturing operations and those of our key manufacturing subcontractors are dependent upon
third-party suppliers, making us vulnerable to supply shortages and price fluctuations, which could harm our business.
Several components and materials that comprise our products are currently manufactured by a single supplier or a limited number of
suppliers. In many of these cases, we have not yet qualified alternate suppliers and rely upon purchase orders, rather than long-term supply agreements. A supply interruption or an increase in demand beyond our current suppliers capabilities
could harm our ability to manufacture our products until new sources of supply are identified and qualified. Our reliance on these suppliers subjects us to a number of risks that could harm our business, including:
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interruption of supply resulting from modifications to or discontinuation of a suppliers operations;
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delays in product shipments resulting from uncorrected defects, reliability issues or a suppliers variation in a component;
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a lack of long-term supply arrangements for key components with our suppliers;
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inability to obtain adequate supply in a timely manner, or to obtain adequate supply on commercially reasonable terms;
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difficulty 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;
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damage to our brand reputation caused by defective components produced by our suppliers;
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interruption or delay of supply due to a natural disaster affecting suppliers operations;
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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
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fluctuation in delivery by our suppliers due to changes in demand from us or their other customers.
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Any interruption in the supply of components or materials, or our inability to obtain substitute components or materials from alternate
sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers, which would have an adverse effect on our business.
If, in the future, we decide to perform additional manufacturing functions internally that we currently outsource, our business could be harmed by our limited manufacturing experience and related
capabilities.
We currently perform certain value-added and proprietary manufacturing processes internally at our principal
facility, and we outsource the manufacture of components, subassemblies and certain finished products to a limited number of third parties. For financial or operational purposes, we may elect to perform additional component or system manufacturing
functions internally. In that event, we may face a number of challenges beyond those that we currently address in our internal assembly, inspection, testing and certification activities. Implementing complex or specialized manufacturing processes
could lead to difficulties in producing sufficient quantities of manufactured items that meet our quality standards and that comply with applicable regulatory requirements in a timely and cost-effective manner. In addition, if we experience these
types of internal manufacturing difficulties, it may be expensive and time consuming to engage a new or previous subcontractor or supplier to fulfill our replacement manufacturing needs. The occurrence of any of these events could harm our business.
Problems in our manufacturing processes, or those of our manufacturing subcontractors, that lead to an actual or possible
malfunction in our products, may require us to recall products from customers and could disrupt our operations. Our results of operations, our reputation and market acceptance of our products could be harmed if we encounter difficulties in
manufacturing that result in a recall or patient injury, and delays in our ability to fill customer orders.
We outsource the repair of key
elements of some products to sole-source service subcontractors.
We outsource the repair of certain key elements of our
systems to sole source contract service providers. If the operations of those service subcontractors are interrupted, we may be limited in our ability to repair equipment. Our service subcontractors are dependent on trained technical labor to
effectively repair our products. In addition, our service subcontractors may be operating as medical device manufacturers and as such are required to demonstrate and maintain compliance with the Quality System Review (QSR). If our
service subcontractors fail to comply with the QSR, repair operations could be affected and our ability to repair certain systems may be impaired.
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We may not be able to develop an alternative cooling system that will be in compliance with changing
environmental regulations in a timely or cost-effective manner.
The cooling capability of our Thermage and Isolaz systems
relies upon a hydroflurocarbon, or HFC, called R134a, to protect the outer layer of the skin from over-heating while our device delivers RF energy to the subcutaneous tissue. New environmental regulations phasing out certain HFCs over the next
decade have been adopted or are under consideration in a number of countries, and recent European Union directives require the phase-out of certain HFCs. We have also put in place a solution for the European Union import restrictions. If we are
unable to develop an alternative cooling system for our device which is not dependent on R134a in a timely or cost-effective manner, our Thermage and Isolaz systems may not be in compliance with environmental regulations, which could result in
fines, civil penalties and the inability to sell our products in certain major international markets.
We forecast sales to determine
requirements for components and materials used in our systems, and if our forecasts are incorrect, we may experience delays in shipments or increased inventory costs.
We keep limited materials, components and finished product on hand. To manage our manufacturing operations with our suppliers, we forecast anticipated product orders and material requirements to predict
our inventory needs up to six months in advance and enter into purchase orders on the basis of these requirements. Our limited historical experience may not provide us with enough data to accurately predict future demand. If our business expands,
our demand for components and materials would increase and our suppliers may be unable to meet our demand. If we overestimate our component and material requirements, we will have excess inventory, which would increase our expenses. If we
underestimate our component and material requirements, we may have inadequate inventory, which could interrupt, delay or prevent delivery of systems to our customers. Any of these occurrences would negatively affect our financial performance and the
level of satisfaction our customers have with our business.
Even though we require training for users of our professional
systems, there exists a potential for misuse, which could harm our reputation and our business.
U.S. federal regulations
allow us to sell our professional systems to licensed practitioners. The definition of licensed practitioners varies from state to state. As a result, our professional systems may be operated by licensed practitioners with
varying levels of training, and in many states by non-physicians, including physician assistants, registered nurses and nurse practitioners. Thus, in some states, the definition of licensed practitioner may result in the legal use of our
professional products by non-physicians. Outside the United States, our independent distributors sell in many jurisdictions that do not require specific qualifications or training for purchasers or operators of products. We do not supervise the
procedures performed with our professional systems, nor can we be assured that direct physician supervision of our equipment occurs according to our recommendations. We, and our distributors, require purchasers of our professional products to
undergo an initial training session as a condition of purchase, but do not require ongoing training. In addition, we prohibit the sale of our professional systems to companies that rent our systems to third parties without our approval, but cannot
prevent an otherwise qualified physician from contracting with a rental company in violation of their purchase agreement with us. The use of our professional systems by non-physicians, as well as noncompliance with the operating guidelines set forth
in our training programs, 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 due to defective design, labeling, material or workmanship, or misuse of our products, and could result in expensive and time-consuming litigation,
payment of substantial damages and an increase 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. For example, as described under Legal Proceedings, one such litigation
matter is currently pending. Misusing our products or failing to adhere to operating guidelines could cause significant skin damage and underlying tissue damage. In addition, if our operating guidelines or product design are found to be inadequate,
we may be subject to liability. We have been, continue to be and may, in the future, be involved in litigation related to the use of our products. Product liability claims could divert managements attention from our core business, be expensive
to defend and result in sizable damage awards against us. We may not have sufficient insurance coverage for all future claims. We may not be able to obtain insurance in amounts or scope sufficient to provide us with adequate coverage against all
potential liabilities. Any product liability claim 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. Product liability claims in excess of our insurance coverage would be paid out of cash reserves, harming our financial condition and reducing our operating results.
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After-market modifications to our treatment tips by third parties and the development of counterfeit
treatment tips could reduce our sales, expose us to product liability litigation and dilute our brand quality.
Third
parties have introduced adulterated after-market modifications to our treatment tips which have enabled re-use of our treatment tips in multiple procedures. Because our treatment tips are designed to withstand a finite number of firings,
modifications intended to increase the number of firings could result in patient injuries caused by the use of worn-out or damaged treatment tips. In addition, third parties may seek to develop counterfeit treatment tips that are compatible with our
systems and available to practitioners at lower prices than our own. If security features incorporated into the design of our systems are unable to prevent after-market modifications to our treatment tips or the introduction of counterfeit treatment
tips, we could be subject to reduced treatment tip sales, product liability lawsuits resulting from the use of damaged or defective goods and damage to our reputation for providing a quality product.
We depend on skilled and experienced personnel to operate our business effectively. If we are unable to recruit, hire and retain these employees, our
ability to manage and expand our business will be harmed, which would impair our future revenue and profitability.
Our
success largely depends on the skills, experience and efforts of our officers and other key employees. Many of our officers and key employees do not have employment contracts with us and can terminate their employment at any time. The loss of any of
our senior management team members could weaken our management expertise and harm our business.
Our ability to retain our
skilled labor force and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we will be successful in the future. We may not be able to meet our future hiring needs or retain existing personnel.
We will face particularly significant challenges and risks in hiring, training, managing and retaining engineering and sales and marketing employees, as well as independent distributors, most of whom are geographically dispersed and must be trained
in the use and benefits of our products. Failure to attract and retain personnel, particularly technical and sales and marketing personnel, would materially harm our ability to compete effectively and grow our business.
Risks Related to Regulatory Matters
If we fail to obtain and maintain necessary FDA clearances for our systems and indications, if clearances for future products and indications are delayed, not issued or rescinded or if there are
federal or state level regulatory changes, our commercial operations would be harmed.
Our systems are medical devices that
are subject to extensive regulation in the United States by the FDA for manufacturing, labeling, sale, promotion, distribution and shipping. Before a new medical device, or a new use of or claim for an existing product, can be marketed in the United
States, it must first receive either 510(k) clearance or premarket approval from the FDA, unless an exemption applies. Either process can be expensive and lengthy. The FDAs 510(k) clearance process usually takes from three to six months from
the time the application is filed with the FDA, but it can take significantly longer. The process of obtaining premarket approval is much more costly and uncertain than the 510(k) clearance process, and it generally takes from one to three years, or
even longer, from the time the application is filed with the FDA.
Medical devices may be marketed only for the indications
for which they are approved or cleared. We have obtained 510(k) clearances for various indications for our Thermage and Fraxel systems. In addition, 510(k) clearance has been obtained for various indications of our recently acquired Isolaz systems,
CLARO products and Liposonix systems. However, our clearances can be revoked if safety or effectiveness problems develop. We are also subject to Medical Device Reporting regulations, which require us to report to the FDA if our product causes or
contributes to a death or serious injury, or malfunctions in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. Our products are also subject to state regulations which are, in many instances,
in flux. Changes in state regulations may impede sales. For example, federal regulations allow our systems to be sold to, or on the order of, licensed practitioners, as determined on a state-by-state basis. As a result, in some states,
non-physicians may legally purchase and operate our systems. However, a state could change its regulations at any time, disallowing sales to particular types of end users. We cannot predict the impact or effect of future legislation or regulations
at the federal or state levels.
The FDA and state authorities have broad enforcement powers. Our failure to comply with
applicable regulatory requirements could result in enforcement action by the FDA or state agencies, which may include any of the following sanctions:
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warning letters, fines, injunctions, consent decrees and civil penalties;
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repair, replacement, refunds, recall or seizure of our products;
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operating restrictions or partial suspension or total shutdown of production;
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refusing our requests for 510(k) clearance or premarket approval of new products, new intended uses or modifications to our existing products;
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withdrawing 510(k) clearance or premarket approvals that have already been granted; and
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If any of these events were to occur, our business could be harmed.
If we modify our
FDA-cleared devices, we may need to seek and obtain new clearances, which, if not granted, would prevent us from selling our modified product or require us to redesign our product.
Any modification to an FDA-cleared device that could significantly affect its safety or effectiveness or that would constitute a change in
its intended use would require a new 510(k) clearance or possibly a premarket approval. We may not be able to obtain additional 510(k) clearances or premarket approvals for new products or for modifications to, or additional indications for, our
existing products in a timely fashion, or at all. Delays in obtaining future clearances would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenue and potential future
profitability. 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. If the FDA disagrees, and requires new clearances
or approvals for the modifications, we may be required to recall and to stop marketing the modified devices, which could harm our operating results and require us to redesign our products.
If we or our suppliers and subcontractors fail to comply with the QSR, our business would suffer.
We and our suppliers and subcontractors are required to demonstrate and maintain compliance with the 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. The FDA enforces the QSR through periodic inspections. We and our suppliers have been, and we anticipate that we and our suppliers will in
the future be, subject to such inspections. In addition, certain of our suppliers have, from time to time, received warning letters from the FDA regarding potential non-compliance. Our failure, or the failure of our suppliers and subcontractors, to
take satisfactory corrective action in response to an adverse QSR inspection could result in enforcement actions, including a public warning letter, a shutdown of our manufacturing operations, a recall of our products, civil or criminal penalties or
other sanctions, which would cause our sales and business to suffer.
We may be unable to obtain or maintain international regulatory
certifications or approvals for our current or future products and indications, which could harm our business.
To support
the marketing of our products outside the United States, we must comply with and be certified to the ISO 13485: 2003 Quality Management System Standard. Failure to adequately maintain our ISO 13485: 2003 certifications may adversely impact or
prevent the marketing of our products internationally. In markets where we sell through distributors, we primarily rely upon distributors to obtain all regulatory licenses, registrations and approvals required in countries outside of the United
States, and these distributors may be unable to obtain or maintain such licenses, registrations and approvals. Our distributors may also incur significant costs in attempting to obtain and in maintaining regulatory licenses, registrations and
approvals, which could increase the difficulty of attracting and retaining qualified distributors. If our distributors experience delays in receiving necessary licenses, registrations or approvals to market our products outside the United States, or
if they fail to receive those licenses, registrations or approvals, we may be unable to market our products or product enhancements in international markets effectively, or at all.
Risks Related to Our Internal Control over Financial Reporting
While we believe we currently have adequate internal control over financial reporting, we are required to assess our internal control over financial reporting on an annual basis and any future adverse
results from such assessment could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock.
Pursuant to the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated by the SEC, we are required to maintain disclosure controls and procedures and adequate internal control over financial
reporting. Under such requirements we must furnish in our Form 10-K a report by our management regarding the effectiveness of our internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness
of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material
weaknesses in our internal control over financial reporting identified by management. While we currently believe our internal control over financial reporting is effective, the effectiveness of our internal controls in future periods is subject to
the risk that our controls may become inadequate because of changes in conditions. The effectiveness of our controls and procedures may in the future be limited by a variety of factors, including:
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faulty human judgment and simple errors, omissions or mistakes;
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fraudulent action of an individual or collusion of two or more people;
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inappropriate management override of procedures; and
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the possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial information.
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If we are unable to assert that our internal control over financial reporting is effective in any future
period, or if and when applicable, our auditors are unable to express an opinion on the effectiveness of our internal controls, or conclude that our internal controls are ineffective, or if we fail to maintain adequate and effective internal control
over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.
Risks Related to Our Common Stock
We expect that the price of our common stock will
fluctuate substantially.
The market price of our common stock has historically been, and is likely to continue to be,
highly volatile and may fluctuate substantially due to many factors, including:
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fluctuations in our operating results and the operating results of our competitors;
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changes in earnings estimates or recommendations regarding us or our competitors by securities analysts;
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volume and timing of sales of our products;
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conditions and trends in our industry and the markets we serve;
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the introduction and market acceptance of new products or product enhancements by us or our competitors;
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our ability to develop, obtain regulatory clearance or approval for and market new and enhanced products on a timely basis;
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changes in our pricing policies or the pricing policies of our competitors;
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announcements of significant new contracts, acquisitions or strategic alliances by us or our competitors;
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our ability to successfully integrate acquired companies or technologies;
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disputes or other developments with respect to our intellectual property rights or the intellectual property rights of others;
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product liability claims or other litigation;
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changes in accounting principles or changes in interpretations of existing principles, which could affect our financial results;
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sales of large blocks of our common stock, including sales by our executive officers and directors;
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media exposure of our products or products of our competitors;
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changes in legislation and governmental regulations or in the status of our regulatory approvals or applications; and
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general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.
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These and other factors may make the price of our stock volatile and subject to unexpected fluctuation.
A sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
As of June 30, 2013, we had 79.8 million shares of our common stock outstanding. We may be required to issue up to
3.6 million additional shares in 2014 as contingent consideration in the Sound Surgical acquisition. If our stockholders sell substantial amounts of our common stock in the public market, for example, liquidation of shares held by our principal
stockholders, including shares issued upon the exercise of outstanding options, the market price of our common stock could decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate.
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If our stockholders sell substantial amounts of our common stock in the public market, for
example, liquidation of shares held by our principal stockholders, including shares issued upon the exercise of outstanding options, the market price of our common stock could decline. These sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
Our directors, officers and
principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders.
Our officers, directors and principal stockholders holding more than 5% of our common stock collectively control approximately 21% of our outstanding common stock. As a result, these stockholders, if they
act together, will be able to significantly influence the management and affairs of our company and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of our other stockholders.
Anti-takeover provisions in our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware law, contain provisions that
could discourage a takeover.
Our certificate of incorporation and bylaws, and Delaware law, contain provisions that might
enable our management to resist a takeover, and might make it more difficult for an investor to acquire a substantial block of our common stock. These provisions include:
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a classified board of directors;
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advance notice requirements to stockholders for matters to be brought at stockholder meetings;
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a supermajority stockholder vote requirement for amending certain provisions of our Amended and Restated Certificate of Incorporation and Bylaws;
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limitations on stockholder actions by written consent; and
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the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.
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These provisions might discourage, delay or prevent a change in control of our company or a change in our
management. The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.
We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of
our stock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common
stock in the foreseeable future. The payment of dividends on our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we
do not pay dividends, our stock may be less valuable because a return on your investment will only occur if our stock price appreciates.
If our public guidance or our future operating performance does not meet investor expectations, our stock price could decline.
We provide guidance to the investing community regarding our anticipated future operating performance. Our business typically has a short
sales cycle, so that we do not have significant backlog of orders at the start of a quarter, and our ability to sell our products successfully is subject to many uncertainties, including those discussed in the foregoing risk factors. In light of
these factors, and the uncertainty as a result of the general economic situation, it is difficult for us to estimate with accuracy our future results. Our expectations regarding these results will be subject to numerous risks and uncertainties that
could make actual results differ materially from those anticipated. If our actual results do not meet our public guidance or our guidance or actual results do not meet the expectations of third-party financial analysts, our stock price could decline
significantly.
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If equity research analysts do not publish research or reports about our business or if they issue
unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for
our common stock relies in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our common stock could decline if one or more equity analysts downgrade our
common stock or if analysts issue other unfavorable commentary or cease publishing reports about us or our business.