S-1 1 d202723ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on October 1, 2021

Registration No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Candela Medical, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3845   87-1652764

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

 

 

251 Locke Drive

Marlborough, Massachusetts 01752

(508) 358-7400

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Ernest Orticerio

Chief Financial Officer

251 Locke Drive

Marlborough, Massachusetts 01752

(508) 358-7400

(Name, address, including zip code, and telephone number, including area code, of registrant’s agent for service)

 

 

With copies to:

Kenneth B. Wallach, Esq.

Sunny Cheong, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

(212) 455-2000

 

Jason M. Licht, Esq.

Stelios G. Saffos, Esq.

Latham & Watkins LLP

555 Eleventh Street, NW

Washington, D.C. 20004

(202) 637-2200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
  Proposed
Maximum
Aggregate
Offering Price(1)(2)
  Amount of
Registration Fee

Common Stock, $0.01 par value per share

  $100,000,000   $9,270

 

 

(1)

Includes                shares of common stock that the underwriters have the option to purchase. See “Underwriting.”

(2)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) promulgated under the Securities Act of 1933, as amended.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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Explanatory Note

This Registration Statement on Form S-1, or this Registration Statement, is being filed by Candela Medical, Inc., a newly formed Delaware corporation, or the Registrant, in connection with a proposed registered public offering of shares of its common stock. Prior to the effectiveness of this Registration Statement, there will be a restructuring as a result of which Candela Medical, Inc. will become the holding company of the business conducted by Dion Holdco Limited and its subsidiaries described in the prospectus that is part of this Registration Statement.


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities nor a solicitation of an offer to buy these securities in any jurisdiction where the offer and sale is not permitted.

 

Subject to completion, dated October 1, 2021

Preliminary Prospectus

                Shares

LOGO

CANDELA MEDICAL, INC.

Common Stock

 

 

This is the initial public offering of common stock of Candela Medical, Inc. We are offering                  shares of common stock.

Prior to this offering, there has been no public market for our common stock. We expect that the initial public offering price of our common stock will be between $                 and $             per share. We have applied to list our common stock on the NASDAQ Global Select Market, or NASDAQ, under the symbol “CDLA.”

We are an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933, as amended, or the Securities Act, and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings. After the completion of this offering, funds advised by Apax Partners LLP and Apax Partners, L.P. will continue to own     % (or     % if the underwriters exercise in full their option to purchase additional shares of our common stock) of the shares eligible to vote in the election of our directors. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of NASDAQ. See “Management—Controlled Company Exemption.”

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 22 to read about factors you should consider before buying shares of our common stock.

 

 

Neither the Securities and Exchange Commission, or the SEC, nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

     Per
share
     Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $        $    

Proceeds, before expenses, to us

   $        $    

 

(1)

See “Underwriting” for additional information regarding underwriting compensation.

To the extent that the underwriters sell more than                shares of our common stock, the underwriters have the option, for a period of 30 days from the date of this prospectus, to purchase up to                  additional shares of common stock from us.

The underwriters expect to deliver the shares against payment in New York, New York on or about                     , 2021.

 

 

 

BofA Securities   Goldman Sachs & Co. LLC   Barclays
Baird   Canaccord Genuity   Stifel
Oppenheimer & Co.   Stephens Inc.

R. Seelaus & Co., LLC

                    , 2021


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LOGO

CANDELA®
Science. Results. Trust.


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TABLE OF CONTENTS

 

     Page  

Industry and Market Data

     ii  

Trademarks, Service Marks and Tradenames

     ii  

Basis of Presentation

     ii  

Non-GAAP Financial Measures

     iii  

Summary

     1  

Risk Factors

     22  

Forward-Looking Statements

     77  

Use of Proceeds

     80  

Dividend Policy

     81  

Capitalization

     82  

Dilution

     84  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     86  

Business

     111  

Management

     151  

Certain Relationships and Related Party Transactions

     171  

Principal Stockholders

     173  

Description of Capital Stock

     175  

Shares Eligible for Future Sale

     183  

Certain United States Federal Income Tax Consequences to Non-U.S. Holders

     185  

Underwriting

     188  

Legal Matters

     195  

Experts

     195  

Where You Can Find More Information

     195  

Index to Financial Statements

     F-1  

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. Neither we nor the underwriters have authorized anyone to provide you with different information. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus, or any free writing prospectus, as the case may be, or any sale of shares of our common stock.

For investors outside the United States: we are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.


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INDUSTRY AND MARKET DATA

This prospectus contains information and statistics that we have obtained from various independent third-party sources, including independent industry publications, reports by market research firms and other independent sources. Some data and other information contained in this prospectus are also based on management’s estimates and calculations, which are derived from our review and interpretation of internal surveys and independent sources. Statements regarding the Company’s leading market position are based on market share as calculated by revenue, as compiled by a third party study that compared revenues of 23 top global suppliers of energy-based device platforms and disposables, 12 of which are public companies. Data regarding the industry in which we compete and our market position and market share within the industry are inherently imprecise, require the making of certain assumptions and are subject to significant business, economic and competitive uncertainties beyond our control, but we believe they generally indicate size, position and market share within the industry. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates. See “Forward-Looking Statements.”

TRADEMARKS, SERVICE MARKS AND TRADENAMES

We own a number of registered and common law trademarks and pending applications for trademark registrations in the United States and other countries, including for example: CANDELA, SCIENCE.RESULTS.TRUST., ELLIPSE IPL, GENTLEMAX PRO, GENTLELASE PRO, PICOWAY, VBEAM, PROFOUND, ETWO, and CO2RE. This prospectus also contains trademarks, tradenames, service marks and copyrights of other companies, which are the property of their respective owners. Solely for convenience, certain trademarks, tradenames, service marks and copyrights referred to in this prospectus may appear without the ®, or © symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, tradenames, service marks and copyrights. We do not intend our use or display of other parties’ trademarks, tradenames, service marks and copyrights to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

BASIS OF PRESENTATION

The following terms are used in this prospectus unless otherwise noted or indicated by the context:

 

   

“Active installed base” means devices (without duplication) (i) that are under a service contract or warranty, (ii) with respect to which a service event was opened in the past five years, or (iii) that have been installed or shipped in the past five years;

 

   

“Apax” means Apax Partners LLP, Apax Partners, L.P. and their affiliates;

 

   

“Candela,” the “Company,” “we,” “us” and “our” mean (1) the business of Dion Holdco Limited and its subsidiaries prior to the Pre-IPO Restructuring and (2) Candela Medical, Inc. and its subsidiaries following the Pre-IPO Restructuring;

 

   

“Marketing authorizations” mean clearances, approvals, marketing authorizations and certifications;

 

   

“Patients” mean patients and other consumers who are interested in receiving and/or receive aesthetic treatments from practitioners;

 

   

“Practitioners” mean physicians, such as dermatologists, plastic surgeons and aesthetic surgeons; medical aesthetics spas; aesthetic business chains; and other medical and aesthetic professionals who provide aesthetic treatments;

 

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“Pre-IPO Restructuring” means the restructuring as a result of which Candela Medical, Inc. will become the holding company of the business conducted by Dion Holdco Limited and its subsidiaries described in this prospectus, which restructuring will be effected prior to the effectiveness of the registration statement of which this prospectus forms a part;

 

   

“Revolving Credit Facility” means our revolving credit facility, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt;”

 

   

“Senior Facility” means our senior term loan facility, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt;”

 

   

“Sponsor” means funds advised by Apax; and

 

   

“Sponsor Acquisition” means the acquisition of the Company by the Sponsor, which was completed on July 17, 2017.

Numerical figures included in this prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.

All consolidated financial statements presented in this prospectus have been prepared in U.S. dollars and in accordance with generally accepted accounting principles in the United States, or GAAP.

All references to years in this prospectus, unless otherwise noted, refer to our fiscal years, which end on December 31.

NON-GAAP FINANCIAL MEASURES

This prospectus contains “non-GAAP financial measures” that are financial measures that either exclude or include amounts that are not excluded or included in the most directly comparable measures calculated and presented in accordance with GAAP. Specifically, we make use of the non-GAAP financial measures “Adjusted EBITDA,” “Adjusted EBITDA margin,” “Adjusted gross profit” and “Adjusted gross profit margin.”

Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin have been presented in this prospectus as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP, because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin are useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Management uses Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures, as the case may be. Management supplements GAAP results with non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone.

Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin are not recognized terms under GAAP and should not be considered as alternatives to net income (loss) or gross profit as a measure of financial performance or cash provided by operating activities as a measure of liquidity, or

 

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any other performance measure derived in accordance with GAAP. Additionally, these measures are not intended to be a measure of free cash flow available for management’s discretionary use as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. The presentations of these measures have limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Because not all companies use identical calculations, the presentations of these measures may not be comparable to other similarly titled measures of other companies and can differ significantly from company to company. For a discussion of the use of these measures and reconciliations to the most directly comparable GAAP measures, see “Summary—Summary Historical Consolidated Financial and Other Data.”

 

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SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before deciding to invest in our common stock, and it is qualified in its entirety by, and should be read with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus and the registration statement of which this prospectus is a part carefully and in their entirety, including “Risk Factors” “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. This summary contains forward-looking statements that involve risks and uncertainties.

Business Overview

We are a leading provider of advanced medical device solutions for a broad range of aesthetic applications. Our brands and products have been recognized for their innovation and as leaders in the high growth medical aesthetics space for almost 40 years. We provide energy-based solutions for primarily elective, cash pay procedures that utilize our leading technologies in laser, pulsed light, radiofrequency and microneedling. Our brand promise of “Science. Results. Trust.” guides our commitment to patients who can expect efficacious and clinically proven results when receiving a procedure involving a Candela device.

We seek to be the partner of choice for aesthetic practitioners by bringing the best technology solutions to their practices. Through our category-leading products, innovative treatments, robust clinical evidence, extensive post-sale support and other value drivers, we facilitate practice growth and a quick return on their investment. Our products enable highly-profitable procedures for our customers, who, on average, recoup the cost of a Candela device in less than six months. We market and sell our solutions to dermatologists, plastic surgeons, aesthetic surgeons, medical aesthetics spas, aesthetic business chains and other qualified medical and aesthetic practitioners. Candela’s reputation with customers is evident in our largest global markets as our Net Promoter Score, or NPS, is 48%, four times our competitors’ average and 60% higher than our next highest competitor. We have a large active installed base of nearly 44,000 devices globally as of June 30, 2021 and more than 50% of our product sales directly to customers and 65% of our total revenues in 2020 came from existing Candela customers, reflecting the quality of our products and consumables, post-sale support services, and brand loyalty. Our 2020 service revenue, which comprised approximately 20% of overall revenue, showed stability despite our customers being impacted by COVID-19.

We have extensive global commercial and supply chain operations. We sell and market our products directly in 18 countries, including our largest markets of the United States, China, Japan and Western Europe, and indirectly in 66 countries throughout the world. We believe we have the largest commercial infrastructure among our peers, which is comprised of approximately 400 employees across sales, clinical training, and post-sale service and support within our Asia Pacific, or APAC, Europe, Middle East and Africa, or EMEA, and Americas regions. We offer extensive clinical education and post-sales support to our customers, including clinical training, product technical and service support, and practice marketing support to help drive patient volume and grow their practices. Further, we offer on-site device maintenance and repair services, including regularly scheduled maintenance, to maximize the amount of time our customers’ devices are available for patient procedures.

We focus on establishing and using clinical evidence to support the use of our products, optimize patient outcomes, strengthen our marketing claims, and drive customer awareness and utilization of our products. We believe our focus on establishing clinical evidence for the efficacy of our products and providing clinical education for practitioners differentiates us from our competitors and is an important driver for customer adoption. Since our inception, clinical studies using our products have been published in over 2,500 peer-reviewed articles, and we conduct over 5,800 virtual and in-person educational forums annually.


 

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Our commitment to innovation has driven our reputation as a market leader in the medical aesthetics device industry. Our current core technological capabilities cover lasers, including solid state, pulsed dye, non-ablative fractional, CO2, and picosecond lasers, as well as intense pulsed light, or IPL, radiofrequency, or RF, and microneedling (including mechanical and RF-based microneedling). We offer category-leading products for the treatment of permanent hair reduction, pigmentation, tattoos, vascular abnormalities, wrinkles, and fractional resurfacing, as well as other fast-growing franchises such as skin tightening.

We have a track record of next-generation product development that leverages our strong R&D capabilities in energy-based, RF, and microneedling technologies and our clinical understanding of aesthetic procedures. Since inception we have developed over 80 products and plan to launch new products every year to grow our product portfolio. Our R&D pipeline is focused on continued development of world-class aesthetic devices, including both new platform technologies as well as upgrades to our existing platforms. Additionally, we have supplemented our product portfolio by selectively acquiring and licensing technologies that we can leverage using our global commercial and customer support capabilities. We protect our innovation with a comprehensive patent portfolio of approximately 130 issued patents and 55 pending patent applications as of June 30, 2021.

While our business was impacted by COVID-19 during 2020, we have seen a strong recovery in demand once lockdowns were gradually lifted and we returned to pre-COVID growth in 2021. Our revenue increased to approximately $209 million for the six months ended June 30, 2021, from approximately $140 million for the six months ended June 30, 2020 and from $189 million for the six months ended June 30, 2019. For the six months ended June 30, 2021 and 2020, we recorded net income of approximately $15 million and net loss of approximately $35 million, respectively, and Adjusted EBITDA of approximately $38 million and $2 million, respectively. Our revenue decreased to approximately $322 million for the year ended December 31, 2020 from approximately $390 million for the year ended December 31, 2019, due to the impact of the COVID-19 pandemic. For the years ended December 31, 2020 and 2019, we recorded net loss of approximately $44 million and $35 million, respectively, and Adjusted EBITDA of approximately $25 million and $24 million, respectively. For more information about how we calculate Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss), see “—Summary Historical Consolidated Financial and Other Data.”

Our Strategic Transformation

Since our Sponsor Acquisition, we have transformed our business into a faster growing, more competitive and higher margin medical aesthetics company. We streamlined our global management structure and operations by integrating the former Syneron and Candela businesses into a single global business and moving the global headquarters from Israel to the United States. We made significant investments in and improvements to our industry-leading product portfolio, global commercial infrastructure, supply chain and manufacturing operations, global IT systems, global quality systems, innovation capabilities, and customer support. During this time, we invested over $100 million in our operational transformation and executed on a series of actions to create a highly-scalable business that is well-positioned for future growth. This transformation was multifaceted and focused on enhancing Candela’s growth, operating efficiencies, and profitability. The program included the following improvements in Candela’s operations:

 

   

Created a single, strategically-aligned organization by integrating the separate, but overlapping Syneron and Candela operations and R&D infrastructures, significantly reducing our costs, footprint and operational complexity;

 

   

Restructured our Americas region to return the region to growth and profitability on par with the other regions;

 

   

Strengthened our supply chain by improving quality, agility, ability to scale, cost structure, procurement and materials management, distribution; significantly reducing the need to carry raw


 

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materials inventory by restructuring our manufacturing and supply chain operations (expect completion in 2022), moving 8 product families to world-class manufacturing partners; and streamlining and upgrading our global freight and distribution network;

 

   

Streamlined our product portfolio in order to focus on the highest-growth product families by discontinuing 18 product families and divesting or closing three non-core business units;

 

   

Unified our global R&D efforts and organization to focus all of our research and development investments on high growth products with significant profit potential;

 

   

Strengthened our quality control and regulatory capabilities by merging three separate quality systems and creating a harmonized, effective, and more efficient global quality management system that is compliant with regulatory requirements in all of the countries into which we sell our products;

 

   

Invested in new information technology systems, including adopting a single new ERP system globally;

 

   

Augmented our management team with executives that have deep medical device expertise and upgraded our global talent at all levels of the organization globally with more than 600 hires; and

 

   

Moved our corporate headquarters to the United States from Israel and rebranded the company under the Candela name.

Our Competitive Strengths

We believe the following strengths have been instrumental to our success. We intend to continue to build on these strengths to position us for future growth and drive our profitability:

 

   

Market leading position in the large and attractive medical aesthetics device market. We are the largest provider globally in the medical aesthetics device market, a highly attractive market estimated at nearly $4 billion and growing at an estimated 12% per year. We have built our market-leading position on the strength of our well-recognized and trusted brand, clinical results, quality, reliability, innovation, and post-sales support, evidenced in our NPS being 48%, four times our competitors’ average and 60% higher than our next highest competitor.

 

   

Global commercial footprint supported by extensive post-sale support infrastructure. We believe we have developed the largest global commercial footprint in the medical aesthetics device industry, with a sales and support presence in the most high-value markets globally, including the United States, Japan, China, and Western European countries. We believe our extensive direct presence in 18 countries, comprised of approximately 400 employees across sales, clinical training and post-sale service and support globally, demonstrates Candela’s full commitment to commercial success and enhances our agility in addressing growing customer demand. Our sales force is complemented by a strong distribution network spanning across 66 countries.

 

   

Large active installed base and strong customer relationships drive sales to existing customers. We believe we have the largest global active installed base of medical aesthetics devices, which includes nearly 44,000 devices installed across 16,000 customers as of June 30, 2021. Our active installed base provides us with significant up-selling and cross-selling opportunities, as we upgrade our existing platforms, sell long-term service contracts, and approach customers with existing and new products.

 

   

Extensive body of clinical evidence and proven regulatory capabilities. We have decades of investment in scientific evidence and clinical studies, and a focus on providing the best, most reliable and clinically-effective devices. Since 2017, 69 clinical studies were completed on our devices and since our inception, studies have been published in over 2,500 peer reviewed articles, which is a


 

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testament to our effort to increasingly bring a scientific and data driven approach to the medical aesthetics device industry. Our investments in quality and regulatory capabilities have led to marketing authorizations in 84 international jurisdictions and enabled us to demonstrate compliance in a complex regulatory landscape.

 

   

Focus on innovation and strong R&D capabilities supported by robust patent portfolio. We have a proven track record of innovation, with over 80 proprietary products developed, spanning cutting-edge technologies in medical aesthetics. Our R&D program is geared towards developing and launching new platform technologies and continuing our franchise leadership by launching product extensions and next generation devices. Our innovations are further supported by our comprehensive patent portfolio, with approximately 130 issued patents and 55 pending patent applications as of June 30, 2021.

 

   

Cost structure optimized for scalable, profitable growth. Since 2017, we have significantly improved and streamlined our operations and scalability by investing over $100 million in operational improvements, in areas such as: supply chain, commercial and IT infrastructure, quality management systems, regulatory, marketing, and global human capital. We believe these investments have created a highly-scalable business with a solid foundation, which we can leverage to support significant growth and increase margins.

 

   

Highly experienced global management team with deep aesthetics and medical device expertise. Our management team has a proven track record of growth, clinical and operational excellence, value creation, innovative technology development and commercialization, and disciplined capital allocation. Our leadership team is comprised of executives with experience leading public and private global organizations across the medical devices, diagnostics, pharmaceuticals, and aesthetics sectors and is supported by a solid bench of talent at all levels of the organization.

Our Growth Strategy

We intend to continue building a high-growth medical aesthetics business that is a global technological leader focused on driving consistent and growing levels of profitability. We intend to achieve these goals by implementing the following strategies:

 

   

Enhance our leadership position and our brand through continued investment in clinical studies and investigations, medical education, and direct-to-practitioner digital and clinical marketing. We believe our ability to grow faster than the energy-based aesthetics market will be supported by our investments in evidence-based clinical research, medical education and customer support. We are committed to promoting awareness of our brand and products through digital marketing and by expanding our clinical research capabilities and medical education services, including through additional investments in the Candela Institute of Excellence, our flagship innovation center and clinic, and increasing the number of Centers of Excellence, our collaboration with expert customers around the globe on educational and marketing initiatives.

 

   

Expand our commercial footprint and implement sales strategies in target markets. We have a global commercial infrastructure spanning the Americas, APAC, and EMEA that includes both a direct sales force, supported by an extensive post-sale support infrastructure, as well as distributorship arrangements with local partners. We expect to strengthen our commercial infrastructure to further penetrate our existing markets and enter new markets, as well as continue to grow our product offerings within our existing distributor channels.

 

   

Leverage our growing customer base to drive product, consumable, and service revenue. We believe that there are opportunities for us to generate additional revenue from existing customers who are familiar with our brand and products. Approximately 65% of our total revenues in 2020 were


 

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generated by our active installed base, including the sale of additional devices, consumables, accessories and services to our existing customers. Over 40% of our new customers make repeat purchases, with nearly 60% of repeat purchases being made within 12 months. We are currently executing on corporate initiatives to increase our recurring revenue streams through more frequent customer training sessions, targeted digital marketing and e-store programs, enhanced service levels, commercial incentives, and higher service contract sales.

 

   

Improve our existing technologies and further expand into new product applications. We are seeking to grow product sales by investing in products and research that would enhance our offerings. We believe our efficient approach to product development results in high-quality products that provide significant clinical and economic benefits. We are planning a regular cadence of new platform and product launches, as well as introductions of new line extensions and new clinical indications, which we believe will result in increased product sales, utilization and recurring revenues.

 

   

Leverage optimized cost structure for scalable, profitable growth. We plan to exploit our highly scalable platform to drive growth and operating leverage. We will complete our manufacturing and supply chain restructuring program in 2022 which will further support operating expense efficiencies, gross margin expansion, and other financial improvements. We will seek to leverage these investments that have enabled us to build a highly scalable business with a solid foundation for future growth.

 

   

Engage in targeted business development activities to augment our product and technology portfolio. We plan to explore business development opportunities to augment our product and technology portfolio, which may include acquisitions, technology licenses, and strategic partnerships in the $12 billion medical aesthetics market where we can leverage our global commercial footprint, brand, and customer relationships to drive growth.

Our Market Opportunity

The global market for medical aesthetics solutions is large and growing. According to Markets & Research, the global medical aesthetics market covering injectables, energy-based devices, topicals and other products currently is $12 billion and is projected to grow to $25 billion by 2028, an 11% compound annual growth rate. Within this $12 billion market, the energy-based aesthetic devices category currently is estimated at nearly $4 billion and is projected to grow to $8 billion by 2028, a 12% compound annual growth rate. In addition, Markets & Research estimates that in 2021 there will be almost 100 million aesthetic treatments and procedures performed worldwide.

We believe the following factors are contributing to the growth in aesthetic treatment procedures and medical aesthetics device sales:

 

   

Aging demographics and increasing patient focus on improving appearance and youthfulness;

 

   

“Pre-juvenation” trend amongst millennials seeking aesthetic treatments at a younger age, which extends the lifetime value of a patient;

 

   

Rising wealth and disposable income as well as a growing middle class, particularly in APAC;

 

   

Normalization and social acceptance of cosmetic procedures, including for men, driven by media, social media influencers and celebrities;

 

   

The rise and growth of aesthetic chain businesses and medical aesthetics spas, or MedSpas, globally;

 

   

Broadening practitioner base seeking to expand menu of elective, private-pay aesthetic procedures they offer;

 

   

Growing patient interest in non-invasive or minimally-invasive procedures and awareness of energy-based aesthetic treatments;


 

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Increasing popularity of combination treatments amongst patients seeking to address a broader range of indications and treatment areas; and

 

   

Reductions in certain entry-level procedure costs, attracting a broader patient base.

Medical aesthetics procedures traditionally have been performed by dermatologists, plastic surgeons, other cosmetic physicians and qualified practitioners. There are also a growing number of other specialists performing medical aesthetics procedures, including primary care physicians, obstetricians, gynecologists, ophthalmologists, and ear, nose and throat specialists, which we refer to as non-core practitioners, that have incorporated aesthetic treatment procedures into their practices. We estimate there are approximately 44,000 plastic surgeons and a significant number of dermatologists globally. For example, in our high value global markets, such as Japan and China, we estimate there are approximately 11,500 and 2,000 dermatologists, respectively. Additionally, we estimate there are approximately 12,000 dermatologists, 8,000 plastic surgeons and 210,000 other practitioners that are potential customers for our products in the United States.

Further, the MedSpa and aesthetic chain market is growing, with the global MedSpa end user market projected to reach $27.6 billion in 2025, a 12% compound annual growth rate from 2017, according to Allied Market Research. A medical spa is a combination of an aesthetic medical center and a day spa that provides nonsurgical aesthetic medical services under the supervision of a licensed treatment provider (as defined by the state in which it operates). Medical spas strive to blend the best of two worlds—a relaxing spa experience with the specialized treatments typically only found at a dermatology or plastic surgery clinic. Some of the more common medical spa offerings include light, laser and energy-based treatments (for skin rejuvenation, aging skin, acne, and hair removal), dermabrasion/infusion, injectables, as well as chemical peels. An aesthetic chain business is a multi-location medical spa (typically more than three locations depending on geography) that may either offer a full range of aesthetic services or specialize in a single treatment, typically laser hair removal or laser tattoo removal. Ownership typically includes physicians who have pivoted to or have specialized in aesthetic medicine or entrepreneurs who contract with local medical directors and consultants.

There are a growing number of MedSpas and retail chains, with multi-location businesses accounting for a large part of this market. Within our high value global markets, such as the United States, Japan, China, Hong Kong, Australia and Western Europe, we estimate there are hundreds of thousands of locations, with many chains planning to expand their presence. For example, China had approximately 300 MedSpa chains with over 100,000 clinics in the aesthetic space in 2018. Additionally, there were approximately 6,500 North American MedSpas in 2020 and 10,400 are expected by 2023 according to the American MedSpa Association, with approximately 20% having 6 or more locations. We believe that MedSpas and non-core practitioners will play increasingly important roles as purchasers of aesthetic devices and that there is significant opportunity for a company that tailors its product offerings to meet the needs of a wide range of customers.

In addition to being supported by favorable patient trends, an increasing number of addressable indications that can be treated with devices, broadening practitioner adoption, and increasing sites of care, the medical aesthetics market is also experiencing significant growth due to favorable demographics and economic expansion, particularly in the APAC region. Asian markets are growing above the global growth rate driven by changing lifestyles and an increasing patient base with improving levels of discretionary income and growing medical tourism. Further, Asia is home to more than 60%, or 1.1 billion, of the 1.8 billion millennial population, who are increasingly seeking out more “pre-juvenation” procedures and further driving demand for treatments.


 

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Key Success Factors within the Energy-Based Medical Aesthetics Market

Many minimally-invasive and non-invasive energy-based aesthetic treatments are available for a variety of conditions that Candela’s products address, including hair removal, vascularity, pigmentation, tattoo removal, skin resurfacing and tightening. Each of these technologies have varying degrees of effectiveness, and we believe the following criteria represents key factors required to be successful in the aesthetic device market:

 

   

Ability to treat a broad range of patient types.

 

   

Highly targeted and selective technology.

 

   

Safe and repeatable results demonstrating high efficacy.

 

   

Efficiently treating larger body areas.

 

   

Consistent heating of target tissue and protection of the epidermal barrier.

 

   

Minimal patient downtime.

 

   

Frequency of treatment and permanency of effect.

We also believe that in selecting solutions, practitioners are increasingly focused on the overall economics of owning aesthetic devices, making solutions that can drive strong and rapid returns on investment more attractive to such practitioners. In order to help customers achieve their business goals with a purchase of a new aesthetic device, having effective post-sale support to drive training and adoption and keep devices running effectively is critical in addition to the above success factors.

Our Solutions

Our products provide an effective, safe, and consistent treatment benefit for patients, and we believe we are well-positioned to enable our global customer base to capitalize on growth trends in aesthetic device procedures. Key benefits of our advanced aesthetic solutions include:

 

   

Consistent, proven results for the most frequent procedures.

 

   

Trusted results backed by a substantial body of clinical data.

 

   

High ease of use and comprehensive training creating loyal, long term customers.

 

   

High return on investment for practitioners.

 

   

Upgradeable technology platforms.

We believe we offer the broadest portfolio of category leading products, with extensive clinical literature and a track record of producing clinical results in the medical aesthetics industry. This is supported by the most robust infrastructure for offering effective post-sales support to aesthetic practitioners. In combination, we believe these attributes position us to be the partner of choice for small and large aesthetic practitioners around the world.


 

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Recent Developments

Preliminary, Unaudited Estimated Financial Data as of and for the Nine Months Ended September 30, 2021

We have presented below preliminary, unaudited estimated ranges of certain of our financial and other information as of and for the nine months ended September 30, 2021, as well as the unaudited condensed consolidated financial and other information as of and for the nine months ended September 30, 2020, as we believe they are useful to investors in understanding our recent comparative operating performance.

We have provided ranges, rather than specific amounts, for certain financial data below, primarily because our financial closing and analysis procedures for the nine months ended September 30, 2021 are not yet completed. The unaudited estimated financial data set forth below are preliminary, based upon our estimates and currently available information and are subject to update based upon, among other things, our financial closing procedures and the completion of our interim condensed consolidated financial statements and other operational procedures. The actual and preliminary financial data as of and for the nine months ended September 30, 2020 and September 30, 2021, respectively, presented below should not be viewed as a substitute for interim condensed consolidated financial statements prepared in accordance with GAAP. Our actual results may be materially different from our estimates, and such estimates should not be regarded as a representation by us, our management or the underwriters as to our actual results as of and for the nine months ended September 30, 2021. You should not place undue reliance on these estimates. See “Forward-Looking Statements” and “Risk Factors.”

The preliminary financial data included in this prospectus has been prepared by, and is the responsibility of, our management. Ernst & Young LLP has not audited, reviewed, compiled or applied agreed-upon procedures with respect to the preliminary financial data. Accordingly, Ernst & Young LLP does not express an opinion or any other form of assurance with respect thereto.

 

     Nine Months Ended  
     September 30, 2021
(Preliminary)
     September 30, 2020  
(In thousands, except percentages and active installed base) (unaudited)    Low      High      Actual  

Revenue

        

Gross profit

        

Adjusted gross profit

        

Gross profit margin

        

Adjusted gross profit margin

        

Net income (loss)

        

Adjusted EBITDA

        

Adjusted EBITDA margin

        

Active installed base (at period end)

        

 

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Please see below for a reconciliation of net income (loss) to Adjusted EBITDA for the nine months ended September 30, 2021 (at the low end and high end of the estimated net income range set forth above) and the nine months ended September 30, 2020. In addition, please see “—Summary Historical Consolidated Financial and Other Data” for how we define Adjusted EBITDA and Adjusted EBITDA margin, the reasons why we include these measures and certain limitations to their use.

 

     Nine Months Ended  
     September 30, 2021
(Preliminary)
     September 30, 2020  
(In thousands, except percentages)    Low      High      Actual  

Net income (loss)

        

Depreciation, amortization and asset disposals

        

Finance expenses(a)

        

Income tax expense

        

Stock-based compensation expense(b)

        

Fair value adjustments related to the Sponsor Acquisition(c)

        

Legal settlement(d)

        

Medical Device Regulation and quality related costs(e)

        

Transformation costs(f)

        

Adjusted EBITDA

        

Revenue

        

Adjusted EBITDA margin

        

 

(a)

Primarily relates to interest and on short-term and long-term borrowings, and realized and unrealized foreign currency losses on transactions associated with our international subsidiaries.

(b)

Costs associated with stock-based compensation plan.

(c)

Impact of amortization of deferred revenue fair value adjustment associated with the Sponsor Acquisition in July 2017.

(d)

Net favorable impact from settlement agreements with several companies relating to patent disputes.

(e)

The initial set up costs of complying with the new EU medical device regulations for previously registered products and primarily relate to third party consulting costs.

(f)

Compensation related charges, asset write-offs, contract cancellations, project management fees and other direct costs associated with the Company’s transformation initiatives post the Sponsor Acquisition. The key initiatives include manufacturing transfer (Nine months ended September 30, 2021 and 2020: $             million and $             million, respectively), post-acquisition integration (Nine months ended September 30, 2021 and 2020:             $             million and $             million, respectively), product discontinuation (Nine months ended September 30, 2021 and 2020: $         million and $             million, respectively) and the ERP implementation (Nine months ended September 30, 2021 and 2020: $             million and $             million, respectively).


 

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Please see below for a reconciliation of gross profit to Adjusted gross profit for the nine months ended September 30, 2021 (at the low end and high end of the estimated gross profit range set forth above) and the nine months ended September 30, 2020. In addition, please see “—Summary Historical Consolidated Financial and Other Data” for how we define Adjusted gross profit and Adjusted gross profit margin, the reasons why we include these measures and certain limitations to their use.

 

     Nine Months Ended  
     September 30,
2021

(Preliminary)
     September 30,
2020
 
(In thousands, except percentages)    Low      High      Actual  

Gross profit

        

Depreciation, amortization and asset disposals

        

Stock-based compensation expense(a)

        

Fair value adjustments related to the Sponsor Acquisition(b)

        

Medical Device Regulation and quality related costs(c)

        

Transformation costs(d)

        

Adjusted gross profit

        

Revenue

        

Adjusted gross profit margin

        

 

(a)

Costs associated with stock-based compensation plan.

(b)

Impact of amortization of deferred revenue fair value adjustment associated with the Sponsor Acquisition in July 2017.

(c)

The initial set up costs of complying with the new EU medical device regulations for previously registered products and primarily relate to third party consulting costs.

(d)

Compensation related charges, asset write-offs, contract cancellations, project management fees and other direct costs associated with the Company’s transformation initiatives post the Sponsor Acquisition. The key initiatives include manufacturing transfer (Nine months ended September 30, 2021 and 2020: $             million and $             million, respectively), post-acquisition integration (Nine months ended September 30, 2021 and 2020: $             million and $             million, respectively), product discontinuation (Nine months ended September 30, 2021 and 2020: $             million and $             million, respectively) and the ERP implementation (Nine months ended September 30, 2021 and 2020: $             million and $             million, respectively).

Summary of Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described in “Risk Factors” before making a decision to invest in our common stock. If any of these risks actually occurs, our business, results of operations and financial condition may be materially adversely affected. In such case, the trading price of our common stock may decline and you may lose part or all of your investment. Below is a summary of some of the principal risks we face:

 

   

major public health issues, and specifically the pandemic caused by the spread of COVID-19, could have an adverse impact on our business, financial condition and results of operations;

 

   

if our existing products fail to gain market acceptance or if we do not continue to develop and commercialize new products that are accepted by the market, identify new markets for our existing products and technologies and/or expand beyond our traditional customer base, we may not remain competitive, and our revenues and operating results could suffer;

 

   

we operate in a highly competitive industry, and our failure to compete effectively could adversely affect our market share, financial condition and growth prospects;


 

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if there is not sufficient demand for the procedures performed with our products, customer demand for our products could decline, resulting in unfavorable operating results;

 

   

our business is subject to risks associated with the financial position and actions of our customers;

 

   

we outsource a significant portion of the manufacturing of our products to a small number of contract manufacturers, and we and our contract manufacturers are dependent on certain third-party suppliers;

 

   

if we fail to manage our inventory effectively or our forecasts are incorrect, our business, financial condition and results of operations may be materially and adversely affected;

 

   

if we encounter problems with distribution, our ability to deliver our products to our customers could be adversely affected;

 

   

our financial results may fluctuate from quarter to quarter;

 

   

increased prices for, or availability constraints on, raw materials or sub-assemblies used in our products could adversely affect our profitability or revenues;

 

   

a disruption in the operations of our freight carriers or higher shipping costs could cause a decline in our net revenues or a reduction in our earnings;

 

   

we may have difficulty managing our growth which could limit our ability to increase sales and cash flow;

 

   

fluctuations in currency exchange rates may negatively affect our business, financial condition and results of operations;

 

   

international sales and operations comprise a significant portion of our business, exposing us to foreign operational, political and other risks that may harm our business, particularly if we are unable to manage our international operations effectively;

 

   

we have growing operations in China, which exposes us to risks inherent in doing business in that country;

 

   

a portion of our product sales are made through independent distributors and sales agents whom we do not control;

 

   

if we are unable to maintain sufficient levels of cash flow from our operations, we may not be able to execute or sustain our growth strategy or we may require additional financing, which may not be available to us on satisfactory terms or at all;

 

   

we may acquire companies and products, form or seek strategic alliances and enter into licensing arrangements in the future, and we may not realize the expected benefits or costs of such arrangements;

 

   

we are continually seeking ways to make our cost structure, business processes and systems more efficient, including by moving activities from higher-cost to lower-cost locations, outsourcing certain business processes and functions, and implementing new business information systems. Problems with the execution of these activities could have an adverse effect on our business, financial condition and results of operations. In addition, we may not achieve the expected benefits of these initiatives;

 

   

we rely on our own direct sales force to sell our products in certain territories, which may result in higher fixed costs than our competitors and may slow our ability to reduce costs in the face of a sudden decline in demand for our products;

 

   

changes in tax laws could adversely affect our financial position;

 

   

we are subject to various tax audits in multiple countries and unfavorable resolution of tax contingencies or exposure to additional income tax liabilities could have a material impact on our business, financial condition and results of operations;


 

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the failure to attract and retain key personnel could adversely affect our business;

 

   

we manufacture, assemble and test certain products in our U.S. manufacturing facility. If our facility is damaged or becomes inoperative, we may not be able to deliver our products to customers on time;

 

   

our revenues may be adversely impacted due to third parties selling services and/or consumables for our devices;

 

   

our success depends, in part, on the quality, efficacy and safety of our products;

 

   

because many of the users of our products may lack training and because we also sell our products to non-physicians, our products may be misused, which could harm our reputation and our business;

 

   

political, economic and military instability in Israel may impede our ability to operate and harm our financial results;

 

   

legal, political and economic uncertainty surrounding the exit of the United Kingdom from the European Union are a source of instability and uncertainty;

 

   

we are increasingly dependent on information technology;

 

   

use of social media may materially and adversely affect our reputation or subject us to fines or other penalties;

 

   

our business relies heavily on email and other messaging services, and any restrictions on the sending of emails or messages or an inability to timely deliver such communications could materially adversely affect our net revenue and business;

 

   

failure to protect sensitive information of our customers and our information technology systems against security breaches could damage our reputation and brand and substantially harm our business, financial condition and results of operations;

 

   

payment methods used on our websites subject us to third-party payment processing-related risks;

 

   

our ability to use our net operating and capital loss carryforwards may be limited;

 

   

we are involved, and may become involved in the future, in disputes and other legal or regulatory proceedings that, if adversely decided or settled, could materially and adversely affect our business, financial condition and results of operations;

 

   

risks related to our intellectual property;

 

   

our status as a “controlled company” within the meaning of NASDAQ rules and the rules of the SEC following the completion of this offering and, as a result, our reliance on available exemptions from certain corporate governance requirements afforded to stockholders of other companies that are subject to such requirements; and

 

   

our Sponsor controls us and its interests may conflict with yours in the future.


 

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Implications of being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements that are applicable to other companies that are not emerging growth companies. Accordingly, in this prospectus, we have (i) presented only two years of audited consolidated financial statements and only two years of summary financial data; and (ii) have not included a compensation discussion and analysis of our executive compensation programs. In addition, for so long as we are an emerging growth company, among other exemptions, we will not be required to:

 

   

engage an independent registered public accounting firm to report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;

 

   

disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation; or

 

   

submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes.”

If we do take advantage of any of these exemptions, some investors may find our securities less attractive, which could result in a less active trading market for our common stock, and the price of our common stock may be more volatile. As an “emerging growth company” under the JOBS Act, we are permitted to delay the adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We are electing to take advantage of such extended transition period, and as a result, we will not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies until the earlier of the date we (i) are no longer an “emerging growth company” or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. Early adoption is permitted.

We will remain an emerging growth company until the earliest to occur of:

 

   

our reporting of $1.07 billion or more in annual gross revenue;

 

   

our becoming a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates;

 

   

our issuance, in any three year period, of more than $1.0 billion in non-convertible debt; and

 

   

the fiscal year-end following the fifth anniversary of the completion of this initial public offering.

Our Sponsor

Apax

Apax is a leading global private equity advisory firm. For nearly 50 years, Apax has worked to inspire growth and ideas that transform businesses. The firm has raised and advised funds with aggregate commitments of more than $60 billion. The funds advised by Apax invest in companies across four global sectors of Tech, Services, Healthcare and Internet/Consumer. These funds provide long-term equity financing to build and strengthen world-class companies.

The funds advised by Apax have a strong track record of investing in the healthcare sector, having committed €8 billion of equity and completed approximately 90 investments across multiple geographies,


 

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including the United States, Europe and Asia. Apax is able to draw on its decades of investment experience and global reach to identify attractive opportunities in the healthcare sector. Apax’s Healthcare team is focused on four core subsectors: Medical Technology, Pharmaceuticals, Healthcare IT and Healthcare Services. Selected healthcare investments include Rodenstock, Healthium, Vyaire Medical, KCI / Acelity, Neuraxpharm, TriZetto Corporation, InnovAge, Unilabs and Genex.

Our Corporate Information

Candela Corporation was formed in 1970 and Syneron Medical Ltd. was formed in 2000. Our Company was formed in 2010, when Candela Corporation and Syneron Medical Ltd. merged, bringing together two leading, innovative companies in the medical aesthetics space. In 2017, the Sponsor completed an acquisition of the Company. Our holding company, Candela Medical, Inc. was incorporated in Delaware on July 9, 2021. Prior to the effectiveness of the registration statement of which this prospectus forms a part, there will be a restructuring as a result of which Candela Medical, Inc. will become the holding company of the business conducted by Dion Holdco Limited and its subsidiaries described in this prospectus.

Our principal offices are located at 251 Locke Drive, Marlborough, MA 01752. Our telephone number is (508) 358-7400. We maintain a website at candelamedical.com/na. The reference to our website is intended to be an inactive textual reference only. The information contained on, or that can be accessed through, our website will not be deemed to be incorporated by reference in, and is not considered part of, this prospectus. You should not rely on our website or any such information in making your decision whether to purchase shares of our common stock.


 

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Organizational Structure

These charts are provided for illustrative purposes only and do not purport to represent all legal entities within our organizational structure.

Organizational Structure Prior to the Pre-IPO Restructuring:

The diagram below depicts our current organizational structure.

LOGO

Organizational Structure Following the Pre-IPO Restructuring:

The diagram below depicts our organizational structure immediately following the consummation of the Pre-IPO Restructuring and this Offering.

 

LOGO


 

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The Offering

 

Issuer

Candela Medical, Inc.

 

Common stock offered by us

             shares

 

Option to purchase additional shares of common stock

We have granted the underwriters a 30-day option from the date of this prospectus to purchase up to             additional shares of our common stock at the initial public offering price, less underwriting discounts and commissions.

 

Common stock to be outstanding immediately after this offering

             shares (or              shares if the underwriters exercise in full their option to purchase additional shares).

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $             million (or approximately $             million, if the underwriters exercise in full their option to purchase additional shares), assuming an initial public offering price of $             per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. For a sensitivity analysis as to the offering price and other information, see “Use of Proceeds.”

 

  We intend to use the net proceeds to us from this offering to repay approximately $             million aggregate principal amount outstanding under our Senior Facility, with any remainder to be used for general corporate purposes. See “Use of Proceeds.”

 

Controlled company

Upon the closing of this offering, our Sponsor will own a majority of the shares eligible to vote in the election of our directors. We currently intend to avail ourselves of the controlled company exemption under the corporate governance standards of NASDAQ.

 

Dividend policy

We have no current plans to pay dividends on our common stock. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, including restrictions in the agreements governing our indebtedness, and other factors that our board of directors may deem relevant. See “Dividend Policy.”

 

Risk factors

Investing in shares of our common stock involves a high degree of risk. See “Risk Factors” for a discussion of the risks you should carefully consider before investing in shares of our common stock.

 

NASDAQ trading symbol

“CDLA.”

 

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Share and per share data for Candela Medical, Inc. in this prospectus has been retroactively adjusted to reflect the             -for-one stock split, which will occur prior to the consummation of this offering. Unless we indicate otherwise or the context otherwise requires, this prospectus:

 

   

reflects and assumes:

 

   

the consummation of the Pre-IPO Restructuring;

 

   

no exercise of the underwriters’ option to purchase additional shares of our common stock;

 

   

an initial public offering price of $             per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus; and

 

   

the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the consummation of this offering; and

 

   

does not reflect              shares of common stock reserved for future issuance pursuant to the new Candela Medical, Inc. 2021 Equity Incentive Plan, or the Incentive Plan, which we intend to adopt in connection with this offering. See “Management—Executive Compensation—Compensation Arrangements to be Adopted in connection with this Offering.”


 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

Set forth below is our summary historical consolidated financial and other data as of the dates and for the periods indicated. The summary historical financial data as of and for the years ended December 31, 2020 and December 31, 2019 has been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary historical consolidated financial data as of June 30, 2021 and for the six months ended June 30, 2021 and June 30, 2020 has been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The summary historical consolidated financial data as of June 30, 2020 has been derived from our unaudited consolidated financial statements not included in this prospectus. The results for any interim period are not necessarily indicative of the results that may be expected for the full year, and the results of operations for any period are not necessarily indicative of the results to be expected for any future period. Share and per share data in the table below has been retroactively adjusted to reflect the                  -for-one stock split, which will occur prior to the consummation of the offering.

The data presented below is the historical consolidated financial and other data of Dion Holdco Limited and its subsidiaries. The summary historical consolidated financial data of Candela Medical, Inc. has not been presented as Candela Medical, Inc. is a newly incorporated entity, has had no business transactions or activities to date and had no assets or liabilities during the periods presented in this section.

You should read the following summary financial and other data below together with the information under “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited historical consolidated financial statements and related notes thereto and our unaudited historical consolidated financial statements and related notes thereto, each included elsewhere in this prospectus.

 

     Year Ended     Six Months Ended  
     December 31,
2020
    December 31,
2019
    June 30, 2021     June 30, 2020  
(In thousands)                (unaudited)  

Operations Data:

        

Revenues:

        

Product and consumables

   $ 258,458     $ 333,037     $ 171,424     $ 110,991  

Service

     63,193       56,734       37,380       29,280  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     321,651       389,771       208,804       140,271  

Cost of revenues:

        

Product and consumables

     (143,380     (179,149     (74,344     (67,725

Service

     (39,193     (41,373     (23,962     (16,108
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     (182,573     (220,522     (98,306     (83,833
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     139,078       169,249       110,498       56,438  

Operating expenses, net:

        

Research and development

     (23,530     (26,704     (11,475     (11,431

Selling and marketing

     (85,741     (123,699     (46,777     (43,335

General and administrative

     (49,849     (42,367     (25,993     (25,950

Other income, net

     560       26       938       424  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses, net

     (158,560     (192,744     (83,307     (80,292
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

     (19,482     (23,495     27,191       (23,854

Financial expenses

     (15,957     (3,083     (5,474     (7,799
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (35,439     (26,578     21,717       (31,653

Income tax expense

     (8,448     (8,307     (6,444     (3,691
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (43,887   $ (34,885   $ 15,273     $ (35,344
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Year Ended     Six Months Ended  
     December 31,
2020
    December 31,
2019
    June 30, 2021     June 30, 2020  
(In thousands, except share and per share amounts)                (unaudited)  

Pro Forma Per Share Data (unaudited):

        

Earnings (loss) per share:

        

Basic

   $       $        

Diluted

   $       $        

Weighted average shares outstanding:

        

Basic

        

Diluted

        

Balance Sheet Data (end of period):

        

Cash

   $ 58,717     $ 27,502     $ 59,876     $ 37,334  

Total assets

     532,877       526,510       540,212       539,041  

Total debt

     119,159       52,447       91,414       136,074  

Total shareholders’ equity

     262,529       296,219       276,834       263,230  

Cash Flow Data:

        

Net cash from (used in) operating activities

   $ (17,515   $ (30,974   $ 33,312     $ (64,599

Net cash used in investing activities

     (11,633     (20,167     (1,496     (3,063

Net cash from (used in) financing activities

     58,757       41,080       (30,195     77,607  

Capital expenditures

     11,633       20,167       1,496       3,063  

Other Financial Data (unaudited):

        

Adjusted EBITDA(1)

   $ 24,851     $ 24,495     $ 38,395     $ 2,020  

Adjusted EBITDA margin(1)

     7.7     6.3     18.4     1.4

Adjusted gross profit(1)

     163,015       200,497       115,559       71,619  

Adjusted gross profit margin(1)

     50.7     51.4     55.3     51.1

 

(1)

We define Adjusted EBITDA as net loss, adjusted to exclude depreciation, amortization and asset disposal, finance expense, income tax expense, stock-based compensation expense, fair value adjustments relating to the Sponsor Acquisition, the favorable impact of a legal settlement, Medical Device Regulation and quality related costs, and transformation costs. We describe these adjustments reconciling net loss to Adjusted EBITDA in the applicable table below. We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of revenue. We define Adjusted gross profit as gross profit, adjusted to exclude depreciation, amortization and asset disposals, stock-based compensation expense, fair value adjustments relating to the Sponsor Acquisition, Medical Device Regulation and quality related costs and transformation costs. We describe these adjustments reconciling gross profit to Adjusted gross profit in the applicable table below. We define Adjusted gross profit margin as Adjusted gross profit as a percentage of revenue.

We present Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin because we believe they are useful indicators of our operating performance. Our management believes that Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin are useful to investors because they are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We also believe Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin are useful to our management and investors as measures of comparative operating performance from period to period.

Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin are non-GAAP financial measures and should not be considered as alternatives to net income (loss) or gross profit as a measure of financial performance or cash provided by operating activities as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In


 

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evaluating Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by primarily relying on our GAAP results in addition to using Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin supplementally.    

Our Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin measures have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

they do not reflect costs or cash outlays for capital expenditures or contractual commitments;

 

   

they do not reflect changes in, or cash requirements for, our working capital needs;

 

   

they do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

   

they do not reflect period to period changes in taxes, income tax expense or the cash necessary to pay income taxes;

 

   

they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and they do not reflect cash requirements for such replacements; and

 

   

other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin should not be considered as a measure of discretionary cash available to invest in business growth or to reduce indebtedness.

The following table provides a reconciliation of net income (loss) to Adjusted EBITDA for the periods presented:

 

     Year Ended     Six Months Ended  
     December 31,
2020
    December 31,
2019
    June 30, 2021     June 30, 2020  
(In thousands, except percentages)                         

Net income (loss)

   $ (43,887 )    $ (34,885 )    $ 15,273     $ (35,344

Depreciation, amortization and asset disposals

     17,467       19,351       8,160       8,346  

Finance expenses(a)

     15,957       3,083       5,474       7,799  

Income tax expense

     8,448       8,307       6,444       3,691  

Stock-based compensation expense(b)

     3,721       3,167       1,129       1,946  

Fair value adjustments related to the Sponsor Acquisition(c)

     820       1,514       —         820  

Legal settlement(d)

     —         (6,400     —         —    

Medical Device Regulation and quality related costs(e)

     1,900       2,503       —         1,870  

Transformation costs(f)

     20,425       27,855       1,915       12,892  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 24,851     $ 24,495     $ 38,395     $ 2,020  
        

Revenue

   $ 321,651     $ 389,771     $ 208,804     $ 140,271  
        

Adjusted EBITDA margin

     7.7     6.3     18.4     1.4

 

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  (a)

Primarily relates to interest and on short-term and long-term borrowings, and realized and unrealized foreign currency losses on transactions associated with our international subsidiaries.

  (b)

Costs associated with stock-based compensation plan.

  (c)

Impact of amortization of deferred revenue fair value adjustment associated with the Sponsor Acquisition in July 2017.

  (d)

Net favorable impact from settlement agreements with several companies relating to patent disputes.

  (e)

The initial set up costs of complying with the new EU medical device regulations for previously registered products and primarily relate to third party consulting costs.

  (f)

Compensation related charges, asset write-offs, contract cancellations, project management fees and other direct costs associated with the Company’s transformation initiatives post the Sponsor Acquisition. The key initiatives include manufacturing transfer (Six months ended June 30, 2021 and 2020: $1.5 million and $2.5 million, respectively, 2020: $6.5 million, 2019: $7.5 million), post-acquisition integration (Six months ended June 30, 2021 and 2020: $0.4 million and $2.6 million, respectively, 2020: $5.1 million, 2019: $18.9 million), product discontinuation (Six months ended June 30, 2021 and 2020: $— and $5.0 million, respectively, 2020: $5.0 million, 2019: $—) and the ERP implementation (Six months ended June 30, 2021 and 2020: $— and $2.8 million, respectively, 2020: $3.8 million, 2019: $1.4 million).

The following table provides a reconciliation of gross profit to Adjusted gross profit for the periods presented:

 

     Year Ended     Six Months Ended  
     December 31,
2020
    December 31,
2019
    June 30, 2021     June 30, 2020  
(In thousands, except percentages)                         

Gross profit

   $ 139,078     $ 169,249     $ 110,498     $ 56,438  

Depreciation, amortization and asset disposals

     7,260       8,048       3,333       3,640  

Stock-based compensation expense(a)

     469       410       153       246  

Fair value adjustments related to the Sponsor Acquisition(b)

     820       1,514       —         820  

Medical Device Regulation and quality related costs(c)

     1,900       2,503       —         1,870  

Transformation costs(d)

     13,488       18,773       1,575       8,605  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted gross profit

   $ 163,015     $ 200,497     $ 115,559     $ 71,619  

Revenue

   $ 321,651     $ 389,771     $ 208,804     $ 140,271  

Adjusted gross profit margin

     50.7     51.4     55.3     51.1

 

  (a)

Costs associated with stock-based compensation plan.

  (b)

Impact of amortization of deferred revenue fair value adjustment associated with the Sponsor Acquisition in July 2017.

  (c)

The initial set up costs of complying with the new EU medical device regulations for previously registered products and primarily relate to third party consulting costs.

  (d)

Compensation related charges, asset write-offs, contract cancellations, project management fees and other direct costs associated with the Company’s transformation initiatives post the Sponsor Acquisition. The key initiatives include manufacturing transfer (Six months ended June 30, 2021 and 2020: $1.6 million and $2.3 million, respectively, 2020: $5.8 million, 2019: $7.3 million), post-acquisition integration (Six months ended June 30, 2021 and 2020: $— and $1.0 million, respectively, 2020: $2.7 million, 2019: $10.7 million), product discontinuation (Six months ended June 30, 2021 and 2020: $— and $5.0 million, respectively, 2020: $5.0 million, 2019: $—) and the ERP implementation (Six months ended June 30, 2021 and 2020: $— and $0.3 million, respectively, 2020: $—, 2019: $0.7 million).


 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below and the other information set forth in this prospectus before deciding to invest in shares of our common stock. If any of the following risks actually occurs, our business, results of operations and financial condition may be materially adversely affected. While we believe that the risks and uncertainties described below are the material risks currently facing us, additional risks that we do not yet know of or that we currently think are immaterial may also arise and materially affect our business. In such case, the trading price of our common stock could decline and you may lose all or part of your investment.

Risks Related to Our Business

Major public health issues, and specifically the pandemic caused by the spread of COVID-19, could have an adverse impact on our business, financial condition and results of operations.

The worldwide COVID-19 pandemic has negatively impacted the global and U.S. economies, disrupted consumer spending and global supply chains, and created significant volatility and disruption of labor and financial markets. The extent to which the coronavirus impacts our business and operating results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the coronavirus, the impact of any virus variants, and the actions to contain the coronavirus or treat its impact, among others.

The spread of the coronavirus, which has caused a broad impact globally, including restrictions on travel, shifting workforce to work remotely and quarantine policies put into place by businesses and governments, may have a material economic effect on our business. Notably, healthcare facilities in many countries banned or effectively banned elective procedures. In addition, general commercial activity was reduced as many avoided any non-essential activities. As a result, our sales and marketing efforts in the early stages of the pandemic were substantially reduced as many of our customers were shut down or unable to operate.

Further, disruptions in the manufacturing and distribution of our products and in our supply chain have occurred as a result of the COVID-19 pandemic and may continue to occur. Such disruptions include staffing shortages, production slowdowns, stoppages and/or disruptions in delivery systems, any of which could materially and adversely affect our ability to obtain necessary raw materials and supplies, manufacture and/or distribute our products in a timely manner, or at all.

Our employees travel frequently to establish and maintain relationships with our customers and distributors, and to manage our internal operations. Much of that travel has halted as many countries have implemented restrictions that prevented our salespersons from attending conferences or meeting customers in person. In response, we have been required to continue sales efforts by using remote tools. We continue to monitor the situation and may adjust our current policies as more information and public health guidance become available. The continued or increased restriction of travel and doing business in person may negatively affect our customer success efforts, sales and marketing efforts, slow down our recruiting efforts, or create operational or other challenges, any of which could harm our business and results of operations.

While we have a distributed workforce and our employees are accustomed to working remotely and working with other remote employees, our workforce was not trained to be fully remote. Continued widespread remote work arrangements may have a negative impact on our operations, the execution of our business plans, the productivity and availability of key personnel and other employees necessary to conduct our business, and on third-party service providers who perform critical services for us, or otherwise cause operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions. If a natural disaster, power outage, connectivity issue, or other event occurred that impacted our employees’ ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time. The continuation of remote working may also result in privacy, data protection, data security and

 

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fraud risks, and our understanding of applicable legal and regulatory requirements, as well as the latest guidance from regulatory authorities in connection with the COVID-19 pandemic, may be subject to legal or regulatory challenge, particularly as regulatory guidance evolves in response to future developments.

While the potential economic impact brought by and the duration of the pandemic may be difficult to assess or predict, it has already caused, and is likely to result in further, significant disruption of global financial markets, which may reduce our ability to access capital either at all or on favorable terms. In addition, a recession, depression, or other sustained adverse market event resulting from the COVID-19 pandemic could materially and adversely affect our business.

The ultimate impact of the current pandemic, or any other health epidemic, is highly uncertain and will depend on future developments, such as the ultimate duration and scope of the outbreak (including any future waves or strains of the coronavirus), the distribution, adoption and availability of effective vaccines, the improvement of healthcare outcomes, its impact on our customers and suppliers, and how quickly normal economic conditions can resume. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, our research programs, healthcare systems or the global economy as a whole. However, these effects could have a material adverse effect on our business, financial condition and results of operations.

If our existing products fail to gain market acceptance or if we do not continue to develop and commercialize new products that are accepted by the market, identify new markets for our existing products and technologies and/or expand beyond our traditional customer base, we may not remain competitive, and our revenues and operating results could suffer.

We have developed products for the treatment of a wide variety of medical aesthetics indications. Our success depends in part on acceptance of our growth products, including for hair removal, pigmentation and tattoo removal, vascular lesion treatment, body and skin tightening and skin resurfacing. The rate of adoption and acceptance of our products for use in these and other clinical indications may be adversely affected by actual or perceived issues relating to quality, reliability and safety, customers’ reluctance to invest in new technologies, pricing of our products, cleared or approved indications for our products, widespread acceptance of other technologies and changes in the competitive landscape.

The industry in which we operate is subject to continuous technological development and rapid product innovation. If we do not continue to be innovative in the development of new products and applications, our competitive position will likely deteriorate as other companies successfully design and commercialize new products and applications. There are few barriers to entry that would prevent new entrants or existing competitors from developing products that compete directly with ours. We expect that any competitive advantage we may enjoy from our current and future innovations would diminish over time, as companies successfully respond to our, or create their own, innovations.

Accordingly, our success depends on developing new and innovative applications of laser and other energy-based technology and identifying new markets for, and applications of, existing products to new customers and technology. This requires us to design, develop, manufacture, test, market and support new products or product enhancements and also requires continued substantial investment in research and development. We may not be able to respond effectively to technological changes and emerging industry standards, or to successfully identify, develop or support new technologies or enhancements to existing products in a timely and cost-effective manner. During the research and development process, we may encounter obstacles that could delay development and consequently increase our expenses, which may ultimately force us to abandon a potential product in which we have already invested substantial time and resources. Technologies in development could prove to be more complex than initially understood or not scientifically or commercially viable. Even if we develop new products and technologies ahead of our competitors, we may not be able to obtain the requisite marketing authorizations for such products, including from public agencies, such as the U.S. Food and Drug Administration, or the FDA,

 

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other foreign regulatory agencies and our Notified Bodies, on a timely and cost-effective basis or at all. In addition, our competitors may obtain FDA clearances for additional indications for use of their products that our products do not have or that we are unable to obtain.

The development and marketing of our products also depend on our ability to continue to develop our clinical support, further expand and nurture relationships with industry thought leaders, and increase market awareness of the benefits of our new products. Physicians assist us as researchers, marketing consultants, product consultants and public speakers, and we rely on these professionals to provide us with considerable knowledge and experience. If we fail to maintain our working relationships with physicians and other healthcare and medical aesthetics practitioners, our products may not be developed and marketed in line with the needs and expectations of the practitioners who use and support our products.

We may be unable to continue to develop, acquire or effectively launch and market new or enhanced products and technologies regularly, or at all, due to, among other things, lack of acceptance of the products, changing patient and customer demands, product pricing and/or delays or difficulties in manufacturing and supply, obtaining marketing authorizations or obtaining sufficient patent or other intellectual property protection. In addition, we may also experience a decrease in sales of certain existing products as a result of newly launched products. If we are unable to develop and commercialize new products or enhancements and identify and penetrate new markets for our products and technology, our products and technology could become obsolete and our business, financial condition and results of operations may be adversely affected.

We operate in a highly competitive industry, and our failure to compete effectively could adversely affect our market share, financial condition and growth prospects.

The medical aesthetics industry is highly competitive. Our products compete against laser and other energy-based products offered by numerous small and large public and private companies, both those focused on the medical aesthetics device market as well as larger pharmaceutical and medical devices companies. These companies can offer practitioners a broad spectrum of services, including special loyalty programs. Our competitors may have greater financial, research and development, manufacturing, and sales and marketing resources and capabilities than we do. Our competitors may have more established products, newer or different products and longer lasting customer relationships, which could inhibit our market penetration efforts. Consolidation in our industry may also make it more difficult for us to compete.

We also face competition from medical products unrelated to energy-based devices, such as neurotoxins and hyaluronic acid injections, and aesthetic procedures, such as face lifts, liposuction, sclerotherapy, electrolysis, chemical peels and microdermabrasion. The introduction of disruptive technological breakthroughs, whether pharmaceutical, surgical or other therapeutic solutions, may present an additional threat to our success in our target markets. Pharmaceutical companies, academic and research institutions or others may develop new, non-invasive or minimally-invasive therapies that are more effective, more convenient or less expensive than our current or future products. Any new technologies, procedures or therapies could result in increased competition or make our products obsolete. Moreover, we could expand our business to include new, non-invasive or minimally-invasive therapies which may compete with our current product offerings. Competition with these companies and with products that do not rely on technologies that we utilize could result in reduced prices and profit margins and loss of market share, which could harm our business, financial condition and results of operations.

To compete effectively, we have to demonstrate that our products are attractive alternatives to other devices and treatments by differentiating our products on the basis of such factors as innovation, performance, clinical evidence, brand recognition, service, post-sale support and price. For example, we have encountered, and expect to continue to encounter, situations where, due to lower prices, potential customers decide to purchase products from our competitors. Potential customers also may need to recoup the cost of products that they have already purchased from our competitors and may decide not to purchase our products, or to delay such purchases. If we are unable to increase our market penetration or compete effectively, our revenue and profitability will be adversely impacted.

 

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We may also need to increase spending on marketing, advertising and new product innovation to protect existing market share or increase market share. The success of our investments is subject to risks, including uncertainties about patient acceptance. As a result, our increased expenditures may not maintain or enhance market share and could result in lower profitability. If we are unable to increase our market penetration or compete effectively, our revenue and profitability will be adversely impacted.

If there is not sufficient demand for the procedures performed with our products, customer demand for our products could decline, resulting in unfavorable operating results.

A material assumption of our business strategy is continued expansion of the global market for energy-based medical aesthetics procedures by dermatologists, plastic surgeons, aestheticians and medical aesthetics chain customers, driving demand for our products. Procedures performed using our products are generally not reimbursable through government or private health insurance and are therefore elective procedures, the cost of which must be borne by the patient. The consumer demand for the procedures supported by our products and customers’ decision to utilize our products for such procedures may therefore be influenced by several factors, including:

 

   

patient disposable income and access to consumer credit;

 

   

the cost of procedures performed using our products;

 

   

actual or perceived quality or safety issues involving our products, unfavorable patient perception of our products or negative publicity surrounding us or our products;

 

   

the cost, safety and effectiveness of alternative treatments, including treatments which are not based upon laser or other energy-based technologies and treatments which use pharmaceutical products;

 

   

fashion and/or trends among patients and the social acceptance (or lack thereof) of procedures supported by our products;

 

   

the success of our sales and marketing efforts; and

 

   

the education of our customers and patients on the benefits and uses of our products compared to competitors’ products and technologies.

If, because of these factors, there is not sufficient demand for the procedures performed with our products, customer demand for our products could decline, which could have a material adverse effect on our results of operations.

In addition, consumer spending habits are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, consumer confidence and consumer perception of economic conditions. A general slowdown in our key markets, including North America, China, Japan, Korea, Australia, Asia Pacific, the Middle East and Europe, or an uncertain economic outlook in any such markets would adversely affect consumer spending habits which may, among other things, result in reduced patient traffic in dermatology or plastic surgeon offices and in MedSpas, reduction in patient spending on elective, non-urgent, or higher value treatments such as those offered by our customers or a reduction in the demand for medical aesthetics services generally, each of which could have a material adverse effect on our sales and operating results. Negative political developments, political unrest, terrorist attacks around the globe and the potential for other hostilities in various parts of the world, public health crises, natural disasters and other catastrophic events may continue to contribute to a climate of economic and political uncertainty that could adversely affect our business, financial condition and results of operations, including our revenue growth and profitability.

 

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Our business is subject to risks associated with the financial position and actions of our customers.

In the event of deterioration of economies, general business conditions or the availability of credit, the financial strength and stability of our customers and potential customers may deteriorate over time. Such circumstances may cause practitioners to postpone investments in capital equipment, cancel or delay purchase of our products, or cause customers not to pay us or to delay paying us for previously purchased products and services. We generally offer credit terms of 30 to 90 days to qualified customers and to leasing companies to finance purchase of our products. The financial position of customers to whom we have provided payment terms may change adversely before we receive payment and in the event that any of these customers default on the amounts payable to us, we may recognize a credit loss provision write-off charge in our general and administrative expense, which may be material. 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 result in credit losses and/or impact our liquidity, cash flows and results of operations.

Some of our customers and prospective customers have had difficulty in procuring or maintaining liability insurance to cover their operation and use of our products. Medical malpractice carriers are withdrawing coverage in certain jurisdictions or substantially increasing premiums. If this trend continues or worsens, our customers may discontinue using our products and, industry-wide, potential customers may opt against purchasing laser and other light-based products due to the cost of, or inability to, procure insurance coverage. The unavailability of insurance coverage for our customers could adversely affect our ability to sell our products and in turn could harm our business, financial condition and results of operations.

We outsource a significant portion of the manufacturing of our products to a small number of contract manufacturers, and we and our contract manufacturers are dependent on certain third-party suppliers.

Through our strategic arrangement with a contract manufacturer, we maintain dedicated manufacturing lines at its medical grade manufacturing facility in Tijuana, Mexico. Within such facility, all proprietary manufacturing, testing and assembly equipment for certain components of our Gentle series, E2, CO2RE, Nordlys, Sirius, FraxPro, and PicoWay products is owned by us. We also operate an approximately 38,000 square-foot manufacturing facility in Wayland, Massachusetts at which we manufacture some of our PicoWay and VBeam systems and certain components for multiple product lines.

In addition, some of our consumable products are outsourced to a contract manufacturer in China, some consumables and accessories are outsourced to contract manufacturers in the United States, and our consumables requiring sterilization are sterilized by a contract service provider in Israel. Furthermore, many of the components of our products are currently manufactured or sourced by a limited number of suppliers, including resins used in our VBeam products and a significant portion of our electronic components from China that are experiencing order lead times of up to six months. We and our contract manufacturers do not have the ability to manufacture these components ourselves. In addition, we and our contract manufacturer use Alexandrite and Ytterbium crystal rods to manufacture the GentleMax, GentleLASE PRO, GentleYag, PicoWay, VBeam Prima and the AlexTriVantage products, as well as Nordlys applicators, which together account for a significant portion of our total revenues. We depend exclusively on our contract manufacturers to obtain supplies of these rods. For our business to be successful, our contract manufacturers and suppliers must provide us with quality products in substantial quantities, in compliance with regulatory requirements, at acceptable costs and on a timely basis. Our ability to obtain a sufficient selection or volume of products on a timely basis at competitive prices could suffer as a result of any deterioration or change in our contract manufacturer or supplier relationships, quality, manufacturing or other regulatory issues, or events that adversely affect our contract manufacturers or suppliers.

Our contract manufacturers’ or suppliers’ facilities and equipment could be harmed or rendered inoperable and/or their operations may be disrupted for many reasons, including changes in economic and political conditions, tariffs, trade disputes, regulatory requirements, import restrictions, loss of certifications, shipment

 

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issues, natural or man-made disasters, fires, physical or cyber break-ins, unplanned maintenance or other manufacturing problems, manufacturing shutdowns stemming from insufficient intellectual property licensing, labor shortages, power outages or shortages, telecommunications failures, work stoppages, slowdowns or strikes, transportation interruption, water shortages, extreme weather conditions, war, acts of terrorism, pandemics (such as the COVID-19 pandemic and related travel restrictions), epidemics, or other unforeseen or catastrophic events. Such disruptions may continue over a sustained period and could cause direct injury or damage to our contract manufacturers’ or suppliers’ employees and property with significant consequences to us. Our contract manufacturers or suppliers may be forced to reduce or cease their production, undertake corrective and preventive actions, shut down their operations or file for bankruptcy due to financial instability, difficulties or problems associated with their business. Any of these events may render it difficult or impossible for us to manufacture products for an extended period of time. If these facilities are inoperable for even a short period of time, the inability to manufacture our current products may result in harm to our reputation, increased costs, lower revenue and the loss of customers, which would have a material adverse effect on our business, financial condition and results of operations.

Our contract manufacturers or suppliers may fail to comply with regulatory requirements or experience quality control issues, which could result in defective products or the failure to produce our products on a timely basis and in the required quantities, if at all. Failure to detect, prevent or fix defects, or the occurrence of real or perceived quality or safety problems or material defects in raw materials, components of products or finished products could result in a variety of consequences, including delays in shipments of our products, a greater number of product returns, litigation, complaints, regulatory investigations and enforcement actions, product recalls and withdrawals and credit, warranty or other claims, among others, which could expose us to liability and harm our results of operations and financial condition. Such problems could negatively impact patient and customer confidence in our products and hurt our reputation.

Our contract manufacturers or suppliers may consolidate, increasing their market power. Our business is dependent upon the ability of our contract manufacturers or suppliers to locate, train, employ and retain adequate personnel. Our contract manufacturers or suppliers have experienced, and may continue to experience in the future, unexpected increases in work wages, whether government-mandated or otherwise. Our contract manufacturers or suppliers may increase their pricing if their raw materials became more expensive, and may pass the increase in sourcing costs to us through price increases, thereby impacting our margins. Material changes in the pricing practices of our contract manufacturers or suppliers could negatively impact our profitability.

In addition, we have credit limits with certain contract manufacturers that may limit the number of orders we can place with them. Further, the manufacturing capacity of these contract manufacturers or suppliers may be inadequate if our customers place orders for unexpectedly large quantities of our products or otherwise to keep pace with our growth plans. If any of our contract manufacturers or suppliers were unable or unwilling to fulfill large orders, we could experience business interruption, increased costs, damage to our reputation and loss of our customers. Due to the stringent regulations and requirements of the FDA and other similar non-U.S. regulatory agencies regarding the manufacture of our products, we may not be able to quickly establish additional or replacement sources for products or components, and alternative facilities with sufficient capacity or capabilities may not be available. In addition, even if we were able to obtain new contract manufacturers or suppliers to replace or supplement our manufacturing needs, training and qualifying such contract manufacturers or suppliers could be time-consuming, resulting in delays in production and delivery of our products and added costs, may require new or additional marketing authorizations and there may be a learning curve until such new contract manufacturers or suppliers can provide products of the required quality. Transitioning to a new contract manufacturer or supplier could also affect the performance specifications of our products or could require that we modify the design of certain product systems. For example, a change in manufacturing location may require certain regulatory filings to be completed for critical markets in which we operate including, but not limited to, China, Japan and the United States. If a change in manufacturer results in a significant change to any product, a new 510(k) clearance from the FDA or similar international marketing authorization may be necessary before we

 

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implement the change, which could cause substantial delays. A reduction or interruption in manufacturing, or an inability to secure alternative sources of raw materials or components, could have a material effect on our business, financial condition, results of operations and cash flows.

If we fail to manage our inventory effectively or our forecasts are incorrect, our business, financial condition and results of operations may be materially and adversely affected.

Our business requires us to manage a large volume of inventory, including a large number of stock-keeping units stored at multiple sites globally. We depend on our forecasts of demand for, and popularity of, various products to make purchasing decisions and to manage our inventory of stock-keeping units. To assist in management of manufacturing operations and in order to minimize inventory costs, we forecast anticipated product sales to predict our inventory needs up to 12 months (and for certain select items, up to three years) in advance and enter into purchase orders on the basis of these forecasts, subject to limitations on the lead time of our product components and items with long lead times. We also accept safety stock of long lead time items. If we overestimate our requirements, we and our contract manufacturers will have excess inventory, increasing our costs and the amount of our capital tied up in inventory. If we underestimate our requirements, we and our contract manufacturers may have inadequate components and materials inventory, which could interrupt, delay or prevent delivery of our products to our customers. Any of these occurrences would negatively affect our financial performance and the level of satisfaction our customers have with our business.

Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale. Demand may be affected by seasonality, new product launches, rapid changes in product cycles and pricing, product defects, promotions, changes in customer and patient spending patterns, changes in customer and patient tastes with respect to our products and other factors, and our customers may not purchase products in the quantities that we expect. It may be difficult to accurately forecast demand and determine appropriate levels of product or component. If we fail to manage our inventory effectively or negotiate favorable credit terms with third-party contract manufacturers and suppliers, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and significant inventory write-downs or write-offs. In addition, if we are required to lower sale prices in order to reduce inventory level or to pay higher prices to our contract manufacturers and suppliers, our profit margins might be negatively affected. Any of the above may materially and adversely affect our business, financial condition and results of operations.

If we encounter problems with distribution, our ability to deliver our products to our customers could be adversely affected.

We depend in large part on the orderly operation of our warehouse and distribution facility, as well as those managed by third-party vendors, for processing, receiving and distributing our products. Any increase in transportation costs and fuel costs, increased shipping costs, issues with overseas shipments, supplier-side delays, reductions in the transportation capacity of carriers, labor strikes or shortages in the transportation industry, disruptions to the national and international transportation infrastructure and unexpected delivery interruptions or delays may increase the cost of, and adversely impact, our distribution process. Recently, we have experienced delays in, and increased costs with respect to, the transportation of our products due to pandemic-related supply chain disruptions. In addition, events beyond our control, such as disruptions in operations due to natural or man-made disasters, inclement weather conditions, accidents, system failures, power outages, political instability, physical or cyber break-ins, server failure, work stoppages, slowdowns or strikes by employees, acts of terrorism, the outbreak of viruses, widespread illness, infectious diseases, contagions and the occurrence of unforeseen epidemics (including the COVID-19 pandemic) and other unforeseen or catastrophic events, could damage our or our vendors’ warehouses and distribution facilities or render them inoperable, making it difficult or impossible for us or our vendors to process customer orders for an extended period of time. Such events may also result in delays in our or our vendors’ receipt of inventory and the delivery of products between our customers and/or our partners and our and our vendors’ warehouses and distribution facilities. We or our vendors could also incur significantly higher costs and longer lead times associated with distributing inventory during the time it takes for us or our vendors to reopen or replace our facilities. The inability to fulfill, or any delays in processing, customer orders could result in the loss of customers and excess inventory, and may also adversely affect our reputation, sales and profitability.

 

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Our financial results may fluctuate from quarter to quarter.

We experience quarterly fluctuations in our financial performance as a result of a variety of factors, including changes in demand for our products due to seasonal buying patterns, the long sales cycle associated with some of our products, which may cause sales to be recognized in a subsequent period, the timing of new product introductions and our ability to scale, suspend or reduce production based on variations in product demand. We base our production, inventory and operating expenditure levels on anticipated orders and sales forecasts. If orders are not received when expected in any given quarter, or if our forecasts for product unit sales or for the mix of products to be sold are not met, then expenditure levels could be disproportionately high in relation to revenue for that quarter. From time to time, we may also enter into acquisition, license or collaboration agreements with other companies that include development funding and significant upfront and milestone payments and/or royalties, which may vary significantly from period to period and cause a significant fluctuation in our operating results from one period to the next. We may not be able to correctly estimate or control our future operating expenses in relation to obtaining, enforcing and/or defending intellectual property, which may fluctuate significantly in the future as a result of a variety of factors, including the costs of preparing, filing, prosecuting, defending, and enforcing patent and trademark claims and other intellectual property-related costs, including adverse proceedings (such as litigation) costs. The cumulative effect of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance.

Increased prices for, or availability constraints on, raw materials or sub-assemblies used in our products could adversely affect our profitability or revenues.

Our profitability is affected by the prices of the raw materials and sub-assemblies used in the manufacture of our products. These prices may fluctuate based on a number of factors beyond our control, including changes in supply and demand, general economic conditions, labor costs, fuel related delivery costs, competition, import duties, excise and other indirect taxes, currency exchange rates and government regulation. Certain of these factors may be heightened as a result of changing political climates and the modification or introduction of other governmental policies with potentially adverse effects. Due to the competitive nature of the medical aesthetics device industry and the cost containment efforts of our customers, we may be unable to pass along cost increases for key components or raw materials through higher prices to our customers. If the cost of key components or raw materials increases, and we are unable to fully recover these increased costs through price increases or offset these increases through other cost reductions, we could experience lower margins and profitability. Significant increases in the prices of raw materials or sub-assemblies that cannot be recovered through productivity gains, price increases or other methods could adversely affect our results of operations. Availability of raw materials might also fluctuate based on a number of factors, which might affect our and our contract manufacturers’ ability to deliver products to our customers and our revenues in specific time periods.

A disruption in the operations of our freight carriers or higher shipping costs could cause a decline in our net revenues or a reduction in our earnings.

We are dependent on commercial freight carriers to deliver our products both within the United States and internationally. If the operations of these carriers are disrupted for any reason, we may be unable to timely deliver our products to our customers. If we cannot deliver our products on time and cost effectively, our customers may choose competitive offerings, which may cause our revenues and gross margins to decline, possibly materially. In a rising fuel cost environment, our freight costs will increase. In addition, we earn an increasingly larger portion of our total revenues from international sales. International sales carry higher shipping costs which could negatively impact our gross margin and results of operations. If freight costs materially increase and we are unable to pass that increase along to our customers or offset such increases in our cost of revenues, our gross margin and financial results could be adversely affected.

 

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We may have difficulty managing our growth which could limit our ability to increase sales and cash flow.

We have experienced rapid growth in our operations and headcount in recent years, which has placed significant demands on our management, as well as our financial and operational resources and supply chain and distribution capacity. In order to achieve our business objectives, we will need to continue to grow our business. To manage growth effectively, we must continue to enhance our operational, financial and management systems, including our warehouse management and inventory control; maintain and improve our internal controls and disclosure controls and procedures; maintain and improve our information technology systems and procedures; and expand, train and manage our employee base.

We may not be able to effectively manage this expansion in any one or more of these areas, and any failure to do so could significantly harm our business, financial condition and results of operations. Growing our business may make it difficult for us to adequately predict the expenditures we will need to make in the future. If we do not make the necessary overhead expenditures to accommodate our future growth, we may not be successful in executing our growth strategy, and our results of operations would suffer.

Fluctuations in currency exchange rates may negatively affect our business, financial condition and results of operations.

A majority of our revenues and a substantial portion of our expenses are denominated in U.S. dollars. However, a material portion of our revenues and a portion of our costs, including personnel and some marketing and facilities expenses, are incurred in Israeli Shekels, Euros, Japanese Yen, Australian Dollars, Canadian Dollars, British Pounds and Chinese Yuan. Regional inflation or a weakening of the U.S. dollar against the Euro, Chinese Yuan, the Japanese Yen or other currencies could make it more expensive for us to fund our operations in the countries that use those other currencies and could have a material adverse impact on our results of operations and financial results.

International sales and operations comprise a significant portion of our business, exposing us to foreign operational, political and other risks that may harm our business, particularly if we are unable to manage our international operations effectively.

We generate an increasing share of our revenue from international sales and maintain international operations, including supply and distribution chains that are, and will continue to be, a significant part of our business. In 2020, approximately 78.0% of our revenues were attributable to sales outside of the United States. Since our growth strategy depends in part on our ability to penetrate international markets and increase the localization of our products and services, we expect to continue to increase our sales and presence outside the United States, particularly in markets we believe to have high-growth potential, such as certain countries in Asia. Expansion of our international business will require significant management attention and financial resources. As of December 31, 2020, we and our subsidiaries had approximately 860 employees in a number of countries around the world, with offices in multiple locations in Japan and China, and offices in Canada, Hong Kong, Korea, Australia, Israel, Spain, Portugal, Germany, Italy, France and the United Kingdom. In addition, our major contract manufacturers and suppliers are located in Mexico, Europe and China.

Our international sales and operations subject us to many risks inherent in international business activities, including:

 

   

local patient preferences and trends;

 

   

increased expense of developing, testing and making localized versions of our products;

 

   

lack of patient awareness of our products in certain jurisdictions outside the United States;

 

   

difficulties in establishing and staffing our international operations;

 

   

differing employment practices and laws and labor disruptions, and the need to implement appropriate systems, policies, benefits and compliance programs over large geographic distances;

 

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difficulties in managing international operations, including any travel restrictions imposed on us or our customers, such as those imposed in response to the COVID-19 pandemic;

 

   

foreign exchange controls that could make it difficult to repatriate earnings and cash;

 

   

general geopolitical instability and the responses to it, such as recent economic sanctions implemented by the United States against China and Russia and tariffs imposed by the United States and China;

 

   

product or material transportation delays or disruption, including as a result of customs clearance, violence, protests, police and military actions, or natural disasters;

 

   

risks of non-compliance by our employees, contractors, or partners or agents with, and burdens of complying with, a wide variety of extraterritorial, regional and local laws, including competition laws and anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act and the UK Bribery Act of 2010, in spite of our policies and procedures designed to promote compliance with these laws;

 

   

the impact of government-led initiatives to encourage the purchase or support of domestic vendors, including the imposition of new or higher tariffs, which can affect the willingness of customers to purchase products from, or collaborate to promote interoperability of products with, companies whose headquarters or primary operations are not domestic;

 

   

an inability to obtain or maintain adequate intellectual property protection for our brand and products outside the United States;

 

   

a legal system subject to undue influence or corruption or a business culture in which illegal sales practices may be prevalent;

 

   

multiple and possibly overlapping tax structures and potential adverse tax consequences;

 

   

changes in tax laws, including those imposing customs duties, and other laws;

 

   

acts of terrorism and war;

 

   

foreign certification and regulatory requirements, including differing packaging, labeling and related laws, rules and regulations;

 

   

lengthy payment cycles and difficulty in collecting accounts receivable;

 

   

distribution center and warehousing logistics, customs clearance and shipping delays; and

 

   

trade protection measures, sanctions, quotas, embargoes, import and export controls, licenses and restrictions, duties, tariffs or surcharges.

If any of these risks materialize, we could experience production delays and lost or delayed revenues, among other potential negative consequences that could materially impact our international operations and adversely affect our business as a whole. If our international sales do not continue at the expected pace or suffer from greater challenges than expected, or unexpected events happen in overseas countries, then we will not experience our projected growth or will have decreased revenue and our financial results will suffer.

We have growing operations in China, which exposes us to risks inherent in doing business in that country.

We have expanded our sales and service geographic coverage in China. With the rapid development of the Chinese economy, the cost of labor has increased and may continue to increase in the future. We may not be able to find a sufficient number of qualified employees due to the highly competitive and fluid market for skilled labor in China. Furthermore, pursuant to Chinese labor laws, employers in China are subject to various requirements when signing labor contracts, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. These labor laws and related regulations impose liabilities on employers and may significantly increase the costs of workforce reductions. If we decide to change or reduce our workforce, these labor laws could limit or restrict our ability to make such changes in a timely, favorable and effective manner.

 

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Operating in China exposes us to political, legal and economic risks. In particular, the political, legal and economic climate in China, both nationally and regionally, is fluid and unpredictable. Our ability to operate in China may be adversely affected by changes in U.S. and Chinese laws and regulations such as those related to, among other things, taxation, import and export tariffs, environmental regulations, intellectual property, currency controls, network security, employee benefits and other matters. For example, China has recently enforced stringent regulations “to protect the physical and mental health of minors,” including significant limitations on the use of online gaming and private tutoring services for young adults and teenagers in China. We may be adversely affected if China imposes regulations on cosmetic procedures for young adults and teenagers, including limitations on the use of cosmetic surgery advertising and social media platforms targeted towards young adults and teenagers. China recently announced draft rules with respect to medical aesthetic advertisements, including banning ads that create “appearance anxiety.” In addition, we may not be able to obtain or retain the requisite legal permits to continue to operate in China, and costs or operational limitations may be imposed in connection with obtaining and complying with such permits. In addition, Chinese trade regulations are in a state of flux, and we may become subject to other forms of taxation, tariffs and duties in China. If any of these events occur, our business, financial condition and results of operations could be materially and adversely affected.

In addition, some of our clinical activities are conducted by third parties in China. We contract with independent investigators to conduct clinical trials in order to obtain specific clearances in China. Any disruption in the operations of such third parties or in their ability to meet our needs, whether as a result of a natural disaster, pandemic or other causes, could impair our ability to gain marketing authorization for our medical aesthetics devices, which could materially and adversely affect our development timelines, business and financial condition.

A portion of our product sales are made through independent distributors and sales agents whom we do not control.

A portion of our product sales are made through independent sales representatives and distributors. Because independent distributors often control customer relationships (and, in certain countries outside the United States, the regulatory relationship), there is a risk that if our relationship with a distributor ends, our relationship with end customers associated with the relevant distributor (or our relationship with regulators, as applicable) will be lost. Also, because we do not control a distributor’s field sales agents, there is a risk we will be unable to ensure that our sales processes, compliance and other priorities will be consistently communicated and executed by the distributor. If we fail to maintain relationships with our key distributors, or fail to ensure that our distributors adhere to our sales processes, compliance and other priorities, this could have an adverse effect on our operations. Actions by independent distributors that are beyond our control could result in flat or declining sales in that geography, harm to our reputation or our products, regulatory or enforcement actions or legal liability. Certain of our international distributors may from time to time experience financial difficulties, including bankruptcy or insolvency. If our distributors suffer significant financial difficulty, they may be unable to pay the amounts due to us timely or at all, which could have a material adverse effect on our ability to collect on receivables and our results of operations. It is possible that distributors may contest their contractual obligations to us under bankruptcy laws or otherwise. We face risk from international distributors that file for bankruptcy protection in foreign jurisdictions, as the application of foreign bankruptcy laws may be more difficult to predict. The operation of local laws and our agreements with distributors can make it difficult for us to change quickly from a distributor who we feel is underperforming. In addition, our international expansion depends on our ability to identify and maintain regional distributor relationships in new and existing geographies, and our failure to so identify and maintain such relationships may adversely affect our growth and financial performance.

If we are unable to maintain sufficient levels of cash flow from our operations, we may not be able to execute or sustain our growth strategy or we may require additional financing, which may not be available to us on satisfactory terms or at all.

We may not generate sufficient cash flow from operations to fund our business and growth plans. We also may be prevented, have difficulty, face delays or be subject to taxes regarding our transfer of cash among our international subsidiaries, such as our Chinese subsidiary, to affiliates in the United States. If our sources of funding are insufficient to satisfy our cash requirements, we may seek to obtain an additional equity or debt financing or restructure or refinance our indebtedness. Any equity financing may result in dilution to our existing stockholders, and the incurrence of additional indebtedness would result in increased debt service obligations and

 

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operating and financing covenants that could restrict our operations. Tightening in the credit markets, low liquidity, volatility in the capital markets and lack of confidence in the equity market could result in diminished availability of credit and higher cost of borrowing, making it more difficult to obtain such financing on terms that are favorable to us, if at all. If our cash flows and capital resources are insufficient to meet our operating needs, debt service obligations and other cash needs, we could face substantial liquidity problems and could be forced to cancel, reduce or delay planned product expansion or introduction, marketing initiatives, investments, acquisitions, capital expenditures or other elements of our growth strategy or to dispose of material assets or operations. Our ability to generate cash will depend on our future performance and financial condition, which will be affected by financial, business, economic, legislative, regulatory and other factors, including potential changes in costs, pricing, the success of product innovation and marketing, competitive pressure and patient preferences.

We may acquire companies and products, form or seek strategic alliances and enter into licensing arrangements in the future, and we may not realize the expected benefits or costs of such arrangements.

We may acquire companies and products, form or seek strategic alliances, create joint ventures or collaborations and enter into licensing arrangements with third parties that we believe will complement or augment our sales and marketing efforts and product portfolio. The planning, negotiation, execution and integration of any such transaction may divert management’s time and resources from our core business, disrupt our operations, cause us to issue securities that dilute our existing stockholders and we may incur significant legal, accounting and banking fees in connection with such a transaction. Acquisitions could diminish our available cash balances for other uses, result in the incurrence of debt, contingent liabilities or amortization expenses and restructuring charges. Also, the anticipated benefits or value of our acquisitions or investments may not materialize and could result in an impairment of goodwill and/or purchased long-lived assets. Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such transactions, incur unanticipated liabilities, and harm our business, financial condition and results of operations.

In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. We may not be able to identify appropriate acquisition candidates or strategic partners, or successfully negotiate, finance or complete the acquisitions or transactions on favorable terms, if at all. If we acquire or license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and culture. We cannot be certain that, following a strategic transaction or license, we will achieve the revenue or specific net income that justifies such transaction. Any delays in entering into new strategic partnership agreements related to our products could delay the commercialization of our products in certain geographies for certain indications, which would harm our business, financial condition and results of operations.

We are continually seeking ways to make our cost structure, business processes and systems more efficient, including by moving activities from higher-cost to lower-cost locations, outsourcing certain business processes and functions, and implementing new business information systems. Problems with the execution of these activities could have an adverse effect on our business, financial condition and results of operations. In addition, we may not achieve the expected benefits of these initiatives.

We continuously seek to make our cost structure and business processes more efficient, including by moving our business activities from higher-cost to lower-cost locations, outsourcing certain business processes and functions, and implementing changes to our business information systems. These efforts involve a significant investment of financial and human resources and significant changes to our current operating processes. In 2020, we completed the global rollout of a company-wide enterprise resource planning, or ERP, system. Any major disruptions or deficiencies in the design and implementation of the ERP system, particularly those that impact our operations, could adversely affect our ability to process customer orders, ship products, provide services and support to our customers, bill and track our customers, timely report our financial results and otherwise run our business.

 

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Since 2018, we have outsourced a large part of our information technology infrastructure and have been executing a plan to outsource manufacturing and operations functions to third parties, and as a result we are managing relationships with third parties who have access to our confidential information. In addition, as we move operations into lower-cost jurisdictions and outsource certain business processes, we become subject to new regulatory regimes and lose control of certain aspects of our operations and, as a consequence, become more dependent upon the systems and business processes of third-parties. If we are unable to move our operations, outsource business processes and implement new business information systems in a manner that complies with local law and maintains adequate standards, controls and procedures, the quality of our products and services may suffer and we may be subject to increased litigation risk, either of which could have an adverse effect on our business, financial condition and results of operations.

While these changes are part of a comprehensive plan to, among other things, accelerate our growth, reduce costs and leverage economies of scale, we may not realize the expected benefits of these and other transformational initiatives. In addition, these actions and potential future improvement efforts could yield unintended consequences, such as distraction of management and employees, business disruption, reduced employee morale and productivity and unexpected additional employee attrition, including the inability to attract or retain key personnel. These consequences could negatively affect our business, financial condition and results of operations. If we do not successfully manage our current initiatives, or any other initiatives that we may take in the future, any expected efficiencies and benefits might be delayed or not realized, and our operations and business could be disrupted. In addition, the costs associated with implementing restructuring activities might exceed expectations, which could result in additional future charges.

We rely on our own direct sales force to sell our products in certain territories, which may result in higher fixed costs than our competitors and may slow our ability to reduce costs in the face of a sudden decline in demand for our products.

We rely on our own direct sales force to market and sell our products in certain territories, such as North America, China, Japan, Korea, Australia and certain countries in Europe. Some of our competitors rely predominantly on independent sales agents and third-party distributors. A direct sales force may subject us to higher fixed costs than those of companies that market competing products through independent third parties, due to the costs that we will bear associated with employee benefits, and training and managing sales personnel. As a result, we could be at a competitive disadvantage. In addition, these fixed costs may slow our ability to reduce costs in the face of a sudden decline in demand for our products, which could have a material adverse effect on our business, financial condition and results of operations. We may also incur costs related to training, education and compliance with any restrictions or disclosure requirements imposed by regulatory authorities related to activities by our sales force, such as gift bans, limitations on certain expenses or annual reports by medical aesthetics device companies.

Changes in tax laws could adversely affect our financial position.

Changes in tax laws and regulations, or their interpretation and application, in the jurisdictions where we are subject to tax could materially impact our effective tax rate. Many countries in which we have significant operations (including the United States) have recently made or are actively considering changes to existing tax laws. For example, the U.S. government may enact significant changes to the taxation of business entities including, among others, an increase in the corporate income tax rate and the imposition of minimum taxes or surtaxes on certain types of income. No specific U.S. tax legislation has been proposed at this time and the likelihood of these changes being enacted or implemented is unclear. We are currently unable to predict whether such changes will occur. If such changes are enacted or implemented, we are currently unable to predict the ultimate impact on our business.

In addition, the Organization for Economic Co-operation and Development, or the OECD, the European Commission, or the EC, and individual taxing jurisdictions where we and our affiliates do business, have recently

 

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focused on issues related to the taxation of multinational corporations. The OECD has released its comprehensive plan to create an agreed set of international rules for fighting base erosion and profit shifting. In addition, the OECD, the EC and individual countries are examining changes to how taxing rights should be allocated among countries considering the digital economy. As a result, the tax laws in the United States and other countries in which we and our affiliates do business could change on a prospective or retroactive basis and any such changes could materially adversely affect our business. Furthermore, changes in customs laws and regulations in the U.S. and various foreign jurisdictions, such as China, Japan and Israel, could have a material impact on our business, financial condition and results of operations.

We are subject to various tax audits in multiple countries and unfavorable resolution of tax contingencies or exposure to additional income tax liabilities could have a material impact on our business, financial condition and results of operations.

We are subject to income taxes as well as non-income-based taxes and tariffs in both the U.S. and various foreign jurisdictions. We are subject to ongoing tax audits in various jurisdictions. In addition, not all of our tax returns are final and may be subject to further audit and assessment by applicable tax authorities. Tax authorities may disagree with certain positions we have taken and assess additional taxes. As of June 30, 2021, we are undergoing corporate income tax audits in Israel (for which we have received notices of proposed assessment for $28 million) and Spain, a withholding tax audit in Israel, and sales and use tax audits in various U.S. states and Canada. The final timing and resolution of any tax examinations are subject to significant uncertainty and could result in us having to pay amounts to the applicable tax authority in order to resolve examination of our tax positions, which amounts may be material. An increase or decrease of tax related to tax examination resolution could result in a change in our income tax accrual and could negatively impact our financial position, results of operations or cash flows.

We regularly assess the likely outcomes of these audits to determine the appropriateness of our tax provision, and we have established contingency reserves for material, known tax exposures. However, the calculation of such tax exposures involves the application of complex tax laws and regulations in many jurisdictions. Therefore, there can be no assurance that we will accurately predict the outcomes of these disputes or other tax audits or that issues raised by tax authorities will be resolved at a financial cost that does not exceed our related reserves and the actual outcomes of these disputes and other tax audits could have a material impact on our business, financial condition and results of operations.

The failure to attract and retain key personnel could adversely affect our business.

Our success largely depends on our ability to continue to attract, retain, develop and motivate key personnel, including our worldwide sales professionals, research and development personnel and senior management. Competition for sales professionals who are familiar with, and trained to sell in, the medical aesthetics market, scientists and development engineers with expertise in lasers, energy-based devices, medical aesthetics device software, manufacturing engineering, and other skill sets required to research technologies, develop new products, and ultimately manufacture at scale our products, is intense. Our global headquarters is located in Massachusetts, which is a competitive environment for life science and medical aesthetics device experienced personnel, including our senior management. In order to provide more comprehensive sales and service coverage, we continue to increase the size of our sales force to pursue growth opportunities in certain geographic markets. It may take time for the sales professionals to become productive and there can be no assurance that recently recruited sales professionals will be adequately trained in a timely manner, or that our direct sales productivity will improve, or that we will not experience significant levels of attrition in the future, which may harm our business.

We may be unable to attract and retain sufficient numbers of the individuals whose knowledge and skills are important to our business and the loss of services of any of these individuals could affect our revenues and ability to maintain market share, our growth, operations and development of any future products. The available pool of hires may be limited due to candidates being restricted by non-compete agreements put in place by their former

 

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or existing employers. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers own their research output. Moreover, in various jurisdictions in which we operate, we may be unable to enforce non-competition arrangements with our professional employees. For instance, covenants not-to-compete are not allowed in many states, and if allowed, are difficult to enforce in many jurisdictions. Such legal enforcement actions are expensive and we cannot give any assurance that these actions will be successful. If we are unable to enforce these covenants not-to-compete, in whole or in part, we may be unable to prevent our competitors from benefiting from the expertise of our former employees, which could harm our business.

We manufacture, assemble and test certain products in our U.S. manufacturing facility. If our facility is damaged or becomes inoperative, we may not be able to deliver our products to customers on time.

We operate a manufacturing facility in Wayland, Massachusetts at which we manufacture certain components for our Gentle series of products and some of our PicoWay and VBeam products. Any significant disruption in our operations at our facility, including any disruption due to changes in economic and political conditions, tariffs, trade disputes, regulatory requirements, import restrictions, loss of certifications, shipment issues, natural or man-made disasters, fires, physical or cyber break-ins, unplanned maintenance or other manufacturing problems, labor shortages, power outages or shortages, telecommunications failures, work stoppages, slowdowns or strikes, transportation interruption, water shortages, extreme weather conditions, war, acts of terrorism, pandemics (such as the COVID-19 pandemic and related travel restrictions), epidemics, or other unforeseen or catastrophic events may result in losses that our insurance is not adequate to cover and could adversely affect our ability to deliver our products to our customers on time, which could significantly impair sales of our products and negatively impact our business, financial condition and results of operations. In addition, our manufacturing capacity may not be able to keep pace with our growth plans, especially if we need significantly greater amounts of inventory. Our business could be adversely affected if we fail to comply with governmental regulations applicable to the manufacturing of our products.

Our revenues may be adversely impacted due to third parties selling services and/or consumables for our devices.

Third-party repair services exist globally and we may not be able to realize revenue from servicing our devices due to third parties offering unauthorized device services at a lower cost than us. Analogues or replacements for some of our consumables have been produced and sold by third parties on an unauthorized basis, often at a cheaper cost than we sell them. As a result, we may experience an adverse impact on our revenues and/or gross margin due to loss of business and/or pricing pressure.

Our success depends, in part, on the quality, efficacy and safety of our products.

The design of our products is complex and we depend on the quality, reliability and safety of our products. In manufacturing our existing and/or new products, we and our contract manufacturers depend upon third-party suppliers for various components, any of which may contain errors or exhibit failures, especially when products are first introduced or when components are upgraded or changed. Many of these components require a significant degree of technical expertise to produce. In addition, new products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only after commercial shipment. If our designs are defective, the material components used in our products are subject to wearing out, our suppliers or their contract manufacturers fail to produce components to specification, or we or our contract manufacturers or suppliers use defective materials or workmanship in the manufacturing process, the reliability and performance of our existing and/or new products will be compromised. Certain of our products require ongoing scheduled maintenance.

Any loss of confidence on the part of practitioners and patients in our products or the procedures for which they are used, whether related to lack of efficacy or product safety or quality issues, actual or perceived, could

 

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tarnish the image of our brand and could cause practitioners to choose other products and patients to choose other procedures, resulting in delay in market acceptance and/or rejection of our products. If future patient studies or clinical testing do not support our belief that our products offer a more advantageous treatment for their cleared, authorized or certified indications for use, market acceptance of our products could fail to increase or could decrease and our business could be harmed. Moreover, if future results and experience indicate that our products cause unexpected or serious complications or other unforeseen negative effects, we could be subject to mandatory or voluntary product recalls, suspension or withdrawal of marketing authorizations, field correction or removal from markets, significant legal liability or harm to our business reputation. Allegations of lack of efficacy or product safety or quality issues, even if untrue, may require us to expend significant time and resources responding to such allegations. Any such issues or recalls could negatively affect our profitability and brand image.

If our products are found to be, or perceived to be, defective or unsafe, or if they otherwise fail to meet our customers’ or their patients’ expectations, our relationships with customers could suffer, we may need to recall or take other actions for some of our products and/or become subject to regulatory action, and we could lose sales or market share. In addition, we may become subject to substantial and costly litigation by our customers or their patients. We may be subject to claims against us even if the apparent injury is due to the actions of others or the pre-existing health of the patient. Product liability claims could result in the rejection of our products by customers, damage to our reputation, lost sales, diverted development resources, increased customer service and support costs and warranty claims, and could also divert management’s attention from our core business, be expensive to defend and result in sizable damage awards against us. We may not be able to obtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Product liability claims in excess of our existing insurance coverage would be paid out of cash reserves, harming our financial condition and reducing our operating results. Our insurance policy contains various exclusions, and we may be subject to a product liability claim for which we have no coverage. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continued coverage, harm our reputation in the industry and reduce product sales. In addition, product liability claims could increase our product liability insurance rates.

We generally provide a one-year limited warranty on our products. After the warranty period, maintenance and support is provided on a service contract basis. If our existing and/or new products malfunction or contain defects that cannot be easily and inexpensively identified and repaired, warranty claims may become significant, which could cause a significant drain on our resources. In addition, third parties may sell counterfeit versions of some of our products, which may pose safety risks, fail to meet practitioners’ and patients’ expectations and regulatory requirements, and may have a negative impact on our business. We may not be able to detect or combat such counterfeit products and we may be required to expand significant time and resources to remove such products from the market, which efforts may not be successful. Any of these outcomes could result in a material adverse effect on our business, financial condition and results of operations.

Because many of the users of our products may lack training and because we also sell our products to non-physicians, our products may be misused, which could harm our reputation and our business.

In the United States, our products are prescription devices, which because of the potential for harmful effect or the method of their use, or the collateral measures necessary for their use are not safe except under the supervision of a practitioner licensed by law to direct the use of such device. As a result, depending on state law, our products may be purchased or operated by physicians or other practitioners, including nurse practitioners, aestheticians and technicians. Outside the United States, many jurisdictions do not require specific qualifications or training for purchasers or operators of our products. Although we provide training to the practitioners and, in the event a user error is detected, often provide retraining to the practitioners, we cannot control attendance at such trainings and cannot ensure that all users of our products will attend such trainings. In addition, we do not supervise the procedures performed with our products and we have no way to confirm that adequate supervision by a licensed practitioner occurs. Misusing our products, using improper techniques or failing to adhere to

 

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operating guidelines could cause significant eye and skin damage, as well as underlying tissue or organ damage, and could subject us to costly litigation by our customers or their patients. In addition, if our operating guidelines are found to be inadequate, we may be subject to liability. The lack of required training and the purchase and use of our products by individuals who are not licensed practitioners or their negligence may result in product misuse and adverse treatment outcomes, which could harm our reputation and expose us to product liability claims and costly product liability litigation. Product liability claims could divert management’s attention from our core business, be expensive to defend, and result in sizable damage awards against us that may not be covered by insurance.

Political, economic and military instability in Israel may impede our ability to operate and harm our financial results.

We have an office and research and development facility located in Israel. In addition, a few suppliers of finished goods, a number of suppliers for components in our products and our sterilization services for certain consumables are located in Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. The Israeli economy has suffered in the past and may suffer in the future from instability. General strikes or work stoppages, including at Israeli ports, have occurred periodically or have been threatened in the past by Israeli trade unions due to labor disputes. These general strikes or work stoppages may have an adverse effect on the Israeli economy and on our business, including our ability to deliver products to our customers and to receive raw materials from our suppliers in a timely manner. If economic conditions deteriorate in Israel, it may adversely affect our business, financial condition and results of operations.

In addition, since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Any hostilities involving Israel, or the interruption or curtailment of trade between Israel and its present trading partners, could affect adversely our operations. Ongoing and revived hostilities or other Israeli political or economic factors could harm our operations and product development and cause our sales to decrease. Furthermore, several countries restrict business with Israel and Israeli companies. These restrictive laws and policies may seriously limit our ability to sell our products in these countries.

Legal, political and economic uncertainty surrounding the exit of the United Kingdom from the European Union are a source of instability and uncertainty.

On January 31, 2020, the United Kingdom formally withdrew from the European Union. Uncertainties regarding trade arrangements between the United Kingdom and the European Union resulting from such withdrawal could result in increased costs or otherwise adversely impact our operations in the European Union and the United Kingdom. We distribute certain of our products to United Kingdom based providers from the European Union. Depending on tariffs and trade regulation negotiations, we may be forced to acquire duplicate arrangements in the European Union either temporarily or permanently, which may increase our costs in the European Union and the United Kingdom.

Further, since the United Kingdom is no longer part of the European Union, its data protection regulatory regime is independent of the European Union. While the Data Protection Act 2018 and legislation referred to as the UK GDPR substantially enacted the EU General Data Protection, or the GDPR, into U.K. law, the exit from the European Union has created uncertainty with regard to the future of data protection regulation in the United Kingdom and data transfers between the United Kingdom and the European Union. If a regulatory issue arose in both the European Union and the United Kingdom (e.g., a breach that affected both the EU and the U.K. residents), then we would be subject to receiving fines for any material non-compliance from both the European Union and the United Kingdom.

In addition, from January 1, 2021 onwards, the Medicines and Healthcare Products Regulatory Agency, or MHRA, becomes the sovereign regulatory authority responsible for the Great Britain (i.e., England, Wales and Scotland) medical device market according to the requirements provided in the Medical Devices

 

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Regulations 2002 (SI 2002 No 618, as amended) that sought to give effect to the three pre-existing EU directives governing active implantable medical devices, general medical devices and in vitro diagnostic medical devices. Northern Ireland continues to be governed by EU rules according to the Northern Ireland Protocol. The new regulations require medical devices to be registered with the MHRA (but manufacturers will be given a grace period of four to 12 months to comply with the new registration process before being placed on the market in Great Britain). Manufacturers based outside the United Kingdom will need to appoint a U.K. Responsible Person to register devices with the MHRA in line with the grace periods. By July 1, 2023, in Great Britain, all medical devices will require a UKCA (UK Conformity Assessed) mark but CE marks issued by European Union Notified Bodies will remain valid until this time. However, UKCA marking alone will not be recognized in the European Union. The rules for placing medical devices on the market in Northern Ireland, which is part of the United Kingdom, differ from those in the rest of the United Kingdom. Under the terms of the Northern Ireland Protocol and according to MHRA guidance, Northern Ireland will follow European Union rules on medical devices and CE marks will be required for devices marketed in Northern Ireland. Alternatively, devices may be placed on the market in Northern Ireland (but not the EU) with a UKNI marking after an assessment by a UK-based Notified Body.

In addition, the process for the United Kingdom to withdraw from the European Union and the longer term economic, legal, political, regulatory and social framework to be put in place between the United Kingdom and the European Union remain unclear and have had and may continue to have a material and adverse effect on global economic conditions and the stability of global financial markets and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital, which could materially and adversely affect our business, financial condition and results of operations.

We are increasingly dependent on information technology.

We rely on information technology networks and systems to market and sell our products, to process electronic and financial information, to assist with sales tracking and reporting, to manage a variety of business processes and activities, such as logistics and distribution, and to comply with regulatory, legal and tax requirements. We are increasingly dependent on our information technology infrastructure to effectively process customer orders, conduct our digital marketing activities and communicate with our personnel, providers, customers, distributors and suppliers around the world. These information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components, power outages, hardware failures, computer viruses, cyber-attacks, telecommunication failures, user errors or catastrophic events. Any material disruption of our systems, or the systems of our third-party service providers, could disrupt our ability to track, record and analyze the products we sell and could negatively impact our operations, shipment of goods, ability to process financial information and transactions and recognize revenue and our ability to receive and process product orders or engage in normal business activities. If our information technology systems suffer damage, disruption or shutdown, we may incur substantial cost in repairing or replacing these systems, and if we do not effectively resolve the issues in a timely manner, our business, financial condition and results of operations may be materially and adversely affected, and we could experience delays in reporting our financial results.

Use of social media may materially and adversely affect our reputation or subject us to fines or other penalties.

We rely to a large extent on our online presence to reach customers and raise awareness among patients. For example, we maintain Facebook, Instagram, Twitter, YouTube and LinkedIn accounts. Negative commentary or false statements regarding us or our products may be posted on our or social media platforms and may be adverse to our reputation or business. The harm may be immediate without affording us an opportunity for redress or correction. As e-commerce and social media platforms continue to rapidly evolve, we must continue to maintain a presence on these platforms and establish presences on new or emerging popular social media platforms. If we

 

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are unable to cost-effectively use social media platforms as marketing tools, our ability to acquire new patients and customers and our financial condition may suffer. Furthermore, as laws, regulations and guidance from regulators, such as the FDA, rapidly evolve to govern the use of these platforms, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms or take applicable guidance into consideration could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have a material adverse effect on our business, financial condition and result of operations. In addition, an increase in the use of social media for product promotion and marketing may cause an increase in the burden on us to monitor compliance of such materials and increase the risk that such materials could contain problematic product or marketing claims in violation of applicable regulations.

Our business relies heavily on email and other messaging services, and any restrictions on the sending of emails or messages or an inability to timely deliver such communications could materially adversely affect our net revenue and business.

Our business is highly dependent upon email and “push” communications and other messaging services for promoting our brand and informing customers of new products and promotions. We believe these messages are an important part of our customer experience. If we are unable to successfully deliver emails or other messages to our customers, or if customers decline to open or read our messages, our business, financial condition and results of operations may be materially adversely affected. Changes in how web and mail services block, organize and prioritize email may reduce the number of customers who receive or open our emails. For example, Google’s Gmail service has a feature that organizes incoming emails into categories (for example, primary, social and promotions). Such categorization or similar inbox organizational features may result in our emails being delivered in a less prominent location in a customer’s inbox or viewed as “spam” by our customers and may reduce the likelihood of that customer reading our emails. Actions by third parties to block, impose restrictions on or charge for the delivery of emails or other messages could also adversely impact our business. From time to time, Internet service providers or other third parties may block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails or other messages to customers.

Changes in the laws or regulations that limit our ability to send such communications or impose additional requirements upon us in connection with sending such communications would also materially adversely impact our business. For example, electronic marketing and privacy requirements in the European Union are highly restrictive and differ greatly from those in the United States, which could cause fewer individuals in the European Union to subscribe to our marketing messages and drive up our costs and risk of regulatory oversight and fines if we are found to be non-compliant. Our use of email and other messaging services to send communications to customers may also result in legal claims against us, which may cause increased expenses, and if successful might result in fines and orders with costly reporting and compliance obligations or might limit or prohibit our ability to send emails or other messages. We also rely on social networking messaging services to send communications and to encourage customers to send communications. Changes to the terms of these social networking services to limit promotional communications, any restrictions that would limit our ability or our customers’ ability to send communications through their services, disruptions or downtime experienced by these social networking services or decline in the use of or engagement with social networking services by customers could materially and adversely affect our business, financial condition and results of operations.

Failure to protect sensitive information of our customers and our information technology systems against security breaches could damage our reputation and brand and substantially harm our business, financial condition and results of operations.

We collect, maintain, transmit and store data about our customers, suppliers and others, including personal data, financial information, including payment information, as well as other confidential and proprietary information important to our business. We also employ third-party service providers that collect, store, process and transmit personal data, and confidential, proprietary and financial information on our behalf. In addition, we

 

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operate one on-site clinic in the United States that may be subject to the requirements of the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, and the regulations that implement both laws, or collectively, HIPAA. HIPAA imposes requirements on certain covered entities and their business associates with respect to the use and disclosure of protected health information.

We have in place technical and organizational measures to maintain the security and safety of critical proprietary, personal, employee, provider, health and financial data which we continue to maintain and upgrade to industry standards. However, advances in technology, the pernicious ingenuity of criminals, new exposures via cryptography, acts or omissions by our employees, contractors or service providers or other events or developments could result in a compromise or breach in the security of such data. In addition, as a result of the COVID-19 pandemic, we may face increased cybersecurity risks due to our reliance on Internet technology and the number of our employees who are working remotely, which may create additional opportunities for cybercriminals to exploit vulnerabilities. We and our service providers may not be able to prevent third parties, including criminals, competitors or others, from breaking into or altering our systems, disrupting business operations or communications infrastructure through denial-of-service attacks, attempting to gain access to our systems, information or monetary funds through phishing or social engineering campaigns, installing viruses or malicious software on our e-commerce websites or devices used by our employees or contractors, or carrying out other activity intended to disrupt our systems or gain access to confidential or sensitive information in our or our service providers’ systems. We have been subject to attacks (e.g., phishing, denial of service, etc.) and cannot guarantee that our security measures will be sufficient to prevent a material breach or compromise in the future. Contracted third-party delivery service providers and business associates may also violate their confidentiality or data processing obligations or business associate agreements and disclose or use information about our customers or protected health information inadvertently or illegally. We have also outsourced elements of our information technology infrastructure, and as a result a number of third-party service providers and vendors may or could have access to our confidential information. If our third-party vendors fail to protect their information technology systems and our confidential and proprietary information, we may be vulnerable to disruptions in service and unauthorized access to our confidential or proprietary information and we could incur liability and reputational damage.

If material security breaches were to occur, our reputation and brand could be damaged, and we could be required to expend significant capital and other resources to alleviate problems caused by such breaches, including exposure of litigation or regulatory action and a risk of loss and possible liability. Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. Any compromise or breach of our security measures, or those of our third-party service providers, may violate applicable privacy, data security, financial, cyber and other laws and cause significant legal and financial exposure, adverse publicity, and a loss of confidence in our security measures, all of which could have a material adverse effect on our business, financial condition and results of operations. We may be subject to post-breach review of the adequacy of our privacy and security controls by regulators and other third parties, which could result in post-breach regulatory investigation, fines and patient litigation as well as regulatory oversight, at significant expense and risking reputational harm.

Payment methods used on our websites subject us to third-party payment processing-related risks.

We accept payments from our customers using a variety of methods, including online payments with credit cards and debit cards issued by major banks and payments through third-party online payment platforms, such as PayPal. We also rely on third parties to provide payment processing services. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profit margins. We may also be subject to fraud and other illegal activities in connection with the various payment methods we offer, including online payment options. Transactions on our websites are card-not-present transactions, so they present a greater risk of fraud. Criminals are using increasingly sophisticated methods to engage in illegal activities such as unauthorized use of credit or debit cards

 

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and bank account information. We may also be vulnerable to error or malfeasance by our own employees or other insiders. Third parties may attempt to fraudulently induce our or our service providers’ employees to misdirect funds or to disclose information in order to gain access to personal data we maintain about our customers, patients or website users. In addition, we have limited control or influence over the security policies or measures adopted by third-party providers of online payment services through which some of our customers may pay for purchases on our websites.

Requirements relating to customer authentication and fraud detection with respect to online sales are complex. We may ultimately be held liable for the unauthorized use of a cardholder’s card number in an illegal activity and be required by card issuers to pay charge-back fees. Charge-backs result not only in our loss of fees earned with respect to the payment, but also leave us liable for the underlying money transfer amount. If our charge-back rate becomes excessive, card associations also may require us to pay fines or refuse to process our transactions. Overall, we may have little recourse if we process a criminally fraudulent transaction.

We are subject to payment card association operating rules, certification requirements and various rules, regulations and requirements governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. As our business changes, we may also be subject to different rules under existing standards, which may require new assessments that involve additional costs. If we fail to comply with the rules or requirements of any provider of a payment method we accept, or if the volume of fraud in our transactions limits or terminates our rights to use payment methods we currently accept, or if a data breach occurs relating to our payment systems, among other things, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers or facilitate other types of online payments, and our reputation and our business, financial condition and results of operations could be materially and adversely affected.

Our ability to use our net operating and capital loss carryforwards may be limited.

As of December 31, 2020, we had approximately $59.6 million in U.S. federal net operating loss carryforwards, or NOLs, with approximately $10.1 million subject to expiration beginning before 2031 and approximately $49.5 million that can be carried forward indefinitely. We also had approximately $60.9 million in U.S. state NOLs, with $57.3 million subject to expiration beginning in 2025 and approximately $3.6 million that can be carried forward indefinitely, and approximately $131.6 million in non-U.S. NOLs that can be carried forward indefinitely. We also had approximately $43.2 million in non-U.S. capital loss carryforwards that can be carried forward indefinitely. At December 31, 2020, we also had approximately $37.2 million in U.S. interest expense carryforwards which can be carried forward indefinitely. Utilization of these NOLs depends on many factors, including our future income, and these NOLs could expire unused and be unavailable to offset our future taxable income. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership by 5% stockholders over a rolling three-year period, the corporation’s ability to use its pre-change U.S. federal NOLs and other pre-change tax attributes to offset its post-change income may be limited. We have previously experienced ownership changes, and although such prior ownership changes have not materially limited our utilization of affected net operating loss carryforwards, this offering and any subsequent shifts in our stock ownership, may result in limitations imposed by Section 382. Any such limitation may have the effect of reducing our after-tax cash flow in future years and may affect our need for a valuation allowance on our deferred tax assets related to federal and state net operating loss carryforwards.

We are involved, and may become involved in the future, in disputes and other legal or regulatory proceedings that, if adversely decided or settled, could materially and adversely affect our business, financial condition and results of operations.

We are, and may in the future become, party to litigation, regulatory proceedings or other disputes. In general, claims made by or against us in disputes and other legal or regulatory proceedings can be expensive and

 

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time-consuming to bring or defend against, requiring us to expend significant resources and divert the efforts and attention of our management and other personnel from our business operations. These potential claims include, but are not limited to, personal injury claims, product liability claims, class action lawsuits, intellectual property claims, contractual disputes, unfair competition disputes, employment litigation and regulatory investigations and causes of action relating to the advertising and promotional claims about our products. Any adverse determination against us in these proceedings, or even the allegations contained in the claims, regardless of whether they are ultimately found to be without merit, may also result in settlements, injunctions or damages that could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Intellectual Property

If we are unable to obtain, maintain, protect and enforce our intellectual property rights for our products and technology, our competitive position could be harmed.

We rely on a combination of patent, trademark, trade secret, copyright and other intellectual property laws as well as confidentiality, non-disclosure and assignment of inventions agreements and contractual clauses to protect the intellectual property related to our products and technology and to prevent third parties from copying and surpassing our achievements, thus eroding our competitive position in our market. Our success and ability to compete depends in large part upon our ability to obtain, maintain, protect and enforce our proprietary products and technology, including through patents and patent applications, trademarks and copyrights in the United States and internationally, in a cost-efficient manner. We seek to protect our proprietary position by filing patent and trademark applications in the United States and abroad related to our products and technology. However, we have not applied for patent and trademark protection in all relevant foreign jurisdictions and cannot assure you that our pending patent and trademark applications will be issued and approved. Even if our currently pending and future patent applications are issued, such issued patents may not afford sufficient protection for our products and technology.

The patenting process is expensive and time-consuming, and we may not be able to file and prosecute all desirable patent applications at a reasonable cost and/or in a timely manner. We may also fail to identify patentable aspects of our research and development output before a competitor files a patent application on the same or a similar product or technology and therefore may face a limited ability to secure patent rights in such an instance. We may not be able to patent certain products or technologies at all or may be able to patent only a limited scope of certain products or technologies, and such limited scope may be inadequate to protect our products, or to block competitor products or technology that are similar or adjacent to ours.

Our earliest patent filings have been published. A competitor may review our published patents and arrive at the same or similar technology advances for our products as we developed. If a competitor files a patent application on such an advance before we do, then we may no longer be able to protect the advances in such technology, we may require a license from the competitor, and if the license is not available on commercially-viable terms, then we may not be able to launch such products.

The patent position of medical device companies generally is highly uncertain and involves complex legal and factual questions for which many legal principles remain unresolved. In recent years, patent rights have been the subject of significant litigation within our industry. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Further, the issuance of a patent is not conclusive as to its scope, validity or enforceability, and our owned and in-licensed patents may be challenged, invalidated or legally circumvented by third parties, or may expire. We cannot be certain that our patents will be upheld as valid and enforceable or will prevent the development of competitive products by third parties. For example, we may become involved in opposition, interference, derivation, inter partes review or other proceedings challenging our patent rights, and the outcome of any proceedings are highly uncertain. Such challenges may result in the patent claims of our owned or in-licensed patents being narrowed, invalidated or held unenforceable, which could limit our ability to stop or prevent us from stopping others from using or commercializing similar or

 

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identical technology and products, or limit the duration of the patent protection of our products and technology. Consequently, competitors could develop, manufacture and sell products that directly compete with our products, which could decrease our sales and affect our ability to compete. In addition, competitors could attempt to reverse engineer our products to replicate some or all of the competitive advantages we derive from our development efforts, design around our protected technology, or develop their own competitive technologies that fall outside the scope of our patents. If our intellectual property does not adequately protect us from our competitors’ products and methods, our business and competitive position could be adversely affected. We have in the past and we may in the future become involved in litigation to protect the patents associated with our products, which could result in substantial costs and distraction to management and other employees.

In addition to seeking patent protection for some of our products and technology, we may also rely on trade secret protections, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. Any disclosure, either intentional or unintentional, by our employees or third-party consultants or vendors that we engage to perform research, clinical trials or manufacturing activities, or misappropriation by third parties (such as through a cybersecurity breach) of our trade secrets or proprietary information could enable competitors to duplicate our technological achievements, potentially eroding our competitive position in our market. Because we rely on third parties in the development and manufacture of our products, we must, at times, share trade secrets with them, increasing the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.

We require our employees, collaborators, consultants, service providers, suppliers, distributors and customers to protect confidentiality and control access and distribution of our proprietary information, trade secrets and know-how. However, these measures may not be adequate to protect our technology from unauthorized disclosure, third-party infringement or misappropriation. We cannot guarantee that we have entered into such agreements with each party that may have or has had access to our trade secrets or proprietary technology and processes. We cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. It is possible that technology relevant to our business will be developed independently by a person that is not a party to such an agreement, and that person could be an employee of or otherwise associated with one of our competitors. In addition, our employees or third parties may breach their agreements with us, and we may not have adequate remedies for any such breach or sufficient resources to litigate any such breach, and we could lose our trade secrets. We may need to share our proprietary information, including trade secrets, with future business partners, collaborators, contractors and others located in countries at heightened risk of theft of trade secrets, including through direct intrusion by private parties or foreign actors, and those affiliated with or controlled by state actors. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts may be less willing or unwilling to protect trade secrets. Further, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third-party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor or other third-party, our competitive position would be harmed. Also, certain provisions in our intellectual property agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could affect the scope of our rights to the relevant intellectual property or technology, or affect financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition and results of operations. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems, which security measures may be breached, and we may not have adequate remedies for any breach.

The growth of our business may depend in part on our ability to acquire or in-license additional proprietary rights. We may be unable to acquire or in-license any relevant third-party intellectual property rights that we identify as necessary or important to our business operations. We may fail to obtain any of these licenses at a

 

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reasonable cost or on reasonable terms, if at all, which could adversely affect our business. We may need to seek to develop alternative approaches that do not rely on or infringe on such intellectual property rights which may entail additional costs and development delays, even if we were able to develop such alternatives, which may not be feasible. Even if we are able to obtain a license under such intellectual property rights, any such license may be non-exclusive, and may allow our competitors access to the same technologies licensed to us. The licensing and acquisition of third-party intellectual property rights is a competitive practice, and companies that may be more established, or have greater resources than we do, may also be pursuing strategies to license or acquire third-party intellectual property rights that we may consider necessary or attractive for commercializing our products. More established companies may have a competitive advantage over us due to their larger size and cash resources or greater clinical development and commercialization capabilities. There can be no assurance that we will be able to successfully complete such negotiations and ultimately acquire the rights to the intellectual property surrounding the additional products and technology that we may seek to acquire.

In addition, periodic maintenance fees, renewal fees, annuity fees and various other government fees on patents and applications will be due to be paid to government patent agencies over the lifetime of our patents and applications. In some situations, non-compliance with procedural, documentary, fee payment and similar provisions of such agencies can result in abandonment or lapse of the patent or patent application, resulting in a partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. In such an event, potential competitors might be able to enter the market with similar or identical products or technology, which could have a material adverse effect on our business, financial condition, and results of operations.

We may be subject to claims challenging the inventorship of our patents and other intellectual property.

We may be subject to claims that former employees, collaborators or other third parties have an ownership interest in our patents or other intellectual property as an inventor or co-inventor. The failure to name the proper inventors on a patent application can result in the patents issuing thereon being unenforceable. Inventorship disputes may arise from conflicting views regarding the contributions of different individuals named as inventors, the effects of foreign laws where foreign nationals are involved in the development of the subject matter of the patent, conflicting obligations of third parties involved in developing our products or as a result of questions regarding co-ownership of potential joint inventions. While it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual proper rights in such agreements may not be self-executing or such agreements may be breached. Litigation may be necessary to resolve these and other claims challenging inventorship and/or ownership. Alternatively, or additionally, we may enter into agreements to clarify the scope of our rights in such intellectual property. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and distraction to management and other employees.

Further, our licensors may have relied on third-party consultants or collaborators or on funds from third parties, such as the U.S. government, such that our licensors are not the sole and exclusive owners of the patents we in-licensed. If other third parties have ownership rights or other rights to our in-licensed patents, they may be able to license such patents to our competitors, and our competitors could market competing products and technology. This could have a material adverse effect on our competitive position, business, financial conditions and results of operations.

 

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We may be subject to lawsuits or litigation to protect or enforce our patents or other intellectual property, which could result in substantial costs and liability and prevent us from commercializing our potential products.

Our ability to enforce our patent rights depends on our ability to detect infringement. It may be difficult to detect infringers that do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful.

To counter infringement or other violations, we may be required to file claims. Any such adverse proceedings can be expensive and time-consuming and may divert the efforts of our technical and managerial personnel, which could in turn harm our business, whether or not we receive a determination favorable to us. Furthermore, any such claims could provoke these parties to assert counterclaims against us, including claims alleging that we infringe their patents or other intellectual property rights. In addition, the defendant could counterclaim, or a court or other judicial body may decide that the patent we seek to enforce is invalid or unenforceable, in whole or in part, construe the patent’s claims narrowly or may refuse to stop the other party from using the technology at issue on the grounds that the patent in question does not cover the technology in question. In patent litigation in the United States and in some other jurisdictions, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, for example, lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld material information from the U.S. Patent and Trademark Office, or the USPTO, or the applicable foreign counterpart, or made a misleading statement, during prosecution. A litigant or the USPTO itself could challenge our patents on this basis even if we believe that we have conducted our patent prosecution in accordance with the duty of candor and in good faith. The outcome following such a challenge is unpredictable. With respect to challenges to the validity of our patents, there might be invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on such product or technology. Even if a defendant does not prevail on a legal assertion of invalidity and/or unenforceability, our patent claims may be construed in a manner that would limit our ability to enforce such claims against the defendant and others. In addition, if the breadth or strength of protection provided by our patents and patent applications or those of our future licensors is threatened, it could dissuade other companies from collaborating with us to license, develop or commercialize current or future products and technology. An adverse result in any proceeding, or the proceeding itself, could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly. Similarly, if we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In such a case, we could ultimately be forced to cease use of such marks.

Even if resolved in our favor, litigation or other legal proceedings relating to our intellectual property rights may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. Some of our competitors may be able to devote significantly more resources to intellectual property proceedings, and may have significantly broader intellectual property portfolios to assert against us if we assert our rights against them. Further, because of the substantial discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be disclosed or otherwise compromised leading to others making, using, importing or selling products that are the same or substantially the same as ours, which could adversely affect our ability to compete in the market.

 

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Changes in the U.S. patent law, or laws in other countries, could diminish the value of patents in general, thereby impairing our ability to protect our products and technology.

Changes in either the patent laws or their interpretation in the U.S. or foreign jurisdictions could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents, ultimately diminishing the value of our patents or narrowing the scope of our patent protection. For example, assuming that other requirements for patentability are met, prior to March 2013, the first to invent the claimed invention was entitled to the patent in the United States, while outside the United States, the first to file a patent application was entitled to the patent. After March 2013, under the Leahy-Smith America Invents Act, or the America Invents Act, enacted in September 2011, the United States transitioned to a first inventor to file system in which, assuming that other requirements for patentability are met, the first inventor to file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed invention. A third party that files a patent application in the USPTO after March 2013, before we file, could therefore be awarded a patent covering an invention of ours even if we had made the invention first. Since patent applications in the United States and most other countries are confidential for a period of time after filing or until issuance, we cannot be certain that we were the first to either (i) file any patent application related to our products or (ii) invent any of the inventions claimed in our patents or patent applications.

The America Invents Act also includes a number of significant changes that affect the way patent applications are prosecuted, redefine prior art and provide more efficient and cost-effective avenues for competitors to challenge the validity of the patents. These include allowing third-party submission of prior art to the USPTO during patent prosecution and additional procedures to attack the validity of a patent by USPTO administered post-grant proceedings, including post-grant review, inter partes review, and derivation proceedings. Further, because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in U.S. federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action. Therefore, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition and results of operations.

In addition, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. Depending on future actions by the U.S. Congress, the U.S. courts, the USPTO and the relevant law-making bodies in other countries, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.

Patent terms may be inadequate to protect our competitive position on our products and technology for an adequate amount of time.

Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest U.S. non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents covering our products and technology are obtained, once the patent life has expired for a product, we may be open to competition. Given the amount of time required for the development, testing and regulatory review of new products and technology, patents protecting such products and technology might expire before or shortly after such products and technology are commercialized. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products and technology similar or identical to ours for a meaningful amount of time, or at all.

 

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We may not be able to protect our intellectual property and proprietary rights throughout the world.

Third parties may attempt to commercialize competitive products or services in foreign countries where we do not have any patents or patent applications or where legal recourse may be limited. This may have a significant commercial impact on our foreign business operations. Filing, prosecuting and defending patents on our products in all countries throughout the world would be prohibitively expensive and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Consequently, we may not be able to prevent third parties from practicing our inventions outside the United States where we have not obtained patent protection or where our products have patent protection but enforcement is not as strong as in the United States, or from selling or importing products made using our inventions into the United States or other jurisdictions. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our intellectual property and proprietary rights generally. Proceedings to enforce our intellectual property and proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not being issued and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. We currently have contract manufacturing and supplier relationships in certain countries that are at heightened risk of theft of technology, data and intellectual property.

Accordingly, our efforts to enforce our intellectual property and proprietary rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license. Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired and our business, financial condition and results of operations may be adversely affected.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

We use and will continue to use registered and/or unregistered trademarks or trade names to brand and market ourselves and our products and technology. Our trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential partners or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. We may license our trademarks and trade names to third parties, such as distributors. Though these license agreements may provide guidelines for how our trademarks and trade names may be used, a breach of these agreements or misuse of our trademarks and tradenames by our licensees may jeopardize our rights in or diminish the goodwill associated with our trademarks and trade names.

 

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Third-party claims of infringement or other claims against us could require us to pay damages, redesign our products, stop selling our products, seek licenses, or engage in future costly intellectual property litigation, which could impact our future business and financial performance.

Our commercial success depends upon our ability to develop, manufacture, market and sell our products and use our proprietary technology without infringing the proprietary rights of third parties. As the medical aesthetics device industry expands and more patents are issued to more parties throughout the industry, the risk increases that others may assert that our products or technology are infringing the patent rights of others. We may not identify relevant third-party patents or may incorrectly interpret the relevance, scope or expiration of a third-party patent, and it is difficult to conclusively assess our freedom to operate without infringing on third-party rights. We cannot guarantee that any of our patent searches or analyses, including the identification of relevant patents, the scope of patent claims or the expiration of relevant patents, are complete or thorough, nor can we be certain that we have identified each and every third-party patent and pending patent application in the United States and abroad that is relevant to or necessary for the commercialization of our products and technology. Thus, because of the large number of patents issued and patent applications filed in our fields, there may be a risk that third parties may allege they have patent rights encompassing our products and technology.

Third parties have claimed, and may in the future claim, that our products infringe on their intellectual property or trade secret rights, and may seek to interfere with our ability to make, use, sell or import our products. Patent applications are latent for the first 18 months after filing and cannot be discovered until they are published. Accordingly, we can conduct only limited searches to determine whether our technology infringes any patents or patent applications of others. Infringement claims in the past have, among other things, led to settlement and license agreements pursuant to which we were required to pay license fees to third-party claimants.

There is substantial amount of litigation involving patent and other intellectual property rights in the medical aesthetics device industry generally. We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that our products and technology infringe their intellectual property rights. In addition, third parties may involve us in intellectual property disputes as part of a business model or strategy to gain competitive advantage. To the extent we gain greater visibility and market exposure as a public company or otherwise, we may also face a greater risk of becoming the subject of such claims and litigation. Infringement and other intellectual property claims, regardless of merit, are expensive and time-consuming to litigate and may divert our management’s attention from our core business. Following any successful third-party action for infringement, we may be required to settle the matter or pay substantial damages for infringement, which we may have to pay if a court decides that the product or technology at issue infringes on or violates the third party’s rights, and, if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patent owner’s attorney’s fees. In such cases, if we cannot obtain a license or redesign our products, we may have to stop manufacturing, selling and marketing our products and our business could suffer significantly as a result. We may not be able to obtain such license because the third party is not required to grant the license, or even if such license is available from a third party, we may have to pay substantial royalties, upfront fees and other amounts, and/or grant cross-licenses to intellectual property rights for our products. Also, we may not be able to redesign our products or such redesigning may require substantial monetary expenditures and time. Furthermore, we may be required to indemnify our customers and distributors against claims relating to the infringement of intellectual property rights of third parties related to our products. These claims may require us to engage in protracted and costly litigation on behalf of our customers or distributors, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers, suppliers or distributors, or may be required to obtain licenses for the products or services they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products or services. Additionally, if names we choose for our products are claimed to infringe upon names held by others, we may be forced to change the name of our products, which may result in a loss in goodwill associated with our brand name, customer confusion and a loss of sales. Any of these events could have a material adverse effect on our business, financial condition and results of operations.

 

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Some of our competitors may be able to sustain the costs of complex intellectual property litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations or could otherwise have a material adverse effect on our business, financial condition and results of operations. Further, during the course of any intellectual property litigation, there could be public announcements of the initiation of the litigation as well as results of hearings, rulings on motions and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of our existing products or intellectual property could be diminished. Accordingly, the market price of shares of our common stock may decline. Such announcements could also harm our reputation or the market for our future products, which could have a material adverse effect on our business.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information or alleged trade secrets of third parties or competitors or are in breach of non-competition or non-solicitation agreements with our competitors or their former employers.

As is common in our industry, many of our employees, consultants and advisors were previously employed at or engaged by other medical aesthetics device companies, including our competitors and potential competitors. Although we try to ensure that our employees, consultants and advisors do not use the proprietary information or know-how of others in their work for us, we have been and may in the future become subject to claims that we or these individuals have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer or clients. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation or other legal proceedings relating to such intellectual property claims could result in substantial costs to us and be a distraction to management.

We depend on certain third-party technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us from selling our products.

We are a party to a license with a hospital for some of the key technologies relating to our Profound device, and we may in the future enter into more license agreements with third parties under which we receive rights to intellectual property that are important to our business. These intellectual property license agreements may subject us to various development, regulatory and/or commercial diligence obligations, payment of milestones and/or royalties and other obligations. If we fail to comply with our obligations under these agreements, we use the licensed intellectual property in an unauthorized manner or we are subject to bankruptcy-related proceedings, the terms of the licenses may be materially modified, such as by rendering currently exclusive licenses non-exclusive, or it may give our licensors the right to terminate their respective agreement with us, which could limit our ability to implement our current business plan and materially adversely affect our business, financial condition, results of operations and prospects.

Further, disputes may arise between us and our licensors regarding intellectual property subject to a license agreement, including:

 

   

the scope of rights granted under the license agreement and other interpretation-related issues;

 

   

whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;

 

   

our right to sublicense patents and other rights to third parties;

 

   

our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our products, and what activities satisfy those diligence obligations;

 

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our right to transfer or assign the license; and

 

   

the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners.

If disputes over intellectual property that we currently license or license in the future prevent or impair our ability to maintain our licensing arrangements on acceptable terms, we may not be able to successfully develop and commercialize the affected products, which would have a material adverse effect on our business.

In addition, certain of our future agreements with third parties may limit or delay our ability to consummate certain transactions, may impact the value of those transactions, or may limit our ability to pursue certain activities. For example, we may in the future enter into license agreements that are not assignable or transferable, or that require the licensor’s express consent in order for an assignment or transfer to take place.

We may not control the prosecution, maintenance, or filing of the patents to which we hold the license, or the enforcement of these patents against third parties. Our licensors may not successfully prosecute the patent applications to which we are licensed. Even if patents are issued in respect of these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents, or may pursue such litigation less aggressively than we would. Without protection for the intellectual property we license, other companies might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our business prospects. For example, we cannot be certain that such activities by the licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights. Further, we may have limited control over the manner in which our licensors initiate an infringement proceeding against a third-party infringer of the intellectual property rights, or defend certain of the intellectual property that is licensed to us. It is possible that the licensors’ infringement proceeding or defense activities may be less vigorous than had we conducted them ourselves. In the event our licensors fail to adequately pursue and maintain patent protection for patents and applications they control, and to timely cede control of such prosecution to us, our competitors might be able to enter the market, which would have a material adverse effect on our business.

Additionally, our current licensor does, and our future licensors may, retain certain rights under their agreements with us, including the right to use the underlying technology for non-commercial academic and research use, to publish general scientific findings from research related to the technology, and to make customary scientific and scholarly disclosures of information relating to the technology. It is difficult to monitor whether our licensors limit their use of the technology to these uses, and we could incur substantial expenses to enforce our rights to our licensed technology in the event of misuse. Also, the U.S. federal government retains certain rights in inventions produced with its financial assistance under the Patent and Trademark Law Amendments Act, or the Bayh-Dole Act. The federal government retains a “nonexclusive, nontransferable, irrevocable, paid-up license” for its own benefit. The Bayh-Dole Act also provides federal agencies with “march-in rights.” March-in rights allow the government, in specified circumstances, to require the contractor or successors in title to the patent to grant a “nonexclusive, partially exclusive, or exclusive license” to a “responsible applicant or applicants.” If the patent owner refuses to do so, the government may grant the license itself. We cannot be certain that our licensed patent rights will be free from such government rights under the Bayh-Dole Act.

 

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Risks Related to Government Regulations

If we fail to obtain and maintain necessary marketing authorizations from the FDA, other applicable foreign regulatory authorities and our Notified Bodies, if marketing authorizations for future products, product modifications or enhancements, and indications are delayed or not issued, or if there are state, federal or international level regulatory changes, our commercial operations could be harmed.

Our products are medical devices subject to extensive regulation in the United States by the FDA and by corresponding state regulatory agencies and authorities. Likewise, our products are subject to extensive medical device regulations and requirements in other countries, such as China, Japan and those in the European Economic Area, or the EEA (which consists of the 27 EU member states and Norway, Liechtenstein and Iceland), by applicable regulatory agencies and our Notified Bodies. These regulations pertain to the design development, evaluation, manufacturing, testing labeling, marketing sale, advertising, promotion, distribution, shipping and servicing of our products. These entities regulate and oversee record-keeping procedures, safety alerts, recalls, market withdrawals, removals and field corrective actions, post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to occur, could lead to death or serious injury, and product import and export.

The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales. For example, in the United States, state laws, including relevant state regulations governing the MedSpas in which certain of our products may be targeted for marketing and use, vary by state, and may affect who may purchase and use such products. Such regulations, and interpretations thereof, may limit our ability to market our products. Further, the FDA, foreign regulatory agencies and U.S. state agencies have broad enforcement powers, and our failure to comply with state, federal and international regulations could lead to the issuance of warning letters or untitled letters, the imposition of injunctions, suspensions or loss of marketing authorizations, product recalls, safety alerts, termination of distribution, product seizures, consent decrees, civil penalties or import detention. In the most extreme cases, criminal sanctions or closure of our manufacturing facilities are possible.

In the United States, before we can market a new medical device, or a new use of, new claim for or significant modification to an existing product, we must first receive either clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or the FDCA, or approval of a pre-market approval application, or PMA, from the FDA, unless an exemption applies. In the 510(k) clearance process, before a device may be marketed, the FDA must determine that a proposed device is “substantially equivalent” to a legally marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (pre-amendments device), a device that was originally on the U.S. market pursuant to an approved PMA and later down classified, or a 510(k) exempt device. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. To date, our products have received marketing authorization pursuant to the 510(k) clearance process. Certain modifications made to products cleared through a 510(k) may require a new 510(k) clearance. The 510(k) clearance process can be expensive, lengthy and uncertain and usually takes from three to 12 months, but can last longer.

The process of obtaining and maintaining marketing authorizations to market a medical device in the United States and other countries can be costly and time-consuming, and we may not be able to obtain or maintain these marketing authorizations on a timely basis, if at all. In addition, regulations regarding the development, manufacturing and sale of our products are subject to change. We cannot predict the impact, if any, that such changes might have on our business, financial condition and results of operations. Changes in existing laws or requirements or adoption of new laws or requirements could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that we will not incur significant costs to

 

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comply with applicable laws and requirements in the future or that applicable laws and requirements will not have a material adverse effect upon our business, financial condition and results of operations.

Our currently commercialized products have received premarket clearance under Section 510(k) of the FDCA. Per FDA regulations, the scope of marketing claims we can make about a cleared device is limited to the indications that were previously 510(k)-cleared. Other countries have similar laws and regulations restricting marketing to cleared indications. If a regulatory agency determines that any of our marketing claims exceed the cleared indications in a particular country, or determines that our marketing claims are false or misleading or suggest a clinical benefit that is not supported in the studies applicable to such products, we may engage in discussions with regulators regarding our marketing claims, and we may be subject to enforcement action and/or we may revise or be required to cease making the challenged marketing claims, issue corrective communications, pay fines or stop selling products until the incorrect claims have been corrected. For instance, on July 30, 2018, the FDA issued a public statement and sent letters to a number of companies in the medical aesthetics industry expressing concerns regarding “vaginal revitalization” procedures using energy-based devices and marketing that potentially violated the FDCA. The FDA has not cleared or approved any energy-based devices to treat these symptoms or conditions or to treat any symptoms related to menopause, urinary incontinence or sexual function. In May 2021, the FDA notified us that it believed our Co2re Intima Laser was being marketed with certain similar claims for which the device has not been cleared. In response, we have removed the claims from our website and have communicated our actions to the FDA. There is no guarantee that the FDA will agree that our remediation efforts resolve their concerns, and we could be subject to further enforcement by the FDA on this basis. Any regulatory action or penalty could lead to private party actions, or private parties could seek to challenge our claims even in the absence of formal regulatory actions, which could also harm our business, financial condition and results of operations.

Regulatory authorities such as the FDA can delay, limit or deny marketing authorizations for a device for many reasons, including:

 

   

our inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory authority or Notified Body that our products are substantially equivalent, in the case of a 510(k) clearance, or safe or effective for their intended uses, in the case of a certification;

 

   

the disagreement of the FDA or the applicable foreign regulatory authorities or Notified Body with the design or implementation of our clinical trials or investigations or the interpretation of data from pre-clinical studies or clinical trials or investigations, as applicable and to the extent required to support a marketing authorization;

 

   

our inability to demonstrate that the clinical and other benefits of the device outweigh the risks;

 

   

the manufacturing process or facilities we use may not meet applicable requirements; and

 

   

the potential for policies or regulations of the FDA or applicable foreign regulatory authorities to change significantly in a manner rendering our clinical data, as applicable, and/or regulatory filings insufficient for marketing authorization.

Sales of our products outside the United States are subject to foreign regulatory requirements that vary widely from country to country, and such regulatory requirements have been changing and increasing in some countries. For example, medical device regulations in China have become more demanding, including a recent requirement for software validation documentation. Complying with international regulatory requirements can be an expensive and time-consuming process and obtaining marketing authorizations is not certain. The time required to obtain foreign regulatory clearance or approvals particularly in China and Japan or CE Certificates of Conformity may be longer than that required for FDA clearance or approvals, and related requirements may significantly differ from FDA requirements. We may be unable to maintain regulatory qualifications, clearances, approvals or CE Certificates of Conformity in these countries or to obtain clearances or approvals in other countries. We may incur significant costs in attempting to obtain, renew, or modify foreign regulatory clearances

 

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or approvals, qualifications or CE Certificates of Conformity. If we experience difficulties in receiving, maintaining, renewing or modifying necessary qualifications, clearances, approvals or CE Certificates of Conformity to market our products outside the United States, or if we fail to receive, renew, modify or maintain those qualifications, clearances, approvals or CE Certificates of Conformity, we may be unable to market our products or enhancements in certain international markets effectively, or at all.

On April 5, 2017, a new regulation on medical devices was adopted to establish a modernized and more robust European Union legislative framework, with the aim of ensuring better protection of public health and patient safety: Regulation (EU) 2017/745 of the European Parliament and of the Council of 5 April 2017 on medical devices, amending Directive 2001/83/EC, Regulation (EC) No 178/2002 and Regulation (EC) No 1223/2009 and repealing Council Directives 90/385/EEC and 93/42/EEC, which became applicable from May 26, 2021, or the MDR. The MDR repeals and replaces the EU Medical Devices Directive and unlike directives, which must be given effect through transposition into the national domestic laws of the EU member states, regulations are directly applicable (i.e., without the need for transposition into national laws implementing them) in all EU member states. The MDR is also applicable in the EEA. Regulations (as EU law instruments) must be applied in their entirety across the EU so that legal acts are automatically and uniformly applied to all EU countries as soon as they enter into force to minimize variations that may arise in transposition of EU law into national law. These modifications may have an effect on the way we design and manufacture products and conduct our business in the EU and EEA. For example, as a result of the transition towards the new regime, Notified Bodies have lengthened their review times, and product introductions or modifications could be delayed or canceled or otherwise rejected, which could adversely affect our ability to grow our business. Our devices are certified under the Medical Devices Directive and can therefore remain on the EU market until – for some of them – mid-2022 and early 2024, and May 27, 2024 for the others, unless registered under MDR before those dates. We are working toward compliance with the MDR, including with MDR requirements with respect to post market surveillance, vigilance, registration of economic operators and of devices. If our program to ensure that all devices we plan to continue to commercialize in the EEA, and all devices that are currently undergoing development in our R&D pipeline comply with MDR is unsuccessful or if our program is delayed, we may be unable to sell our products in the EEA for some period of time, or indefinitely. In addition, this program could incur costs materially above and beyond the current expected costs resulting in an impact to our operational expenses.

New legislation and regulations and legislative and regulatory reforms may make it more difficult and costly for us to obtain marketing authorization of our new and modified products, to manufacture, market and distribute our products after marketing authorization is obtained and limit our ability to sell to non-physicians.

From time to time, legislation is drafted and introduced in the legislative bodies of the countries in which we sell our products to revise the process for regulatory approval, clearance, authorization, manufacture and marketing of regulated products or the reimbursement thereof. In addition, FDA, EEA and other applicable foreign regulations and guidance are often revised or reinterpreted by the applicable competent authority in ways that may significantly affect our business and our products. For example, the MDR may impose increased compliance obligations for us to access EEA member State markets. These modifications may have an effect on the way we conduct our business in the EEA member States and these modifications may have an impact on the way we design and manufacture products and the way we conduct our business in the EEA member States, which could adversely affect our business, financial condition and results of operations.

As another example, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any future products or make it more difficult to obtain clearance for, manufacture, market or distribute our products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other

 

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things, require: additional testing prior to obtaining clearance; changes to manufacturing methods; recall, replacement or discontinuance of our products; or additional recordkeeping.

In addition, regulatory authorities’ policies may change and additional laws or regulations may be enacted or promulgated that could prevent, limit or delay marketing authorizations for our products. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing authorizations that we may have obtained and we may not achieve or sustain profitability.

We sell our products to physicians and licensed practitioners, including aestheticians. Current laws and regulations could change at any time, disallowing sales of our products to aestheticians and other non-physician providers, imposing additional educational or regulatory requirements on aestheticians and other non-physician providers and limiting the ability of aestheticians and non-physicians to operate our products, which could adversely affect our business, financial condition and results of operations.

Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of future products or limit our ability to sell to our customers. It is impossible to predict whether legislative changes will be enacted or if regulations, guidance or interpretations will change and what the impact of such changes, if any, may be.

Modifications to our products may require new marketing authorizations, and may require us to cease marketing or recall the modified products until marketing authorizations are obtained.

In the United States, any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design, or manufacture, requires a new marketing authorization. The FDA regulations require every manufacturer to make this determination in the first instance, but the FDA may review such determinations and may not agree with our decisions regarding whether new marketing authorizations are necessary. We have modified some of our 510(k)-cleared products and have determined based on our review of the applicable FDA guidance that in certain instances new marketing authorizations are not required. If the FDA disagrees with our determination and requires us to submit new 510(k)s or premarket approvals, or PMAs, for modifications to our previously cleared products for which we have concluded that new marketing authorizations are unnecessary, we may be required to cease marketing or to recall the modified products until we obtain marketing authorizations, and we may be subject to significant regulatory fines or penalties.

In the EU, we must inform the Notified Bodies that carried out the conformity assessment of the medical devices that we market or sell in the EU and EEA of any planned substantial changes to our quality system or substantial changes to our medical devices that could affect compliance with the General safety and performance requirements set forth in Annex I and Annex VIX to the MDR or cause a substantial change to the intended use for which the device has been CE marked. The Notified Bodies will then assess the planned changes and verify whether they affect the products’ ongoing conformity with the MDR. If the assessment is favorable, the Notified Bodies will issue a new CE Certificate of Conformity or an addendum to the existing certificate attesting compliance with the General safety and performance requirements and quality system requirements.

Consistent with regulatory requirements, we often seek marketing authorizations such as clearance or approval from the FDA, the National Medical Products Administration, or the NMPA, and/or the Pharmaceutical and Medical Devices Agency, or PMDA, and conformity assessment review by our Notified Bodies for additional indications for use. Clinical trials or investigations in support of such marketing authorizations and submissions for conformity assessment by our Notified Bodies may be costly and time-consuming. In the event that we do not obtain additional marketing authorization from the FDA or foreign regulatory authorities or a CE Certificate of Conformity from our Notified Bodies, our ability to market products in the United States, China,

 

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Japan and the EEA and revenue derived therefrom may be adversely affected. Medical devices subject to premarket review may be marketed only for the indications for which they are approved, cleared, or assessed, and if we are found to be marketing our products for off-label uses or indications for use that have not received the requisite marketing authorizations or assessments, we might be subject to FDA and other competent authorities’ enforcement action or have other resulting liability. In addition, if the FDA or the competent authorities in China, Japan and the EEA countries determine that our promotional materials or training constitute promotion of a use which is unapproved, not cleared or not covered by the certification or in compliance with other regulatory authorities’ requirements, they could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, an injunction, product seizures, consent decrees, civil fines, criminal penalties or import detention.

Environmental and health safety laws may result in liabilities, expenses and restrictions on our operations.

Federal, state, local and foreign laws regarding environmental protection, hazardous substances, climate change and human health and safety may adversely affect our business. Using hazardous substances in our operations, such as the use of cyclooctatetraene in our VBeam series of products, exposes us to the risk of accidental injury, contamination or other liability from the use, storage, importation, handling, or disposal of hazardous materials. If our or our contract manufacturers’ operations result in the contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and fines, and any liability could significantly exceed our insurance coverage and have a material adverse effect on our on our business, financial condition and results of operations.

Evolving climate change concerns or changes in regulations related to such concerns, including restrictions on the manufacture, supply, use and importation of fluorinated gases, such as our Cryogen product, could subject us to additional costs, including the purchase of importation quotas and increased supply chain costs, and restrictions on the sales of our products. Furthermore, various jurisdictions and regulators may take different approaches to and impose differing or inconsistent requirements under environmental and climate change-related laws, which may make it more costly or difficult for us to sell our products (including by requiring that we monitor such developments, incur increased costs, increase time-to-market and develop additional country-specific variants for certain products) or prevent us from selling certain products in certain geographic markets. Future changes to environmental and health and safety laws could cause us to incur additional expenses, redesign our products or restrict our operations, which could have a material adverse effect on our business, financial condition and results of operations.

Clinical trials or investigations may be necessary to support a marketing authorization. Such trials or investigations may require the enrollment of large numbers of patients and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials or investigations may prevent us from commercializing modified or new products and may adversely affect our business, financial condition and results of operations.

Initiating and completing the clinical trials or investigations necessary to support our current and future products will be time consuming and expensive and the outcome of any such clinical trials or investigations is uncertain. Moreover, the results of early clinical trials or investigations are not necessarily predictive of future results, and any product we advance into clinical trials may not have favorable results in later clinical trials or investigations. Regulatory authorities may disagree with our interpretation of data and results from our clinical trials or investigations, and data are often susceptible to various interpretations and analyses. Failure can occur at any stage of clinical testing. Our clinical studies or investigations may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and non-clinical testing in addition to those we have planned.

 

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The initiation and completion of any of clinical studies may be prevented, delayed, or halted for numerous reasons. We may experience delays in our ongoing clinical trials or investigations for a number of reasons, which could adversely affect the costs, timing or successful completion of our clinical trials or investigations, including related to the following:

 

   

we may be required for future products to submit an IDE application to FDA, which must become effective prior to commencing certain human clinical trials of medical devices, and FDA may reject our IDE application and notify us that we may not begin clinical trials; similar requirements may apply in foreign countries;

 

   

clinical trials or investigations may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or investigations or abandon product development programs;

 

   

we might have to suspend or terminate clinical trials or investigations for various reasons, including a finding that the subjects are being exposed to unacceptable health risks;

 

   

we may have to amend clinical trial or investigation protocols or conduct additional studies to reflect changes in regulatory requirements or guidance, which we may be required to submit to an IRB or ethics committee and/or regulatory authorities for re-examination; and

 

   

our current or future products may have undesirable side effects or other unexpected characteristics.

Any of these occurrences may significantly harm our business, financial condition and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials or investigations may also ultimately lead to the denial of marketing authorization of our product candidates.

Our facilities are subject to regulation under the Federal Food, Drug and Cosmetic Act and FDA implementing regulations as well as potential audits by our Notified Bodies.

Our facilities and those of our contract manufacturers and suppliers are subject to regulation under the FDCA and FDA implementing regulations, as well as potential audits by our Notified Bodies. The FDA may inspect all of our facilities periodically to determine if we are complying with provisions of the FDCA and FDA regulations. In addition, our facilities must comply with the FDA’s Good Marketing Practices, or GMP, requirements. Our product suppliers are also required to meet certain standards applicable to their manufacturing processes. Our operations could be harmed if regulatory authorities make determinations that we, or our vendors, are not in compliance with these regulations. If the FDA finds a violation of GMPs, it may enjoin our manufacturing operations, seize product, restrict importation of goods, and impose administrative, civil or criminal penalties or take other enforcement actions, such as requesting or requiring recalls. If we or our contract manufacturers or suppliers fail to comply with applicable regulatory requirements, we or they could be required to take costly corrective actions, including suspending manufacturing operations, changing product designs, suspending sales, or initiating product recalls or market withdrawals. In addition, compliance with these regulations has increased and may further increase the cost of manufacturing certain of our products to ensure and maintain compliance. Any of these outcomes could have a material adverse effect on our business, financial condition and results of operations.

Even after marketing authorizations for our products are obtained, we and our contract manufacturers are subject to extensive post-market regulation by the FDA, foreign regulatory authorities and our Notified Bodies. Our failure to meet strict regulatory requirements could result in our being required to stop sales of our products, conduct voluntary or mandatory product recalls, pay fines, incur other costs or even close our facilities.

Even after devices receive marketing authorizations, there are significant post-market regulations with which we must comply. For example, we are required to comply with the FDA’s Quality System Regulation, or

 

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QSR, which covers the methods used in, and the facilities and controls used for, the design, manufacture, quality assurance, labeling, packaging, sterilization, storage, shipping, installation, distribution and servicing of our marketed products. Because certain of our products involve the use of lasers, those 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. The FDA enforces the QSR through periodic announced and unannounced inspections of manufacturing facilities. Any failure by us or our contract manufacturers to take satisfactory corrective action in response to an adverse QSR inspection or to comply with applicable laser performance standards could result in enforcement actions against us or our contract manufacturers.

In the EU, we are also required to demonstrate compliance with similar quality system requirements which are laid down in the relevant Annexes to the MDR. A Notified Body would typically audit and examine a product’s technical dossiers and the manufacturers’ quality system (which must, in particular, comply with ISO 13485:2016 related to Medical Devices Quality Management Systems). Failure to comply with such standards could adversely impact our business.

Later discovery of previously unknown problems with our products, including unanticipated adverse events, adverse events of unanticipated severity or frequency, or manufacturing problems, may result in changes to labeling, restrictions on such products or manufacturing processes, withdrawal of the products from the market, a requirement to repair, replace or refund the cost of any medical device that we manufacture or distribute, fines, import refusals, product seizures, injunctions, the suspension, variation or withdrawal of marketing authorizations or the imposition of civil, administrative or criminal penalties or other enforcement or regulatory actions, each of which could adversely affect our business, financial condition and results of operations.

The FDA and similar foreign governmental authorities, such as the NMPA, Japan PMDA and the authorities of the EEA countries, also have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture or in the event that a product poses an unacceptable risk to health. Moreover, our Notified Bodies have the power to suspend, vary or withdraw our CE Certificates of Conformity in such circumstances. Manufacturers may, on their own initiative, recall a product if any material deficiency in a device is found or conduct a market withdrawal such as the correction or removal of a device to reduce a risk to health posed by the device, to remedy a minor violation of law or even if no violation of law has occurred. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, manufacturing errors, other problems with design or labeling, packaging defects or other deficiencies or failures to comply with applicable regulations.

Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA, other applicable foreign regulatory authorities or our Notified Bodies may require, or we may decide, that we will need to obtain marketing authorizations for the product before we may market or distribute the corrected product. Seeking such marketing authorizations may delay our ability to replace the recalled or withdrawn products in a timely manner. Moreover, if we do not adequately address problems associated with our products, we may face additional regulatory enforcement action, including warning letters, product seizure, injunctions, administrative penalties or civil or criminal fines. Companies often are required to maintain certain records of recalls and withdrawals, even if they are not reportable to the applicable regulatory authority. We may initiate voluntary withdrawals for our products in the future that we determine do not require notification of the FDA, other applicable foreign regulatory authorities or our Notified Bodies. If such regulatory authority or Notified Bodies disagrees with our determinations, it could require us to report those actions as recalls and we may be subject to enforcement action.

Any future recalls or market withdrawals of any of our products would divert managerial and financial resources and have an adverse effect on our reputation, business, financial condition and results of operations, 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 required to bear other costs or take other actions that may have a negative

 

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impact on our future sales and our ability to generate profits. A future recall announcement or corrective action, whether voluntary or involuntary, could also potentially lead to product liability claims against us.

The FDA’s medical device reporting regulations and similar foreign regulations require us to report to the FDA and other foreign governmental authorities when we receive or become aware of information that reasonably suggests that one or more of our products may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have experienced a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of the product. If we fail to comply with our reporting obligations or any other regulatory requirements, the FDA and other foreign governmental authorities could take action, including issuances of warning letters or untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our marketing authorizations or failure to grant new marketing authorizations, seizure of our products or delay in marketing authorizations of future products, recalls, requirements for customer notifications or repairs, operating restrictions or partial suspension or total shutdown of production. Any of these enforcement actions or sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, financial condition and results of operations.

If the third parties on which we rely to conduct our clinical trials or investigations and to assist us with pre-clinical development do not perform as contractually required or expected, we may not be able to obtain marketing authorizations for or commercialize our products.

We do not have the ability to independently conduct all of our pre-clinical and clinical trials or investigations for our products without the participation of third parties. We must rely on third parties such as medical institutions and clinical investigators to conduct such trials or investigations. If these third parties do not successfully carry out their contractual duties or comply with regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to a failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials or investigations may be extended, delayed, suspended or terminated. Furthermore, our third-party clinical trial or investigation investigators may be delayed in conducting our clinical trials for reasons outside of their control, including the COVID-19 pandemic. In the event of such extensions, delays, suspensions or terminations, we may not be able to obtain marketing authorizations or other required regulatory authorizations for, or successfully commercialize, our products on a timely basis, if at all, and our business, financial condition and results of operations may be adversely affected.

Disruptions at the FDA, foreign regulatory agencies and at our Notified Bodies caused by funding shortages or global health concerns could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new products and services from being developed or commercialized in a timely manner, which could negatively impact our business.

The ability of the FDA, foreign regulatory agencies such as the NMPA and Japan PMDA, and our Notified Bodies to review and clear, approve or certify new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees and statutory, regulatory and policy changes. Average review times at these organizations have fluctuated in recent years as a result. In addition, government funding of other government agencies that oversee marketing authorizations and that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.

Disruptions at these agencies and our Notified Bodies may slow the time necessary for new devices to be reviewed and/or cleared, approved or certified, which would adversely affect our business. For example, over the last several years, the U.S. government has shut down several times and certain regulatory agencies, such as the

 

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FDA, have had to furlough critical employees and stop critical activities. Separately, in response to the global COVID-19 pandemic, in March 2020, the FDA temporarily postponed all domestic and foreign routine surveillance facility inspections. Subsequently, in July 2020, the FDA announced its intention to resume certain on-site inspections of domestic manufacturing facilities subject to a risk-based prioritization system and in May 2021, the FDA issued a new report outlining the agency’s plan to move toward a more consistent state of inspectional capacity and priorities for domestic and foreign inspections that were not performed during the pandemic. The FDA’s report continues to prioritize mission-critical inspections and higher priority inspections that are not considered mission-critical, such as for-cause inspections, as well as high-risk assignments based on FDA’s risk-based work plan, over lower priority inspections such as routine surveillance. Regulatory authorities and our Notified Bodies outside the United States may adopt similar restrictions, inspection priorities or other policy measures in response to the COVID-19 pandemic or rely on remote interactive evaluations, record requests or information from trusted regulatory partners if on-site inspections are not feasible. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA, other foreign regulatory authorities and our Notified Bodies from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA, other regulatory authorities and our Notified Bodies to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

In the EU, Notified Bodies must be officially designated to certify products and services in accordance with the MDR. Notified Bodies which have applied for designation under the MDR are currently undergoing such designation assessments. Several Notified Bodies have been designated so far (including notably TÜV SÜD, DEKRA and DNV) but the COVID-19 pandemic has significantly slowed down their designation process. We are aiming at shifting from using several Notified Bodies towards one single Notified Body (DNV) for all our products by September 2021. This situation may lead to delays in recertification and compliance with the MDR.

The FDA and other regulatory enforcement agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. If we are found to have improperly promoted off-label uses, we may become subject to significant liability.

The FDA and other regulatory enforcement agencies strictly regulate the promotional claims that may be made about medical devices. For example, devices authorized for marketing pursuant to a 510(k) clearance cannot be marketed for any intended use beyond the cleared indications. Practitioners nevertheless may use our products on their patients in a manner that is inconsistent with the indications for use cleared by the FDA. The FDA does not restrict or regulate a physician’s use of a medical product within the practice of medicine, and we cannot prevent a physician from using our products for an off-label use. The use of our products for indications other than those for which our products have been cleared by the FDA or approved or authorized by foreign regulatory enforcement authorities or certified by Notified Bodies may not effectively treat the conditions not referenced in product indications, which could harm our reputation in the marketplace among practitioners and patients. If we are found to have promoted such “off-label” uses, we may become subject to significant government fines and other related liability. For example, if the FDA or any foreign regulatory body determines that our promotional materials or training constitute promotion of an off label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance or imposition of an untitled letter, which is used for violators that do not necessitate a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action under other regulatory authority if they consider our business activities to constitute promotion of an off label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, and the curtailment of our operations. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The government has also required companies to enter into consent decrees or imposed permanent injunctions under which specified promotional conduct is changed or curtailed.

 

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Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy and data protection. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased costs of operations or otherwise harm our business, financial condition and results of operations.

We are subject to a variety of laws and regulations in the United States and abroad regarding privacy and data protection, some of which can be enforced by private parties or government entities and some of which provide for significant penalties for non-compliance. There are numerous laws in the countries in which we operate regarding privacy and the storage, sharing, use, processing, disclosure and protection of this kind of information, the scope of which are constantly changing, and in some cases, inconsistent and conflicting and subject to differing interpretations, as new laws of this nature are proposed and adopted and we currently, and from time to time, may not be in technical compliance with all such laws.

As our operations and business grow, we may become subject to or affected by new or additional data protection laws and regulations and face increased scrutiny or attention from regulatory authorities. In the U.S., the Health Insurance Portability and Accountability Act, or HIPAA imposes, among other things, certain standards relating to the privacy, security, transmission and breach reporting of individually identifiable health information. Certain states have also adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA. Such laws and regulations will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our future customers and strategic partners. In addition, the California Consumer Privacy Act of 2018, or the CCPA, went into effect on January 1, 2020. The CCPA creates individual privacy rights for California consumers and increases the privacy and security obligations of entities handling certain personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and potential liability, and many similar laws have been proposed at the federal level and in other states. Further, the California Privacy Rights Act, or the CPRA, recently passed in California, which expands upon CCPA and will impose further obligations on covered businesses when it becomes effective on January 1, 2023. In the event that we are subject to or affected by HIPAA, the CCPA, the CPRA or other domestic privacy and data protection laws, any liability from failure to comply with the requirements of these laws could adversely affect our financial condition.

In Europe, the European Union GDPR and the U.K. GDPR, respectively, impose strict requirements for processing the personal data of individuals within the EEA/U.K. Companies that must comply with the GDPR face increased compliance obligations and risk, including more robust regulatory enforcement of data protection requirements and potential fines for noncompliance of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater. Among other requirements, the GDPR regulates transfers of personal data subject to the GDPR to third countries that have not been found to provide adequate protection to such personal data, including the United States, and the efficacy and longevity of current transfer mechanisms between the European Union and the United States remains complex and uncertain.

In response to these laws, we have reviewed and amended our information practices involving applicable customers, patients and employees, as well as our use of service providers or interactions with other parties to whom we disclose personal information. We cannot yet predict the full impact of these laws and their respective implementing regulations on our business or operations, but these laws may require us to further modify our information practices and policies, and to incur substantial costs and expenses in an effort to comply. We make public statements about our use and disclosure of personal information through our privacy policy, information provided on our website and press statements. We may at times fail to comply with our public statements or be alleged to have failed to do so. We may be subject to potential government or legal action if such policies or statements are found to be deceptive, unfair or misrepresentative of our actual practices. In addition, from time to time, concerns may be expressed about whether our products and services compromise the privacy of our users and others. Any concerns about our data privacy and security practices (even if unfounded), or any failure, real or perceived, by us to comply with our posted privacy policies or with any legal or regulatory requirements,

 

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standards, certifications or orders or other privacy or consumer protection-related laws and regulations applicable to us, could cause our users to reduce their use of our products and services.

There is no assurance that we will not be subject to claims that we have violated applicable laws or codes of conduct, that we will be able to successfully defend against such claims or that we will not be subject to significant fines and penalties in the event of non-compliance. In addition, to the extent multiple state-level laws are introduced with inconsistent or conflicting standards and there is no federal law to preempt such laws, compliance with such laws could be difficult to achieve and we could be subject to fines and penalties in the event of non-compliance. Any failure or perceived failure by us or our employees, representatives, contractors, consultants, collaborators, or other third parties to comply with such requirements or adequately address privacy and security concerns, even if unfounded, could result in additional cost and liability to us, damage our reputation, and adversely affect our business and results of operations.

U.S. and foreign laws and regulations regarding privacy and data security may also affect our products as well as the design, clearance and approval of future products. Compliance with existing, not yet effective, and proposed privacy and data protection laws and regulations can be costly and can delay or impede our ability to market and sell our products, impede our ability to conduct business through websites we and our partners may operate, change and limit the way we use patient information in operating our business, cause us to have difficulty maintaining a single operating model, result in negative publicity, increase our operating costs, require significant management time and attention, or subject us to inquiries or investigations, claims or other remedies, including significant fines and penalties or demands that we modify or cease existing business practices. In addition, if our privacy or data security measures fail to comply with applicable current or future laws and regulations, we may be subject to litigation, regulatory investigations, enforcement notices requiring us to change the way we use personal data or our marketing practices, fines or other liabilities, as well as negative publicity and a potential loss of business.

Our employees, independent contractors, consultants, commercial partners, distributors and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

We are exposed to the risk that our employees, independent contractors, consultants, commercial partners, distributors and vendors and other individuals or entities with whom we have arrangements may engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates: (i) the laws of the FDA, other similar foreign regulatory authorities and foreign governments, including those laws requiring the reporting of true, complete and accurate information to such regulators; (ii) manufacturing standards; (iii) healthcare fraud and abuse laws in the U.S. and similar foreign fraudulent misconduct laws; or (iv) laws that require the true, complete and accurate reporting of financial information or data. These laws may impact, among other things, future sales, marketing and education programs. In particular, the promotion, sales and marketing of healthcare items and services, as well as certain business arrangements in the healthcare industry, are subject to extensive laws designed to prevent fraud, waste, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, structuring and commissions, certain customer incentive programs and other business arrangements generally. Activities subject to these laws also involve the improper use of information obtained in the course of patient recruitment for clinical trials.

It is not always possible to identify and deter misconduct by our employees and other third parties, and the precautions we take to detect and prevent these activities may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in government investigations, civil and criminal proceedings, the imposition of significant fines or other sanctions, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, additional

 

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integrity reporting and oversight obligations, possible exclusion from participation in federal and international healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment of operations, any of which could adversely affect our ability to operate our business and our results of operations. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations, which could have a material adverse effect on our business, financial condition and results of operations.

We are subject to anti-bribery, anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act, as well as export control laws, customs laws, sanctions laws and other laws governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures and legal expenses, which could adversely affect our business, results of operations and financial condition.

With our international presence and global operations and use of distributors in many foreign jurisdictions, we are subject to trade and economic sanctions and other restrictions imposed by the United States, the European Union and other governments and organizations. The U.S. Departments of Justice, Commerce, State and Treasury and other federal agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for violations of economic sanctions laws, export control laws, the U.S. Foreign Corrupt Practices Act of 1977, or the FCPA, and other federal statutes and regulations, including those established by the Office of Foreign Assets Control, or OFAC. In addition, the UK Bribery Act of 2010, or the UK Bribery Act, prohibits both domestic and international bribery, as well as bribery across both private and public sectors. An organization that “fails to prevent bribery” by anyone associated with the organization can be charged under the Bribery Act unless the organization can establish the defense of having implemented “adequate procedures” to prevent bribery. Under these laws and regulations, as well as other anti-corruption laws, anti-money laundering laws, export control laws, customs laws, sanctions laws and other laws governing our operations, various government agencies may require export licenses, may seek to impose modifications to business practices, including cessation of business activities in sanctioned countries or with sanctioned persons or entities and modifications to compliance programs, which may increase compliance costs, and may subject us to fines, penalties and other sanctions. A violation of these laws or regulations would negatively affect our business, financial condition and results of operations.

We have implemented policies and procedures designed to ensure compliance by us and our directors, officers, employees, representatives, consultants and agents with the FCPA, OFAC restrictions, the Bribery Act and other export control, anti-corruption, anti-money-laundering and anti-terrorism laws and regulations. We cannot assure you, however, that our policies and procedures are or will be sufficient or that directors, officers, employees, representatives, consultants and agents have not engaged and will not engage in conduct for which we may be held responsible, nor can we assure you that our business partners have not engaged and will not engage in conduct that could materially affect their ability to perform their contractual obligations to us or even result in our being held liable for such conduct. Violations of the FCPA, OFAC restrictions, the Bribery Act or other export control, anti-corruption, anti-money laundering and anti-terrorism laws or regulations may result in severe criminal or civil sanctions, including delisting from securities exchanges, and we may be subject to other liabilities, which could have a material adverse effect on our business, financial condition and results of operations.

Although we work to comply with applicable laws, regulations and standards, our contractual obligations and other legal obligations, these requirements are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another or other legal obligations with which we must comply. Any failure or perceived failure by us or our employees, representatives, contractors, consultants, collaborators, or other third parties to comply with such requirements or adequately address privacy and security concerns, even if unfounded, could result in additional cost and liability to us, damage our reputation, and adversely affect our business, financial condition and results of operations.

 

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Our activities in countries targeted by economic sanctions may negatively affect our reputation and result in criminal, civil and/or material financial penalties.

Various members of the international community have targeted certain countries, including Iran, with economic sanctions and other restrictive measures. We rely on a general license from OFAC to sell our medical products to customers in Iran. The use of this OFAC general license requires us to observe strict conditions with respect to products sold, end-user limitations and payment requirements. Although we believe we have maintained compliance with the general license requirements, there can be no assurance that the general license will not be revoked, be renewed in the future or that we will remain in compliance. Although the revenue from these sales is immaterial, a violation of the OFAC general license could result in substantial fines, sanctions, civil or criminal penalties, competitive or reputational harm, litigation or regulatory action and other consequences that may adversely affect our business, financial condition and results of operations.

We may be subject to certain state laws prohibiting lay entities from providing licensed medical services or exercising control over physicians, and our business could be harmed if we become subject to legal challenges.

The Company clinics’ operations and our employment of physicians who run clinical trials and post-market studies at such clinics may implicate certain state laws that generally prohibit non-professional entities from providing licensed medical services or exercising improper control over licensed physicians or other healthcare professionals in providing such services (such activities generally referred to as the “corporate practice of medicine”). The interpretation and enforcement of these laws vary significantly from state to state. There can be no assurance that these laws will be interpreted in a manner consistent with our practices or that other laws or regulations will not be enacted in the future that could have a material and adverse effect on our business, financial condition and results of operations. Regulatory authorities, state boards of medicine, state attorneys general and other parties may assert that we are engaged in the provision of medical services in connection with the clinical trials and post-market studies conducted at the Company clinics and overseen by physicians directly employed by us. If a jurisdiction’s prohibition on the corporate practice of medicine is interpreted in a manner that is inconsistent with our practices, we would be required to restructure or terminate the Company clinics’ operations to bring our activities into compliance with such laws. A determination of non-compliance, or the termination of, or failure to successfully restructure, the Company clinics’ operations could result in disciplinary action, penalties, damages and/or fines, any of which could have a material and adverse effect on our business, financial condition and results of operations. State corporate practice prohibitions also often impose penalties on healthcare professionals for aiding in the improper rendering of professional services, which could discourage physicians and other healthcare professionals from overseeing the clinical trials and post-market studies conducted at the Company clinics.

We may be subject to various federal and state laws pertaining to healthcare fraud and abuse, and any violations by us of such laws could result in fines or other penalties.

While procedures utilizing our products are generally not currently covered or reimbursed by third-party payors, our commercial, research and other financial relationships with healthcare providers and others may nonetheless be subject to various state, federal and foreign laws intended to prevent healthcare fraud and abuse. Such laws include the U.S. federal Anti-Kickback Statute, foreign counterparts and similar laws that apply to state healthcare programs, private payors and self-pay patients; the U.S. federal civil and criminal false claims laws, such as the civil False Claims Act and civil monetary penalties laws; state, federal and foreign transparency laws regarding payments and other transfers of value made to physicians and other healthcare professionals; and state, federal and foreign consumer protection and unfair competition laws. Further, these laws may impact any sales, marketing and education programs we currently have or may develop in the future and the manner in which we implement any of those programs. Penalties for violations of these laws can include exclusion from federal healthcare programs and substantial civil and criminal penalties.

 

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Efforts to ensure that our internal operations and business arrangements with third parties comply with future applicable healthcare laws and regulations may involve substantial costs. These laws and regulations, among other things, could constrain our business, marketing and other promotional activities by limiting the kinds of financial arrangements, including financing programs and consulting agreements, we may have with physicians or other potential purchasers or referral sources of our products. It is possible that governmental authorities may conclude that our business practices, including our arrangements with physicians, are subject to and do not comply with current or future statutes, regulations, agency guidance or case law involving applicable healthcare laws. If our current or future operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties which could adversely affect our ability to operate our business and pursue our strategy.

Regulations related to “conflict minerals” may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products.

SEC Regulations require certain disclosure by public companies that use specified minerals (tin, tantalum, gold and tungsten), known as conflict minerals, in their products. The rules require companies to annually perform due diligence (and report on the results of such due diligence on Form SD) regarding whether or not such minerals originate from the Democratic Republic of Congo or an adjoining country, or collectively, Covered Countries, with substantial supply chain verification requirements in the event that the minerals come from, or could have come from, the Covered Countries. Since our supply chain is complex, we may not be able to sufficiently verify the origins of the relevant minerals used in components manufactured by third parties through the due diligence procedures that we implement, which may harm our reputation.

Risks Related to Our Indebtedness

We will require a significant amount of cash to service our debt and our ability to generate cash depends on many factors beyond our control and any failure to meet our debt service obligations could materially adversely affect our business, results of operations and financial condition.

Our ability to make payments or repayments on and to refinance our indebtedness and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control. We also may be prevented, have difficulty, face delays or be subject to taxes regarding our transfer of cash among our international subsidiaries, for example from our Chinese subsidiary to affiliates in the United States.

If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to enable us to pay or repay our indebtedness when due or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness on or before the maturity thereof, sell assets, reduce or delay capital investments or seek to raise additional capital, any of which could have a material adverse effect on our operations. In addition, we may not be able to effect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments, including the credit agreements governing our Senior Facility and Revolving Credit Facility, may limit or prevent us from taking any of these actions. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on commercially reasonable terms or at all. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our business, results of operations and financial condition, as well as on our ability to satisfy our obligations in respect of our Senior Facility and Revolving Credit Facility.

 

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Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our control, could result in an event of default that could materially adversely affect our business, results of operations and financial condition.

If there were an event of default which is continuing under any of the agreements relating to our outstanding debt, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. Our assets or cash flow may not be sufficient to fully repay borrowing under our outstanding debt instruments if accelerated upon an event of default which is continuing. Further, if we are unable to repay, refinance or restructure our secured debt, the holders of such debt could proceed against the collateral securing such debt. In addition, any event of default or declaration of acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments. As a result, any default by us on our debt could have a materially adverse effect on our business, results of operations and financial condition.

Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations.

We have a significant amount of indebtedness. As of June 30, 2021, prior to giving effect to this offering and the use of proceeds therefrom, we had approximately $91.4 million of aggregate principal amount of indebtedness outstanding, all of which was secured indebtedness and an additional $50.0 million available for drawing under our Revolving Credit Facility.

Our substantial level of indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. Our substantial indebtedness could have other important consequences to us, including:

 

   

increase our vulnerability to adverse changes in general economic, industry and competitive conditions;

 

   

require us to dedicate a substantial portion of our cash flow from operations to make interest and principal payments or repayments in connection with our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

require us to repatriate cash from our foreign subsidiaries to accommodate debt service payments;

 

   

expose us to the risk of increased interest rates as certain of our borrowings, including borrowings under our Senior Facility and Revolving Credit Facility, are at variable rates and we may not be able to enter into interest rate swaps and any swaps we enter into may not fully mitigate our interest rate risk;

 

   

restrict us from capitalizing on business opportunities;

 

   

make it more difficult to satisfy our financial obligations, including payments on our indebtedness;

 

   

place us at a competitive disadvantage compared to our competitors that have less debt; and

 

   

limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes.

In addition, the credit agreements governing our Senior Facility and Revolving Credit Facility contain, and the agreements governing future indebtedness may contain, restrictive covenants that limit our ability to engage in certain activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived pursuant to the terms of the relevant credit agreement, could result in the acceleration of the relevant indebtedness.

 

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We may be able to incur significant additional indebtedness in the future. Although the credit agreements governing our Senior Facility and Revolving Credit Facility contain restrictions on the incurrence of additional indebtedness by us, such restrictions are subject to a number of qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. Also, these restrictions do not prohibit us from incurring obligations that do not constitute indebtedness as defined therein. To the extent that we incur additional indebtedness or such other obligations, the risk associated with our substantial indebtedness described above will increase.

Our debt instruments restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

The credit agreements governing our Senior Facility and Revolving Credit Facility impose significant operating and financial restrictions and limit our ability to:

 

   

incur additional indebtedness and guarantee indebtedness;

 

   

pay dividends or make other distributions in respect of, or repurchase or redeem, capital stock;

 

   

prepay, redeem, repurchase or modify the terms of certain debt;

 

   

make acquisitions, investments, loans and advances;

 

   

sell or otherwise dispose of assets;

 

   

create, incur or assume liens;

 

   

enter into negative pledge clauses;

 

   

enter into certain transactions with affiliates;

 

   

enter into agreements restricting our subsidiaries’ ability to pay dividends;

 

   

consolidate, merge or sell all or substantially all of our assets; and

 

   

engage in certain fundamental changes, including changes in the nature of our business.

As a result of these covenants and restrictions, we are and will be limited in how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. In addition, we are required to maintain specified financial ratios and satisfy other financial condition tests. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot guarantee that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.

Our failure to comply with the restrictive covenants described above as well as others contained in our future debt instruments from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms, our results of operations and financial condition could be adversely affected.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Borrowings under our Senior Facility and Revolving Credit Facility bear interest at variable rates of interest (plus an agreed margin) and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed will remain the same, and our net income and operating cash flows, including cash available for capital expenditures or servicing our indebtedness, will correspondingly decrease.

 

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On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced it intends to stop compelling banks to submit rates for the calculation of the London Interbank Offered Rate, or LIBOR, after 2021. It is unclear if LIBOR will cease to exist at that time, if a new method of calculating LIBOR will be established, or if an alternative reference rate will be established. The Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee, which identified the Secured Overnight Financing Rate, or SOFR, as its preferred alternative to U.S. dollar LIBOR in derivatives and other financial contracts. We are not able to predict when LIBOR will cease to be available or if SOFR, or another alternative reference rate, attains market traction as a LIBOR replacement. LIBOR is used as the reference rate under our credit facilities. If LIBOR ceases to exist, we and the administration agents for our credit facilities may amend our debt agreements to replace LIBOR with a different benchmark index and make certain other conforming changes to our debt agreements. As such, the interest rate on borrowings under our credit facilities may change. The new rate may not be as favorable as those in effect prior to any LIBOR phase-out. Furthermore, the transition process may result in delays in funding, higher interest expense, additional expenses, and increased volatility in markets for instruments that currently rely on LIBOR, all of which could negatively impact our interest expense, results of operations, and cash flow.

General Risk Factors

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies” will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in Section 2(a)(19) of the Securities Act, and we may take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” In particular, while we are an “emerging growth company,” among other exemptions:

 

   

we will not be required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act;

 

   

we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and

 

   

we will not be required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments not previously approved.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards, meaning that such company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period, and as a result, our financial statements may not be comparable with similarly situated public companies.

We may remain an “emerging growth company” until the fiscal year-end following the fifth anniversary of the completion of this initial public offering, though we may cease to be an “emerging growth company” earlier under certain circumstances, including (1) if our gross revenue exceeds $1.07 billion in any fiscal year, (2) if we become a large accelerated filer, with at least $700 million of equity securities held by non-affiliates, or (3) if we issue more than $1.0 billion in non-convertible notes in any three-year period.

We cannot predict if investors may find our common stock less attractive if we rely on the exemptions and relief granted by the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may decline and/or become more volatile.

 

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We will be a “controlled company” within the meaning of the rules of NASDAQ and the rules of the SEC and, as a result, qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of other companies that are subject to such requirements.

After completion of this offering, our Sponsor will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of NASDAQ. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirement that:

 

   

a majority of our board of directors consist of “independent directors” as defined under the rules of NASDAQ;

 

   

our director nominees be selected, or recommended for our board of directors’ selection by a nominating/governance committee comprised solely of independent directors; and

 

   

the compensation of our executive officers be determined, or recommended to our board of directors for determination, by a compensation committee comprised solely of independent directors.

Following this offering, we intend to utilize these exemptions. As a result, we may not have a majority of independent directors and our compensation committee and nominating and governance committee may not consist entirely of independent directors. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of NASDAQ.

Our Sponsor controls us and its interests may conflict with yours in the future.

Immediately following this offering, our Sponsor will beneficially own     % of our common stock, or     % if the underwriters exercise in full their option to purchase additional shares. Our Sponsor will be able to control the election and removal of our directors and thereby determine our corporate and management policies, including potential mergers or acquisitions, payment of dividends, asset sales, amendment of our certificate of incorporation or bylaws and other significant corporate transactions for so long as our Sponsor and its affiliates retain significant ownership of us. This concentration of our ownership may delay or deter possible changes in control of us, which may reduce the value of an investment in our common stock. So long as our Sponsor continues to own a significant amount of our combined voting power, even if such amount is less than 50%, our Sponsor will continue to be able to strongly influence or effectively control our decisions and, so long as our Sponsor and its affiliates collectively own at least     % of all outstanding shares of our stock entitled to vote generally in the election of directors, our Sponsor will be able to appoint individuals to our board of directors under the stockholders agreement that we expect to enter into in connection with this offering. See “Certain Relationships and Related Party Transactions—Stockholders Agreement.” The interests of our Sponsor may not coincide with the interests of other holders of our common stock.

In the ordinary course of their business activities, our Sponsor and its affiliates may engage in activities where their interests conflict with our interests or those of our stockholders. Our certificate of incorporation will provide that any director who is not employed by us or his or her affiliates will not have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Our Sponsor also may pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. In addition, our Sponsor may have an interest in pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance its investment, even though such transactions might involve risks to you.

In addition, the Sponsor and its affiliates will be able to determine the outcome of all matters requiring stockholder approval and will be able to cause or prevent a change of control of us or a change in the composition of our board of directors and could preclude any acquisition of us. This concentration of voting

 

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control could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of us and ultimately might affect the market price of our common stock.

We will incur increased costs and become subject to additional regulations and requirements as a result of becoming a public company, and our management will be required to devote substantial time to new compliance matters, which could lower our profits or make it more difficult to run our business.

As a public company, and particularly when we lose our status as an emerging growth company in the future, we will incur significant legal, regulatory, finance, accounting, investor relations and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements and costs of recruiting and retaining non-executive directors. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and related rules implemented by the SEC and NASDAQ and other applicable securities rules and regulations that impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices.

The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. We will need to retain additional employees to supplement our current finance and legal staff, and we may not be able to do so in a timely manner, or at all. Our management will need to devote a substantial amount of time to ensure that we comply with all of these requirements, diverting the attention of management away from revenue-producing activities.

We are evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

Failure to comply with requirements to design, implement and maintain effective internal controls could have a material adverse effect on our business and stock price.

As a privately-held company, we were not required to evaluate our internal control over financial reporting in a manner that meets the standards of publicly traded companies required by Section 404(a) of the Sarbanes-Oxley Act, or Section 404.

As a public company, we will have significant requirements for enhanced financial reporting and internal controls. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. If we are unable to establish or maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our consolidated financial statements and harm our operating results. In addition, we will be required, pursuant to Section 404, to furnish a report by management on, among other things, the

 

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effectiveness of our internal control over financial reporting in the second annual report following the completion of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. Testing and maintaining internal controls may divert our management’s attention from other matters that are important to our business. If we are no longer an “emerging growth company,” our auditors will be required to issue an attestation report on the effectiveness of our internal controls on an annual basis.

In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, we may encounter problems or delays in completing the remediation of any deficiencies identified by our independent registered public accounting firm in connection with the issuance of their attestation report. Our testing, or the subsequent testing (if required) by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Any material weaknesses could result in a material misstatement of our annual or quarterly consolidated financial statements or disclosures that may not be prevented or detected.

We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 or our independent registered public accounting firm may not issue an unqualified opinion. If either we are unable to conclude that we have effective internal control over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified report (to the extent it is required to issue a report), investors could lose confidence in our reported financial information, which could have a material adverse effect on the trading price of our common stock.

There may not be an active, liquid trading market for shares of our common stock, which may cause shares of our common stock to trade at a discount from the initial offering price and make it difficult to sell the shares of common stock you purchase.

Prior to this offering, there has not been a public trading market for shares of our common stock. We cannot predict the extent to which investor interest in us will lead to the development of a trading market or how active and liquid that market may become. If an active and liquid trading market does not develop or continue, you may have difficulty selling your shares of our common stock at an attractive price or at all. The initial public offering price per share of common stock will be determined by agreement between us and the representatives of the underwriters, and may not be indicative of the price at which shares of our common stock will trade in the public market after this offering. The market price of our common stock may decline below the initial offering price and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all. In addition, upon the completion of this offering, our Sponsor will beneficially own approximately    % of our common stock (or approximately    % if the underwriters exercise in full their option to purchase additional shares of common stock in full), which may inhibit the development and maintenance of an active trading market. An inactive trading market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

Our stock price may change significantly following this offering, and you may not be able to resell shares of our common stock at or above the price you paid or at all, and you could lose all or part of your investment as a result.

Even if a trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. You may not be able to resell your shares at or above the initial public offering price due to a number of factors such as those listed in “—Risks Related to Our Business” and the following:

 

   

results of operations that vary from the expectations of securities analysts and investors;

 

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results of operations that vary from those of our competitors;

 

   

changes in expectations as to our future financial performance, including financial estimates and investment recommendations by securities analysts and investors;

 

   

changes in economic conditions for companies in our industry;

 

   

changes in market valuations of, or earnings and other announcements by, companies in our industry;

 

   

declines in the market prices of stocks generally, particularly those of medical aesthetics device companies;

 

   

additions or departures of key management personnel;

 

   

strategic actions by us or our competitors;

 

   

announcements by us, our competitors, our suppliers or our distributors of significant contracts, price reductions, new products or technologies, acquisitions, dispositions, joint marketing relationships, joint ventures, other strategic relationships or capital commitments;

 

   

changes in preference of our customers and our market share;

 

   

changes in general economic or market conditions or trends in our industry or the economy as a whole;

 

   

changes in business or regulatory conditions;

 

   

future sales of our common stock or other securities;

 

   

investor perceptions of or the investment opportunity associated with our common stock relative to other investment alternatives;

 

   

the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC;

 

   

changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business;

 

   

announcements relating to litigation or governmental investigations;

 

   

guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;

 

   

the development and sustainability of an active trading market for our stock;

 

   

changes in accounting principles; and

 

   

other events or factors, including those resulting from informational technology system failures and disruptions, natural disasters, war, acts of terrorism or responses to these events.

Furthermore, the stock market in general, and medical device and aesthetic companies in particular, have experienced extreme volatility that, in some cases, were unrelated or disproportionate to the operating performance of these companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low.

In the past, following periods of market volatility or the reporting of unfavorable news, stockholders have instituted securities class action litigation. If we were to become involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation.

 

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Investors in this offering will suffer immediate and substantial dilution.

The initial public offering price per share of common stock will be substantially higher than our pro forma as adjusted net tangible book value (deficit) per share immediately after this offering. As a result, you will pay a price per share of common stock that substantially exceeds the per share book value of our tangible assets after subtracting our liabilities. In addition, you will pay more for your shares of common stock than the amounts paid by our existing stockholders. Assuming an initial public offering price of $         per share of common stock, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, you will incur immediate and substantial dilution in an amount of $         per share of common stock. If the underwriters exercise in full their option to purchase additional shares, you will experience additional dilution. See “Dilution.”

You may be diluted by the future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise.

After this offering we will have approximately             shares of common stock authorized but unissued. Our amended and restated certificate of incorporation to become effective immediately prior to the consummation of this offering will authorize us to issue these shares of common stock and options relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved shares for issuance under the Incentive Plan. See “Management—Executive Compensation—Long-Term Equity Incentive Compensation.” Any common stock that we issue, including under the Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase common stock in this offering. In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

Because we have no current plans to pay cash dividends on our common stock, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We have no current plans to pay cash dividends on our common stock. The declaration, amount and payment of any future dividends will be at the sole discretion of our board of directors, and will depend on, among other things, general and economic conditions, our results of operations and financial condition, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, including restrictions under our credit agreements and other indebtedness we may incur, and such other factors as our board of directors may deem relevant. See “Dividend Policy.”

As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than your purchase price.

Candela Medical, Inc. is a holding company with no operations of its own and, as such, it depends on its subsidiaries for cash to fund all of its operations and expenses, including future dividend payments, if any.

Our operations are conducted entirely through our subsidiaries and our ability to generate cash to meet our debt service obligations or to make future dividend payments, if any, is highly dependent on the earnings and the receipt of funds from our subsidiaries via dividends or intercompany loans. We do not currently expect to declare or pay dividends on our common stock for the foreseeable future; however, to the extent that we determine in the future to pay dividends on our common stock, the agreements governing our indebtedness may restrict the ability of our subsidiaries to pay dividends or otherwise transfer assets to us. In addition, Delaware law may impose requirements that may restrict our ability to pay dividends to holders of our common stock.

 

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Future sales, or the perception of future sales, of our common stock by us or our existing stockholders in the public market following this offering could cause the market price for our common stock to decline.

The sale of substantial amounts of shares of our common stock in the public market, or the perception that such sales could occur, including sales by our Sponsor, could harm the prevailing market price of shares of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Upon completion of this offering we will have a total of              shares of our common stock outstanding (or              shares if the underwriters exercise in full their option to purchase additional shares). Of the outstanding shares, the              shares sold in this offering (or              shares if the underwriters exercise in full their option to purchase additional shares) will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, or Rule 144, including our directors, executive officers and other affiliates (including our Sponsor), may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.”

The remaining outstanding          shares of common stock held by our existing stockholders after this offering will be subject to certain restrictions on resale. We, our executive officers, directors and certain of our significant stockholders will sign lock-up agreements with the underwriters that will, subject to certain customary exceptions, restrict the sale of the shares of our common stock and certain other securities held by them for 180 days following the date of this prospectus. Any two of BofA Securities, Inc., Goldman Sachs & Co. LLC and Barclays Capital Inc. may, in their sole discretion and at any time without notice, release all or any portion of the shares or securities subject to any such lock-up agreements. See “Underwriting” for a description of these lock-up agreements.

Upon the expiration of the lock-up agreements described above, all of such          shares will be eligible for resale in a public market, subject, in the case of shares held by our affiliates, to volume, manner of sale and other limitations under Rule 144. We expect that our Sponsor will be considered an affiliate upon the expiration of the lock-up period based on its expected share ownership (consisting of          shares), as well as its board nomination rights. Certain other of our stockholders may also be considered affiliates at that time.

In addition, pursuant to a stockholders’ agreement, our Sponsor will have the right, subject to certain conditions, to require us to register the sale of its shares of our common stock under the Securities Act. See “Certain Relationships and Related Party Transactions—Stockholders’ Agreement.” By exercising its registration rights and selling a large number of shares, our Sponsor could cause the prevailing market price of our common stock to decline. Our Sponsor will also have “piggyback” registration rights with respect to future registered offerings of our common stock. Following completion of this offering, the shares covered by registration rights would represent approximately    % of our total common stock outstanding (or    % if the underwriters exercise in full their option to purchase additional shares). Registration of any of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. See “Shares Eligible for Future Sale.”

We intend to file one or more registration statements on Form S-8 under the Securities Act to register shares of our common stock or securities convertible into or exchangeable for shares of our common stock issuable pursuant to the Incentive Plan. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market. We expect that the initial registration statement on Form S-8 will cover          shares of our common stock.

As restrictions on resale end, or if our Sponsor exercises its registration rights, the market price of our shares of common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of common stock or other securities.

 

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Our management may spend the proceeds of this offering in ways with which you may disagree or that may not be profitable.

Although we anticipate using the net proceeds from the offering as described under “Use of Proceeds,” we will have broad discretion as to the application of the net proceeds and could use them for purposes other than those contemplated by this offering. You may not agree with the manner in which our management chooses to allocate and spend the net proceeds. Our management may use the proceeds for corporate purposes that may not increase our profitability or otherwise result in the creation of stockholder value. In addition, pending our use of the proceeds, we may invest the proceeds primarily in instruments that do not produce significant income or that may lose value.

If securities analysts do not publish research or reports about our business or if they downgrade our stock or our sector, our stock price and trading volume could decline.

The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts and cannot assure you that any analysts will initiate or maintain research coverage of us and our stock. Furthermore, if one or more of the analysts who do cover us provide more favorable recommendations about our competitors or downgrade our stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business, the price of our stock could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.

Anti-takeover provisions in our organizational documents could delay or prevent a change of control.

Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have an anti-takeover effect and may delay, defer or prevent a merger, acquisition, tender offer, takeover attempt, or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders.

These provisions will provide for, among other things:

 

   

a classified board of directors, as a result of which our board of directors will be divided into three classes, with each class serving for staggered three-year terms;

 

   

the ability of our board of directors to issue one or more series of preferred stock;

 

   

advance notice requirements for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings;

 

   

certain limitations on convening special stockholder meetings;

 

   

the removal of directors only for cause and only upon the affirmative vote of the holders of at least 662/3% of the shares of common stock entitled to vote generally in the election of directors if the Sponsor and its affiliates cease to beneficially own at least 40% of shares of common stock entitled to vote generally in the election of directors; and

 

   

that certain provisions may be amended only by the affirmative vote of at least 662/3% of shares of common stock entitled to vote generally in the election of directors if the Sponsor and its affiliates cease to beneficially own at least 40% of shares of common stock entitled to vote generally in the election of directors.

These anti-takeover provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares. See “Description of Capital Stock.”

 

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Our board of directors will be authorized to issue and designate shares of our preferred stock in additional series without stockholder approval.

Our amended and restated certificate of incorporation will authorize our board of directors, without the approval of our stockholders, to issue              shares of our preferred stock, subject to limitations prescribed by applicable law, rules and regulations and the provisions of our amended and restated certificate of incorporation, as shares of preferred stock in series, to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The powers, preferences and rights of these additional series of preferred stock may be senior to or on parity with our common stock, which may reduce its value.

Our amended and restated certificate of incorporation will provide, subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders and the federal district courts will be the exclusive forum for Securities Act claims, which could limit our stockholders’ ability to bring a suit in a different judicial forum than they may otherwise choose for disputes with us or our directors, officers, employees or stockholders.

Our amended and restated certificate of incorporation will provide, subject to limited exceptions, that unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by law, be the sole and exclusive forum for any (i) derivative action or proceeding brought on behalf of us, (ii) action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees or stockholders to us or our stockholders, creditors or other constituents, (iii) action asserting a claim against us or any of our directors or officers arising pursuant to any provision of the Delaware General Corporation Law, or the DGCL, or our amended and restated certificate of incorporation or our amended and restated bylaws or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, or (iv) action asserting a claim against us or any of our directors or officers governed by the internal affairs doctrine; provided that, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Securities Exchange Act of 1934, as amended, or the Exchange Act, which already provides that such claims must be bought exclusively in the federal courts. Our amended and restated certificate of incorporation also provides that, unless we consent in writing to the selection of an alternative forum, the U.S. federal district courts will be the exclusive forum for the resolution of any actions or proceedings asserting claims arising under the Securities Act. While the Delaware Supreme Court has upheld the validity of similar provisions under the DGCL, there is uncertainty as to whether a court in another state would enforce such a forum selection provision. Our exclusive forum provision will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations.

Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations and financial condition.

 

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FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements that reflect our current views with respect to, among other things, our operations and financial performance. Forward-looking statements include all statements that are not historical facts. These forward-looking statements are included throughout this prospectus, including in the sections entitled “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We have used the words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “future,” “will,” “seek,” “foreseeable,” the negative version of these words or similar terms and phrases to identify forward-looking statements in this prospectus.

The forward-looking statements contained in this prospectus are based on management’s current expectations and are not guarantees of future performance. The forward-looking statements are subject to various risks, uncertainties, assumptions or changes in circumstances that are difficult to predict or quantify. Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs and projections will result or be achieved. Actual results may differ materially from these expectations due to changes in global, regional or local economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. We believe that these factors include but are not limited to those described under “Risk Factors” and the following:

 

   

major public health issues, and specifically the pandemic caused by the spread of COVID-19, could have an adverse impact on our business, financial condition and results of operations;

 

   

if our existing products fail to gain market acceptance or if we do not continue to develop and commercialize new products that are accepted by the market, identify new markets for our existing products and technologies and/or expand beyond our traditional customer base, we may not remain competitive, and our revenues and operating results could suffer;

 

   

we operate in a highly competitive industry, and our failure to compete effectively could adversely affect our market share, financial condition and growth prospects;

 

   

if there is not sufficient demand for the procedures performed with our products, customer demand for our products could decline, resulting in unfavorable operating results;

 

   

our business is subject to risks associated with the financial position and actions of our customers;

 

   

we outsource a significant portion of the manufacturing of our products to a small number of contract manufacturers, and we and our contract manufacturers are dependent on certain third-party suppliers;

 

   

if we fail to manage our inventory effectively or our forecasts are incorrect, our business, financial condition and results of operations may be materially and adversely affected;

 

   

if we encounter problems with distribution, our ability to deliver our products to our customers could be adversely affected;

 

   

our financial results may fluctuate from quarter to quarter;

 

   

increased prices for, or availability constraints on, raw materials or sub-assemblies used in our products could adversely affect our profitability or revenues;

 

   

a disruption in the operations of our freight carriers or higher shipping costs could cause a decline in our net revenues or a reduction in our earnings;

 

   

we may have difficulty managing our growth which could limit our ability to increase sales and cash flow;

 

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fluctuations in currency exchange rates may negatively affect our business, financial condition and results of operations;

 

   

international sales and operations comprise a significant portion of our business, exposing us to foreign operational, political and other risks that may harm our business, particularly if we are unable to manage our international operations effectively;

 

   

we have growing operations in China, which exposes us to risks inherent in doing business in that country;

 

   

a portion of our product sales are made through independent distributors and sales agents whom we do not control;

 

   

if we are unable to maintain sufficient levels of cash flow from our operations, we may not be able to execute or sustain our growth strategy or we may require additional financing, which may not be available to us on satisfactory terms or at all;

 

   

we may acquire companies and products, form or seek strategic alliances and enter into licensing arrangements in the future, and we may not realize the expected benefits or costs of such arrangements;

 

   

we are continually seeking ways to make our cost structure, business processes and systems more efficient, including by moving activities from higher-cost to lower-cost locations, outsourcing certain business processes and functions, and implementing new business information systems. Problems with the execution of these activities could have an adverse effect on our business, financial condition and results of operations. In addition, we may not achieve the expected benefits of these initiatives;

 

   

we rely on our own direct sales force to sell our products in certain territories, which may result in higher fixed costs than our competitors and may slow our ability to reduce costs in the face of a sudden decline in demand for our products;

 

   

changes in tax laws could adversely affect our financial position;

 

   

we are subject to various tax audits in multiple countries and unfavorable resolution of tax contingencies or exposure to additional income tax liabilities could have a material impact on our business, financial condition and results of operations;

 

   

the failure to attract and retain key personnel could adversely affect our business;

 

   

we manufacture, assemble and test certain products in our U.S. manufacturing facility. If our facility is damaged or becomes inoperative, we may not be able to deliver our products to customers on time;

 

   

our revenues may be adversely impacted due to third parties selling services and/or consumables for our devices;

 

   

our success depends, in part, on the quality, efficacy and safety of our products;

 

   

because many of the users of our products may lack training and because we also sell our products to non-physicians, our products may be misused, which could harm our reputation and our business;

 

   

political, economic and military instability in Israel may impede our ability to operate and harm our financial results;

 

   

legal, political and economic uncertainty surrounding the exit of the United Kingdom from the European Union are a source of instability and uncertainty;

 

   

we are increasingly dependent on information technology;

 

   

use of social media may materially and adversely affect our reputation or subject us to fines or other penalties;

 

   

our business relies heavily on email and other messaging services, and any restrictions on the sending of emails or messages or an inability to timely deliver such communications could materially adversely affect our net revenue and business;

 

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failure to protect sensitive information of our customers and our information technology systems against security breaches could damage our reputation and brand and substantially harm our business, financial condition and results of operations;

 

   

payment methods used on our websites subject us to third-party payment processing-related risks;

 

   

our ability to use our net operating and capital loss carryforwards may be limited;

 

   

we are involved, and may become involved in the future, in disputes and other legal or regulatory proceedings that, if adversely decided or settled, could materially and adversely affect our business, financial condition and results of operations;

 

   

if we are unable to obtain, maintain, protect and enforce our intellectual property rights for our products and technology, our competitive position could be harmed;

 

   

we may be subject to claims challenging the inventorship of our patents and other intellectual property;

 

   

we may be subject to lawsuits or litigation to protect or enforce our patents or other intellectual property, which could result in substantial costs and liability and prevent us from commercializing our potential products;

 

   

changes in the U.S. patent law, or laws in other countries, could diminish the value of patents in general, thereby impairing our ability to protect our products and technology;

 

   

patent terms may be inadequate to protect our competitive position on our products and technology for an adequate amount of time;

 

   

we may not be able to protect our intellectual property and proprietary rights throughout the world;

 

   

if our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected;

 

   

third-party claims of infringement or other claims against us could require us to pay damages, redesign our products, stop selling our products, seek licenses, or engage in future costly intellectual property litigation, which could impact our future business and financial performance;

 

   

we may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information or alleged trade secrets of third parties or competitors or are in breach of non-competition or non-solicitation agreements with our competitors or their former employers; and

 

   

we depend on certain third-party technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us from selling our products.

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.

Any forward-looking statement made by us in this prospectus speaks only as of the date of this prospectus and are expressly qualified in their entirety by the cautionary statements included in this prospectus. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, investments or other strategic transactions we may make. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $         million from the sale of              shares of our common stock in this offering, assuming an initial public offering price of $                 per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise in full their option to purchase additional shares, we estimate the net proceeds to us will be approximately $        million. An increase (decrease) of 1,000,000 shares from the expected number of shares to be sold by us in this offering, assuming no change in the assumed initial offering price per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) our net proceeds from this offering by approximately $         million. A $1.00 increase (decrease) in the assumed initial offering price of $         per share, based on the mid-point of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds to us from this offering to repay approximately $                 million aggregate principal amount outstanding under our Senior Facility, with any remainder to be used for general corporate purposes.

As of June 30, 2021, there was $91.4 million aggregate principal amount (including paid-in-kind interest) outstanding under the Senior Facility, with the maturity date of January 21, 2025. As of June 30, 2021, the borrowings under the Senior Facility bore an interest rate of 11.7%.

 

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DIVIDEND POLICY

We currently expect to retain all future earnings for use in the operation and expansion of our business and have no current plans to pay dividends on our common stock. The declaration, amount and payment of any future dividends will be at the sole discretion of our board of directors, and will depend on, among other things, general and economic conditions, our results of operations and financial condition, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, including restrictions under our credit agreements and other indebtedness we may incur, and such other factors as our board of directors may deem relevant. If we elect to pay such dividends in the future, we may reduce or discontinue entirely the payment of such dividends at any time.

Because we are a holding company, our ability to pay dividends depends on our receipt of cash from our operating subsidiaries, which may further restrict our ability to pay dividends as a result of the laws of their jurisdiction of organization, agreements of our subsidiaries or covenants under any existing and future outstanding indebtedness we or our subsidiaries incur. Certain of our subsidiaries are subject to our credit agreements, which contain covenants that limit such subsidiaries’ ability to make restricted payments, including dividends, and take on additional indebtedness. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt” for a description of the restrictions on our ability to pay dividends.

 

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CAPITALIZATION

The following table sets forth our cash and capitalization as of June 30, 2021, for:

 

   

Dion Holdco Limited and its subsidiaries on an actual basis;

 

   

Candela Medical, Inc. and its consolidated subsidiaries on a pro forma basis to give effect to the Pre-IPO Restructuring; and

 

   

Candela Medical, Inc. and its consolidated subsidiaries on a pro forma as adjusted basis to give effect to the Pre-IPO Restructuring and the issuance of                       shares of our common stock offered by us in this offering at an assumed initial public offering price of $                 per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds to us therefrom as described under “Use of Proceeds.”

You should read this table in conjunction with the information contained in “Use of Proceeds,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as our audited consolidated financial statements and related notes thereto and our unaudited consolidated financial statements and related notes thereto, each included elsewhere in this prospectus.

 

     As of June 30, 2021  
(In thousands, except share data and par value)    Actual     Pro Forma      Pro Forma
As Adjusted(1)
 

Cash

   $ 59,876     $                        $                    
  

 

 

   

 

 

    

 

 

 

Debt:

       

Senior Facility(2)

     91,414       

Revolving Credit Facility(3)

     —         

Other debt

     —         
  

 

 

   

 

 

    

 

 

 

Total liabilities

   $ 91,414     $        $    
  

 

 

   

 

 

    

 

 

 

Shareholders’ equity:

       

Ordinary shares, $1.00 par value per share, 39,922,220 shares authorized, issued and outstanding, actual; Common stock, $0.01 par value per share,             shares authorized,             shares issued and outstanding, pro forma; Common stock, $0.01 par value per share,             shares authorized,              shares issued and outstanding, pro forma as adjusted

   $ 39,922     $        $    

Preferred stock, $0.01 par value per share, no shares authorized, issued and outstanding, actual and pro forma;         shares authorized, no shares issued and outstanding, pro forma as adjusted

     —         

Additional paid-in capital

     381,038       

Accumulated other comprehensive income

     2,550       

Accumulated deficit

     (146,676     
  

 

 

   

 

 

    

 

 

 

Total shareholders’ equity

   $ 276,834     $        $    
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 368,248     $        $    
  

 

 

   

 

 

    

 

 

 

 

(1)

To the extent we change the number of shares of common stock sold by us in this offering from the shares we expect to sell or we change the initial public offering price from the assumed initial public offering price of $            per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, or any combination of these events occurs, the net proceeds to us from this offering and each of

 

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  additional paid-in capital, total stockholders’ equity and total capitalization may increase or decrease. A $1.00 increase (decrease) in the assumed initial public offering price of $            per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds that we receive in this offering and each of additional paid-in capital, total stockholders’ equity and total capitalization by approximately $            , assuming the number of shares offered by us remains the same as set forth on the cover page of this prospectus and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. An increase (decrease) of 1,000,000 shares in the expected number of shares to be sold by us in this offering, assuming no change in the assumed initial public offering price of $            per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) our net proceeds from this offering and each of additional paid-in capital, total stockholders’ equity and total capitalization by approximately $            after deducting the underwriting discount and commissions and estimated offering expenses payable by us.
(2)

For a further description of our Senior Facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt.”

(3)

For a further description of our Revolving Credit Facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt.”

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest in us will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value (deficit) per share of our common stock after giving effect to this offering. Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the book value per share attributable to the shares of common stock held by existing stockholders.

Our pro forma net tangible book deficit as of June 30, 2021 was approximately $(8.8) million, or $             per share of our common stock. We calculate pro forma net tangible book deficit per share by taking the amount of our total tangible assets, reduced by the amount of our total liabilities, and then dividing that amount by the total number of shares of common stock outstanding after giving effect to the Pre-IPO Restructuring.

After giving effect to our sale of            shares in this offering at an assumed initial public offering price of $             per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds to us from this offering as set forth under “Use of Proceeds,” our pro forma as adjusted net tangible book value (deficit) as of June 30, 2021 would have been $            million, or $             per share of our common stock. This amount represents an immediate increase in net tangible book value (or a decrease in net tangible book deficit) of $            per share to existing stockholders and an immediate and substantial dilution in net tangible book value (deficit) of $             per share to new investors purchasing shares in this offering at the assumed initial public offering price. We may also increase or decrease the number of shares we are offering. Each increase or decrease in 1,000,000 shares offered by us would increase or decrease the total consideration to be paid by investors participating in the offering by $            million, assuming that the assumed offering price remains the same and before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

   $                

Pro forma net tangible book value (deficit) per share as of June 30, 2021 after giving effect to the Pre-IPO Restructuring

  

Increase in tangible book value per share attributable to new investors

  

Pro forma as adjusted net tangible book value (deficit) per share after giving effect to the Pre-IPO Restructuring and this offering

  
  

 

 

 

Dilution per share to new investors

   $    
  

 

 

 

Dilution is determined by subtracting pro forma as adjusted net tangible book value (deficit) per share of common stock after the offering from the initial public offering price per share of common stock.

If the underwriters exercise in full their option to purchase additional shares, the pro forma as adjusted net tangible book value (deficit) per share after giving effect to the offering and the use of proceeds therefrom would be $                per share. This represents an increase in net tangible book value (or a decrease in net tangible book deficit) of $            per share to the existing stockholders and results in dilution in net tangible book value (deficit) of $            per share to new investors.

Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, a $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the tangible book value attributable to new investors purchasing shares in this offering by $             per share and the dilution to new investors by $              per share and increase (decrease) the pro forma as adjusted net tangible book value (deficit) per share after giving effect to this offering by $             per share.

 

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The following table summarizes, as of June 30, 2021, the differences between the number of shares purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and by new investors. As the table shows, new investors purchasing shares in this offering will pay an average price per share substantially higher than our existing stockholders paid. The table below assumes an initial public offering price of $             per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, for shares purchased in this offering and excludes underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent  
                  (in thousands)               

Existing stockholders

                   $                                 $    

New investors

            

Total

                   $                     $                

If the underwriters were to exercise in full their option to purchase              additional shares of our common stock from us, the percentage of shares of our common stock held by existing stockholders who are directors, officers or affiliated persons as of June 30, 2021 would be          % and the percentage of shares of our common stock held by new investors would be         %.

Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, a $1.00 increase (decrease) in the assumed initial offering price of $            per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and average price per share paid by all stockholders by $             million, $             million and $             per share, respectively.

To the extent that we grant options to our employees in the future and those options are exercised or other issuances of common stock are made, there will be further dilution to new investors.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of the financial condition and results of operations of Dion Holdco Limited and its subsidiaries should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. The historical consolidated financial data of Candela Medical, Inc. is not discussed below, as Candela Medical, Inc. is a newly incorporated entity, has had no business transactions or activities to date other than in connection with its formation and this offering and had no assets or liabilities during the periods presented in this section. Prior to the effectiveness of the registration statement of which this prospectus forms a part, there will be a restructuring as a result of which Candela Medical, Inc. will become the parent company of Dion Holdco Limited, which is the holding company of the business described in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See “Forward-Looking Statements.” Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

Overview

We are a leading provider of advanced medical device solutions for a broad range of aesthetic applications. Our noninvasive or minimally invasive medical aesthetics products treat a broad range of conditions ranging from the most common aesthetic device procedures to specialized medical treatments and offer practices differentiated solutions for their customers. We offer category-leading products in permanent hair reduction, treatment of pigmentation, tattoos, vascular abnormalities, and fractional resurfacing, as well as fast growing franchises in skin tightening, fat destruction and cellulite, ablative and non-ablative skin resurfacing and rejuvenation, facial wrinkles and acne scar reduction. Our devices include our established key platform families: Gentle Pro series, PicoWay, Vbeam series, and Nordlys multi-application platform, as well as product families such as Profound and CO2RE. Our devices also use consumables, which is a source of recurring revenue to us. We complement our product offerings with comprehensive and responsive service offerings, including on-site device maintenance and repair services, clinical training, and practice development. We market and sell our solutions to dermatologists, plastic surgeons, aesthetic surgeons, MedSpas, aesthetic business chains and other qualified medical and aesthetic practitioners.

We sell our products directly in 18 countries, including the United States, China, Japan and Western Europe, and use distributors to sell our products in another 66 countries where we do not have a direct presence or to complement our direct sales force in selected countries. For the years ended December 31, 2020 and 2019, we derived 78% and 73%, respectively, of our revenue from sales outside the United States through a combination of direct and distributor sales. For the six months ended June 30, 2021 and 2020, we derived 76% and 77%, respectively, of our revenue from sales outside the United States through a combination of direct and distributor sales. As of June 30, 2021, we had approximately 400 employees across sales, clinical training, and post-sale service and support worldwide, primarily supporting direct customers.

While our business was impacted by COVID-19 during 2020, we have seen a strong recovery in demand once lockdowns were gradually lifted and we returned to pre-COVID growth in 2021. Our revenue increased to approximately $209 million for the six months ended June 30, 2021, from approximately $140 million for the six months ended June 30, 2020 and from $189 million for the six months ended June 30, 2019. For the six months ended June 30, 2021 and 2020, we recorded net income of approximately $15 million and net loss of approximately $35 million, respectively, and Adjusted EBITDA of approximately $38 million and $2 million, respectively. Our revenue decreased to approximately $322 million for the year ended December 31, 2020 from approximately $390 million for the year ended December 31, 2019, due to the impact of the COVID-19 pandemic. For the years ended December 31, 2020 and 2019, we recorded net loss of approximately $44 million and $35 million, respectively, and Adjusted EBITDA of approximately $25 million and $24 million, respectively. As of June 30, 2021, we had cash of approximately $60 million and approximately $91 million of outstanding indebtedness under the Senior Facility. For more information about how we calculate Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss), see “—Non-GAAP Financial Measures.”

 

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We derive revenue from the sale of our products, consumables and services. For the year ended December 31, 2020, we derived 80% of our revenue from products and consumables and 20% from service. For the year ended December 31, 2019, we derived 85% of our revenue from products and consumables and 15% from service. We believe the increase in the percentage of our service revenue in 2020 was a result of decreased products and consumables revenue due to the impact of COVID-19, which had less of an impact on our revenue from services due to our service contracts and demand for repair and maintenance services. We believe our future revenue mix will be more in line with historical trends as the impact of COVID-19 dissipates.

Our existing customer base represents a significant source of revenue for us. Approximately 65% of our total revenues in 2020 were generated by our active installed base, including the sale of additional devices, consumables, accessories and services to our existing customers. Over 40% of our new customers make repeat purchases. Of those customers who purchase a second device, nearly 60% of them do so within 12 months of their initial purchase and nearly 50% do so within six months of their initial purchase. As our active installed base of products continues to grow, we expect service revenue will also increase due to an increased number of service contracts and demand for service calls not covered by a warranty.

Candela Corporation was formed in 1970 and Syneron Medical Ltd. was formed in 2000. Our Company was formed in 2010, when Candela Corporation and Syneron Medical Ltd. merged, bringing together two leading, innovative companies in the medical aesthetics space. In 2017, the Sponsor acquired the Company. Since the Sponsor Acquisition, we have streamlined our operations and scalability by investing over $100 million in operational improvements, in areas such as supply chain, commercial and information technology infrastructure, quality management systems, regulatory, marketing, and global human capital, significantly improving each function. We integrated the parallel operations of Candela and Syneron and divested or shut down non-core business units. We have substantially completed the outsourcing of our manufacturing and significantly upgraded key suppliers to increase the strength and scalability of our supply chain. Our outsourcing model allows us to scale our manufacturing to achieve our growth targets, significantly reduce our need to carry inventory, and reduce our manufacturing costs.

Factors Affecting Our Business

We believe that growth in our business will be driven by the following factors:

 

   

Industry growth. The global market for medical aesthetics solutions is large and growing. According to Markets & Research, the global medical aesthetics market covering injectables, energy-based devices, topicals and other products is currently $12 billion and is projected to grow to $25 billion by 2028, an 11% compound annual growth rate. Within this $12 billion market, the energy-based aesthetic devices market is estimated at $3.9 billion and is projected to grow to $8.4 billion by 2028, a 12% compounded annual growth rate.

 

   

Favorable global demographic and consumer trends. We believe the following demographic and consumer trends are helping drive the growth in the market for medical aesthetics solutions: aging demographics and increasing patient focus on improving appearances and youthfulness; “pre-juvenation” trend among millennials seeking aesthetic treatments at a younger age, which extends the lifetime value of a patient; rising wealth and disposable income, as well as a growing middle class, particularly in APAC; normalization and social acceptance of cosmetic procedures, including for men; growing patient interest in non-invasive or minimally-invasive procedures and awareness of energy-based aesthetic treatments; increasing popularity of combination treatments among patients seeking to address a broader range of indications and treatment areas; and reductions in certain entry-level procedure costs.

 

   

Expanding customer base. Medical aesthetics procedures traditionally have been performed by dermatologists, plastic surgeons, other cosmetic physicians and qualified practitioners. There are also a growing number of other specialists performing medical aesthetics procedures, including primary care

 

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physicians, obstetricians, gynecologists, ophthalmologists, and ear, nose and throat specialists that have incorporated aesthetic treatment procedures into their practices. In addition, the number of MedSpas, including MedSpa retail chains, has grown significantly and are a key part of this market. We believe that MedSpas and other non-core practitioners will play increasingly important roles as purchasers of aesthetic treatment devices and that these purchasers will favor product offerings that allow them to meet the needs of a wide range of patients.

 

   

Improving our existing technologies and further expanding into new product applications. We are seeking to grow product sales by investing in products and research that would enhance our offerings. We believe our efficient approach to product development results in high-quality products that provide significant clinical and economic benefits. Overseen by our experienced Medical Advisory Board, our near-term product development pipeline consists of next-generation solutions meant to enhance Candela’s leadership in existing categories as well as to expand Candela’s product offerings into new therapeutic areas. As we introduce new products with greater functionality and adoption, we expect our revenue will shift towards these newer products, in some cases reducing sales of existing products or resulting in end of life product rationalization. On average, we expect new products to be sold at higher gross margins and to generate a greater degree of consumables revenue than our existing portfolio. We are planning a regular cadence of new platform and product launches, as well as introductions of new line extensions and new clinical indications, which we believe will enable us to continue to grow our product sales, drive utilization and recurring revenues.

 

   

Expanding our commercial footprint. We plan to expand our commercial and post-sale support organizations and our distribution network. We plan to recruit and train talented professionals in existing markets to help us broaden the adoption of our products, drive further market penetration and expand our customer base. As we did with Korea and New Zealand in 2018, we will selectively evaluate new markets for expansion of our direct sales force.

 

   

Leveraging our global infrastructure. We have substantially completed our operational transformation investment program and plan to leverage our highly scalable platform to drive growth and operating leverage.

We have managed our business in light of the following challenges:

 

   

Competitive industry. The medical aesthetics industry is highly competitive. Our products compete against laser and other energy-based products offered by numerous small and large public and private companies, both those focused on the medical aesthetics device market as well as larger pharmaceutical and medical devices companies. We also face competition from medical products unrelated to energy-based devices. Any new technologies, procedures or therapies could result in increased competition or make our products obsolete. In addition, our competitors may have stronger relationships with key customers. Our competitors include both established companies that are seeking to expand their market share and new entrants to the market. Our competitors may be able to offer practitioners a broader spectrum of services or have greater financial, research and development, manufacturing, and sales and marketing resources and capabilities than we do. Business combinations among our competitors may result in increased competition.

 

   

Compliance with a complex and changing regulatory landscape. Our products are medical devices subject to extensive regulation in the United States by the FDA, and by corresponding state and foreign regulatory agencies and authorities. Sales of our products outside the United States are subject to foreign regulatory requirements that vary widely from country to country, and such regulatory requirements have been changing and increasing in some countries. Changes to medical device regulations, such as MDR in Europe, privacy and other laws may result in additional cost and compliance complexities for existing products as well as delays in obtaining marketing authorizations for new product introductions and line extensions.

 

   

Sourcing and supply chain management. For our business to be successful, our suppliers and contract manufacturers must provide us with quality products in substantial quantities, in compliance with

 

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regulatory requirements, at acceptable costs and on a timely basis. Competition for resources throughout the supply chain, such as production and transportation capacities, has increased. Recently, we have experienced delays in, and increased costs with respect to, the transportation of our products due to pandemic-related supply chain disruptions. Trends affecting the supply chain include the impact of fluctuating prices of labor and raw materials on our suppliers and contract manufacturers. In addition, the announcement or imposition of any new or increased tariffs, duties or taxes as a result of trade or political tensions between the United States and other countries or otherwise could adversely affect our supply chain.

Impact of COVID-19 Pandemic on our Business

The outbreak of COVID-19, which has been declared a global pandemic by the World Health Organization, has affected our business, as well as our customers, employees, contract manufacturers and suppliers, and resulted in federal, state and local governmental authority safety recommendations and requirements aimed at mitigating the spread of the virus, such as stay-at-home orders, prohibitions of large group gatherings, travel restrictions and closures of certain businesses.

During 2020, healthcare facilities in many countries banned or effectively banned elective procedures. In addition, general commercial activity was reduced as many avoided any non-essential activities. As a result, our sales and marketing efforts in the early stages of the pandemic were substantially reduced as many of our customers were shut down or unable to operate. Also negatively impacting our business was the fact that our employees travel frequently to establish and maintain relationships with our customers and distributors, and to manage our internal operations. Much of that travel was halted as many countries implemented restrictions that prevented our salespersons from attending conferences or meeting customers in person. The COVID-19 pandemic also disrupted the manufacturing and distribution of our products due to staffing shortages, production slowdowns, and stoppages and/or disruptions in delivery system. The impact of COVID-19 on our business began to subside, beginning in the second quarter of 2020 for APAC and in the third quarter of 2020 for the EMEA and Americas regions, as described below under “—Results of Operations.” Still, these disruptions significantly impacted our results of operations for the year ended December 31, 2020.

Our global footprint mitigated the impact of COVID-19 on our operations as the rolling nature of the pandemic meant that certain of our regions were able to keep selling when other regions were more impacted by the pandemic at such time. The agility of our operations, supply chain, and commercial organizations allowed us to make quick adjustments to the business and unwind those adjustments when growth returned. We were able to utilize our digital marketing capabilities to continue to reach customers at a reduced cost, which we intend to continue to leverage going forward to supplement in-person sales and marketing efforts.

As our customers reopen for business, we have seen a quick return to growth as the end-users of our products tend to be more affluent and less susceptible to recessionary environments or changes to the global economy. This has caused some disruptions to our supply chain due to the rapid increase in demand for our products and associated components and we are working with our contract manufacturers to scale accordingly.

The extent to which our operations and business trends will be impacted by, and any unforeseen costs will result from, the pandemic, as well as the impact of any virus variants, will depend largely on future developments, which are highly uncertain and cannot be accurately predicted. See “Risk Factors—Risks Related to Our Business—Major public health issues, and specifically the pandemic caused by the spread of COVID-19, could have an adverse impact on our business, financial condition and results of operations.” We continue to actively monitor the ongoing global outbreak of COVID-19 and its impacts.

Components and Key Factors Influencing Our Results of Operations

Revenue

We derive our revenue from sales of our products, and recurring services and consumables to our customers, typically dermatologists, plastic surgeons, aesthetic surgeons, MedSpas, aesthetic business chains and other

 

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qualified medical and aesthetic practitioners. Our product revenue is comprised of the sale of our aesthetic devices, as well as handpieces and other accessories for such devices. Revenue is also generated through sales of consumables used by our aesthetic devices whose use and the volume of our sales is related to the number of procedures performed on our devices. Service revenue is generated by service contracts at the time of a product sale (extended limited warranty) or some other point following the sale of a product and repair and maintenance services sold outside of a contract or warranty period that are priced on a time and material basis, including the sale of repair parts, for devices we have sold. Our standard limited product warranty period is one year, however customers have an option to purchase up to an additional four years at the time of a sale.

Our revenue is denominated primarily in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located. Changes in foreign currency exchange rates have not materially affected us to date; however, they may become material to us in the future as our operations outside of the United States continue to expand.

Several factors may affect our reported revenue in any period, including product and geographic sales mix, operational effectiveness, pricing realization, marketing and promotional efforts, timing of orders and shipments, competition, business acquisitions and collaborations and changes in foreign currency exchange rates.

Total cost of revenues

Cost of revenues for product consists of instrument cost from the contract manufacturer, raw material parts costs and sub assembly costs for instruments manufactured by us, and associated freight, shipping and handling costs, salaries and other personnel costs, stock-based compensation, royalty expense due to third parties, overhead and other direct costs related to those sales recognized as product revenue in the period. Cost of revenues for consumables consists of materials costs, shipping, and assembly. Cost of revenues for service consists of salaries and other personnel costs, travel, materials costs, stock-based compensation, shipping, in addition to other costs related to warranties and other costs of servicing instruments at customer sites. The changes in our cost of revenues typically correspond with the changes in revenue. We expect our cost of revenues to change due primarily to changes in sales volumes and product sales mix.

Gross profit and gross profit margin

Gross profit is calculated as total revenue less total cost of revenues, and generally increases as revenue increases. Gross profit margin is calculated as gross profit divided by total revenue. Our gross profit margin is affected by product and geographic mix, the efficiency of our and our contract manufacturers’ manufacturing operations and the costs of materials used to make our products.

Research and development expenses

Research and development expenses consist of salaries and other personnel costs, stock-based compensation, research supplies, third-party development costs for new products, costs relating to clinical studies, consulting costs, materials for prototypes, and allocated overhead costs that include facility and other overhead costs. We have made substantial investments in research and development since our inception, and plan to continue to make substantial investments in the future. Our research and development efforts have focused primarily on the tasks required to support development and commercialization of new and existing products. While our research and development expenses fluctuate from period to period based on the timing of specific research, clinical studies, product launches, development and testing initiatives, we generally expect these costs will increase in absolute terms over time as we continue to expand our product portfolio and add personnel to support these efforts.

Selling and marketing expenses

Selling and marketing expenses consist primarily of salaries and other personnel costs, travel, commissions and stock-based compensation for our sales and marketing personnel. We expect selling and marketing expenses

 

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to increase in future periods as the number of sales, technical support and marketing personnel grows and we continue to introduce new products, broaden our customer base and grow our business.

General and administrative expenses

General and administrative expenses consist primarily of salaries and other personnel costs, stock-based compensation for our finance, legal, human resources and general management, facilities costs, as well as professional services, such as legal, information technology and accounting services. We expect general and administrative expenses to increase in future periods as the number of administrative personnel grows and we continue to grow our business. We also expect to incur additional expenses as a public company, including expenses related to compliance with the rules and regulations of the SEC and NASDAQ, additional insurance expenses, and expenses related to investor relations activities and other administrative and professional services.

Total financial expenses

Our financial expenses consist primarily of the interest related to borrowings under our debt obligations, realized and unrealized foreign currency remeasurement adjustments and interest we earn on our cash, cash equivalents and cash deposits.

Income tax expense

Income tax expense primarily consists of state and foreign income taxes. Due to cumulative losses, we maintain a valuation allowance against our deferred tax assets. We consider all available evidence, both positive and negative, in assessing the extent to which a valuation allowance should be applied against our deferred tax assets.

Key Performance Indicators

Our management considers a number of financial and operating metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, determine the allocation of resources, make decisions regarding corporate strategies and evaluate projections. These metrics include operational measures and non-GAAP metrics supplemental to our GAAP results. The following table sets forth our key performance metrics for the periods presented, which are further discussed below:

 

(dollars in thousands)    Year ended     Six months ended  
     December 31,
2020
    December 31,
2019
    June 30,
2021
    June 30,
2020
 
                 (unaudited)     (unaudited)  

Revenue

   $ 321,651     $ 389,771     $ 208,804     $ 140,271  

Gross profit

   $ 139,078     $ 169,249     $ 110,498     $ 56,438  

Adjusted gross profit

   $ 163,015     $ 200,497     $ 115,559     $ 71,619  

Gross profit margin

     43.2     43.4     52.9     40.2

Adjusted gross profit margin

     50.7     51.4     55.3     51.1

Net income (loss)

   $ (43,887   $ (34,885   $ 15,273     $ (35,344

Adjusted EBITDA

   $ 24,851     $ 24,495     $ 38,395     $ 2,020  

Adjusted EBITDA margin

     7.7     6.3     18.4     1.4

Active installed base (at period end)

     42,908       41,679       43,907       41,937  

Revenue

We use revenue to evaluate the size and growth of our business, including the effectiveness of various company strategies, new product introductions, pricing effectiveness, commercial and go-to-market strategies, marketing and lead generation.

 

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Gross profit, gross profit margin

Our gross profit and gross margin, which reflect our revenues and our cost of revenues and any changes to the components thereof, allow us to evaluate our profitability and overall business results.

Net income (loss), Adjusted gross profit, Adjusted gross profit margin, Adjusted EBITDA and Adjusted EBITDA margin

Net income (loss), Adjusted gross profit, Adjusted gross profit margin, Adjusted EBITDA and Adjusted EBITDA margin are key metrics used by management to assess our financial performance and enterprise value. We use Adjusted gross profit, Adjusted gross profit margin, Adjusted EBITDA and Adjusted EBITDA margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures, as the case may be.

We define Adjusted gross profit as gross profit, adjusted to exclude depreciation, amortization and asset disposals, stock-based compensation expense, fair value adjustments relating to the Sponsor Acquisition, Medical Device Regulation and quality related costs and transformation costs. We define Adjusted gross profit margin as Adjusted gross profit as a percentage of revenue.

We define Adjusted EBITDA as net loss, adjusted to exclude depreciation, amortization and asset disposal, finance expense, income tax expense, stock-based compensation expense, fair value adjustments relating to the Sponsor Acquisition, the favorable impact of a legal settlement, Medical Device Regulation and quality related costs, and transformation costs. We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of revenue.

For a discussion of Adjusted gross profit, Adjusted gross profit margin, Adjusted EBITDA and Adjusted EBITDA margin and the limitation on their use, and the reconciliations to the most directly comparable GAAP financial measures, see “—Non-GAAP Financial Measures” below.

Active Installed Base

We use active installed base to evaluate and track our opportunity for additional sales to our existing client base, as well as to provide ongoing clinical education to them. We define active installed base as devices (without duplication) (i) that are under a service contract or warranty, (ii) with respect to which a service event was opened in the past five years, or (iii) that have been installed or shipped in the past five years.

 

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Results of Operations

Comparison of the unaudited six months ended June 30, 2021 and 2020 (dollars in thousands):

 

     Six months
ended June 30,
2021
    % of
revenue
    Six months
ended June 30,
2020
    % of
revenue
    $ change     % change  

Product and consumables

   $ 171,424       82   $ 110,991       79   $ 60,433       54

Service

     37,380       18     29,280       21     8,100       28
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     208,804       100 %      140,271       100 %      68,533       49 % 

Product and consumables

     (74,344     36     (67,725     48     (6,619     10

Service

     (23,962     12     (16,108     12     (7,854     49
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     (98,306 )      47 %      (83,833 )      60 %      (14,473     17 % 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     110,498       53 %      56,438       40 %      54,060       96 % 

Research and development

     (11,475     6     (11,431     8     (44     *  

Selling and marketing

     (46,777     22     (43,335     31     (3,442     8

General and administrative

     (25,993     12     (25,950     18     (43     *  

Other income, net

     938       *       424       *       514       *  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses, net

     (83,307 )      40 %      (80,292 )      57 %      (3,015     4 % 
  

 

 

   

 

 

   

 

 

       

Operating income (loss)

     27,191       13 %      (23,854 )      (17 )%      51,045       *  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest on short-term and long-term debt

     (5,143     3     (5,587     4     444       (8 )% 

Foreign currency remeasurement adjustments and other financial expenses

     (331     *       (2,212     2     1,881       (85 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial expenses

     (5,474 )      3 %      (7,799 )      6 %      2,325       (30 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     21,717       10 %      (31,653 )      (22 )%      53,370       *  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     (6,444     3     (3,691     3     (2,753     75
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 15,273       7 %    $ (35,344 )      (25 )%    $ 50,617       *  

 

*

not meaningful.

Revenue

Revenue increased by $68.5 million, or 49%, to $208.8 million for the six months ended June 30, 2021, compared to $140.3 million for the six months ended June 30, 2020, primarily due to the return in demand following the impact of the COVID-19 pandemic in the comparable period for 2020 and growth within the aesthetics market. Revenue consisted of sales of products and consumables totaling $171.4 million, and revenues from service of $37.4 million for the six months ended June 30, 2021. Revenue consisted of sales of products and consumables totaling $111.0 million, and revenues from service of $29.3 million for the six months ended June 30, 2020. The increase in product and consumables revenue of $60.4 million and the increase in service revenue of $8.1 million were primarily due to the return in demand following the impact of the COVID-19 pandemic in the comparable period for 2020 and growth within the aesthetic market.

 

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The following table reflects total revenue by geography and as a percentage of total revenue, based on the billing address of our customers. Americas consists of the United States, Canada, Central and South America; EMEA consists of Europe, Middle East, and Africa; and APAC includes Japan, China, South Korea, Australia, New Zealand and other South Asian countries (dollars in thousands):

 

     Six months
ended June 30,
2021
     % of
revenue
    Six months
ended June 30,

2020
     % of
revenue
    $ change      % change  

Americas

   $ 58,786        28   $ 36,024        26   $ 22,762        63

EMEA

     54,608        26     38,766        28     15,842        41

APAC

     95,410        46     65,481        46     29,929        46
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue

   $ 208,804        100 %    $ 140,271        100 %    $ 68,533        150 % 

Revenue for the Americas increased by $22.8 million, or 63%, from $36.0 million for the six months ended June 30, 2020 to $58.8 million for the six months ended June 30, 2021. Revenue for EMEA increased by $15.8 million from $38.8 million for the six months ended June 30, 2020 to $54.6 million for the six months ended June 30, 2021. Revenue for APAC increased by $29.9 million from $65.5 million for the six months ended June 30, 2020 to $95.4 million for the six months ended June 30, 2021. The increase in revenue across all geographies was due to the return in demand following the impact of the COVID-19 pandemic in the comparable period for 2020 and growth within the aesthetic market.

Cost of revenues

Cost of product and consumables revenue increased by $6.6 million, or 10%, to $74.3 million for the six months ended June 30, 2021 as compared to $67.7 million for the six months ended June 30, 2020. The increase was primarily due to a return in demand following the impact of the COVID-19 pandemic in the comparable period for 2020. Cost of service revenue increased from $16.1 million for the six months ended June 30, 2020 to $24.0 million for the six months ended June 30, 2021. The increase was primarily due to a return in demand following the impact of the COVID-19 pandemic in the comparable period for 2020. Total cost of revenues as a percentage of revenue decreased to 47.1% of revenue for the six months ended June 30, 2021 as compared to 59.8% in the comparable period for 2020. The higher total cost of revenues as a percentage of revenues in the six months ended June 30, 2020 was caused by our cost of revenue not decreasing proportionally to match the lower demand following the impact of the COVID-19 pandemic and one-time costs related to the manufacturing transformation initiative.

Gross Profit and Gross Profit Margin

Gross profit increased by $54.1 million, or 96%, to $110.5 million for the six months ended June 30, 2021 as compared to $56.4 million for the six months ended June 30, 2020. The increase was primarily due to a return in demand following the impact of the COVID-19 pandemic in the comparable period for 2020. Gross profit margin increased to 52.9% in the six months ended June 30, 2021 from 40.2% in the six months ended June 30, 2020. The lower margin in the six months ended June 30, 2020 was caused by our cost of revenue not decreasing proportionally to match the lower demand following the impact of the COVID-19 pandemic and one-time costs related to the manufacturing transformation initiative.

Research and development expense

Research and development expense was substantially consistent period-over-period at $11.5 million for the six months ended June 30, 2021 as compared to $11.4 million for the six months ended June 30, 2020. The Company continued to invest in research and development during the six months ended June 30, 2020, despite the impact of COVID-19, and the Company invested a comparable amount during the six months ended June 30, 2021.

 

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Selling and Marketing

Selling and marketing expense increased by $3.5 million, or 8%, to $46.8 million for the six months ended June 30, 2021, compared to $43.3 million for the six months ended June 30, 2020. The increase was primarily due to a return in demand following the impact of the COVID-19 pandemic during the six months ended June 30, 2020, and an increase in commission expenses and marketing activities during the six months ended June 30, 2021, although at a lower rate than revenue. The Company continued to generate operating leverage from its actions taken during the six months ended June 30, 2020, which saw reductions in fixed and variable expenses, such as travel, and marketing program costs, which the Company maintained in the six months ended June 30, 2021.

General and administrative

General and administrative expense was consistent period-over-period at $26.0 million for the six months ended June 30, 2021 and 2020. An increase in general and administrative expenses during the six months ended June 30, 2021, primarily due to a return in demand following the impact of the COVID-19 pandemic in the comparable period for 2020, was largely offset by additional ERP post-implementation costs during the six months ended June 30, 2020.

Interest on short-term and long-term debt

Interest on short-term and long-term debt decreased by $0.5 million to $5.1 million for the six months ended June 30, 2021, compared to $5.6 million for the six months ended June 30, 2020, primarily due to a lower effective interest rate on long-term debt.

Foreign currency remeasurement adjustments and other financial expenses

Foreign currency remeasurement adjustments and other financial expenses decreased by $1.9 million to $0.3 million for the six months ended June 30, 2021, compared to $2.2 million for the six months ended June 30, 2020. This was primarily due to the movement in exchange rates on non-U.S. dollar related monetary balances.

Taxation expense

The Company’s income tax expense on continuing operations and effective tax rates were $6.4 million and 29.7% for the six months ended June 30, 2021 and $3.7 million and (11.7)% for the six months ended June 30, 2020. The change in our reported tax rate for the six months ended June 30, 2021, as compared to the six months ended June 30, 2020, primarily relates to changes in the jurisdictional mix of earnings. In addition, during the six months ended June 30, 2020, the Company provided a tax provision on the earnings of its profitable subsidiaries, which resulted in a negative effective tax rate as a result of the overall loss from continuing operations incurred in the period.

Net income (loss)

Net income increased by $50.6 million to $15.3 million for the six months ended June 30, 2021 as compared to a net loss of $35.3 million for the six months ended June 30, 2020. The increase was primarily due to a return in demand following the impact of the COVID-19 pandemic and operational efficiencies achieved compared to 2020.

 

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Comparison of the years ended December 31, 2020 and December 31, 2019 (dollars in thousands):

 

     Year ended
December 31,
2020
    % of
revenue
    Year ended
December 31,
2019
    % of
revenue
    $ change     %
change
 

Product and consumables

   $ 258,458       80   $ 333,037       85   $ (74,579     (22 )% 

Service

     63,193       20     56,734       15     6,459       11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     321,651       100     389,771       100     (68,120     (17 )% 

Product and consumables

     (143,380     45     (179,149     46     (35,769     (20 )% 

Service

     (39,193     12     (41,373     11     (2,180     (5 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     (182,573     57     (220,522     57     (37,949     (17 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     139,078       43     169,249       43     (30,171     (18 )% 

Research and development

     (23,530     7     (26,704     7     (3,174     (12 )% 

Selling and marketing

     (85,741     27     (123,699     32     (37,958     (31 %) 

General and administrative

     (49,849     15     (42,367     11     7,482       18

Other income, net

     560       *       26       *       534       *  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses, net

     (158,560     49     (192,744     50     (34,184     (18 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (19,482     (6 )%      (23,495     (6 )%      4,013       17
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest on short-term and long-term debt

     (12,430 )     4     (2,673     1     (9,757     365

Foreign currency remeasurement adjustments and other financial expenses

     (3,527     1     (410     *       (3,117     760
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial expenses

     (15,957     5     (3,083     1     (12,874     418
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (35,439     11     (26,578     7     (8,861     (33 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     (8,448     3     (8,307     2     (141     (3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (43,887     (14 )%    $ (34,885     (9 )%    $ (9,002     (26 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*

not meaningful.

Revenue

Revenue decreased by $68.1 million, or 17%, to $321.7 million for the year ended December 31, 2020, compared to $389.8 million for the year ended December 31, 2019, primarily due to the impact of the COVID-19 pandemic. Revenue consisted of sales of products and consumables totaling $258.5 million, and revenues from services of $63.2 million for the year ended December 31, 2020. Revenue consisted of sales of products and consumables totaling $333.0 million and recurring revenues from services of $56.7 million for the year ended December 31, 2019. The decrease in product and consumables revenue of $74.6 million was primarily due to decreased demand arising from the temporary closure of customer premises and fewer procedures being performed due to the COVID-19 pandemic, and certain product end of life decisions. This was partially offset by an increase in service revenue of $6.5 million where, despite the COVID-19 pandemic, service contract revenue remained stable in the Americas and EMEA and grew in APAC where the COVID-19 impact was not as significant in the year ended December 31, 2020.

 

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The following table reflects total revenue by geography and as a percentage of total revenue, based on the billing address of our customers (dollars in thousands):

 

     Year ended
December 31,
2020
     % of
revenue
    Year ended
December 31,
2019
     % of
revenue
    $ change     %
change
 

Americas

   $ 82,193        26   $ 134,469        34   $ (52,276     (39 )% 

EMEA

     88,003        27     106,078        27     (18,075     (17 )% 

APAC

     151,455        47     149,224        39     2,231       1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue

   $ 321,651        100   $ 389,771        100   $ (68,120     (17 )% 

Revenue for the Americas decreased by $52.3 million from $134.5 million for the year ended December 31, 2019 to $82.2 million for the year ended December 31, 2020. Revenue for EMEA decreased by $18.1 million from $106.1 million for the year ended December 31, 2019 to $88.0 million for the year ended December 31, 2020. Revenue for APAC increased by $2.2 million from $149.2 million for the year ended December 31, 2019 to $151.5 million for the year ended December 31, 2020. The decrease in revenue for the Americas and EMEA was primarily due to decreased demand arising from the temporary closure of customer premises due to the COVID-19 pandemic. The impact of the COVID-19 pandemic was more pronounced in Americas due to the concentration of customers in the United States, which experienced prolonged and fairly uniform restrictions, compared to EMEA where there is a more diverse geographic customer base across numerous countries, which countries were shut down and reopened at different times. This was partially offset by an increase in revenues for APAC where customer demand from the COVID-19 pandemic recovered more quickly, given the region was more significantly impacted by the pandemic earlier in the year.

Cost of revenues

Cost of product and consumables revenue decreased by $35.8 million, or 19%, to $143.4 million for the year ended December 31, 2020 as compared to $179.1 million for the year ended December 31, 2019. The decrease was primarily due to lower demand related to the impact of the COVID-19 pandemic. Cost of service revenue decreased from $41.4 million for the year ended December 31, 2019 to $39.2 million for the year ended December 31, 2020. The decrease was primarily due to the temporary reduction in work force, temporary salary and related benefit reductions, decline in variable costs, such as variable compensation expense and deferral of discretionary and transformational spend, in each case, related to the COVID-19 pandemic. Total cost of revenues as a percentage of revenue increased to 56.8% of revenue for the year ended December 31, 2020 as compared to 56.6% in the prior year period.

Gross Profit and Gross Profit Margin

Gross profit decreased by $30.2 million, or 18%, to $139.1 million for the year ended December 31, 2020, compared to $169.3 million for the year ended December 31, 2019. The decrease was primarily due to lower demand related to the impact of the COVID-19 pandemic. Gross profit margin remained relatively consistent at 43.2% for the year ended December 31, 2020, compared to 43.4% for the year ended December 31, 2019.

Research and development expense

Research and development expense decreased by $3.2 million, or 12%, to $23.5 million for the year ended December 31, 2020 as compared to $26.7 million for the year ended December 31, 2019. The decrease was primarily due to reductions in salary and other compensation costs and materials related to the program deferrals by the Company in response to the impact of the COVID-19 pandemic.

 

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Selling and Marketing

Selling and marketing expense decreased by $38 million, or 31%, to $85.7 million for the year ended December 31, 2020, compared to $123.7 million for the year ended December 31, 2019. The decrease was primarily due to permanent and temporary headcount reductions and decline in variable expenses, such as travel, marketing program and variable compensation expenses, related to our revenue decline caused by the effects of the COVID-19 pandemic.

General and administrative

General and administrative expense increased by $7.5 million, or 18%, to $49.8 million for the year ended December 31, 2020 as compared to $42.4 million for the year ended December 31, 2019. The primary drivers of the year-on-year increase were the favorable impact of a legal settlement, which reduced the general and administrative expense in 2019 by $6.4 million, and $3.8 million of costs incurred in 2020 relating to the post-implementation support of the global ERP system.

Interest on short-term and long-term debt

Interest on short-term and long-term debt increased by $9.8 million to $12.4 million for the year ended December 31, 2020, compared to $2.7 million for the year ended December 31, 2019, primarily due to higher interest expense related to the Senior Facility discussed in “—Liquidity and Capital Resources—Debt” below.

Foreign currency remeasurement adjustments and other financial expenses

Foreign currency remeasurement adjustments and other financial expenses increased by $3.1 million to $3.5 million for the year ended December 31, 2020, compared to $0.4 million for the year ended December 31, 2019. This is primarily due to the movement in exchange rates on non-U.S. dollar related monetary balances.

Taxation expense

The Company’s income tax expense on continuing operations and effective tax rates were $8.4 million (23.8)% in 2020 and $8.3 million (31.3%) in the prior year. The change in tax expense from the prior year was primarily due to changes in the jurisdictional mix of earnings and the impact of the valuation allowance maintained on the Company’s deferred tax assets.

Net loss

Net loss increased by $9.0 million to $43.9 million for the year ended December 31, 2020 as compared to $34.9 million for the year ended December 31, 2019, primarily due to higher interest expense related to the long-term debt discussed in “—Liquidity and Capital Resources—Debt” below.

Non-GAAP Financial Measures

We present Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin because we believe they are useful indicators of our operating performance. Our management believes that Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin are useful to investors because they are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We also believe Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin are useful to our management and investors as measures of comparative operating performance from period to period.

 

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Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin are non-GAAP financial measures and should not be considered as alternatives to net income (loss) or gross profit as a measure of financial performance or cash provided by operating activities as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In evaluating Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by primarily relying on our GAAP results in addition to using Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin supplementally.

Our Adjusted EBITDA, Adjusted EBITDA margin, Adjusted gross profit and Adjusted gross profit margin measures have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

they do not reflect costs or cash outlays for capital expenditures or contractual commitments;

 

   

they do not reflect changes in, or cash requirements for, our working capital needs;

 

   

they do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

   

they do not reflect period to period changes in taxes, income tax expense or the cash necessary to pay income taxes;

 

   

they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and they do not reflect cash requirements for such replacements; and

 

   

other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

The following table provides a reconciliation of our net income (loss) to Adjusted EBITDA for the periods presented:

 

     Year ended December 31,     Six months ended June 30,  
(in thousands)    2020     2019           2021                 2020        

Net income (loss)

   $ (43,887   $ (34,885   $ 15,273     $ (35,344

Depreciation, amortization and asset disposals

     17,467       19,351       8,160       8,346  

Financial expenses(a)

     15,957       3,083       5,474       7,799  

Income tax expense

     8,448       8,307       6,444       3,691  

Stock-based compensation expense(b)

     3,721       3,167       1,129       1,946  

Fair value adjustments relating to the Sponsor Acquisition(c)

     820       1,514       —         820  

Legal settlement(d)

     —         (6,400     —         —    

Medical Device Regulation and quality related costs(e)

     1,900       2,503       —         1,870  

Transformation costs(f)

     20,425       27,855       1,915       12,892  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 24,851     $ 24,495     $ 38,395     $ 2,020  

Revenue

   $ 321,651     $ 389,771     $ 208,804     $ 140,271  

Adjusted EBITDA margin

     7.7     6.3     18.4     1.4

 

  (a)

Primarily relates to interest on short-term and long-term borrowings, and realized and unrealized foreign currency losses on transactions associated with our international subsidiaries.

 

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  (b)

Costs associated with stock-based compensation plan.

  (c)

Impact of amortization of deferred revenue fair value adjustment associated with the Sponsor Acquisition in July 2017.

  (d)

Net favorable impact from settlement agreements with several companies relating to patent disputes.

  (e)

The initial setup costs of complying with the new EU medical device regulations for previously registered products and primarily relate to third party consulting costs.

  (f)

Compensation related charges, asset write-offs, contract cancellations, project management fees and other direct costs associated with the Company’s transformation initiatives post the Sponsor Acquisition. The key initiatives include manufacturing transfer (Six months ended June 30, 2021 and 2020: $1.5 million and $2.5 million, respectively, 2020: $6.5 million, 2019: $7.5 million), post-acquisition integration (Six months ended June 30, 2021 and 2020: $0.4 million and $2.6 million, respectively, 2020: $5.1 million, 2019: $18.9 million), product discontinuation (Six months ended June 30, 2021 and 2020: $— and $5.0 million, respectively, 2020: $5.0 million, 2019: $—) and the ERP implementation (Six months ended June 30, 2021 and 2020: $— and $2.8 million, respectively, 2020: $3.8 million, 2019: $1.4 million).

The following table provides a reconciliation of our gross profit to Adjusted gross profit for the periods presented:

 

     Year ended December 31,     Six months ended June 30,  
(in thousands)    2020     2019     2021     2020  

Gross profit

   $ 139,078     $ 169,249     $ 110,498     $ 56,438  

Depreciation, amortization and asset disposals

     7,260       8,048       3,333       3,640  

Stock-based compensation expense(a)

     469       410       153       246  

Fair value adjustments relating to the Sponsor Acquisition(b)

     820       1,514       —         820  

Medical Device Regulation and quality related costs(c)

     1,900       2,503       —         1,870  

Transformation costs(d)

     13,488       18,773       1,575       8,605  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted gross profit

   $ 163,015     $ 200,497     $ 115,559     $ 71,619  

Revenue

   $ 321,651     $ 389,771     $ 208,804     $ 140,271  

Adjusted gross profit margin

     50.7     51.4     55.3     51.1

 

  (a)

Costs associated with stock-based compensation plan.

  (b)

Impact of amortization of deferred revenue fair value adjustment associated with the Sponsor Acquisition in July 2017.

  (c)

The initial setup costs of complying with the new EU medical device regulations for previously registered products and primarily relate to third party consulting costs.

  (d)

Compensation related charges, asset write-offs, contract cancellations, project management fees and other direct costs associated with the Company’s transformation initiatives post the Sponsor Acquisition. The key initiatives include manufacturing transfer (Six months ended June 30, 2021 and 2020: $1.6 million and $2.3 million, respectively, 2020: $5.8 million, 2019: $7.3 million), post-acquisition integration (Six months ended June 30, 2021 and 2020: $— and $1.0 million, respectively, 2020: $2.7 million, 2019: $10.7 million), product discontinuation (Six months ended June 30, 2021 and 2020: $— and $5.0 million, respectively, 2020: $5.0 million, 2019: $—) and the ERP implementation (Six months ended June 30, 2021 and 2020: $— and $0.3 million, respectively, 2020: $—, 2019: $0.7 million).

Quarterly Results of Operations

The following table sets forth our historical quarterly results of operations as well as certain key metrics for each of our most recent eight fiscal quarters. This information should be read in conjunction with the audited

 

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consolidated financial statements and related notes thereto and unaudited consolidated financial statements and related notes thereto, each included elsewhere in this prospectus.

 

(dollars in thousands)   For the Quarters Ended  
    December 31,
2020
    September 30,
2020
    June 30,
2020
    March 31,
2020
    December 31,
2019
    September 30,
2019
    June 30,
2019
    March 31,
2019
 
    (unaudited)  

Product and consumables revenue

    85,953       61,514       51,882       59,109       90,966       81,023       82,725       78,323  

Service revenue

    17,183       16,730       14,097       15,183       14,806       14,361       13,875       13,692  

Total revenue

    103,136       78,244       65,979       74,292       105,772       95,384       96,600       92,015  

Cost of product and consumables revenue

    41,970       33,685       33,543       34,182       49,635       43,471       37,909       48,134  

Cost of service revenue

    12,825       10,260       5,482       10,626       11,383       10,351       10,393       9,246  

Total cost of revenue

    54,795       43,945       39,025       44,808       61,018       53,822       48,302       57,380  

Gross profit

    48,341       34,299       26,954       29,484       44,754       41,562       48,298       34,635  

Gross profit margin

    47     44     41     40     42     44     50     38

Net loss

    (757     (7,786     (13,727     (21,617     (10,830     (9,024     (6,954     (8,077

Adjusted gross profit

    51,587       39,809       36,213       35,406       51,302       48,957       52,316       47,922  

Adjusted gross profit margin

    50     51     55     48     49     51     54     52

Adjusted EBITDA

    14,822       8,009       7,007       (4,987     7,955       3,684       6,878       5,978  

Adjusted EBITDA margin

    14     10     11     (7 %)      8     4     7     6

Active installed base

    42,908       42,391       41,937       41,793       41,679       42,386       41,715       41,053  
(dollars in thousands)   For the Quarters Ended  
    December 31,
2020
    September 30,
2020
    June 30,
2020