S-1/A 1 d562972ds1a.htm S-1/A NO. 3 S-1/A No. 3
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As filed with the Securities and Exchange Commission on September 24, 2018

Registration No. 333-226191

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 3

TO

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

Ra Medical Systems, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware

  3841   38-3661826
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

2070 Las Palmas Drive

Carlsbad, California 92011

(760) 804-1648

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

 

 

Dean Irwin

Chief Executive Officer, Chairman of the Board, Co-President, and Chief Technology Officer

Ra Medical Systems, Inc.

2070 Las Palmas Drive

Carlsbad, California 92011

(760) 804-1648

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

 

 

Copies to:

Martin J. Waters

Wilson Sonsini Goodrich & Rosati, P.C.

12235 El Camino Real,

San Diego, California 92130

(858) 350-2300

 

Joshua A. Kaufman

Divakar Gupta

Charles Bair

Cooley LLP

1114 Avenue of the Americas

New York, New York 10036

(212) 479-6000

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

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 to Section 7(a)(2)(B) of the Securities Act.  ☐

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 or until the 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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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 nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS    (Subject to Completion, Dated September 24, 2018)   

3,333,333 Shares

 

LOGO

Common Stock

 

 

This is the initial public offering of shares of common stock by Ra Medical Systems, Inc. No public market for our common stock currently exists. We are offering all of the 3,333,333 shares of common stock offered by this prospectus. We expect the initial public offering price to be between $14.00 and $16.00 per share.

Our common stock has been approved for listing on the NYSE American under the symbol “RMED.” We have also applied to list our common stock on the New York Stock Exchange, or NYSE, under the symbol “RMED.” In the event that we do not meet the listing requirements of the NYSE, we will list on the NYSE American.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and may elect to do so in future filings.

 

 

Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common shares in “Risk factors” beginning on page 14 of this prospectus.

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

 

 

 

     Per Share      Total  

Initial public offering price

   $                                 $                             

Underwriting discounts(1)

   $                                 $                             

Proceeds, before expenses, to us

   $                                 $                             

 

 

(1)  

We refer you to “Underwriting” beginning on page 159 for additional information regarding total underwriting compensation.

The underwriters may also purchase up to an additional 499,999 shares of common stock from us at the public offering price, less the underwriting discounts payable by us, to cover over-allotments, if any, within 30 days from the date of this prospectus.

The underwriters expect to deliver the shares of common stock to investors on or about                 , 2018.

 

Piper Jaffray    Cantor

SunTrust Robinson Humphrey

 

Nomura    Maxim Group LLC

                    , 2018


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TABLE OF CONTENTS

 

     Page  

Prospectus summary

     1  

Risk factors

     14  

Special notes regarding forward looking statements

     63  

Market, industry and other data

     65  

Use of proceeds

     66  

Dividend policy

     67  

Capitalization

     68  

Dilution

     70  

Selected financial data

     73  

Management’s discussion and analysis of financial condition and results of operations

     75  

Business

     95  

Management

     120  

Executive compensation

     130  

Certain relationships and related party transactions

     145  

Security ownership of certain beneficial owners and management

     147  

Description of capital stock

     149  

Shares eligible for future sale

     153  

Material U.S. federal income tax consequences to non-U.S. holders of ownership and disposition of our common stock

     155  

Underwriting

     159  

Legal matters

     166  

Experts

     166  

Where you can find more information

     166  

Index to financial statements

     F-1  

 

 

 

 

Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

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Through and including                 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

For investors outside the U.S.: Neither we nor any of 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 U.S. You are required to inform yourselves about, and to observe any restrictions relating to, this offering and the distribution of this prospectus.

 

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PROSPECTUS SUMMARY

This summary highlights selected information appearing elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. This summary may not contain all the information you should consider before investing in our common stock. You should carefully read this prospectus in its entirety before investing in our common stock, including the sections titled “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations” and our financial statements and related notes included elsewhere in this prospectus. Unless the context otherwise requires, the terms “Ra Medical,” “Ra Medical Systems,” “the Company,” “our company,” “we,” “us,” and “our,” refer to Ra Medical Systems, Inc.

Overview

We are a commercial-stage medical device company leveraging our advanced excimer laser-based platform for use in the treatment of vascular and dermatological diseases. We believe our products enhance patients’ quality of life by restoring blood-flow in arteries and clearing chronic skin conditions. In June 2018, we completed our 12 month commercial launch period, which included training, production, and staffing for the marketing of the DABRA laser system and disposable catheter, together referred to as DABRA, in the United States. Following the temporary placement period for DABRA and once our customers decide to continue using DABRA in their facilities, we typically enter into DABRA laser commercial usage agreements or DABRA laser placement acknowledgments with each customer, which we refer to collectively as Usage Agreements. As of June 30, 2018, we had a U.S. installed base of 31 DABRA laser systems, eight of which have signed Usage Agreements with us, and the remainder of which are temporarily placed for use in demonstrations, trials, or training. DABRA is cleared by the U.S. Food and Drug Administration, or FDA, as a device for crossing chronic total occlusions, or CTOs, in patients with symptomatic infrainguinal lower extremity vascular disease and with an intended use for ablating a channel in occlusive peripheral vascular disease. DABRA is used as a tool in the treatment of peripheral artery disease, or PAD, a form of peripheral vascular disease, which commonly occurs in the legs. These procedures are typically referred to in the medical community as atherectomy procedures, which the medical community commonly defines as any removal by surgery or specialized catheterization of an atheroma, or blockage, in an artery. Even though the medical community refers to it as atherectomy, DABRA is not cleared for atherectomy. Nevertheless, third party health payers can reimburse a procedure performed by a device which is not cleared or approved for a specific indication or procedure, if the physician determines the device and procedure are medically appropriate for a particular patient. Payers and the medical community can take a broader view than FDA in recognizing the scope of appropriate device use. We currently intend to pursue expanded indications for use for DABRA to include an atherectomy indication for use, which FDA currently defines to include a prespecified improvement in luminal patency, or a prespecified increase in the openness of the artery at a pre-defined time point, and an indication for use for the treatment of in-stent restenosis. To satisfy FDA’s data requirements to support an atherectomy indication, we believe that we will need to perform a new clinical study or collect real-world data that demonstrates an acceptable level of openness of the artery at a pre-defined time point, such as six months following a DABRA procedure, using a consistent assessment tool, e.g., an ultrasound. We believe this will allow FDA to evaluate the clinical success of a DABRA atherectomy procedure. At this time, our strategy to collect the data necessary to expand our indications is not yet certain based on numerous factors, including potential feedback from FDA. If we need to conduct a new clinical study, we may need to obtain FDA approval for an Investigational Device Exemption, or IDE, prior to initiating the study. However, we believe that while these activities will take time to

 

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complete, the incremental cost of obtaining an atherectomy indication will not be material. In addition, we intend to pursue additional uses for DABRA, including seeking regulatory clearance for the use of DABRA as a tool for the treatment of vascular blockages associated with coronary artery disease, or CAD, in-stent restenosis, and other venous and arterial occlusions, or blockages in the veins or arteries. However, there can be no assurance that DABRA will receive the necessary clearances for these additional indications. The DABRA laser system is based on the same core technology and utilizes a similar excimer laser as Pharos, a medical device that we have marketed as a tool for the treatment of proliferative skin conditions since October 2004. Pharos is designed for use in the treatment of inflammatory skin conditions and is FDA cleared as a tool used in the treatment of psoriasis, vitiligo, atopic dermatitis, and leukoderma. Because DABRA and Pharos are both based on our core excimer laser technology platform and deploy similar mechanisms of action, we benefit from economies of scale in product development, manufacturing, quality assurance and distribution.

DABRA.    DABRA is our minimally-invasive excimer laser and disposable catheter system that is used by physicians as a tool in the endovascular treatment of vascular blockages resulting from lower extremity vascular disease, a form of PAD, both above- and below-the-knee, by breaking down plaque to its fundamental chemistry, such as proteins, lipids and other chemical compounds, eliminating blockages by essentially dissolving them without generating potentially harmful particulates. The accumulation of plaque in arteries, which is a result of lower extremity vascular disease, most commonly occurs in the pelvis and legs. Plaque accumulation, known as atherosclerosis, causes the narrowing of arteries, thereby reducing the flow of oxygenated blood to tissue and organs. If vascular blockages are left untreated, they can increase the risk of heart attack, stroke, amputation or death. Major risk factors for PAD include age, smoking, diabetes and obesity. Despite its prevalence, PAD is underdiagnosed and undertreated relative to many other serious vascular conditions, including CAD, in part because up to half of the PAD population is asymptomatic, or shows no symptoms, and many dismiss symptoms as normal signs of aging.

DABRA is a novel technology for use in the endovascular treatment of vascular blockages resulting from lower extremity vascular disease. We believe that our liquid-filled, full aperture ratio catheter allows for a less traumatic endovascular treatment for the removal of vascular blockages and offers significant benefits over competing treatments and therapies. DABRA is easy to use and can cross and debulk, or reduce or remove, a broad range of blockage types without the use of a guidewire. Although DABRA is suitable for use as a monotherapy, or a therapy that uses one type of treatment, it is predominantly used with angioplasty balloons and also can be used adjunct to drug-eluting balloons, stents, and other endovascular treatments.

In May 2017, we received FDA 510(k) clearance to market the DABRA laser system and disposable DABRA catheter in the U.S. for crossing chronic total occlusions in patients with symptomatic infrainguinal lower extremity vascular disease and with an intended use for ablating a channel in occlusive peripheral vascular disease. In June 2018, we completed our 12 month commercial launch period, which included training, production, and staffing for the marketing of DABRA in the United States. We market DABRA in the U.S. through our direct sales force comprised of 15 sales representatives as of June 30, 2018, which places lasers in catheterization laboratories that perform high volumes of endovascular procedures, including plaque removal in peripheral arteries. We have plans to increase sales by further expanding this organization. DABRA was granted CE mark clearance in September 2016 for the endovascular treatment of infrainguinal arteries via atherectomy and for crossing total occlusions, and we sell systems through distributors in select non-U.S. countries.

Pharos.    Pharos is our excimer laser device that emits highly concentrated ultraviolet light and is used as a tool in the treatment of dermatological skin disorders. Physicians use Pharos by applying

 

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308 nanometer ultraviolet light to the skin. The FDA has granted 510(k) clearance to market Pharos in the U.S. for psoriasis, vitiligo, atopic dermatitis, and leukoderma. Pharos was granted CE mark clearance in September of 2016 for use in the treatment of psoriasis, vitiligo, atopic dermatitis and leukoderma by the application of UVB ultraviolet light. We have also received clearance to market Pharos from the China Food and Drug Administration, or CFDA, and South Korea Ministry of Drug Safety, or KFDA in the applicable jurisdictions. Pharos offers significant benefits to patients. The targeted nature of our treatment allows the operator to spare healthy tissue from exposure to the ultraviolet light making the treatment faster and safer than some other forms of phototherapy, or light therapy. The light induces T-cell apoptosis, or cell death, which we believe may produce an immunosuppressant effect.

Our Strategy

Our goal is to become the leading medical device company marketing excimer lasers as tools for the treatment of endovascular diseases. Key elements of our strategy to achieve this goal are:

 

   

Driving physician awareness of DABRA.    Our program to educate physicians regarding DABRA’s value proposition consists of presentations and exhibits at industry conferences, advertising in medical journals, direct visits, webinars, and calls.

 

   

Creating patient awareness of DABRA.    We are establishing marketing and support programs with physicians and patient advocacy organizations to create patient awareness of PAD treatment options in order to generate demand for our products.

 

   

Expanding DABRA sales.    We provide physicians with clinical training to drive adoption and utilization of DABRA. We believe that a strong sales team to train physicians on the use and the benefits of DABRA will increase sales. We expect to continue to expand the clinical sales team through 2018 and beyond.

 

   

Extending DABRA to additional indications.    We plan to leverage our product technology and research and development expertise to develop DABRA for additional vascular indications, such as CAD and in-stent restenosis.

 

   

Expanding commercial opportunities for DABRA internationally.    We received the right to affix the CE mark to DABRA in the third quarter of 2016, permitting DABRA to be marketed and sold in Europe and other CE mark markets. We plan to expand commercial opportunities for DABRA internationally through obtaining additional regulatory approvals and expanding our relationships with international distributors.

 

   

Optimizing existing manufacturing capabilities to generate operating leverage.    We design, develop and manufacture DABRA in-house using components and sub-assemblies provided by third-party suppliers. We believe that by controlling the manufacturing and assembly of our products we are able to innovate more quickly, produce higher quality products, and increase our manufacturing scale in a cost-effective manner. We intend to use our design, engineering, and manufacturing capabilities to further improve the efficiency of our manufacturing process and expand our margins.

 

   

Expanding our product offerings.    We believe that we will be able to leverage our technology and sales platform to expand our endovascular offerings with ancillary endovascular devices such as angioplasty balloons, guide catheters, and introducers. We intend to achieve this through our internal development efforts and with selective licenses, alliances or acquisitions of complementary products, technologies or businesses.

 

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Strengths of our Approach—DABRA

DABRA includes a portable excimer laser system combined with proprietary, single-use catheters that together represent a competitive plaque removal solution for the minimally invasive endovascular treatment of blockages in the vasculature, or blood vessels such as arteries or veins. DABRA represents a novel approach to the treatment of a broad range of vascular blockages that is safe and effective, easy to use, and competitively priced. We believe that the principal benefits of DABRA are:

 

   

Safety.    DABRA is designed to track the patient’s true lumen, or the center of the artery, and not to penetrate between the layers of arterial structure known as the subintimal space. Damage or stretching of the arterial walls, which can lead to dissection, or a tear in the inner lining of the vessel wall, or perforation, or a hole or a break in the vessel wall, may be reduced. No serious adverse events were reported in our 2017 pivotal study, which followed 38 subjects for 180 days, or reported in our post-market surveillance for DABRA. In our post-market surveillance, the most frequent complication reported to us has been clinically non-significant vessel perforation.

 

   

Efficacy.    Unlike many treatments for PAD that do not remove plaque, DABRA employs photochemical ablation, or the removal of body tissue by using photons, to disintegrate plaque by breaking its chemical bonds, thereby reducing the plaque to the components of its fundamental chemistry without generating potentially harmful particulates. We believe that eliminating plaque while minimizing injury to the arterial wall may minimize the rate of restenosis, or the re-accumulation of blockages. We followed 38 subjects from our pivotal study to 180 days thereafter and all of the subjects were determined to be completely free of target lesion revascularization, or the need to retreat the lesion.

 

   

Utility.    DABRA enables physicians to remove plaque from long and calcified lesions in arteries located in the lower extremities both above- and below-the-knee. DABRA is able to cross and debulk a wide variety of plaque, removing vascular blockages that other products are unable to cross without the use of a guidewire. For example, in patients with a CTO the physician may use DABRA to cross the CTO prior to alternative treatments consisting of balloon angioplasty and possibly stenting.

 

   

Ease of Use.    DABRA employs techniques similar to those used in angioplasty, which are familiar to the approximately 10,000 interventional cardiologists, vascular surgeons and interventional radiologists in the U.S. who are generally trained in endovascular techniques. This significantly increases the number of physicians who are able to perform the procedure compared to surgical alternatives that must be performed by highly-trained vascular surgeons.

 

   

Cost and Time Efficient.    We believe that because our single-use DABRA catheters are priced competitively and because we provide the DABRA laser system for a nominal periodic fee without requiring the purchase of capital equipment, DABRA is a cost-effective solution for providers. Providers are also eligible for reimbursement for procedures that are performed using DABRA by using existing Current Procedural Terminology, or CPT, codes. The existence of a CPT code does not guarantee reimbursement, and payors impose restrictions on the use of codes. In addition, DABRA’s easy setup and fast ablation speed reduce both treatment and fluoroscopy time, or x-ray exposure time, for the patient, physician, and staff, improving the providers’ patient throughput. The average lasing time in our pivotal study was approximately two and a half minutes per procedure. Cost and time efficiencies can

 

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trigger Medicare payment reductions based on the resource based relative value payment methodology.

 

   

Immunotherapeutic Benefits.    Research performed using 308 nanometer laser energy, the wavelength of Pharos, demonstrated increased T-cell apoptosis, which may produce an immunosuppressant effect. Unlike with Pharos, where we can measure the degree and speed of clearance of disease and quantify the remission time, with DABRA we have not established the benefits of this immunosuppressant effect in the vasculature. We intend to conduct a registry or study to identify any immunotherapeutic benefits.

Strengths of our Approach—Pharos

Pharos is an excimer laser device that emits highly concentrated ultraviolet light and is used as a tool in the treatment of dermatological skin disorders, such as psoriasis, vitiligo, atopic dermatitis, and leukoderma. We believe that the principal benefits of Pharos are:

 

   

Wavelength.    Studies have shown that the action spectrum, or the rate of a physiological activity plotted against wavelength of light, for immunologically modulated skin disorders is centered at about 308 nanometers. Pharos is a 308 nanometer laser, making it ideally suited for use as a tool in the treatment of these disorders.

 

   

Energy.    The energy from excimer lasers has been shown, in both in vivo and in vitro studies, to have almost four times the T-cell apoptosis generation than non-laser sources. Pharos is a pulsed laser capable of producing very high peak powers and we believe that this may produce an immunosuppressive effect.

 

   

Collimation.    Ultraviolet-B light has a very shallow penetration into the skin, typically less than 100 microns. Although the skin tends to scatter the light, collimation, or keeping the light rays parallel, helps prevent reflection and improves the dose delivery. Pharos has a moderately collimated beam and this collimation allows for treatment in intertriginous areas, such as the groin and armpits, and mucosal areas, such as the mouth and ears, without compromising dose.

 

   

Targeting.    Applying the laser energy only to the diseased tissue not only spares the healthy tissue from exposure, but also allows the operator to increase the dose to the affected areas. We believe that Pharos is the only system that has an integrated adjustable spot size offering continuous beam adjustment from a large square to a small circle.

 

   

Footprint.    Dermatological treatment rooms are small and often crowded with other equipment. Pharos has a small footprint and is among the lightest excimer lasers currently marketed, allowing physicians to conserve space and easily move the system.

Risks Associated with our Business

Our ability to execute our business strategy is subject to numerous risks, as more fully described in the section captioned “Risk factors” immediately following this prospectus summary. You should read these risks before you invest in our common stock. In particular, risks associated with our business include, but are not limited to, the following:

 

   

We have incurred losses in each of the last two years and may be unable to achieve profitability in the future.

 

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We may be unable to achieve revenue growth.

 

   

Our success depends in large part on DABRA. If we are unable to successfully market and sell DABRA, our business prospects will be significantly harmed.

 

   

We will require substantial additional capital to finance our planned operations, which may not be available to us on acceptable terms, or at all. As a result, we may not be able to continue our marketing efforts to increase the adoption of our products.

 

   

Our products may not gain or maintain market acceptance among physicians and patients and others in the medical community.

 

   

The continuing development of our products depends upon our maintaining strong working relationships with physicians.

 

   

If our manufacturing facility becomes damaged or inoperable, or we are required to vacate the facility, our ability to manufacture and sell our products and to pursue our research and development efforts may be jeopardized.

 

   

We face substantial competition, which may result in others discovering, developing or commercializing products more successfully than us.

 

   

If DABRA and Pharos are not approved for new indications, our commercial opportunity will be limited.

 

   

If we are unable to obtain and maintain patent protection for our products, our competitors could develop and commercialize products and technology similar or identical to ours, and our ability to successfully commercialize our existing products and any new products we may develop, and our technology may be adversely affected.

 

   

Third parties may claim that the manufacture, use or sale of our products infringe their intellectual property rights.

 

   

Healthcare cost containment pressures and legislative or administrative reforms resulting in restrictive coverage and reimbursement practices of third-party payors could decrease the demand for our products and the number of procedures performed using our devices, which could have an adverse effect on our business.

 

   

Regulatory compliance is expensive, complex and uncertain, and a failure to comply could lead to enforcement actions against us and other negative consequences for our business.

 

   

We may not be able to achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payors and acceptable market share for DABRA and Pharos.

 

   

If critical components used in manufacturing our products become scarce or unavailable, we may incur increased costs and delays in the manufacturing and delivery of our products, which could damage our business.

 

   

Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or our guidance.

 

   

We have identified a material weakness in our internal control over financial reporting. If our remediation of this material weakness is not effective, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective

 

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system of internal control over financial reporting in the future, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

Corporate and other Information

We were incorporated in California on September 4, 2002, and reincorporated in Delaware in July 2018. Our principal executive offices are located at 2070 Las Palmas Drive, Carlsbad, California 92011 and our telephone number is (760) 804-1648 or (877) 635-1800 toll-free. Our corporate website address is www.ramed.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.

We own or have rights to trademarks that we use in connection with the operation of our business. Ra Medical Systems, Inc. and our logo as well as other trademarks such as DABRA and Pharos, are used in this prospectus. Solely for convenience, the trademarks referred to in this prospectus are listed without trademark symbols, but we will assert, to the fullest extent under applicable law, our rights to these trademarks. Additionally, we do not intend for our use or display of other companies’ trademarks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

Implications of being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, enacted in April 2012. An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

   

being permitted to present only two years of audited financial statements and only two years of “Selected financial data” and related “Management’s discussion and analysis of financial condition and results of operations” in this prospectus;

 

   

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended;

 

   

reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

   

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We may use these provisions until the last day of our fiscal year following the fifth anniversary of the closing of this offering. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue exceeds $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this prospectus is a part and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our

 

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stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have elected to avail ourselves of this exemption and, therefore, we are not subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

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THE OFFERING

 

Common stock offered by us

   3,333,333 shares

Common stock to be outstanding after this offering

   11,537,584 shares

Underwriters’ option to purchase additional shares

  

 

We have granted the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to an additional 499,999 shares of common stock from us.

Use of proceeds

   We estimate that we will receive net proceeds from this offering of approximately $43 million based upon an assumed initial public offering price of $15.00 per share, the mid-point of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We expect to use the net proceeds from this offering for the expansion of our direct sales force and marketing of our products, to support clinical studies for new products and product enhancements including for expanded indications, and to support other research and development activities, working capital, and general corporate purposes. We may also use a portion of the net proceeds of this offering for acquisitions to bolster our product offerings. We have not entered into any agreements or commitments with respect to any specific acquisitions and have no understandings or agreements with respect to any such acquisition or investment at this time. See “Use of proceeds” for additional information.

Risk factors

   You should carefully read the “Risk factors” section of this prospectus beginning on page 14 for a discussion of factors that you should consider before deciding to invest in our common stock.

Proposed NYSE American/New York Stock Exchange trading symbol

   “RMED”

The number of shares of our common stock to be outstanding after this offering is based on 8,204,251 shares of our common stock outstanding as of June 30, 2018, and excludes:

 

   

1,898,000 shares of common stock issuable upon exercise of options outstanding as of June 30, 2018, that were issued at an exercise price of $28.94 per share under our 2018 Stock Compensation Plan, or our Compensation Plan;

 

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1,340,301 shares of common stock issuable upon the vesting and settlement of restricted stock units outstanding as of June 30, 2018, that were issued under our Compensation Plan; and

 

   

1,990,585 shares of common stock reserved for future issuance under our stock-based compensation plans, consisting of:

 

   

61,699 shares of common stock reserved for future issuance under our Compensation Plan as of June 30, 2018, which shares will be added to the shares reserved under our 2018 Equity Incentive Plan, or our 2018 Plan, which will become effective upon the completion of this offering;

 

   

1,632,134 shares of common stock reserved for future issuance under our 2018 Plan, which will become effective upon the completion of this offering;

 

   

296,752 shares of common stock reserved for issuance under our 2018 Employee Stock Purchase Plan, or ESPP, which will become effective upon the completion of this offering; and

 

   

any shares that become available for future issuance under our 2018 Plan and ESPP, pursuant to provisions that automatically increase the reserves under such plans each year.

Unless otherwise noted, the information in this prospectus assumes:

 

   

the filing of our amended and restated certificate of incorporation immediately prior to the closing of this offering;

 

   

no exercise of outstanding options subsequent to June 30, 2018; and

 

   

no exercise by the underwriters of their option to purchase up to an additional 499,999 shares of our common stock in this offering.

 

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SUMMARY FINANCIAL DATA

The following tables summarize our financial data for the periods and as of the dates indicated. We have derived the statements of operations data for the years ended December 31, 2016 and 2017 from our audited financial statements included elsewhere in this prospectus. We have derived the statements of operations data for the six months ended June 30, 2017 and 2018, and the balance sheet data as of June 30, 2018 from our unaudited interim condensed financial statements included elsewhere in this prospectus. We have prepared the unaudited interim financial statements on the same basis as the audited financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future and the results for the six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the full year or any other period. You should read this information together with our financial statements and related notes appearing elsewhere in this prospectus and the information in the sections titled “Selected financial data” and “Management’s discussion and analysis of financial condition and results of operations.”

 

     Year Ended
December 31,
    Six Months Ended
June 30,
 
     2016     2017     2017     2018  
     (in thousands, except per share data)  

Statement of Operations Data:

        

Net revenue

   $ 5,976     $ 5,870     $ 2,643     $ 2,205  

Cost of revenue

     3,138       4,165       1,813       1,726  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     2,838       1,705       830       479  

Operating expenses:

        

Selling, general and administrative

     5,321       14,947       10,028       10,254  

Research and development

     1,715       4,518       3,746       1,308  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     7,036       19,465       13,774       11,562  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (4,198     (17,760     (12,944     (11,083

Interest expense

     3       4       2       2  

Income tax expense

     1       1       1       3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (4,202     (17,765     (12,947     (11,088
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

   $ (0.60   $ (2.35   $ (1.73   $ (1.38
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding, basic and diluted

     6,951       7,545       7,464       8,020  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     As of June 30, 2018  
     Actual     As
Adjusted(1) (2)
 
    

(in thousands)

 

Balance Sheet Data:

    

Cash and cash equivalents

   $ 9,769     $ 52,969  

Working capital(3)

     6,109       49,309  

Total assets

     16,605       59,805  

Accumulated deficit

     (40,477     (40,477

Total stockholders’ equity

     9,778       52,978  

 

footnotes on following page

 

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(1) 

As adjusted amounts reflect the sale of 3,333,333 shares of our common stock in this offering at an assumed initial public offering price of $15.00 per share (the mid-point of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(2) 

A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) as adjusted cash and cash equivalents, working capital, total assets and total stockholders’ equity by $3.1 million, assuming the number of shares offered by us as stated on the cover of this prospectus remain unchanged and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by $14.0 million, assuming the assumed initial public offering price of $15.00 per share (the mid-point of the price range set forth on the cover of this prospectus) remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(3) 

We define working capital as current assets less current liabilities.

The as adjusted information discussed above is illustrative only and will be revised based on the actual initial public offering price and other terms of our initial public offering determined at pricing.

Non-GAAP Measures

EBITDA and Adjusted EBITDA are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures. These non-GAAP Measures exclude the financial impact of items management does not consider relevant in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Comparability to our results of operations to other companies may be impacted by our stock-based compensation which was classified as a liability and revalued at each reporting period with the change in fair value recorded to compensation expense in the statement of operations.

We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. Some of these limitations are that:

 

   

EBITDA excludes certain recurring, non-cash charges such as depreciation of fixed assets and amortization of acquired intangible assets and, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future; and

 

   

Adjusted EBITDA further excludes stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy, as well as certain non-recurring items which may affect comparability of our core operations such as the loss on abandonment of facility.

In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison.

A reconciliation for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with U.S. GAAP is included below. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single

 

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financial measure to evaluate our business. We define Adjusted EBITDA as our GAAP net loss as adjusted to exclude depreciation, amortization, interest expense, income tax expense, stock-based compensation and loss on abandonment of facility.

The following table presents a reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP financial measure, for each of the periods presented:

 

     Year Ended
December 31,
     Six Months Ended
June 30,
 
     2016      2017      2017      2018  
     (in thousands)  

Statement of Operations Data:

           

Net loss

   $ (4,202    $ (17,765    $ (12,947    $ (11,088

Depreciation and amortization

     95        218        86        231  

Interest expense

     3        4        2        2  

Income tax expense

     1        1        1        3  
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

     (4,103      (17,542      (12,858      (10,852

Stock-based compensation

     2,300        12,706        10,884        5,204  

Loss on abandonment of facility

     —          212        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ (1,803    $ (4,624    $ (1,974    $ (5,648
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as all of the other information contained in this prospectus, including our financial statements and related notes, before investing in our common stock. 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. If any of the following risks materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.

Risks Related to our Business and Products

We have incurred losses in each of the last two years and may be unable to achieve profitability in the future.

We incurred net losses of $4.2 million and $17.8 million for the years ended December 31, 2016 and 2017, respectively, and $12.9 million and $11.1 million for the six months ended June 30, 2017 and 2018, respectively. As of June 30, 2018, we had an accumulated deficit of $40.5 million. We expect to continue to incur significant sales and marketing, product development, regulatory and other expenses as we continue to expand our marketing efforts to increase adoption of our products and expand existing relationships with our customers, to obtain regulatory clearances or approvals for our products in additional jurisdictions and for additional indications, and to develop new products or add new features to our existing products. In addition, we expect our general and administrative expenses to increase following this offering due to the additional costs associated with being a public company. The net losses that we incur may fluctuate significantly from period to period. We will need to generate significant additional revenues in order to achieve and sustain profitability and, even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time. Our failure to achieve or return to profitability would have a material adverse effect on our business, financial condition, and results of operations and could negatively impact the value of our common stock.

We may be unable to achieve revenue growth.

Our ability to grow our revenue in future periods will depend on our ability to successfully penetrate our target markets and increase sales of our products and any new product indications that we introduce, which will, in turn, depend in part on our success in growing our installed unit base and driving continued use of our systems. New product indications will also need to be approved or cleared by the FDA and comparable non-U.S. regulatory agencies to drive revenue growth. If we cannot achieve revenue growth, it could have a material adverse effect on our business, financial condition, and results of operations.

Our success depends in large part on DABRA. If we are unable to successfully market and sell DABRA, our business prospects will be significantly harmed.

Our future financial success will depend substantially on our ability to effectively and profitably market and sell DABRA. The commercial success of DABRA will depend on a number of factors, including the following:

 

   

the effectiveness of our and our distributors’ marketing and sales efforts in the U.S. and abroad, including our efforts to build out our sales team;

 

   

the availability, perceived advantages, relative cost, relative safety, and relative efficacy of alternative and competing treatments;

 

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the availability of coverage and adequate levels of reimbursement under private and governmental health insurance plans for DABRA-based procedures;

 

   

our ability to obtain, maintain, and enforce our intellectual property rights in and to DABRA;

 

   

our ability to achieve and maintain compliance with all regulatory requirements applicable to DABRA;

 

   

our ability to continue to develop, validate and maintain a commercially viable manufacturing process that is compliant with current Good Manufacturing Practices, or cGMP; and

 

   

whether we are required by the FDA, EMA or comparable non-U.S. regulatory authorities to conduct additional clinical trials for future or current indications.

If we fail to successfully market and sell DABRA, we will not be able to achieve profitability, which will have a material adverse effect on our business, financial condition, and results of operations.

We will require substantial additional capital to finance our planned operations, which may not be available to us on acceptable terms or at all. As a result, we may not be able to continue our marketing efforts to increase the adoption of our products.

Our operations have consumed substantial amounts of cash since inception, primarily due to our research and development and marketing efforts. We expect our sales and marketing expenses to increase substantially in connection with our plan to commercialize DABRA in the U.S. and internationally. These expenditures will also include costs associated with manufacturing and supply, sales and marketing costs, and general operations. In addition, other unanticipated costs may arise.

As of June 30, 2018, we had cash and cash equivalents of $9.8 million. We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will fund our projected operating expenses and capital expenditure requirements for at least the next 12 months.

The amount and timing of any expenditures needed to implement our sales and marketing programs will depend on numerous factors, including, but not limited to:

 

   

our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payors and acceptable market share for DABRA and Pharos;

 

   

the cost to establish, maintain, expand, and defend the scope of our intellectual property portfolio, as well as any other action required in connection with licensing, preparing, filing, prosecuting, defending, and enforcing any patents or other intellectual property rights;

 

   

the emergence of competing technologies and other adverse market developments;

 

   

the costs associated with manufacturing, selling, and marketing DABRA and Pharos for their cleared or approved indications or any other indications for which we receive regulatory clearance or approval, including the cost and timing of expanding our manufacturing capabilities, as well as establishing our sales and marketing capabilities;

 

   

our ability to establish and maintain strategic licensing or other arrangements and the financial terms of such agreements;

 

   

the timing, receipt, and amount of license fees and sales of, or royalties on, our future products or future improvements on our existing products, if any;

 

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the time and cost necessary to complete post-marketing studies that could be required by regulatory authorities or other studies required to obtain clearance for additional indications; and

 

   

our need to implement additional internal systems and infrastructure, including financial and reporting systems, as we become a public company.

If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our products, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend our sales and marketing efforts, which would have a material adverse effect on our business, financial condition, and results of operations.

Our products may not gain or maintain market acceptance among physicians and patients and others in the medical community.

Our success will depend, in part, on the acceptance of our products as safe, useful and, with respect to physicians, cost effective. We cannot predict how quickly, if at all, catheterization laboratories and physicians will accept our products or, if accepted, how frequently they will be used. Patients and their care providers must believe our products offer benefits over alternative treatment methods. Additional factors that will influence whether our products gain and maintain market acceptance, include:

 

   

whether physicians, catheterization laboratory owners and operators, patients, and others in the medical community consider our products safe, effective, and cost effective treatment methods;

 

   

the potential and perceived advantages of our products over alternative treatment methods;

 

   

the prevalence and severity of any side effects associated with using our products;

 

   

product labeling or product insert requirements of the FDA, EMA or other regulatory authorities;

 

   

limitations or warnings contained in the labeling cleared or approved by the FDA, EMA or other authorities;

 

   

the cost of treatment in relation to alternative treatments methods;

 

   

the convenience and ease of use of DABRA and Pharos relative to alternative treatment methods;

 

   

pricing pressure, including from group purchasing organizations, or GPOs, seeking to obtain discounts on DABRA and Pharos based on the collective buying power of the GPO members;

 

   

the availability of adequate coverage, reimbursement and pricing by third-party payors, including government authorities;

 

   

the willingness of patients to pay out-of-pocket in the absence of coverage by third-party payors, including government authorities;

 

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our ability to provide incremental clinical and economic data that shows the safety and clinical efficacy and cost effectiveness of, and patient benefits from, our products; and

 

   

the effectiveness of our sales and marketing efforts for DABRA and Pharos.

If we do not educate physicians about PAD and the existence of our products, DABRA may not gain market acceptance, as many physicians do not routinely screen for PAD while screening for CAD. Additionally, even if our products achieve market acceptance, they may not maintain that market acceptance over time if competing products or technologies are introduced that are received more favorably or are more cost effective. Failure to achieve or maintain market acceptance and/or market share would limit our ability to generate revenue and would have a material adverse effect on our business, financial condition, and results of operations.

The continuing development of our products depends upon our maintaining strong working relationships with physicians.

The research, development, marketing and sale of our current products and any potential new and improved products or future product indications for which we receive regulatory clearance or approval depend upon our maintaining working relationships with physicians. We rely on these professionals to provide us with considerable knowledge and experience regarding the development, marketing and sale of our products. Physicians assist us as researchers, marketing and product consultants and public speakers. If we cannot maintain our strong working relationships with these professionals and continue to receive their advice and input, the development and marketing of our products could suffer, which could have a material adverse effect on our business, financial condition, and results of operations. At the same time, the medical device industry’s relationship with physicians is under increasing scrutiny by the U.S. Department of Health and Human Services Office of Inspector General, or OIG, and the U.S. Department of Justice, or DOJ. Our failure to comply with requirements governing the industry’s relationships with physicians, including the reporting of certain payments to physicians under the National Physician Payment Transparency Program (Open Payments) or an investigation into our compliance by the OIG or the DOJ, could have a material adverse effect on our business, financial condition, and results of operations. Additional information regarding the laws impacting our relationships with physicians and other healthcare professionals can be found below in the Risk Factor captioned “Our operations and relationships with customers and third-party payors are subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to penalties including criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.”

Physicians and staff may not commit enough time to sufficiently learn how to use our products.

In order for physicians and staff to learn to use our products, we encourage physicians to attend structured training sessions in order to familiarize themselves with our technology. There are many nuances to using our products as intended. For example, the DABRA catheter is fragile and may be prone to bending at the entry of the artery, a problem known as kinking. Further, physicians and their staff must utilize the technology on a regular basis to ensure they maintain the skill set necessary to use our products. Market acceptance of DABRA could be delayed by lack of physician or staff willingness to attend training sessions or familiarize themselves with DABRA. An inability to train a sufficient number of physicians to generate adequate demand for our products could have a material adverse effect on our business, financial condition, and results of operations.

 

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If our sole manufacturing facility becomes damaged or inoperable, or we are required to vacate the facility, our ability to manufacture and sell our products and to pursue our research and development efforts may be jeopardized.

We currently manufacture and assemble our products in our sole manufacturing facility in Carlsbad, California. Our products consist of components sourced from a variety of suppliers, with final assembly completed at our facility. Our facility and equipment, or those of our suppliers, could be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, fires, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, extreme weather conditions, medical epidemics, and other natural or man-made disasters or other business interruptions, for which we are predominantly self-insured. Any of these may render it difficult or impossible for us to manufacture products for an extended period of time. If our facility is inoperable for even a short period of time, the inability to manufacture our current products, and the interruption in research and development of any future products, may result in harm to our reputation, increased costs, lower revenues and the loss of customers, which would have a material adverse effect on our business, financial condition, and results of operations. Furthermore, it could be costly and time-consuming to repair or replace our facilities and the equipment we use to perform our research and development work and manufacture our products. We also rely on third-party component suppliers, and our ability to obtain commercial supplies of our products could be disrupted if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption, which would have a material adverse effect on our business, financial condition, and results of operations.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit or halt the marketing and sale of our products.

We face an inherent risk of product liability as a result of the marketing and sale of our products. For example, we may be sued if our products cause or are perceived to cause injury or are found to be otherwise unsuitable during manufacturing, marketing or sale. Any such product liability claim may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. In addition, 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. For example, we rely on physicians in connection with the use of our products on patients. If these physicians are not properly trained or are negligent, the capabilities of our products may be diminished or the patient may suffer critical injury. We may also be subject to claims that are caused by the activities of our suppliers, such as those who provide us with components and sub-assemblies.

If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or halt commercialization of our products. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

   

decreased demand for our products;

 

   

injury to our reputation;

 

   

initiation of investigations by regulators;

 

   

costs to defend the related litigation;

 

   

a diversion of management’s time and our resources;

 

   

substantial monetary awards to trial participants or patients;

 

   

product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

   

loss of revenue;

 

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exhaustion of any available insurance and our capital resources;

 

   

the inability to market and sell our products; and

 

   

a decline in the price of our common stock.

We believe our product liability insurance is customary for similarly situated companies, but it may not be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly expensive. We may not be able to maintain or obtain insurance at a reasonable cost or in an amount adequate to satisfy any liability that may arise, if at all. Our insurance policy contains various exclusions, and we may be subject to a product liability claim for which we have no coverage. The potential inability to obtain sufficient product liability insurance at an acceptable cost to protect against product liability claims could prevent or inhibit the marketing and sale of products we develop. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts, which would have a material adverse effect on our business, financial condition, and results of operations.

We face substantial competition, which may result in others discovering, developing or commercializing products more successfully than us.

The medical device industry is intensely competitive and subject to rapid and significant technological change. Many of our competitors have significantly greater financial, technical and human resources. Smaller and early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

Our competitors may also develop products that are more effective, more convenient, more widely used, less costly, or have a better safety profile than our products and these competitors may also be more successful than us in manufacturing and marketing their products.

Our competitors also compete with us in recruiting and retaining qualified scientific, management and commercial personnel, as well as in acquiring technologies complementary to, or necessary for, our programs. Because of the complex and technical nature of our systems and the dynamic market in which we compete, any failure to attract and retain a sufficient number of qualified employees could materially harm our ability to develop and commercialize our technology, which would have a material adverse effect on our business, financial condition, and results of operations.

We may be unable to compete successfully with larger companies in our highly competitive industry.

The healthcare industry is highly competitive. There are numerous approved products for treating vascular and dermatological diseases in the indications in which we have received clearance or approval and those that we may pursue in the future. Many of these cleared or approved products are well-established and are widely accepted by physicians, patients and third-party payors. Insurers and other third-party payors may encourage the use of competitors’ products. In addition, many companies are developing products, and we cannot predict what the standard of care will be in the future.

Our primary competitors for DABRA include Medtronic plc, Cardiovascular Systems Inc., Boston Scientific Corp., Avinger, Inc., Koninklijke Philips N.V., or Philips, including Volcano Corporation and Spectranetics Corporation, including products from the C.R. Bard acquisition, and Abbott Laboratories. These companies are manufacturers of products used in competing therapies within the peripheral and coronary atherectomy markets such as:

 

   

atherectomy, using mechanical methods to remove vascular blockages;

 

   

balloon angioplasty and stents;

 

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specialty balloon angioplasty, such as scoring balloons, pillowing balloons, cutting balloons and drug-coated balloons;

 

   

bypass surgery; and

 

   

amputation.

We are also subject to competition from pharmaceutical companies that produce drugs which aim to destroy plaque or remove blockages in the bloodstream.

Our primary competitors for Pharos are Daavlin, National Biological, STRATA Skin Sciences and large pharmaceutical companies producing biologicals used in the treatment of chronic skin conditions.

Many of our competitors have substantially greater financial, manufacturing, commercial, and technical resources than we do. There has been consolidation in the industry, and we expect that to continue. Larger competitors may have substantially larger sales and marketing operations than we do. This may allow those competitors to spend more time with current and potential customers and to focus on a larger number of current and potential customers, which gives them a significant advantage over our sales and marketing team and our international distributors in making sales. In addition, we are often selling to customers who already utilize our competitors’ products and who have established relationships with our competitors’ sales representatives and familiarity with our competitors’ products.

Larger competitors may also have broader product lines, which enables them to offer customers bundled purchase contracts and quantity discounts. These competitors may have more experience than we have in research and development, marketing, manufacturing, preclinical testing, conducting clinical trials, obtaining FDA and non-U.S. regulatory clearances or approvals and marketing cleared or approved products. Our competitors may discover technologies and techniques, or enter into partnerships and collaborations, to develop competing products that are more effective or less costly than our products or the products we may develop. This may render our technology or products obsolete or noncompetitive. Our competitors may also be better equipped than we are to respond to competitive pressures. If we are unable to compete successfully in our industry, it would have a material adverse effect on our business, financial condition, and results of operations.

If DABRA and Pharos are not approved for new indications, our commercial opportunity will be limited.

We market and sell DABRA for use in the treatment of vascular blockages resulting from lower extremity vascular disease and Pharos for use in the treatment of psoriasis, vitiligo, atopic dermatitis and leukoderma. Although physicians, in the practice of medicine, may prescribe or use marketed products for unapproved indications, manufacturers may promote their products only for the approved indications and in accordance with the provisions of the approved label. However, one of our strategies in the future is to pursue additional vascular indications for DABRA and additional dermatological indications for Pharos. Submitting the required applications for additional indications may require substantial additional funding beyond the net proceeds of this offering. We cannot assure you that we will be able to successfully obtain approval for any of these additional product indications through the application process.

Even if we obtain FDA clearance or approval to market our products for additional indications in the U.S., we cannot assure you that any such indications will be successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives. If we are unable to successfully develop our products for additional indications, our commercial opportunity will be limited, which would have a material adverse effect on our business, financial condition, and results of operations.

 

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We may experience development or manufacturing problems or delays that could limit the potential growth of our revenue or increase our losses.

We may encounter unforeseen situations in the manufacturing and assembly of our products that would result in delays or shortfalls in our production. For example, our production processes and assembly methods may have to change to accommodate any significant future expansion of our manufacturing capacity, which may increase our manufacturing costs, delay production of our products, reduce our product margin, and adversely impact our business. Conversely, if demand for our products shifts such that a manufacturing facility is operated below its capacity for an extended period, we may adjust our manufacturing operations to reduce fixed costs, which could lead to uncertainty and delays in manufacturing times and quality during any transition period.

Additionally, since all of our products are manufactured at our facility in Carlsbad, any contamination of the controlled environment, equipment malfunction, or failure to strictly follow procedures can significantly reduce our yield. A drop in yield can increase our cost to manufacture our products or, in more severe cases, require us to halt the manufacture of our products until the problem is resolved. Identifying and resolving the cause of a drop in yield can require substantial time and resources.

If our manufacturing activities are adversely impacted, or if we are otherwise unable to keep up with demand for our products by successfully manufacturing, assembling, testing, and shipping our products in a timely manner, our revenue could be impaired, market acceptance for our products could be adversely affected and our customers might instead purchase our competitors’ products, which would have a material adverse effect on our business, financial condition, and results of operations.

If we make acquisitions or divestitures, we could encounter difficulties that harm our business.

To date, the growth of our business has been organic, and we have no experience in acquiring other businesses, products or technologies. We may acquire companies, products or technologies that we believe to be complementary to the present or future direction of our business. If we engage in such acquisitions, we may have difficulty integrating the acquired personnel, financials, operations, products or technologies. Acquisitions may dilute our earnings per share, disrupt our ongoing business, distract our management and employees, increase our expenses, subject us to liabilities, and increase our risk of litigation, all of which could harm our business. If we use cash to acquire companies, products or technologies, it may divert resources otherwise available for other purposes. If we use our common stock to acquire companies, products or technologies, our stockholders may experience substantial dilution.

Technological change may adversely affect sales of our products and may cause our products to become obsolete.

The medical device market is characterized by extensive research and development and rapid technological change. Technological progress or new developments in our industry could adversely affect sales of our products. Our products could be rendered obsolete because of future innovations by our competitors or others in the treatment of vascular diseases and dermatological diseases, which would have a material adverse effect on our business, financial condition, and results of operations.

Consolidation in the medical device industry could have an adverse effect on our revenue and results of operations.

Many medical device industry companies are consolidating to create new companies with greater market power. For example, Spectranetics was acquired by Philips in August 2017. As the medical device industry consolidates, competition to provide goods and services to industry participants will become more intense. These industry participants may try to use their market power to negotiate price concessions or reductions for medical devices that incorporate components produced by us. If we reduce our prices because of consolidation in the healthcare industry, our revenue would decrease and our

 

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earnings, financial condition, or cash flows would suffer, which would have a material adverse effect on our business, financial condition, and results of operations.

We may be subject to enforcement actions, competitor lawsuits, or other claims if we engage in the off-label promotion of our products.

Our promotional materials and training methods must comply with FDA regulations and other applicable laws, including restraints and prohibitions on the promotion of off-label, or uncleared use, of our products. Physicians may use our products for off-label use without regard to these prohibitions, as FDA regulations do not restrict or regulate a physician’s choice of treatment within the practice of medicine. Although our policy is to follow published FDA guidance in order to avoid promoting our products improperly, the FDA or other regulatory agencies or third-parties could disagree and conclude that we have engaged in off-label promotion. For example, our DABRA Laser System has been cleared by the FDA for crossing chronic total occlusions in patients with symptomatic infrainguinal lower extremity vascular disease and has an intended use for ablating a channel in occlusive peripheral vascular disease. We have not received FDA clearance or approval to market DABRA for an atherectomy indication. While our pivotal clinical study of the DABRA Laser System would not be sufficient to expand our FDA-cleared indication for use to an atherectomy indication for use, which the FDA currently defines to include a prespecified improvement in luminal patency, or prespecified increase in the openness of the artery at a pre-defined time point, such as six months following a DABRA procedure, using a consistent assessment tool, we believe that we can promote the device using the truthful and not misleading information from this study that is not inconsistent with our cleared indication.

We recently received correspondence from a competitor claiming our promotion for DABRA as an atherectomy tool used by surgeons to treat peripheral vascular disease is off-label promotion for the product. We disagree with our competitors’ claims and believe FDA’s regulations and judicial case law allow companies to engage in certain forms of truthful, non-misleading and non-promotional speech concerning the off-label use of products, and we believe that we comply with these restrictions. We operate in an industry characterized by extensive litigation. However, the scope of potential liability with respect to any such claims, enforcement actions, or lawsuits is uncertain, and we cannot assure you that we will not receive claims from competitors or other third parties or be subject to enforcement actions in the future from regulatory agencies. For example, the FDA, FTC, the Office of the Inspector General of the Department of Health and Human Services (“HHS”), the DOJ and various state Attorneys General actively enforce laws and regulations that prohibit the promotion of off-label uses. If we are found to have improperly promoted off-label uses, we may be subject to significant liability, including civil fines, criminal fines and penalties, civil damages, exclusion from federal funded healthcare programs and potential liability under the federal False Claims Act and any applicable state false claims act. In addition, if the FDA determines that our promotional materials or training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials, which could negatively impact our marketing and decrease demand for our products. Conduct giving rise to such liability could also form the basis for private civil litigation by third-party payers, competitors, or other persons claiming to be harmed by such conduct. Notwithstanding the regulatory restrictions on off-label promotion, the FDA’s regulations, guidance and judicial case law allow companies to engage in certain forms of truthful, non-misleading and non-promotional speech concerning the off-label use of products, for example FDA’s June 2018 guidance document, “Medical Product Communications That Are Consistent With the FDA-Required Labeling — Questions and Answers.” Nonetheless, the FDA, HHS, DOJ, and/or state Attorneys General, competitors, and other third parties may take the position that we are not in compliance with such requirements, and if such non-compliance is proven, it could harm our reputation, financial condition or divert financial and management resources from our core business, and would have a material adverse effect on our business, financial condition and results of operations. Moreover, any threatened or actual government enforcement actions or lawsuits by third parties could

 

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also generate adverse publicity, which could decrease demand for our products and require that we devote substantial resources that could be used productively on other aspects of our business.

Litigation and other legal proceedings may adversely affect our business.

From time to time we are involved in and may become involved in legal proceedings relating to patent and other intellectual property matters, product liability claims, employee claims, tort or contract claims, federal regulatory investigations, securities class action, and other legal proceedings or investigations, which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. Litigation is inherently unpredictable and can result in excessive or unanticipated verdicts and/or injunctive relief that affect how we operate our business. We could incur judgments or enter into settlements of claims for monetary damages or for agreements to change the way we operate our business, or both. There may be an increase in the scope of these matters or there may be additional lawsuits, claims, proceedings or investigations in the future, which could have a material adverse effect on our business, financial condition, and results of operations. Adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine our customers’ confidence and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations.

We must indemnify officers and directors, including, in certain circumstances, former employees and directors, against all losses, including expenses, incurred by them in legal proceedings and advance their reasonable legal defense expenses, unless certain conditions apply. A prolonged uninsured expense and indemnification obligation could have a material adverse effect on our business, financial condition, and results of operations.

We are subject to numerous laws and regulations related to health care fraud and abuse, false claims, anti-bribery and anti-corruption laws, such as the U.S. Anti-Kickback Statute and Foreign Corrupt Practices Act of 1977, in which violations of these laws could result in substantial penalties and prosecution.

In the United States, we are subject to various state and federal fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and federal False Claims Act. There are similar laws in other countries. These laws may impact, among other things, the sales, marketing and education programs for our products. The federal Anti-Kickback Statute prohibits persons from knowingly and willingly soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal health care program. The federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim to, or the knowing use of false statements to obtain payment from the federal government. Any allegation, investigation, or violation of these domestic health care fraud and abuse laws could result in government or internal investigations, significant diversion of resources, exclusion from government health care reimbursement programs and the curtailment or restructuring of our operations, significant fines, penalties, or other financial consequences, any of which may ultimately have a material adverse effect on our business, financial condition, and results of operations.

For our sales and operations outside the United States, we are similarly subject to various heavily-enforced anti-bribery and anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, U.K. Bribery Act, and similar laws around the world. These laws generally prohibit U.S. companies and their employees and intermediaries from offering, promising, authorizing or making improper payments to foreign government officials for the purpose of obtaining or retaining business or gaining any advantage. We face significant risks if we, which includes our third parties, fail to comply with the FCPA and other anti-corruption and anti-bribery laws.

 

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We leverage various third parties to sell our products and conduct our business abroad, including to government owned universities and hospitals. We, our distributors and channel partners, and our other third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities (such as in the context of obtaining government approvals, registrations, or licenses or sales to government owned or controlled health care facilities, universities, institutes, clinics, etc.) and may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses engage in practices that are prohibited by the FCPA or other applicable laws and regulations. To that end, while we have adopted and implemented internal control policies and procedures and employee training and compliance programs to deter prohibited practices, such compliance measures ultimately may not be effective in prohibiting our employees, contractors, third parties, intermediaries or agents from violating or circumventing our policies and/or the law.

Responding to any enforcement action or related investigation may result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees. Any violation of the FCPA, other applicable anti-bribery, anti-corruption laws, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, which could have a material and adverse effect on our reputation, business, financial condition, and results of operations.

Governmental export or import controls could limit our ability to compete in foreign markets and subject us to liability if we violate them.

Our products may be subject to U.S. export controls. Governmental regulation of the import or export of our products, or our failure to obtain any required import or export authorization for our products, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of our products may create delays in the introduction of our products in international markets or, in some cases, prevent the export of our products to some countries altogether. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products and services to countries, governments, and persons targeted by U.S. sanctions. If we fail to comply with export and import regulations and such economic sanctions, we may be fined or other penalties could be imposed, including a denial of certain export privileges. Moreover, any new export or import restrictions, new legislation or shifting approaches in the enforcement or scope of existing regulations, or in the countries, persons, or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export our products to existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell access to our products would likely materially and adversely affect our business, financial condition, and results of operations.

A variety of risks associated with marketing our products internationally could materially adversely affect our business.

In addition to selling our products in the U.S., we sell Pharos and DABRA outside of the U.S. We are subject to additional risks related to operating in foreign countries, including:

 

   

differing regulatory requirements in foreign countries;

 

   

differing reimbursement regimes in foreign countries, including price controls and lower payment;

 

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unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;

 

   

economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

   

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

   

foreign taxes, including withholding of payroll taxes;

 

   

foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;

 

   

difficulties staffing and managing foreign operations;

 

   

workforce uncertainty in countries where labor unrest is more common than in the U.S.;

 

   

potential liability under the FCPA or comparable foreign regulations;

 

   

challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the U.S.;

 

   

product shortages resulting from any events affecting raw material or finished good supply or distribution or manufacturing capabilities abroad; and

 

   

business interruptions resulting from geo-political actions, including war and terrorism.

These and other risks associated with our international operations may materially adversely affect our ability to attain or maintain profitable operations, which would have a material adverse effect on our business, financial condition, and results of operations.

We face additional credit and compliance risks related to our international sales using foreign distributors.

We partner with distributors for DABRA and Pharos in select geographies outside of the U.S. Specifically, in 2017 we sold to distributors located in the Netherlands, China, Thailand, United Arab Emirates, and Italy. In 2017, approximately 10% of our sales were outside of the U.S. We may not be able to collect all of the funds owed to us by our foreign distributors. Some foreign distributors may experience financial difficulties, including bankruptcy, which may hinder our collection of accounts receivable. Where we extend credit terms to distributors, we periodically review the collectability and creditworthiness when determining the payment terms for such distributors. If our uncollectible accounts exceed our expectations, this could adversely impact our operating results. In addition, failure by our foreign distributors to comply with the Foreign Corrupt Practices Act or similar laws, insurance requirements, or other contract terms could have a negative impact on our business. Failure to manage the risks related to our foreign distributors would have a material adverse effect on our business, financial condition, and results of operations.

We are highly dependent on our key personnel, and if we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.

Our ability to compete in the highly competitive medical devices industry depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our senior management team. The loss of the services of any of our executive officers and other key employees, and our inability to find suitable replacements could result in delays in product development and harm our business.

 

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Competition for skilled personnel in our market is intense and may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all. To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have issued stock options and restricted stock units that vest over time. The value to employees of stock options and restricted stock units that vest over time may be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Although we have employment agreements with our key employees, these employment agreements provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees, with the exception of the “key man” insurance policy for our Chief Executive Officer, Dean Irwin. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior scientific and medical personnel. If we are not successful in attracting and retaining highly qualified personnel, it would have a material adverse effect on our business, financial condition, and results of operations

If we experience significant disruptions in our information technology systems, our business may be adversely affected.

We depend on our information technology systems for the efficient functioning of our business, including the manufacture, distribution and maintenance of DABRA and Pharos, as well as for accounting, data storage, compliance, purchasing and inventory management. We do not have redundant information technology systems at this time. Our information technology systems may be subject to computer viruses, ransomware or other malware, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, telecommunication failures and user errors, among other malfunctions. In addition, a variety of our software systems are cloud-based data management applications hosted by third-party service providers whose security and information technology systems are subject to similar risks. Technological interruptions would impact our business operations would disrupt our operations, including our ability to timely ship and track product orders, project inventory requirements, manage our supply chain and otherwise adequately service our customers or disrupt our customers’ ability use our products for treatments. In the event we experience significant disruptions, we may be unable to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our business, financial condition, and results of operations. Currently, we carry business interruption coverage to mitigate certain potential losses, but this insurance is limited in amount and we cannot be certain that such potential losses will not exceed our policy limits. We are increasingly dependent on complex information technology to manage our infrastructure. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance our existing systems. Failure to maintain or protect our information systems and data integrity effectively could have a material adverse effect on our business, financial condition, and results of operations

We have identified a material weakness in our internal control over financial reporting. Failure to maintain effective internal controls could cause our investors to lose confidence in us and adversely affect the market price of our common stock. If our internal controls are not effective, we may not be able to accurately report our financial results or prevent fraud.

Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, requires that we maintain internal control over financial reporting that meets applicable standards. We may err in the design or operation of our controls, and all internal control systems, no matter how well designed and operated, can provide only reasonable assurance that the objectives of the control system are met. Because there are inherent limitations in all control systems, there can be no assurance that all control issues have been or will be

 

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detected. If we are unable, or are perceived as unable, to produce reliable financial reports due to internal control deficiencies, investors could lose confidence in our reported financial information and operating results, which could result in a negative market reaction and a decrease in our stock price.

Following our initial public offering, we will be required, pursuant to Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. Such report will not be required until our second annual report filed on Form 10-K. We will need to disclose any material weaknesses identified by our management in our internal control over financial reporting. As an “emerging growth company,” we will avail ourselves of the exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404. However, we may no longer avail ourselves of this exemption when we cease to be an “emerging growth company.” When our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404 will correspondingly increase. Our compliance with applicable provisions of Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance-related issues as we implement additional corporate governance practices and comply with reporting requirements. Moreover, if we are not able to comply with the requirements of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the U.S. Securities and Exchange Commission, or SEC, or other regulatory authorities, which would require additional financial and management resources.

In prior periods we identified certain material weaknesses in our internal controls related to revenue recognition and lack of staffing in the accounting and finance organization. In connection with these prior material weaknesses we implemented remediation measures including training of accounting personnel as well as hiring additional personnel with experience in the ongoing identification, design and implementation of internal control over financial reporting.

In connection with our 2017 audit, as part of the restatement to the 2016 financial statements described in Note 3 to the financial statements, we identified a material weakness in the design of our internal controls related to the administration of capital stock transactions, including stock issuances and a reverse stock split which were not effected in accordance with the requirements of applicable law and the communication of stock option awards which were not validly authorized. While we have designed and implemented, or expect to implement, measures that we believe address this material weakness, we continue to develop our internal controls, processes and reporting systems by, among other things, hiring qualified personnel with expertise to perform specific functions, including our Chief Financial Officer, the engagement of third party legal counsel to assist in the administration of capital stock transactions, and designing and implementing improved processes and internal controls, including ongoing senior management review and board of directors oversight. We expect to continue to build a more experienced administrative organization with expertise to perform specific functions and to design and implement improved processes and internal controls. We have incurred significant costs to remediate these weaknesses, primarily personnel costs, external consulting and legal fees, system implementation costs, and related indirect costs including the use of facilities and technology, and we expect to incur additional costs to remediate these weaknesses. We may not be successful in implementing these remediation efforts or in developing other internal controls, which may undermine our ability to provide accurate, timely and reliable reports on our financial and operating results. Further, we will not be able to fully assess whether the steps we are taking will remediate the material weakness in our internal control over financial reporting until we have completed our implementation efforts and sufficient time passes in order to evaluate their effectiveness. In addition, if we identify additional errors that result in material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis

 

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and our financial statements may be materially misstated. Moreover, in the future we may engage in business transactions, such as acquisitions, reorganizations or implementation of new information systems that could negatively affect our internal control over financial reporting and result in material weaknesses.

If we identify new material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, we may be late with the filing of our periodic reports, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected. As a result of such failures, we could also become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, and become subject to litigation from investors and stockholders, which could harm our reputation, financial condition or divert financial and management resources from our core business, and would have a material adverse effect on our business, financial condition and results of operations.

We could be subject to claims based on defects with respect to certain corporate transactions that were not authorized in accordance with applicable law.

We have determined that due to the material weakness in our internal controls related to the administration of capital stock transactions, there have been defects with respect to certain corporate transactions, including (i) stock issuances that were not or may not have been properly approved by our board of directors and/or adequately documented, (ii) a reverse stock split for which we failed to file the amendment to our articles of incorporation, and (iii) the communication of option awards that were not validly authorized by our board of directors as a result of non-existent or defective board approvals, in each case in accordance with applicable law.

To remediate these defects, we have taken a number of actions. Our board of directors has ratified the defective stock issuances; we obtained agreements from holders of the vast majority of our common stock which include a confirmation of the securities each stockholder holds, a release of potential claims with respect to issuance of securities to such stockholders, and a surrender specifically of any claims to the equity of the Delaware corporation except for the shares of the Delaware corporation that such stockholder has received in the reincorporation merger pursuant to the merger agreement; we confirmed with the vast majority of the applicable stockholders that the appropriate number of shares of common stock outstanding immediately prior to the time of the intended reverse stock split were contributed to the capital of the Company effective as of the intended time of, and to give effect to, the intended reverse stock split; and we have approved compensation to and obtained releases from our impacted employees and other service providers to resolve potential claims, if any, related to the communicated grants of option awards and to promote retention and align their interests with the long-term interests of our stockholders. While we have attempted to narrow potential future claims by taking certain remedial corporate actions, the scope of liability with respect to such defects is uncertain and we cannot assure that these actions will entirely remediate these defects or that we will not receive claims in the future from other persons asserting rights to shares of our capital stock or to stock options or other equity. To the extent any such claims are successful, they could have a material adverse effect on our business, financial condition and results of operations.

Under certain authority, common law ratification by our board of directors of prior stock issuances may have caused such issuances to be valid stock issuances by us at the time of the respective issuances. However, there is uncertainty under applicable law as to whether such common law ratification may be effective under all circumstances. There can be no assurance that stockholders will not assert claims that a defective corporate act or putative stock issuance ratified by us is void or voidable due to the identified

 

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failure of proper authorization by our board of directors, as well as other claims related thereto, and, if asserted, that any such claims will not be successful. If such ratification is deemed not to be effective, then the issuances of certain shares of our stock and other attempted corporate actions would be invalid and we could have liability to grantees of our common stock, which may have a material adverse effect on our business and results of operations.

We have also confirmed that the vast majority of the applicable stockholders as of the time of the intended reverse stock split contributed a number of shares of common stock sufficient to give effect to the recapitalization intended by the reverse stock split. However, a holder of our common stock could argue that this process does not represent an adequate remedy for a potential failure to properly implement the reverse stock split. If the contribution of shares to the capital of the Company was not effective, then we could have liability to certain holders of our common stock, which may have a material adverse effect on our business and results of operations.

Additionally, we may have potential liability to certain of our employees, directors, consultants, and other service providers for communicated grants of option awards that were not authorized in compliance with applicable law. With respect to the communicated grants of option awards that were not validly authorized, we approved compensation and obtained a release of potential claims from such persons. We approved compensation to our impacted employees, directors, consultants, and other service providers to mitigate potential claims related to the communicated grants of option awards, if any. However, an impacted individual could argue that such compensation is not an adequate remedy for prior invalid option awards and, if a court were to impose a greater remedy, our financial exposure could be greater and have a material adverse effect on our business and results of operations. The foregoing could also result in tax withholding, employment taxes or other tax liabilities, including penalties and interest, all of which could have a material adverse effect on our business, financial condition and results of operations.

We will need to grow the size of our organization, and we may experience difficulties in managing this growth.

At June 30, 2018, we had 75 full-time employees. As our sales and marketing strategies develop, and as we transition into operating as a public company, we expect to need additional managerial, operational, sales, marketing, financial, and other personnel. Future growth would impose significant added responsibilities on members of management, including:

 

   

identifying, recruiting, integrating, maintaining, and motivating additional employees;

 

   

managing our internal development efforts effectively, while complying with our contractual obligations to contractors and other third parties; and

 

   

improving our operational, financial and management controls, reporting systems and procedures.

Our future financial performance and our ability to successfully market and sell our products will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities.

If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further develop and commercialize our products and, accordingly, may not achieve our research, sales and marketing goals, which would have a material adverse effect on our business, financial condition, and results of operations.

 

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We actively employ social media as part of our marketing strategy, which could give rise to regulatory violations, liability, breaches of data security or reputational damage.

Despite our efforts to monitor evolving social media communication guidelines and comply with applicable rules, there is risk that the use of social media by us, our employees or our customers to communicate about our products or business may cause us to be found in violation of applicable requirements, including requirements of regulatory bodies such as the FDA and Federal Trade Commission. For example, promotional communications and endorsements on social media that, among other things, promote our products for uses or in patient populations that are not described in the product’s approved labeling (known as “off-label uses”), do not contain a fair balance of information about risks associated with using our products, make comparative or other claims about our products that are not supported by sufficient evidence, and/or do not contain required disclosures could result in an enforcement actions against us. In addition, adverse events, product complaints, off-label usage by physicians, unapproved marketing or other unintended messages posted on social media could require an active response from us, which may not be completed in a timely manner and could result in regulatory action by a governing body. Further, our employees may knowingly or inadvertently make use of social media in ways that may not comply with our corporate policies or other legal or contractual requirements, which may give rise to liability, lead to the loss of trade secrets or other intellectual property, or result in public exposure of personal information of our employees, clinical trial patients, customers and others. Furthermore, negative posts or comments about us or our products in social media could seriously damage our reputation, brand image and goodwill, which would have a material adverse effect on our business, financial condition, and results of operations.

Risks Related to Regulatory Approval and our Industry

Regulatory compliance is expensive, complex and uncertain, and a failure to comply could lead to enforcement actions against us and other negative consequences for our business.

The FDA, EMA and similar agencies regulate our products as medical devices. Complying with these regulations is costly, time consuming, complex and uncertain. FDA and EMA regulations and regulations of similar agencies are wide-ranging and include, among other things, oversight of:

 

   

product design, development, manufacture (including suppliers) and testing;

 

   

pre-clinical and clinical studies;

 

   

product safety and effectiveness;

 

   

product labeling;

 

   

product storage and shipping;

 

   

record keeping;

 

   

pre-market clearance or approval;

 

   

marketing, advertising and promotion;

 

   

product sales and distribution;

 

   

product changes;

 

   

product recalls; and

 

   

post-market surveillance and reporting of deaths or serious injuries and certain malfunctions.

Our current products are subject to extensive regulation by the FDA and non-U.S. regulatory agencies. Further, all of our potential products and improvements of our current products will be subject to extensive

 

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regulation and will likely require permission from regulatory agencies and ethics boards to conduct clinical trials, and clearance or approval from the FDA and non-U.S. regulatory agencies prior to commercial sale and distribution. Failure to comply with applicable U.S. requirements regarding, for example, promoting, manufacturing or labeling our products, may subject us to a variety of administrative or judicial actions and sanctions, such as Form 483 observations, warning letters, untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties, and criminal prosecution. The FDA can also refuse to clear or approve pending applications. Any enforcement action by the FDA and other comparable non-U.S. regulatory agencies could have a material adverse effect on our business, financial condition, and results of operations.

Our medical device operations are subject to pervasive and continuing FDA regulatory requirements.

Medical devices regulated by the FDA are subject to “general controls” which include: registration with the FDA; listing commercially distributed products with the FDA; complying with cGMPs under the Quality System Regulations, or QSR; filing reports with the FDA of and keeping records relative to certain types of adverse events associated with devices under the medical device reporting regulation; assuring that device labeling complies with device labeling requirements; reporting certain device field removals and corrections to the FDA; and obtaining premarket notification 510(k) clearance for devices prior to marketing. Some devices known as “510(k)-exempt” devices can be marketed without prior marketing clearance or approval from the FDA. In addition to the “general controls,” some Class II medical devices are also subject to “special controls,” including adherence to a particular guidance document and compliance with the performance standard. Instead of obtaining 510(k) clearance, most Class III devices are subject to premarket approval, or PMA. None of our current products are Class III devices, but future products could be, which would subject them to the PMA process.

Many medical devices, such as medical lasers, are also regulated by the FDA as “electronic products.” In general, manufacturers and marketers of “electronic products” are subject to certain FDA regulatory requirements intended to ensure the radiological safety of the products. These requirements include, but are not limited to, filing certain reports with the FDA about the products and defects/safety issues related to the products as well as complying with radiological performance standards.

The medical device industry is now experiencing greater scrutiny and regulation by federal, state and foreign governmental authorities. Companies in our industry are subject to more frequent and more intensive reviews and investigations, often involving the marketing, business practices, and product quality management. Such reviews and investigations may result in the civil and criminal proceedings; the imposition of substantial fines and penalties; the receipt of warning letters, untitled letters, demands for recalls or the seizure of our products; the requirement to enter into corporate integrity agreements, stipulated judgments or other administrative remedies, and result in our incurring substantial unanticipated costs and the diversion of key personnel and management’s attention from their regular duties, any of which may have an adverse effect on our financial condition, results of operations and liquidity, and may result in greater and continuing governmental scrutiny of our business in the future.

Additionally, federal, state and foreign governments and entities have enacted laws and issued regulations and other standards requiring increased visibility and transparency of our interactions with healthcare providers. For example, the U.S. Physician Payment Sunshine Act, now known as Open Payments, requires us to report to the Centers for Medicare & Medicaid Services, or CMS, payments and other transfers of value to all U.S. physicians and U.S. teaching hospitals, with the reported information made publicly available on a searchable website. Failure to comply with these legal and regulatory requirements could impact our business, and we have had and will continue to spend substantial time and financial resources to develop and implement enhanced structures, policies, systems and processes to comply with these legal and regulatory requirements, which may also impact our business and which could have a material adverse effect on our business, financial condition, and results of operations.

 

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Product clearances and approvals can often be denied or significantly delayed.

Under FDA regulations, unless exempt, a new medical device may only be commercially distributed after it has received 510(k) clearance, is authorized through the de novo classification process, or is the subject of an approved PMA. The FDA will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product is substantially equivalent to another legally marketed product not subject to a PMA. Sometimes, a 510(k) clearance must be supported by preclinical and clinical data.

The PMA process typically is more costly, lengthy and stringent than the 510(k) process. Unlike a 510(k) review which determines “substantial equivalence,” a PMA requires that the applicant demonstrate reasonable assurance that the device is safe and effective by producing valid scientific evidence, including data from preclinical studies and human clinical trials. Therefore, to obtain regulatory clearance or approvals, we typically must, among other requirements, provide the FDA and similar foreign regulatory authorities with preclinical and clinical data that demonstrate to their satisfaction that our products satisfy the criteria for approval. Preclinical testing and clinical trials must comply with the regulations of the FDA and other government authorities in the U.S. and similar agencies in other countries.

We may be required to obtain PMAs, PMA supplements or additional 510(k) premarket clearances to market modifications to our existing products. The FDA requires device manufacturers to make and document a determination of whether a modification requires approval or clearance; however, the FDA can review a manufacturer’s decision. The FDA may not agree with our decisions not to seek approvals or clearances for particular device modifications. If the FDA requires us to obtain PMAs, PMA supplements or pre-market clearances for any modification to a previously cleared or approved device, we may be required to cease manufacturing and marketing the modified device and perhaps also to recall such modified device until we obtain FDA clearance or approval. We may also be subject to significant regulatory fines or penalties.

The FDA may not approve our current or future PMA applications or supplements or clear our 510(k) applications on a timely basis or at all. Such delays or refusals could have a material adverse effect on our business, financial condition, and results of operations.

The FDA may also change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions which may prevent or delay approval or clearance of our products under development or impact our ability to modify our currently approved or cleared products on a timely basis. Any of these actions could have a material adverse effect on our business, financial condition, and results of operations.

International regulatory approval processes may take more or less time than the FDA clearance or approval process. If we fail to comply with applicable FDA and comparable non-U.S. regulatory requirements, we may not receive regulatory clearances or approvals or may be subject to FDA or comparable non-U.S. enforcement actions. We may be unable to obtain future regulatory clearance or approval in a timely manner, or at all, especially if existing regulations are changed or new regulations are adopted. For example, the FDA clearance or approval process can take longer than anticipated due to requests for additional clinical data and changes in regulatory requirements. A failure or delay in obtaining necessary regulatory clearances or approvals would materially adversely affect our business, financial condition, and results of operations.

Although we have obtained regulatory clearance for our products in the U.S. and certain non-U.S. jurisdictions, they will remain subject to extensive regulatory scrutiny.

Although our products have obtained regulatory clearance in the U.S. and certain non-U.S. jurisdictions, they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies, and submission of

 

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safety, effectiveness, and other post-market information, including both federal and state requirements in the U.S. and requirements of comparable non-U.S. regulatory authorities.

Our manufacturing facility is required to comply with extensive requirements imposed by the FDA, EMA and comparable foreign regulatory authorities, including ensuring that quality control and manufacturing procedures conform to the QSR or similar regulations set by foreign regulatory authorities. As such, we will be subject to continual review and inspections to assess compliance with the QSR and adherence to commitments made in any 510(k) application. Accordingly, we continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production and quality control.

Any regulatory clearances or approvals that we have received for our products will be subject to limitations on the cleared or approved indicated uses for which the product may be marketed and promoted or to the conditions of approval, or contain requirements for potentially costly post-marketing testing. We are required to report certain adverse events and production problems, if any, to the FDA, EMA and comparable foreign regulatory authorities. Any new legislation addressing product safety issues could result in increased costs to assure compliance. The FDA and other agencies, including the Department of Justice, closely regulate and monitor the post-clearance or approval marketing and promotion of products to ensure that they are marketed and distributed only for the cleared or approved indications and in accordance with the provisions of the cleared or approved labeling. We have to comply with requirements concerning advertising and promotion for our products.

Promotional communications with respect to devices are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s cleared or approved labeling. As such, we may not promote our products for indications or uses for which they do not have clearance or approval. However, many physicians use our products for off-label purposes and are allowed to do so. For certain changes to a cleared product, including certain changes to product labeling, the holder of a cleared 510(k) application may be required to submit a new application and obtain clearance.

If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with our facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, such regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may, among other things:

 

   

subject our facility to an adverse inspectional finding or Form 483, or other compliance or enforcement notice, communication, or correspondence;

 

   

issue warning or untitled letters that would result in adverse publicity or may require corrective advertising;

 

   

impose civil or criminal penalties;

 

   

suspend or withdraw regulatory clearances or approvals;

 

   

refuse to clear or approve pending applications or supplements to approved applications submitted by us;

 

   

impose restrictions on our operations, including closing our sub-assembly suppliers’ facilities;

 

   

seize or detain products; or

 

   

require a product recall.

 

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In addition, violations of the Federal Food, Drug, and Cosmetic Act, or FDCA, relating to the promotion of approved products may lead to investigations alleging violations of federal and state healthcare fraud and abuse and other laws, as well as state consumer protection laws.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response, and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate revenue from our products. If regulatory sanctions are applied or if regulatory clearance or approval is withdrawn, it would have a material adverse effect on our business, financial condition, and results of operations.

Our products may be subject to recalls after receiving FDA, EMA or foreign approval or clearance, which could divert managerial and financial resources, harm our reputation, and adversely affect our business.

The FDA, EMA and similar foreign governmental authorities have the authority to require the recall of our products because of any failure to comply with applicable laws and regulations, or defects in design or manufacture. A government mandated or voluntary product recall by us could occur because of, for example, component failures, device malfunctions, or other adverse events, such as serious injuries or deaths, or quality-related issues such as manufacturing errors or design or labeling defects. Any future recalls of our products could divert managerial and financial resources, harm our reputation and adversely affect our business. The EMA may also order us to reimburse parties affected by the recall of our products.

In addition, we are subject to medical device reporting regulations that require us to report to the FDA, EMA, or similar foreign governmental authorities if one of our products may have caused or contributed to a death or serious injury or if we become aware that it has malfunctioned in a way that would be likely to cause or contribute to a death or serious injury if the malfunction recurred. After a May 2018 inspection, the FDA issued to us a Form 483 that included observations for failure to properly evaluate whether certain complaints related to Pharos and DABRA that we have received rose to a level required to be reported to the FDA. In response, we informed the FDA that we have modified our complaint review procedures and are in the process of retrospectively evaluating whether product complaints received within the last two years require reporting to the FDA. We intend to complete this retrospective evaluation and submit any required Medical Device Reports, or MDRs, by September 30, 2018. Failures to properly identify reportable events or to file timely reports, as well as failure to address each of the observations to FDA’s satisfaction, can subject us to sanctions and penalties, including warning letters and recalls. Physicians, hospitals and other healthcare providers may make similar reports to regulatory authorities. Any such reports may trigger an investigation by the FDA, EMA or similar foreign regulatory bodies, which could divert managerial and financial resources, harm our reputation and have a material adverse effect on our business, financial condition, and results of operations.

If we fail to comply with the FDA’s Quality System Regulation or any applicable state equivalent, our operations could be interrupted and our potential product sales and operating results could suffer.

We are required to comply with the FDA’s QSR, which delineates the design controls, document controls, purchasing controls, identification and traceability, production and process controls, acceptance activities, nonconforming product requirements, corrective and preventive action requirements, labeling and packaging controls, handling, storage, distribution and installation requirements, complaint handling, records requirements, servicing requirements, and statistical techniques potentially applicable to the production of our medical devices. We and our suppliers are also subject to the regulations of foreign jurisdictions regarding the manufacturing process if we market products overseas. The FDA enforces the QSR through periodic and announced or unannounced inspections of manufacturing facilities. Our facilities have been inspected by the FDA and other regulatory authorities, and we

 

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anticipate that we and certain of our third-party component suppliers will be subject to additional future inspections. If our facilities are found to be in non-compliance or fail to take satisfactory corrective action in response to adverse QSR inspectional findings, FDA could take legal or regulatory enforcement actions against us and/or our products, including but not limited to the cessation of sales or the recall of distributed products, 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 impact on our future sales and our ability to generate profits.

Current regulations depend heavily on administrative interpretation. If the FDA does not believe that we are in compliance with applicable FDA regulations, the agency could take legal or regulatory enforcement actions against us and/or our products. We are also subject to periodic inspections by the FDA, other governmental regulatory agencies, as well as certain third-party regulatory groups. Future interpretations made by the FDA or other regulatory bodies made during the course of these inspections may vary from current interpretations and may adversely affect our business and prospects. The FDA’s and other comparable non-U.S. regulatory agencies’ statutes, regulations, or policies may change, and additional government regulation or statutes may be enacted, which could increase post-approval regulatory requirements, or delay, suspend, prevent marketing of any cleared or approved products or necessitate the recall of distributed products. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the U.S. or abroad.

The medical device industry has been under heightened FDA scrutiny as the subject of government investigations and enforcement actions. If our operations and activities are found to be in violation of any FDA laws or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and other legal and/or agency enforcement actions. Any penalties, damages, fines, or curtailment or restructuring of our operations or activities could adversely affect our ability to operate our business and our financial results. The risk of us being found in violation of FDA laws is increased by the fact that many of these laws are broad and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend ourselves against that action and its underlying allegations, could cause us to incur significant legal expenses and divert management’s attention from the operation of our business. Where there is a dispute with a federal or state governmental agency that cannot be resolved to the mutual satisfaction of all relevant parties, we may determine that the costs, both real and contingent, are not justified by the commercial returns to us from maintaining the dispute or the product.

Various claims, design features or performance characteristics of our medical devices, that we regarded as permitted by the FDA without marketing clearance or approval, may be challenged by the FDA or state or foreign regulators. The FDA or state or foreign regulatory authorities may find that certain claims, design features or performance characteristics, in order to be made or included in the products, may have to be supported by further studies and marketing clearances or approvals, which could be lengthy, costly and possibly unobtainable.

If any of our products cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be required to report under applicable medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.

Under the FDA medical device reporting regulations, or MDR regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur. For example, in 2015 we submitted to the FDA an MDR for an event that involved a patient who experienced significant erythema, or skin reddening, and transient blistering after treatment with Pharos. The patient was treated

 

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with topical antibiotics and subsequently continued treatment. For DABRA, the most frequent complication reported to us as a result of post-market surveillance is clinically non-significant vessel perforation. To date, we do not believe that we have received any complaints for DABRA that require submission of an MDR to the FDA. If we fail to report events required to be reported to the FDA within the required timeframes, or at all, the FDA could take enforcement action against us. Any such adverse event involving our products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require our time and capital, distract management from operating our business, and may harm our reputation and have a material adverse effect on our business, financial condition, and results of operations.

Healthcare reform initiatives and other administrative and legislative proposals may adversely affect our business, financial condition, results of operations and cash flows in our key markets.

There have been and continue to be proposals by the federal government, state governments, regulators and third-party payors to control or manage the increased costs of health care and, more generally, to reform the U.S. healthcare system. Certain of these proposals could limit the prices we are able to charge for our products or the coverage and reimbursement available for our products and could limit the acceptance and availability of our products. The adoption of proposals to control costs could have a material adverse effect on our business, financial condition, and results of operations.

For example, in the United States, in March 2010, the Patient Protection and Affordable Care Act, or ACA, was passed. The ACA has made significant changes to the way healthcare is financed by both federal and state governments and private insurers, and has directly impacted the medical device industry. Among other provisions that may affect our business, including provisions that are meant to contain healthcare costs, improve quality and/or expand access, the ACA implemented, with limited exceptions, a deductible excise tax of 2.3% on sales of medical devices by entities, including us, which manufacture or import certain medical devices offered for sale in the U.S., including many of our products. The tax was to become effective January 1, 2013, but is currently suspended until January 1, 2020. Revenue from many of our products will be subject to that excise tax.

There have been judicial and Congressional challenges to certain aspects of the ACA, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the ACA and we expect such challenges and amendments to continue. For example, the Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Additionally, on January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including the 2.3% excise tax imposed on manufacturers and importers for certain sales of medical devices, the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, and the annual fee imposed on certain health insurance providers based on market share. Congress may consider additional legislation to repeal or repeal and replace all or certain elements of the ACA, including the medical device excise tax. We continue to evaluate the impact of the ACA and its possible repeal or replacement on our business.

In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. In August 2011, the Budget Control Act of 2011, among other things, led to aggregate reductions of Medicare payments to providers of 2% per fiscal year. These reductions went into effect in April 2013 and, due to subsequent legislative amendments to the statute, including the Bipartisan Budget Act of 2018, will remain in effect through 2027 unless additional action is taken by Congress. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types of providers, including hospitals, imaging centers

 

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and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

Further, recently there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several U.S. Congressional inquiries and proposed and enacted federal legislation designed to bring transparency to product pricing and reduce the cost of products and services under government healthcare programs. Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control product costs. Additionally, individual states in the United States have also become increasingly active in passing legislation and implementing regulations designed to control product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures. Moreover, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what products to purchase and which suppliers will be included in their healthcare programs. Adoption of price controls and other cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures may prevent or limit our ability to generate revenue, attain profitability.

Various new healthcare reform proposals are emerging at the federal and state level. Any new federal and state healthcare initiatives that may be adopted could limit the amounts that federal and state governments will pay for healthcare products and services, and could have a material adverse effect on our business, financial condition, and results of operations.

Healthcare cost containment pressures and legislative or administrative reforms resulting in restrictive coverage and reimbursement practices of third-party payors could decrease the demand for our products and the number of procedures performed using our devices, which could have an adverse effect on our business.

Our products are purchased principally by catheterization laboratories, which typically bill various third-party payors, including governmental programs, such as Medicare and Medicaid, private insurance plans and managed care plans, for the healthcare services provided to their patients. The ability of our customers to obtain reimbursement for procedures that are performed using our products from government and private third-party payors is critical to our success. The availability of coverage and reimbursement for procedures performed using our products affects which products customers purchase and the prices they are willing to pay to us.

Reimbursement varies based on country, geographical location, type of provider/customer, and third-party payor and can significantly influence the acceptance of new products and services. Third-party payors may view some procedures performed using our products as experimental and may not provide coverage. Third-party payors may not cover and reimburse our customers for certain procedures performed using our products in whole or in part in the future, or payment rates may decline and not be adequate, or both. Further, coverage and reimbursement by third-party payors to our customers is also related to billing codes to describe procedures performed using our products. Hospitals and physicians use several billing codes to bill for such procedures. Third-party payors may not continue to recognize the CPT codes available for use by our customers. The CPT codes may change undermining our customer’s ability to use those codes and reimbursement may be interrupted. Furthermore, some payors may not recognize these codes for payment. If payors do not cover atherectomy, physicians may not perform as many DABRA treatments as they otherwise would perform. Consequently, we may not be able to sell as many catheters for DABRA treatments as projected.

Reimbursement rates are unpredictable, and we cannot project how our business may be affected by future legislative and regulatory developments. Future legislation or regulation, or changing payment methodologies, may have a material adverse effect on our business, financial condition, and results of

 

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operations, and reimbursement may not be adequate for all customers. From time to time, typically on an annual basis, payment amounts are updated and revised by third-party payors. Because the cost of our products generally is recovered by the healthcare provider as part of the payment for performing a procedure and not separately reimbursed, these updates, especially lower payments could directly impact the demand for our products. For example, in July 2013, the CMS proposed reimbursement changes that would have decreased reimbursement for procedures in an outpatient based facility, such as a catheterization lab. Although CMS chose not to implement those changes in 2013, we cannot assure you that CMS will not take similar actions in the future.

After we develop new products or seek to market our products for new approved or cleared indications, we may find limited demand for the product unless government and private third-party payors provide adequate coverage and reimbursement to our customers. Obtaining codes and reimbursement for new products may require an extended, multi-year effort. Even with reimbursement approval and coverage by government and private payors, providers submitting reimbursement claims may face delay in payment if there is confusion by providers or payors regarding the appropriate codes to use in seeking reimbursement. Such delays may create an unfavorable impression within the marketplace regarding the level of reimbursement or coverage available for our products.

Demand for our products or new approved indications for our existing products may fluctuate over time if federal or state legislative or administrative policy changes affect coverage or reimbursement levels for our products or the services related to our products. In the U.S., there have been and we expect there will continue to be legislative and regulatory proposals to change the healthcare system, such as the potential repeal of the ACA, some of which could significantly affect our business. It is uncertain what impact the current U.S. presidential administration will have on health care spending including a campaign promise to repeal the ACA. If enacted and implemented, any measures to restrict health care spending could result in decreased revenue from our products and decreased potential returns from our research and development initiatives. Other legislative or administrative reforms to the U.S. or international reimbursement systems in a manner that significantly reduces reimbursement for procedures performed using our products or denies coverage for those procedures could have a material adverse effect on our business, financial condition, and results of operations.

Modifications to our products may require new 510(k) clearances or premarket approvals or may require us to recall or cease marketing our products until clearances are obtained.

Modifications to our products may require new 510(k) clearances or PMAs or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplemental approval or clearance; however, the FDA will review and can disagree with a manufacturer’s decision. Any modification to an FDA-cleared device that would significantly affect its safety or efficacy or that would constitute a major change in its intended use would require a new 510(k) clearance or possibly a PMA. We may not be able to obtain additional 510(k) clearances or PMAs for new products or for modifications to, or additional indications for, our products in a timely fashion, or at all. Delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth. We may make modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing our products as modified, which could harm our operating results and require us to redesign our products. In these circumstances, we may be subject to significant enforcement actions.

 

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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 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 and other similar foreign regulatory bodies, 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, 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.

We have adopted a code of ethics and conduct that will become effective upon the completion of this offering, but 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 any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, additional integrity reporting and oversight obligations, possible exclusion from participation in Medicare, Medicaid and other federal 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.

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 and human health and safety may adversely affect our business. Using hazardous substances in our operations 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 suppliers’ 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. Future changes to environmental and health and safety laws could cause us to incur additional expenses or restrict our operations, which could have a material adverse effect on our business, financial condition, and results of operations.

 

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Our operations and relationships with customers and third-party payors are subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to penalties including criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers and third-party payors play a primary role in the recommendation of our cleared devices and any future cleared or approved devices. Our current and future arrangements with providers, third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our cleared devices.

Restrictions under applicable U.S. federal and state healthcare laws and regulations may include the following:

 

   

the federal Anti-Kickback Statute prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it in order to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act;

 

   

federal false claims laws, including the federal False Claims Act, imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government. Persons and entities can be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or promoting a product off-label;

 

   

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the health care fraud statute implemented under HIPAA or specific intent to violate it in order to have committed a violation;

 

   

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health, or HITECH, Act and its implementing regulations, also imposes obligations, including mandatory contractual terms, on covered entities subject to the rule, such as health plans, healthcare clearinghouses and certain healthcare providers, as well as their business associates that perform certain services for or on their behalf involving the use or disclosure of individually identifiable health information with respect to safeguarding the privacy, security and transmission of individually identifiable health information. We believe we are not a covered entity for purposes of HIPAA, and we believe that we generally do not conduct our business in a manner that would cause us to be a business associate under HIPAA;

 

   

the U.S. Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare,

 

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Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the government information related to payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and requires applicable manufacturers and group purchasing organizations to report annually to the government ownership and investment interests held by the physicians described above and their immediate family members; and

 

   

analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers.

Some state laws require medical device companies to comply with the medical device industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and may require medical device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures. In addition, we may be subject to state and non-U.S. laws governing the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our 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, damages, fines, imprisonment, exclusion of product candidates from government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. Defending against any such actions can be costly, time-consuming and may require significant financial and personnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired. If any of the above occurs, it could adversely affect our ability to operate our business and our results of operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs, which 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 and maintain patent protection for our products, our competitors could develop and commercialize products and technology similar or identical to ours, and our ability to successfully commercialize our existing products and any products we may develop, and our technology may be adversely affected.

As with other medical device companies, our ability to maintain and solidify a proprietary position for our products will depend upon our success in obtaining effective patent claims that cover such products, their manufacturing processes and their intended methods of use, and enforcing those claims once granted. Furthermore, in some cases, we may not be able to obtain issued claims covering DABRA and Pharos, as well as other technologies that are important to our business, which are sufficient to prevent third parties, such as our competitors, from utilizing our technology. Any failure to obtain or maintain

 

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patent protection with respect to DABRA and Pharos could have a material adverse effect on our business, financial condition, and results of operations.

Changes in either the patent laws or their interpretation in the U.S. and other countries may diminish our ability to protect our inventions, obtain, maintain, and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property or narrow the scope of our issued patents. Additionally, we cannot predict whether the patent applications we are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient protection from competitors or other third parties.

The patent prosecution process is expensive, time-consuming, and complex, and we may not be able to file, prosecute, maintain, enforce, or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output in time to obtain patent protection. Although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, such as our employees, corporate collaborators, outside scientific collaborators, suppliers, consultants, advisors and other third parties, any of these parties may breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection. In addition, our ability to obtain and maintain valid and enforceable patents depends on whether the differences between our inventions and the prior art allow our inventions to be patentable over the prior art. Furthermore, publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the U.S. and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in any of our pending patent applications, or that we were the first to file for patent protection of such inventions. Moreover, in some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology that we license from or license to third parties and are therefore reliant on our licensors or licensees. Therefore, these and any of our patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. Defects of form in the preparation or filing of our patents or patent applications may exist, or may arise in the future, for example, with respect to proper priority claims, inventorship, and the like, although we are unaware of any such defects that we believe are of material importance. If we or any future licensors or licensees, fail to establish, maintain or protect such patents and other intellectual property rights, such rights may be reduced or eliminated. If any future licensors or licensees are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised. If there are material defects in the form, preparation or prosecution of our patents or patent applications, such patents or applications may be invalid and unenforceable. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.

In addition, if any patents are issued in the future, they may not provide us with any competitive advantages, or may be successfully challenged by third parties. Agreement terms that address non-competition are difficult to enforce in many jurisdictions and may not be enforceable in any particular case. To the extent that our intellectual property and other proprietary rights are not adequately protected, third parties might gain access to our proprietary information, develop and market products or services similar to ours, or use trademarks similar to ours, each of which could materially harm our business. Existing United States federal and state intellectual property laws offer only limited protection. Moreover, the laws of other countries in which we now, or may in the future, conduct operations or contract for services may afford little or no effective protection of our intellectual property. The failure to adequately protect our intellectual property and other proprietary rights could materially harm our business.

 

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The strength of patent rights involves complex legal and scientific questions and can be uncertain. This uncertainty includes changes to the patent laws through either legislative action to change statutory patent law or court action that may reinterpret existing law or rules in ways affecting the scope or validity of issued patents. The patent applications that we own may fail to result in issued patents in the United States or foreign countries with claims that cover our products or services. Even if patents do successfully issue from the patent applications that we own, third parties may challenge the validity, enforceability or scope of such patents, which may result in such patents being narrowed, invalidated or held unenforceable. Any successful challenge to our patents could deprive us of exclusive rights necessary for the successful commercialization of our products and services. Furthermore, even if they are unchallenged, our patents may not adequately protect our products and services, provide exclusivity for our products and services, or prevent others from designing around our claims. If the breadth or strength of protection provided by the patents we hold or pursue with respect to our products and services is challenged, it could dissuade companies from collaborating with us to develop, or threaten our ability to commercialize, our products and services.

Patents have a limited lifespan. In the United States, the natural expiration of a utility patent is generally 20 years after its effective filing date and the natural expiration of a design patent is generally 14 years after its issue date, unless the filing date occurred on or after May 13, 2015, in which case the natural expiration of a design patent is generally 15 years after its issue date. Various extensions may be available; however the life of a patent, and the protection it affords, is limited. Without patent protection for our products and services, we may be open to competition. Further, if we encounter delays in our development efforts, the period of time during which we could market our products and services under patent protection would be reduced.

In addition to the protection afforded by patents, we also rely on trade secret protection to protect proprietary know-how that may not be patentable or that we elect not to patent, processes for which patents may be difficult to obtain or enforce, and any other elements of our products and services that involve proprietary know-how, information or technology that is not covered by patents. However, trade secrets can be difficult to protect. If the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating any trade secrets. Misappropriation or unauthorized disclosure of our trade secrets could significantly affect our competitive position and may have a material adverse effect on our business. Furthermore, trade secret protection does not prevent competitors from independently developing substantially equivalent.

If the scope of any patent protection we obtain is not sufficiently broad, or if we lose any of our patent protection, our ability to prevent our competitors from commercializing similar or identical technology and products would be adversely affected.

The patent position of medical device companies generally is highly uncertain, involves complex legal and factual questions, and has been the subject of much litigation in recent years. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents being issued which protect our products or which effectively prevent others from commercializing competitive technologies and products.

Moreover, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. Even if patent applications we license or own currently or in the future issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors or other third parties from competing with us, or otherwise provide us with any competitive advantage. Any patents that we own may be challenged, narrowed, circumvented, or invalidated by third parties. Consequently, we do not know whether DABRA and Pharos will be protectable or remain protected by valid and enforceable patents. Our competitors or

 

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other third parties may be able to circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner which could materially adversely affect our business, financial condition, results of operations and prospects.

The issuance of a patent is not conclusive as to its inventorship, scope, validity, or enforceability, and our patents may be challenged in the courts or patent offices in the U.S. and abroad. We may be subject to a third-party preissuance submission of prior art to the United States Patent and Trademark Office, or USPTO, or become involved in opposition, derivation, revocation, reexamination, post-grant and inter partes review, or interference proceedings or other similar proceedings challenging our patent rights. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate or render unenforceable, our patent rights, allow third parties to commercialize our products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights. Moreover, we may have to participate in interference proceedings declared by the USPTO to determine priority of invention or in post-grant challenge proceedings, such as oppositions in a foreign patent office, that challenge our priority of invention or other features of patentability with respect to our patents and patent applications. Such challenges may result in loss of patent rights, loss of exclusivity, or in patent claims being narrowed, invalidated, or held unenforceable, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of DABRA and Pharos. Such proceedings also may result in substantial cost and require significant time from our scientists and management, even if the eventual outcome is favorable to us, which would have a material adverse effect on our business, financial condition, and results of operations.

Obtaining and maintaining our patent protection depends on compliance with various procedural measures, document submissions, fee payments and other requirements imposed by government patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees, renewal fees, annuity fees and various other government fees on patents and applications will be due to be paid to the USPTO and various government patent agencies outside of the U.S. over the lifetime of our patents and applications. The USPTO and various non-U.S. government agencies require compliance with several procedural, documentary, fee payment and other similar provisions during the patent application process. In some cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. There are situations, however, in which non-compliance 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. 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 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 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 U.S. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the U.S., or from selling or importing products made using our inventions in and into the U.S. or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further,

 

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may export otherwise infringing products to territories where we have patent protection but enforcement is not as strong as that in the U.S. 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 issuing, 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. 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, results of operations and prospects may be adversely affected.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

Changes in either the patent laws or interpretation of the patent laws in the U.S. could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. Assuming that other requirements for patentability are met, prior to March 2013, in the U.S., the first to invent the claimed invention was entitled to the patent, while outside the U.S., 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 U.S. 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, but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by such third party. This will require us to be cognizant going forward of the time from invention to filing of a patent application. Since patent applications in the U.S. 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 will be prosecuted and also may affect patent litigation. 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. 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

 

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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.

Issued patents covering our products could be found invalid or unenforceable if challenged in court or before administrative bodies in the U.S. or abroad.

If we initiated legal proceedings against a third party to enforce a patent covering our products, the defendant could counterclaim that such patent is invalid or unenforceable. In patent litigation in the U.S., defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including 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 relevant information from the USPTO, or made a misleading statement, during prosecution. Third parties may raise claims challenging the validity or enforceability of our patents before administrative bodies in the U.S. or abroad, even outside the context of litigation. Such mechanisms include re-examination, post-grant review, inter partes review, interference proceedings, derivation proceedings, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). Such proceedings could result in the revocation of, cancellation of, or amendment to our patents in such a way that they no longer cover our products. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our products. Such a loss of patent protection would have a material adverse effect on our business, financial condition, and results of operations.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to seeking patents for our products, we rely upon unpatented trade secrets, know-how and continuing technological innovation to develop and maintain a competitive position. We seek to protect our proprietary information, in part, through confidentiality agreements with our employees, collaborators, contractors, advisors, consultants, and other third parties, and invention assignment agreements with our employees. We also have agreements with some of our consultants that require them to assign to us any inventions created as a result of their working with us. The confidentiality agreements are designed to protect our proprietary information and, in the case of agreements or clauses requiring invention assignment, to grant us ownership of technologies that are developed through a relationship with a third party.

Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive, and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the U.S. are less willing or unwilling to protect trade secrets. 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 materially and adversely harmed. Furthermore, we expect these trade secrets, know-how and proprietary information to over time be disseminated within the industry through

 

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independent development, the publication of journal articles describing the methodology, and the movement of personnel from academic to industry scientific positions.

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. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our consultants, contractors or collaborators use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions, 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 interest in our patents, trade secrets, or other intellectual property as an inventor or co-inventor. For example, we may have inventorship disputes arise from conflicting obligations of employees, consultants or others who are involved in developing our products. Litigation may be necessary to defend against these and other claims challenging inventorship or our patents, trade secrets or other 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, intellectual property that is important to our products. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Any of the foregoing could have a material adverse effect on our business, financial condition, and results of operations.

We may become involved in intellectual property litigation either due to claims by others that we are infringing their intellectual property rights or due to our own assertions that others are infringing upon our intellectual property rights.

The medical device industry in general has been characterized by extensive litigation and administrative proceedings regarding patent infringement and intellectual property rights. Our competitors hold a significant number of patents relating to medical laser technology. From time to time, we may commence litigation to enforce our intellectual property rights. An adverse decision in these actions or in any other legal action could limit our ability to assert our intellectual property rights, limit the value of our technology or otherwise negatively impact our business, financial condition and results of operations.

Monitoring unauthorized use of our intellectual property is difficult and costly. Unauthorized use of our intellectual property may have occurred or may occur in the future. Although we have taken steps to minimize the risk of this occurring, any such failure to identify unauthorized use and otherwise adequately protect our intellectual property would adversely affect our business. Moreover, if we are required to commence litigation, whether as a plaintiff or defendant, not only will this be time-consuming, but we will also be forced to incur significant costs and divert our attention and efforts of our employees, which could, in turn, result in lower revenue and higher expenses.

We cannot provide assurance that our products or methods do not infringe the patents or other intellectual property rights of third parties. Additionally, if our business is successful, the possibility may increase that others will assert infringement claims against us.

Determining whether a product infringes a patent involves complex legal and factual issues, and the outcome of a patent litigation action is often uncertain. We have not conducted an extensive search of patents issued or assigned to other parties, including our competitors, and no assurance can be given that patents containing claims covering our products, parts of our products, technology or methods do not exist, have not been filed or could not be filed or issued. Because of the number of patents issued and

 

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patent applications filed in our technical areas, our competitors or other parties may assert that our products and the methods we employ in the use of our products are covered by U.S. or foreign patents held by them. In addition, because patent applications can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending of which we are unaware and which may result in issued patents which our current or future products infringe. Also, because the claims of published patent applications can change between publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe. There could also be existing patents that one or more of our products or parts may infringe and of which we are unaware. As the number of competitors in the market for medical lasers and as the number of patents issued in this area grows, the possibility of patent infringement claims against us increases. In certain situations, we may determine that it is in our best interests or their best interests to voluntarily challenge a party’s products or patents in litigation or other proceedings, including patent interferences or re-examinations. As a result, we may become involved in unwanted litigation that could be costly, result in diversion of management’s attention, require us to pay damages and force us to discontinue selling our products.

Infringement and other intellectual property claims and proceedings brought against us, whether successful or not, could result in substantial costs and harm to our reputation. Such claims and proceedings can also distract and divert management and key personnel from other tasks important to the success of the business. We cannot be certain that we will successfully defend against allegations of infringement of patents and intellectual property rights of others. In the event that we become subject to a patent infringement or other intellectual property lawsuit and if the other party’s patents or other intellectual property were upheld as valid and enforceable and we were found to infringe the other party’s patents or violate the terms of a license to which we are a party, we could be required to do one or more of the following:

 

   

cease selling or using any of our products that incorporate the asserted intellectual property, which would adversely affect our revenue;

 

   

pay substantial damages for past use of the asserted intellectual property;

 

   

obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all, and which could reduce profitability; and

 

   

redesign or rename, in the case of trademark claims, our products to avoid violating or infringing the intellectual property rights of third parties, which may not be possible and could be costly and time-consuming if it is possible to do so.

Third-party claims of intellectual property infringement, misappropriation or other violation against us or our collaborators may prevent or delay the sale and marketing of our products.

The medical devices industry is highly competitive and dynamic. Due to the focused research and development that is taking place by several companies, including us and our competitors, in this field, the intellectual property landscape is in flux, and it may remain uncertain in the future. As such, there may be significant intellectual property related litigation and proceedings relating to our, and other third party, intellectual property and proprietary rights in the future.

Our commercial success depends in part on our and any potential future collaborators’ ability to avoid infringing, misappropriating and otherwise violating the patents and other intellectual property rights of third parties. It is uncertain whether the issuance of any third-party patent would require us or any licensee to alter our development or commercial strategies, obtain licenses, or cease certain activities. The medical device industry is characterized by extensive litigation regarding patents and other intellectual property rights, as well as administrative proceedings for challenging patents, including interference, derivation and reexamination proceedings before the USPTO or oppositions and other comparable

 

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proceedings in foreign jurisdictions. As discussed above, recently, due to changes in U.S. law referred to as patent reform, new procedures including inter partes review and post-grant review have been implemented. As stated above, this reform adds uncertainty to the possibility of challenge to our patents in the future.

Third parties may currently have patents or obtain patents in the future and claim that the manufacture, use or sale of our products infringes upon these patents. In the event that any third-party claims that we infringe their patents or that we are otherwise employing their proprietary technology without authorization and initiates litigation against us, even if we believe such claims are without merit, a court of competent jurisdiction could hold that such patents are valid, enforceable and infringed by our products. In this case, the holders of such patents may be able to block our ability to commercialize the applicable products or technology unless we obtain a license under the applicable patents, or until such patents expire or are finally determined to be held invalid or unenforceable. Such a license may not be available on commercially reasonable terms or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, which could result in our competitors gaining access to the same intellectual property. If we are unable to obtain a necessary license to a third-party patent on commercially reasonable terms, we may be unable to commercialize our products, or such commercialization efforts may be significantly delayed, which could in turn significantly harm our business.

For example, in December of 2017, we were contacted by a third party suggesting that we should consider licensing three U.S. patents directed to the treatment of vitiligo, U.S. Pat. No. 6,979,327 (“’327 patent”), U.S. Pat. No. 7,261,729 (“’729 patent”), and U.S. Pat. No. 8,387,621 (“’621 patent”). In addition, we were also previously contacted in 2006 by the same third party suggesting that we should consider licensing the ‘327 patent as well as the then pending application that became the ‘729 patent. We believe that we will be meritorious if a claim of infringement of the ‘327 patent, the ‘729 patent, or the ‘621 patent is asserted against us in a legal proceeding by this or any other third party. However, although we believe that we do not infringe the claims of the ‘327 patent, the ‘729 patent, or the ‘621 patent, nor do we believe that we need a license to the ‘327 patent, the ‘729 patent, or the ‘621 patent in order to freely commercialize our products, there is a possibility that a suit claiming infringement of the ‘327 patent, the ‘729 patent, or the ‘621 patent will be brought against us, and we cannot assure that a court or an administrative agency will agree with our assessment with regard to non-infringement of the ‘327 patent, the ‘729 patent, or the ‘621 patent. If it was necessary to obtain a license to the ‘327 patent, the ‘729 patent, or the ‘621 patent and a license was not available on commercially reasonable terms or available at all, that could affect our ability to commercialize our products and materially and adversely affect our business.

If a third party commences a patent infringement action against us it could consume significant financial and management resources, regardless of the merit of the claims or the outcome of the litigation. Defense of infringement claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of management and other employee resources from our business, and may impact our reputation. In the event of a successful claim of infringement against us, we may be enjoined from further developing or commercializing our infringing products. In addition, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties and/or redesign our infringing products or technologies, which may be impossible or require substantial time and monetary expenditure. In that event, we would be unable to further develop and commercialize our products, which could harm our business significantly.

Engaging in litigation to defend against third parties alleging that we have infringed their patents or other intellectual property rights is very expensive, particularly for a company of our size, and time-consuming. Some of our competitors may be able to sustain the costs of litigation or administrative proceedings more effectively than we can because they may have greater financial resources. Patent litigation and other

 

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proceedings may also consume significant management time. Uncertainties resulting from the initiation or continuation of patent litigation or other proceedings against us could impair our ability to compete in the marketplace. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.

We may become involved in lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive, time consuming and unsuccessful.

Competitors may infringe our patents, or we may be required to defend against claims of infringement. In addition, our patents also may become involved in inventorship, priority or validity disputes. To counter or defend against such claims can be expensive and time consuming. In an infringement proceeding, a court may decide that a patent owned by us is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on our common stock price. 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. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

We may be subject to claims that our employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property.

Many of our employees, consultants and scientific advisors are currently or were previously employed at universities or healthcare 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 used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. For example, in 2018, we received letters from a competitor concerning one of their former employees who is currently working for us. The letters allege, among other things, that the employee is in violation of the employee’s continuing obligations to the employee’s prior employer. While we dispute the validity of the claims and would vigorously defend against them and assert appropriate defenses, litigation may be necessary to defend against these claims. If we fail in defending any such claims, it could have a material adverse effect on our business, financial condition, and results of operations. Even if we are successful in defending against such claims, litigation could result in substantial costs to us and be a distraction to management.

In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual

 

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property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. Such claims could have a material adverse effect on our business, financial condition, and results of operations.

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.

Our trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be violating or 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 or other third parties 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 or dilution claims brought by owners of other trademarks. 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. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely affect our business, financial condition, and results of operations.

Intellectual property rights do not necessarily address all potential threats.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example:

 

   

others may be able to make products that are similar to our products or utilize similar technology but that are not covered by the claims of the patents that we may own or that incorporate certain technology in our products that is in the public domain;

 

   

we, or our future licensors or collaborators, might not have been the first to make the inventions covered by the issued patent or pending patent application that we own now or in the future;

 

   

we, or our future licensors or collaborators, might not have been the first to file patent applications covering certain of our or their inventions;

 

   

others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;

 

   

it is possible that our current or future pending patent applications will not lead to issued patents;

 

   

issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors or other third parties;

 

   

our competitors or other third parties might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;

 

   

we may not develop additional proprietary technologies that are patentable;

 

   

the patents of others may harm our business; and

 

   

we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property.

 

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Should any of these events occur, they could have a material adverse effect on our business, financial condition, and results of operations.

Risks Related to Our Reliance on Third Parties

We depend on third-party suppliers for key components and sub-assemblies used in our manufacturing processes, and the loss of these third-party suppliers or their inability to supply us with adequate components and sub-assemblies could harm our business.

We may encounter unforeseen situations that would result in delays or shortfalls in manufacturing. Key components and sub-assemblies of DABRA and Pharos are currently provided by a limited number of suppliers, and we do not maintain large inventory levels of these components and sub-assemblies. For example, we rely on a limited number of suppliers for the Thyratron used to manufacture our lasers. If we experience a shortage in any of these components or sub-assemblies, we would need to identify and qualify new supply sources, which could increase our costs, result in manufacturing delays, and cause delays in the delivery of our products. We may also experience a delay in completing validation and verification testing or sterility audits for controlled-environment rooms at our facility.

We also depend on limited source suppliers for some of our product components and sub-assemblies, and if any of those suppliers are unable or unwilling to produce these components or sub-assemblies or supply them in the quantities that we need, and at acceptable prices, we would experience manufacturing delays and may not be able to deliver our products on a timely or cost-effective basis to our customers, or at all, which could reduce our product sales, increase our costs, and harm our business. While we believe that we could obtain replacement components from alternative suppliers, we may be unable to do so. Losing any of these suppliers could cause a disruption in our production. Our suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction and environmental factors. Establishing additional or replacement suppliers for these materials may take significant time, as certain of these suppliers must be approved by regulatory authorities, which could disrupt our production. As a result, we could experience significant delays in manufacturing and delivering our products to customers. We cannot assure you we can continue obtaining required materials, components, and sub-assemblies that are in short supply within the time frames we require at an affordable cost, if at all. If we cannot secure on a timely basis sufficient quantities of the materials we depend on to manufacture our products, if we encounter delays or contractual or other difficulties in our relationships with these suppliers, or if we cannot find replacement suppliers at an acceptable cost, then manufacturing our products may be disrupted, which could increase our costs, prevent or impair our development or commercialization efforts, and have a material adverse effect on our business, financial condition, and results of operations.

We and our component suppliers may not meet regulatory quality standards applicable to our manufacturing processes, which could have an adverse effect on our business, financial condition, and results of operations.

As a medical device manufacturer, we must register with the FDA and non-U.S. regulatory agencies, and we are subject to periodic inspection by the FDA and foreign regulatory agencies, for compliance with certain good manufacturing practices, including design controls, product validation and verification, in process testing, quality control and documentation procedures. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA and foreign regulatory agencies. Our component suppliers are also required to meet certain standards applicable to their manufacturing processes.

We cannot assure you that we or our component suppliers comply or can continue to comply with all regulatory requirements. A failure by us or one of our component suppliers to achieve or maintain

 

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compliance with these requirements or quality standards may disrupt our ability to supply products sufficient to meet demand until compliance is achieved or, with a component supplier, until a new supplier has been identified and evaluated. Our or any of our component supplier’s failure to comply with applicable regulations could cause sanctions to be imposed on us, including warning letters, fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals or clearances, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, which could harm our business. We cannot assure you that if we need to engage new suppliers to satisfy our business requirements, we will be able to locate new suppliers in compliance with regulatory requirements at a reasonable cost and in an acceptable timeframe. Our failure to do so could have a material adverse effect on our business, financial condition, and results of operations.

In the European Union, we must maintain certain International Organization for Standardization, or ISO, certifications to sell our products and must undergo periodic inspections by notified bodies, including the British Standards Institution, to obtain and maintain these certifications. If we fail these inspections or fail to meet these regulatory standards, it could have a material adverse effect on our business, financial condition, and results of operations.

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

We may form or seek strategic alliances, create joint ventures or collaborations or enter into additional licensing arrangements with third parties that we believe will complement or augment our sales and marketing efforts with respect to our products and any future product candidates that we may develop. Any of these relationships may require us to incur non-recurring and other charges, increase our near and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for our products. If we 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 company 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 prospects, financial condition and results of operations.

Risks Related to This Offering and Ownership of Our Common Stock

Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or our guidance.

Our quarterly and annual operating results may fluctuate significantly in the future, which makes it difficult for us to predict our future operating results. Our operating results may fluctuate due to a variety of factors, many of which are outside of our control and may be difficult to predict, including the following:

 

   

the timing and cost of, and level of investment in, research and development activities relating to our current and any future products, which will change from time to time;

 

   

the cost of manufacturing our current and any future products, which may vary depending on FDA and EMA guidelines and requirements, the quantity of production and the terms of our agreements with suppliers;

 

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the degree and rate of market acceptance for DABRA and Pharos, including the ability of our customers to receive adequate reimbursement for procedures performed using our products;

 

   

expenditures that we will or may incur to acquire or develop additional products and technologies;

 

   

competition from existing and potential future products that compete with our products, and changes in the competitive landscape of our industry, including consolidation among our competitors or partners;

 

   

the level of demand for our current and future products, if approved, which may fluctuate significantly and be difficult to predict;

 

   

the risk/benefit profile, cost and reimbursement policies with respect to our products, and existing and potential future products that compete with our products;

 

   

our ability to commercialize additional products, if approved, inside and outside of the U.S., either independently or working with third parties;

 

   

our ability to establish and maintain collaborations, licensing, or other arrangements;

 

   

our ability to adequately support future growth;

 

   

potential unforeseen business disruptions that increase our costs or expenses;

 

   

changes in FDA regulations and comparable foreign regulations;

 

   

future accounting pronouncements or changes in our accounting policies; and

 

   

the changing and volatile global economic environment.

In addition, we measure compensation cost for stock-based awards made to employees at the grant date of the award, based on the fair value of the award as determined by our board of directors, and recognize the cost as an expense over the employee’s requisite service period. As the variables that we use as a basis for valuing these awards change over time, including, after the closing of this offering, our underlying stock price and stock price volatility, the magnitude of the expense that we must recognize may vary significantly.

From time to time, we may also enter into license or collaboration agreements with other companies that include development funding and significant upfront and milestone payments and/or royalties, which may become an important source of our revenue. Accordingly, our revenue may depend in part on any potential future license and collaboration agreements and sales of our products. These upfront and milestone payments may vary significantly from period to period and any such variance could cause a significant fluctuation in our operating results from one period to the next.

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. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated revenue and/or earnings guidance we may provide.

 

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The price of our stock may be volatile, and you could lose all or part of your investment. Further, we do not know whether an active, liquid and orderly trading market will develop for our common stock or what the market price of our common stock will be and as a result it may be difficult for you to sell your shares of our common stock.

Prior to this offering there has been no public market for shares of our common stock. Although we have applied to have our common stock listed on the New York Stock Exchange and our common stock has been approved for listing on the NYSE American, an active trading market for our shares may never develop or be sustained following this offering. You may not be able to sell your shares quickly or at the market price if trading in shares of our common stock is not active. The initial public offering price for our common stock will be determined through negotiations with the underwriters, and the negotiated price may not be indicative of the market price of the common stock after the offering. As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the initial public offering price. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic partnerships or acquire companies or products by using shares of our common stock as consideration, which could have a material adverse effect on our business, financial condition, and results of operations. In addition, the trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control, including limited trading volume. In addition to the factors discussed in this “Risk factors” section and elsewhere in this prospectus, these factors include:

 

   

our failure to increase the sales of our products, specifically DABRA;

 

   

the failure by our customers to obtain adequate reimbursements or reimbursement levels that would be sufficient to support product sales to our customers and pricing of our products to support revenue projections;

 

   

unanticipated serious safety concerns related to the use of our products;

 

   

introduction of new products or services offered by us or our competitors;

 

   

announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

 

   

our ability to effectively manage our growth;

 

   

the size and growth of our target markets;

 

   

actual or anticipated variations in quarterly operating results;

 

   

disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

 

   

significant lawsuits, including stockholder litigation or litigation related to intellectual property;

 

   

our cash position;

 

   

our failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public;

 

   

publication of research reports about us or our industry, or positive or negative recommendations or withdrawal of research coverage by securities analysts;

 

   

any delay in any regulatory filings for our future products and any adverse development or perceived adverse development with respect to the applicable regulatory authority’s review of such products;

 

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adverse regulatory decisions, including failure to receive regulatory approval of our future products, failure to maintain regulatory approval for our existing products or failure to obtain regulatory approval for additional indications for our existing products;

 

   

changes in laws or regulations applicable to our products;

 

   

adverse developments concerning our suppliers or distributors;

 

   

our inability to obtain adequate supplies and components for our products or inability to do so at acceptable prices;

 

   

our inability to establish and maintain collaborations if needed;

 

   

changes in the market valuations of similar companies;

 

   

overall performance of the equity markets;

 

   

sales of large blocks of our common stock including sales by our executive officers and directors;

 

   

trading volume of our common stock;

 

   

limited “public float” in the hands of a small number of persons whose sales or lack of sales of our common stock could result in positive or negative pricing pressure on the market price for our common stock;

 

   

additions or departures of key scientific or management personnel;

 

   

changes in accounting practices;

 

   

ineffectiveness of our internal controls;

 

   

general political and economic conditions; and

 

   

other events or factors, many of which are beyond our control.

In addition, the stock market in general and medical device companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of a company’s securities. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business, financial condition, and results of operations.

We do not intend to pay dividends on our common stock so any returns will be limited to increases, if any, in our stock’s value.

We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on, among other factors, our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant. Any return to stockholders will therefore be limited to the appreciation in the value of their stock, if any.

 

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

As of December 31, 2017, we had net operating loss, or NOL, carryforwards of approximately $7.2 million for federal income tax purposes, and $7.0 million for state income tax purposes. These federal and state NOL carryforwards begin expiring in 2029. Utilization of these NOLs depends on many factors, including our future income, which cannot be assured. These NOLs could expire unused and be unavailable to offset our future income tax liabilities. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, and corresponding provisions of state law, 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 three-year period, the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes to offset its post-change income may be limited. We have not determined if we have experienced Section 382 ownership changes in the past and if a portion of our NOLs is subject to an annual limitation under Section 382. In addition, we may experience ownership changes in the future as a result of subsequent changes in our stock ownership, including this offering, some of which may be outside of our control. If we determine that an ownership change has occurred and our ability to use our historical NOLs is materially limited, it could harm our future operating results by effectively increasing our future tax obligations. In addition, under the Tax Cuts and Jobs Act of 2017, federal NOLs incurred in 2018 and in future years may be carried forward indefinitely and the deductibility of such federal NOLs is limited.

Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow, financial condition or results of operations.

New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could affect the tax treatment of our domestic and foreign earnings. Any new taxes could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. For example, on December 22, 2017, President Trump signed tax legislation into law, commonly referred to as the Tax Cuts and Jobs Act of 2017, that contains many significant changes to the U.S. tax laws, the consequences of which have not yet been fully determined. Changes in corporate tax rates, the realization of net deferred tax assets relating to our U.S. operations, the taxation of foreign earnings, and the deductibility of expenses contained in the Tax Cuts and Jobs Act of 2017 or other tax reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges in the current or future taxable years, and could increase our future U.S. tax expense. The foregoing items could have a material adverse effect on our business, cash flow, financial condition or results of operations. In addition, it is uncertain if and to what extent various states will conform to the newly enacted federal tax legislation. The impact of this tax legislation on holders of our common stock is also uncertain and could be adverse. We urge our stockholders and investors to consult with our legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

Prior to this offering, our executive officers, directors, and 5% stockholders beneficially owned approximately 62% of the outstanding shares of our common stock as of September 12, 2018, and, upon the closing of this offering, that same group will hold approximately 44% of our outstanding shares of common stock (assuming no exercise of the underwriters’ option to purchase additional shares). In addition, as of September 12, 2018, our officers and directors held (i) options to purchase an aggregate of 1,221,000 shares of our common stock at exercise prices of $28.94 per share; and (ii) 858,926 restricted stock units, which would give our officers and directors ownership of approximately 53% of our outstanding common stock following this offering if such awards are fully vested and are exercised in full (assuming no exercise of the underwriters’ option to purchase additional shares). Therefore, even

 

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after this offering, these stockholders will have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders, which could have a material adverse effect on our business, financial condition, and results of operations.

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

We are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years following the year in which we complete this offering, although circumstances could cause us to lose that status earlier. We will remain an emerging growth company until the earlier of (i) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a large accelerated filer, which requires the market value of our common stock that is held by non-affiliates to exceed $700.0 million as of the prior June 30th, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption and, therefore, we are not subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, changes in rules of U.S. generally accepted accounting principles or their interpretation, the adoption of new guidance or the application of existing guidance to changes in our business could significantly affect our financial position and results of operations.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company. We will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which will require, among other things, that we file with the SEC, annual, quarterly and current reports with respect to our business and financial condition. In addition, the Sarbanes-Oxley Act, as well as rules subsequently adopted by the SEC and the New York Stock Exchange or NYSE American to implement provisions of the Sarbanes-Oxley Act, impose

 

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significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Further, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as “say on pay” and proxy access. Emerging growth companies are permitted to implement many of these requirements over a longer period and up to five years from the pricing of this offering. We intend to take advantage of this legislation but cannot guarantee that we will not be required to implement these requirements sooner than anticipated or planned and thereby incur unexpected expenses. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currently anticipate.

We expect the rules and regulations applicable to public companies to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition, and results of operations. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements 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 executive officers.

If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.

The initial public offering price is substantially higher than the net tangible book value per share of our common stock. Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution of $10.41 per share, based on an initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus. Further, investors purchasing common stock in this offering will contribute approximately 64% of the total amount invested by stockholders since our inception, but will own only approximately 29% of the shares of common stock outstanding after giving effect to this offering.

This dilution is due to our investors who purchased shares prior to this offering having paid substantially less when they purchased their shares than the price offered to the public in this offering. To the extent outstanding options are exercised and outstanding restricted stock units vest, there will be further dilution to new investors. As a result of the dilution to investors purchasing shares in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

 

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Future sales and issuances of a substantial number of shares of our common stock or rights to purchase common stock by our stockholders in the public market could result in additional dilution of the percentage ownership of our stockholders and cause our stock price to fall.

If our stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline. Based on 8,204,251 shares of common stock outstanding at June 30, 2018, upon the closing of this offering we will have outstanding a total of 11,537,584 shares of common stock, assuming no exercise of outstanding options or vesting of outstanding restricted stock units after June 30, 2018. Of these shares, only the shares of common stock sold in this offering by us, plus any shares sold upon exercise of the underwriters’ option to purchase additional shares, plus the shares not subject to lock-up agreements, will be freely tradable without restriction in the public market immediately following this offering. The underwriters, however, may, in their sole discretion, permit our officers, directors and other stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

The lock-up agreements pertaining to this offering will expire after 180 days from the date of this prospectus. Subject to certain limitations, 7,887,820 shares will become eligible for sale upon expiration of the lock-ups in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements, Rule 144 and Rule 701 under the Securities Act, and our insider trading policy. Shares issued or issuable upon the exercise of options vested as of the expiration of the lock-up period will be eligible for sale at that time, as well as shares to be issued upon settlement of outstanding restricted stock units that vest following the completion of this offering. Moreover, pursuant to our 2018 Plan, our Board is authorized to grant equity incentive awards representing up to an aggregate of 1,632,134 shares of our common stock to our employees, directors and consultants. The 2018 Plan includes an annual increase in the number of shares available for future grant each year pursuant to the “evergreen” provision of our 2018 Plan. Additionally, pursuant to our ESPP a total of 296,752 shares are available for sale under our ESPP. The ESPP also includes an annual increase in the number of shares available for sale under our ESPP each year pursuant to the “evergreen” provision of our ESPP. If these additional shares of common stock are issued and sold, or if it is perceived that they will be sold, in the public market, this could result in additional dilution and the trading price of our common stock could decline.

Further, we expect that significant additional capital may be needed in the future to continue our planned operations, including commercialization efforts, expanded research and development activities and costs associated with operating a public company. To raise capital, we may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights, preferences and privileges senior to the holders of our common stock, including shares of common stock sold in this offering.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the section entitled “Use of proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment. We expect to use the net proceeds from this offering for the expansion of our direct sales force and marketing of our products, to support clinical studies for new products and product

 

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enhancements including for expanded indications, and to support other research and development activities, working capital, and general corporate purposes. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.

Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control which could limit the market price of our common stock and may prevent or frustrate attempts by our stockholders to replace or remove members of our board of directors or our current management and may adversely affect the market price of our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect upon completion of this offering contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions include:

 

   

our board of directors will be divided into three classes serving staggered three-year terms, such that not all members of the board will be elected at one time, which could delay the ability of stockholders to change the membership of a majority of our board of directors;

 

   

the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

 

   

the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

   

a prohibition on stockholder action through written consent, which requires that all stockholder actions be taken at an annual or special meeting of our stockholders;

 

   

a requirement that special meetings of stockholders be called only by the chairperson of the board of directors, the chief executive officer or president (in the absence of a chief executive officer) or a majority vote of our board of directors, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

 

   

the requirement for the affirmative vote of holders of at least 66  2/3% of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend the provisions of our amended and restated certificate of incorporation relating to the issuance of preferred stock and management of our business or our amended and restated bylaws, which may inhibit the ability of an acquirer to affect such amendments to facilitate an unsolicited takeover attempt;

 

   

the ability of our board of directors, by majority vote, to amend our amended and restated bylaws, which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our amended and restated bylaws to facilitate an unsolicited takeover attempt; and

 

   

advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.

 

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In addition, because we are now incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These anti-takeover provisions and other provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors and could also delay or impede a merger, tender offer or proxy contest involving our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions you desire. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware and the federal district courts of the United States will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation, which will become effective immediately prior to the completion of this offering, will provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws; any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or our amended and restated bylaws; and any action asserting a claim against us that is governed by the internal affairs doctrine. Our amended and restated certificate of incorporation further provides that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.

These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find either exclusive forum provision 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 have a material adverse effect on our business, financial condition, and results of operations.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price may decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

 

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SPECIAL NOTES REGARDING FORWARD LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on management’s beliefs and assumptions and on information currently available to management. Some of the statements in the section captioned “Prospectus summary,” “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations,” “Business,” and elsewhere in this prospectus contain forward-looking statements. In some cases, you can identify these statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of these terms or other comparable expressions that convey uncertainty of future events or outcomes, although not all forward-looking statements contain these terms.

These statements involve risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

   

our plans to obtain funding for our operations, including funding necessary to develop, manufacture and commercialize our products;

 

   

the size and growth of the markets for our products;

 

   

the rate and degree of market acceptance of our products;

 

   

our ability to seek and obtain approvals for new indications for our products;

 

   

our commercialization, marketing, and manufacturing capabilities and strategy;

 

   

our ability to compete with companies currently producing alternative treatment methods;

 

   

our expectations regarding the ease of administration associated with our products;

 

   

pricing and reimbursement for procedures performed using our products;

 

   

our plans to research, develop and commercialize our products and any other approved product;

 

   

our ability to establish the potential immunotherapeutic effects of DABRA with a study or registry;

 

   

the cost, timing and outcomes of any potential litigation involving our products;

 

   

our expectation that our capital resources and the proceeds raised in this offering will be sufficient to fund our operations for at least the next 12 months;

 

   

regulatory developments in the U.S. and in non-U.S. countries;

 

   

the performance of third parties in connection with the development of our products, including third-party suppliers;

 

   

the development, regulatory approval, efficacy and commercialization of competing products;

 

   

our ability to retain key scientific or management personnel;

 

   

the scope of protection we are able to establish and maintain for intellectual property rights covering our products and technology;

 

   

the terms and conditions of licenses granted to us and our ability to license additional intellectual property related to our products, as appropriate;

 

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our expectations regarding our ability to obtain and maintain intellectual property protection for our products;

 

   

potential claims related to our intellectual property;

 

   

the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

 

   

our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act;

 

   

our ability to develop and maintain our corporate infrastructure, including our internal controls;

 

   

our ability to develop innovative new products;

 

   

our financial performance; and

 

   

our anticipated use of the net proceeds from this offering.

In addition, you should refer to the “Risk factors” section of this prospectus for a discussion of other important factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus forms a part with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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MARKET, INDUSTRY AND OTHER DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations and market position, market opportunity, and market size, is based on information from various third-party industry and research sources, on assumptions that we have made based on that data and other similar sources, and on our knowledge of the markets for our services. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates.

In addition, industry publications, studies, and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section captioned “Risk factors” and elsewhere in this prospectus. These and other factors could cause our actual results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of 3,333,333 shares of common stock in this offering will be approximately $43.2 million at an initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that the net proceeds will be approximately $50.2 million after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) our net proceeds by $3.1 million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $14.0 million, assuming the assumed initial public offering price stays the same.

We intend to use the net proceeds of this offering as follows:

 

   

approximately $21 million for the expansion of our direct sales force and marketing of our products;

 

   

approximately $14 million to support clinical studies for new products and product enhancements including for expanded indications; and

 

   

the balance of the proceeds may be used to support other research and development activities, working capital, and general corporate purposes.

We may also use a portion of the net proceeds of this offering for acquisitions to bolster our product offerings. We have not entered into any agreements or commitments with respect to any specific acquisitions and have no understandings or agreements with respect to any such acquisition or investment at this time.

Due to the uncertainties inherent in the product development and commercialization process, it is difficult to estimate with certainty the exact amounts of the net proceeds from this offering that may be used for the above purposes. The amount and timing of our actual expenditures will depend upon numerous factors. As a result, our management will have broad discretion over the use of the net proceeds from this offering.

We are undertaking this offering in order to access the public capital markets and to increase our liquidity. At June 30, 2018, we had cash and cash equivalents of $9.8 million. Based on our current plans, we believe that our existing cash and cash equivalents and the net proceeds raised from this offering will fund our projected operating expenses and capital expenditure requirements for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect.

Pending use of the proceeds as described above, we intend to invest the proceeds in a variety of capital preservation investments, including interest-bearing, investment-grade instruments and U.S. government securities.

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on, among other factors, our financial condition, operating results, capital requirements, general business conditions, the terms of any future credit agreements and other factors that our board of directors may deem relevant. See the section entitled “Material U.S. federal income tax consequences to non-U.S. holders of the ownership and disposition of our common stock” for a discussion of certain withholding and other tax considerations with respect to dividends paid to non-U.S. holders (as defined therein) of our common stock.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, debt obligations, and capitalization as of June 30, 2018:

 

   

on an actual basis;

 

   

on an as adjusted basis to give effect to the issuance and sale of 3,333,333 shares of our common stock in this offering at an assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     As of June 30, 2018  
     Actual     As  Adjusted(1)  
    

(in thousands, except share
and per share data)

 

Cash and cash equivalents

   $ 9,769     $ 52,969  
  

 

 

   

 

 

 

Capitalization:

    

Equipment financing

     42       42  

Stockholders’ equity:

    

Preferred stock, $0.0001 par value; no shares authorized, actual; 10,000,000 shares authorized, as adjusted; no shares issued or outstanding, actual and as adjusted

     —         —    

Common stock, $0.0001 par value: 25,000,000 shares authorized, actual; 300,000,000 shares authorized, as adjusted; 8,204,251 shares issued and outstanding, actual; 11,537,584 shares issued and outstanding, as adjusted

     1       1  

Additional paid-in capital

     50,254       93,454  

Accumulated deficit

     (40,477     (40,477

Total stockholders’ equity

     9,778       52,978  
  

 

 

   

 

 

 

Total capitalization

   $ 9,820     $ 53,020  
  

 

 

   

 

 

 

 

(1)  

Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $3.1 million, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $14.0 million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The foregoing as adjusted information is illustrative only, and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with our financial statements and the related notes appearing elsewhere in this prospectus and the “Selected financial data” and “Management’s discussion and analysis of financial condition and results of operations” sections of this prospectus.

 

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The foregoing discussion and table is based on 8,204,251 shares of our common stock outstanding as of June 30, 2018 and excludes:

 

   

1,898,000 shares of common stock issuable upon exercise of options outstanding as of June 30, 2018 that were issued at an exercise price of $28.94 per share under our Compensation Plan;

 

   

1,340,301 shares of common stock issuable upon the vesting and settlement of restricted stock units outstanding as of June 30, 2018 that were issued under our Compensation Plan; and

 

   

1,990,585 shares of common stock reserved for future issuance under our stock-based compensation plans, consisting of:

 

   

61,699 shares of common stock reserved for future issuance under our Compensation Plan as of June 30, 2018, which shares will be added to the shares reserved under our 2018 Plan, which will become effective upon the completion of this offering;

 

   

1,632,134 shares of common stock reserved for future issuance under our 2018 Plan, which will become effective upon the completion of this offering;

 

   

296,752 shares of common stock reserved for future issuance under our ESPP, which will become effective upon the completion of this offering; and

 

   

any shares that become available under our 2018 Plan and ESPP, pursuant to provisions that automatically increase the reserves under such plans each year.

 

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DILUTION

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the amount per share paid by purchasers of shares of our common stock in this initial public offering and the as adjusted net tangible book value per share of our common stock immediately after completion of this offering.

Our historical net tangible book value as of June 30, 2018 was approximately $9.8 million, or $1.19 per share of common stock. Our historical net tangible book value is the amount of our total tangible assets less our total liabilities. Historical net tangible book value per share is our historical net tangible book value divided by the number of shares of common stock outstanding as of June 30, 2018.

After giving effect to the sale of 3,333,333 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value at June 30, 2018 would have been $53.0 million, or $4.59 per share of common stock. This amount represents an immediate increase in as adjusted net tangible book value of $3.40 per share to existing stockholders and an immediate dilution in as adjusted net tangible book value of $10.41 per share to new investors.

The following table illustrates this dilution:

 

Assumed initial public offering price per share

      $ 15.00  

Historical net tangible book value per share as of June 30, 2018

   $
1.19
 
  

Increase in as adjusted net tangible book value per share attributable to this offering

   $ 3.40     

As adjusted net tangible book value per share after giving effect to this offering

      $ 4.59  
  

 

 

    

 

 

 

Dilution in as adjusted net tangible book value per share to investors purchasing common stock in this offering

      $ 10.41  

Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) our as adjusted net tangible book deficit per share to new investors by $0.27, and would increase (decrease) dilution per share to new investors in this offering by $0.73, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. In addition, to the extent any outstanding options to purchase common stock are exercised or any outstanding restricted stock units vest, new investors would experience further dilution. If the underwriters exercise their option to purchase additional shares in full, the as adjusted net tangible book value per share of our common stock after giving effect to this offering would be approximately $5.20 per share, and the dilution in as adjusted net tangible book value per share to investors in this offering would be approximately $9.80 per share of common stock.

 

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The following table summarizes, on an as adjusted basis as of June 30, 2018, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and by new investors purchasing shares of common stock in this offering at the initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total
Consideration
    Average
Price Per
Share
 
     Number      Percent     Amount      Percent  

Existing stockholders

     8,204,251        71   $ 27,545,000        36   $ 3.36  

New investors

     3,333,333        29       50,000,000        64       15.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     11,537,584        100   $ 77,545,000        100  

Except as otherwise indicated, the above discussion and tables assumes no exercise by the underwriters of their option to purchase up to 499,999 additional shares from us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) each of the total consideration paid by new investors and total consideration paid by all stockholders by approximately $3.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, would increase (decrease) each of the total consideration paid by new investors and total consideration paid by all stockholders by approximately $14.0 million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. In addition, to the extent any outstanding options to purchase common stock are exercised or any outstanding restricted stock units vest, new investors will experience further dilution.

If the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own approximately 68% and our new investors would own approximately 32% of the total number of shares of our common stock outstanding after this offering.

The foregoing discussion and tables are based on 8,204,251 shares of our common stock outstanding as of June 30, 2018, and excludes:

 

   

1,898,000 shares of common stock issuable upon exercise of options outstanding as of June 30, 2018, that were issued at an exercise price of $28.94 per share under our Compensation Plan;

 

   

1,340,301 shares of common stock issuable upon the vesting and settlement of restricted stock units outstanding as of June 30, 2018 that were issued under our Compensation Plan; and

 

   

1,990,585 shares of common stock reserved for future issuance under our stock-based compensation plans, consisting of:

 

   

61,699 shares of common stock reserved for future issuance under our Compensation Plan as of June 30, 2018, which shares will be added to the shares reserved under our 2018 Plan, which will become effective upon the completion of this offering;

 

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1,632,134 shares of common stock reserved for future issuance under our 2018 Plan, which will become effective upon the completion of this offering;

 

   

296,752 shares of common stock reserved for future issuance under our ESPP, which will become effective upon the completion of this offering; and

 

   

any shares that become available for future issuance under our 2018 Plan and ESPP, pursuant to provisions that automatically increase the reserves under such plans each year.

 

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SELECTED FINANCIAL DATA

The following tables summarize our selected financial data for the periods and as of the dates indicated. We have derived our selected statements of operations data for the years ended December 31, 2016 and 2017, and our selected balance sheet data as of December 31, 2016 and 2017, from our audited financial statements and related notes included elsewhere in this prospectus. We have derived the statements of operations data for the six months ended June 30, 2017 and 2018 and the balance sheet data as of June 30, 2018 from our unaudited interim financial statements and related notes included elsewhere in this prospectus. The unaudited interim financial statements have been prepared on the same basis as the audited financial statements and reflect, in the opinion of management, all adjustments, which include only normal, recurring adjustments that are necessary to present fairly the unaudited interim financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and the results for the six months ended June 30, 2018 are not necessarily indicative of results to be expected for the full year or any other period. You should read this information together with our financial statements and related notes appearing elsewhere in this prospectus and the information in the section captioned “Management’s discussion and analysis of financial condition and results of operations.”

 

     Years Ended
December 31,
    Six Months
Ended June 30,
 
     2016     2017     2017     2018  
     (in thousands, except per share data)  

Net revenue

   $ 5,976     $ 5,870     $ 2,643     $ 2,205  

Cost of revenue

     3,138       4,165       1,813       1,726  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     2,838       1,705       830       479  

Operating expenses

        

Selling, general and administrative

     5,321       14,947       10,028       10,254  

Research and development

     1,715       4,518       3,746       1,308  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     7,036       19,465       13,774       11,562  

Operating loss

     (4,198     (17,760     (12,944     (11,083
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expense

        

Interest expense

     3       4       2       2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     3       4       2       2  

Loss before income tax expense

     (4,201     (17,764     (12,946     (11,085

Income tax expense

     1       1       1       3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (4,202     (17,765     (12,947     (11,088
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share

   $ (0.60   $ (2.35   $ (1.73   $ (1.38
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted weighted average common shares outstanding

     6,951       7,545       7,464       8,020  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     As of December 31,        
     2016     2017     As of June 30, 2018  
     (in thousands)  

Balance Sheet Data:

      

Cash and cash equivalents

   $ 3,921     $ 8,237     $ 9,769  

Working capital(1)

     2,598       7,409       6,109  

Total assets

     5,842       11,269       16,605  

Equipment financing

     107       63       42  

Accumulated deficit

     (11,624     (29,389     (40,477

Total stockholders’ (deficit) equity

     (380     (7,615     9,778  

 

(1)  

We define working capital as current assets less current liabilities.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing at the end of this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, uncertainties and assumptions. You should read the “Special note regarding forward-looking statements” and “Risk factors” sections of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a commercial-stage medical device company leveraging our advanced excimer laser-based platform for use in the treatment of vascular and dermatological diseases. We believe our products enhance patients’ quality of life by restoring blood-flow in arteries and clearing chronic skin conditions. In June 2018, we completed our 12 month commercial launch period, which included training, production, and staffing for the marketing of the DABRA laser system and disposable catheter, together referred to as DABRA, in the United States. Following the temporary placement period for DABRA and once our customers decide to continue using DABRA in their facilities, we typically enter into DABRA laser commercial usage agreements or DABRA laser placement acknowledgements with each customer, which we refer to collectively as Usage Agreements. As of June 30, 2018, we had a U.S. installed base of 31 DABRA laser systems, eight of which have signed Usage Agreements with us, and the remainder of which are temporarily placed for use in demonstrations, trials, or training. DABRA is cleared by the U.S. Food and Drug Administration, or FDA, as a device for crossing chronic total occlusions, or CTOs, in patients with symptomatic infrainguinal lower extremity vascular disease and with an intended use for ablating a channel in occlusive peripheral vascular disease. DABRA is used as a tool in the treatment of peripheral artery disease, or PAD, a form of peripheral vascular disease, which commonly occurs in the legs. These procedures are typically referred to in the medical community as atherectomy procedures, which the medical community commonly defines as any removal by surgery or specialized catheterization of an atheroma, or blockage, in an artery. Even though the medical community refers to it as atherectomy, DABRA is not cleared for atherectomy. Nevertheless, third party health payers can reimburse a procedure performed by a device which is not cleared or approved for a specific indication or procedure, if the physician determines the device and procedure are medically appropriate for a particular patient. Payers and the medical community can take a broader view than FDA in recognizing the scope of appropriate device use. We currently intend to pursue expanded indications for use for DABRA to include an atherectomy indication for use, which FDA currently defines to include a prespecified improvement in luminal patency, or a prespecified increase in the openness of the artery at a pre-defined time point, and an indication for use for the treatment of in-stent restenosis. To satisfy FDA’s data requirements to support an atherectomy indication, we believe that we will need to perform a new clinical study or collect real-world data that demonstrates an acceptable level of openness of the artery at a pre-defined time point, such as six months following a DABRA procedure, using a consistent assessment tool, e.g., an ultrasound. We believe this will allow FDA to evaluate the clinical success of a DABRA atherectomy procedure. At this time, our strategy to collect the data necessary to expand our indications is not yet certain based on numerous factors, including potential feedback from FDA. If we need to conduct a new clinical study, we may need to obtain FDA approval for an Investigational Device Exemption, or IDE, prior to initiating the study. However, we believe that while these activities will take time to complete, the incremental cost of obtaining an atherectomy indication will not be material. In addition, we intend to pursue additional uses for DABRA, including seeking regulatory clearance for the use of DABRA as a tool for the treatment of vascular blockages associated with coronary artery disease, or CAD, in-stent restenosis, and other venous and arterial occlusions, or blockages in the veins or arteries. However, there can be no assurance that

 

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DABRA will receive the necessary clearances for these additional indications. The DABRA laser system is based on the same core technology and utilizes a similar excimer laser as Pharos, a medical device that we have marketed as a tool for the treatment of proliferative skin conditions since October 2004. Pharos is designed for use in the treatment of inflammatory skin conditions and is FDA cleared as a tool used in the treatment of psoriasis, vitiligo, atopic dermatitis, and leukoderma. Because DABRA and Pharos are both based on our core excimer laser technology platform and deploy similar mechanisms of action, we benefit from economies of scale in product development, manufacturing, quality assurance and distribution.

DABRA is our minimally-invasive excimer laser and disposable catheter system that is used by physicians as a tool in the endovascular treatment of vascular blockages resulting from lower extremity vascular disease, a form of PAD, both above- and below-the-knee, by breaking down plaque to its fundamental chemistry, such as proteins, lipids and other chemical compounds, eliminating blockages by essentially dissolving them without generating potentially harmful particulates. The accumulation of plaque in arteries, which is a result of lower extremity vascular disease, most commonly occurs in the pelvis and legs. Plaque accumulation, known as atherosclerosis, causes the narrowing of arteries, thereby reducing the flow of oxygenated blood to tissue and organs. If vascular blockages are left untreated, they can increase the risk of heart attack, stroke, amputation or death. Major risk factors for PAD include age, smoking, diabetes and obesity. Despite its prevalence, PAD is underdiagnosed and undertreated relative to many other serious vascular conditions, including CAD, in part because up to half of the PAD population is asymptomatic, or shows no symptoms, and many dismiss symptoms as normal signs of aging. Recent analysis suggests that 17.6 million people in the U.S. suffer from PAD. However, only 20-30% of PAD patients are actively being treated. We anticipate revenue from this recently commercialized business segment to grow over the near term. Our sales strategy includes either selling DABRA with a transfer in title or placing it in high-volume practices for a nominal periodic fee while we retain title. We sell extended warranties for our lasers that have been purchased. Each vascular procedure requires the one-time use of our proprietary catheters which we expect to be the primary source of revenue for the vascular segment. Therefore, under both the sale and periodic fee options, we anticipate recurring revenue in catheter sales for each laser in operation. We currently use our internal sales force to target the U.S. market and we utilize distributors outside the U.S. The current retail price of the DABRA laser is approximately $70,000 and of a DABRA catheter is $1,200.

Pharos is our excimer laser device that emits highly concentrated ultraviolet light and is used as a tool in the treatment of dermatological skin disorders. Physicians use Pharos by applying 308 nanometer ultraviolet light to the skin. The FDA has granted 510(k) clearance to market Pharos in the U.S. for psoriasis, vitiligo, atopic dermatitis, and leukoderma. Pharos was granted CE mark clearance in September of 2016 for use in the treatment of psoriasis, vitiligo, atopic dermatitis and leukoderma by the application of UVB ultraviolet light. We have also received clearance to market Pharos from the China Food and Drug Administration, or CFDA, and South Korea Ministry of Drug Safety, or KFDA in the applicable jurisdictions. Pharos was commercialized in 2004 and we have shipped over 1,000 systems to customers globally. Pharos is in use in nearly every U.S. state and in over 20 markets including several non-U.S. countries. While we have entered into periodic fee arrangements, our primary strategy is to sell Pharos. We recognize additional recurring revenue from the sale of extended warranties for Pharos. We do not anticipate significant organic revenue growth in the near term from this mature product line. The current retail price of Pharos is approximately $70,000.

We incurred net losses of $4.2 million, $17.8 million, and $11.1 million for the years ended December 31, 2016 and 2017 and the six months ended June 30, 2018, respectively, and had an accumulated deficit of $40.5 million as of June 30, 2018. As of June 30, 2018, we had available cash and cash equivalents of approximately $9.8 million and had current liabilities of approximately $5.9 million and long-term liabilities of approximately $0.9 million. As of June 30, 2018, we had no preferred stock outstanding and no indebtedness through commercial loans, other than the equipment financings of

 

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$42,000. Since inception, we have financed our operations primarily through sales of our products and services and, to a lesser extent, private placements of our common stock and debt financing arrangements. We expect to continue to incur net losses for the near term as we commercialize our products in the U.S., including building our sales and marketing organization and expanding our manufacturing facilities, continuing research and development efforts, and seeking regulatory clearance for new products and product enhancements, including new indications, both in the U.S. and in select non-U.S. markets. We will need additional funding to pay expenses relating to our operating activities, including selling, general and administrative expenses and research and development expenses. Adequate funding may not be available to us on acceptable terms, or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business, financial condition, and results of operations.

Components of our Results of Operations

Net revenue

Product sales consist of the sale of DABRA and Pharos, the sale of catheters for use in the DABRA laser and the sale of consumables and replacement parts.

Services and other revenues consists primarily of sales of extended warranties which is recognized over the contract period and billable services, including repair activity, which is recognized when the service is provided. It also includes income from the rental of our lasers.

We currently use our internal sales force to target the U.S. market, and we utilize distributors outside the U.S. in markets where we have received regulatory approval. We will continue to seek regulatory approvals for our products in additional strategic markets.

Cost of revenue and gross margin

Cost of revenue for product sales consists primarily of costs of components for use in our products, the materials and labor that are used to produce our products, and the manufacturing overhead that directly support production.

Cost of revenue for services and other includes the cost of maintaining and serving the warranties on our products.

We expect cost of revenue to increase to the extent our total revenue grows.

We calculate gross margin as gross profit divided by total net revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily production volumes, the cost of direct materials, discounting practices, manufacturing costs, product yields, headcount and cost-reduction strategies. We expect our gross margin to increase over the long term as our production volume increases and certain costs remain fixed. We intend to use our design, engineering and manufacturing capabilities to further advance and improve the efficiency of our manufacturing processes, which we believe will reduce costs and increase our gross margin. While we expect gross margin to increase over the long term, it will likely fluctuate from quarter to quarter as we continue to introduce new products and adopt new manufacturing processes and technologies.

Research and development expenses

Research and development, or R&D, expenses consist of applicable personnel, consulting, materials and clinical trial expenses. R&D expenses include:

 

   

certain employee-related expenses, including salaries, benefits, travel expense and stock-based compensation expense;

 

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cost of outside consultants who assist with technology development, regulatory affairs, clinical affairs and quality assurance;

 

   

cost of clinical studies to support new products and product enhancements, including expanded indications; and

 

   

supplies used for internal research and development and clinical activities.

We expense R&D costs as incurred. In the future, we expect R&D expenses to increase as we continue to develop new products, enhance existing products and technologies and perform activities related to obtaining additional regulatory approval. However, we expect R&D expenses as a percentage of total revenue to vary over time depending on the level and timing of our new product development efforts, as well as our clinical development, clinical trial and other related activities.

Selling, general and administrative expenses

Selling, general and administrative, or SG&A, expenses consist of employee-related expenses, including salaries, benefits, travel expense, sales commissions and stock-based compensation expense. Other SG&A expenses include promotional activities, marketing, conferences and trade shows, professional services fees, including legal, audit and tax fees, insurance costs, general corporate expenses, allocated facilities-related expenses and shipping and handling costs. We expect to continue to grow our sales force and increase marketing efforts as we continue commercializing DABRA in both domestic and international markets. We also expect increased costs due to the additional legal, accounting, insurance and other expenses associated with becoming a public company. As a result, we expect SG&A expenses to increase as a percentage of total net revenue in future periods.

 

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Results of Operations

Comparison of the Six Months Ended June 30, 2017 and 2018

The following table shows our results of operations for the six months ended June 30, 2017 and 2018 (in thousands):

 

     Six months ended
June 30,
    Change  
     2017     2018     $     %  

Statements of operations data:

        

Net revenue

        

Product sales

   $ 1,301     $ 710     $ (591     (45 %) 

Service and other

     1,342       1,495       153       11
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     2,643       2,205       (438     (17 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

        

Product

     1,174       989       (185     (16 %) 

Service and other

     639       737       98       15
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     1,813       1,726       (87     (5 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     830       479       (351     (42 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Selling, general and administrative

     10,028       10,254       226       2

Research and development

     3,746       1,308       (2,438     (65 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     13,774       11,562       (2,212     (16 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (12,944     (11,083     1,861       (14 %) 

Interest expense

     2       2       —         0
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (12,946     (11,085     1,861       (14 %) 

Income tax expense

     1       3       2       200
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (12,947   $ (11,088   $ 1,859       (14 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Six Months Ended June 30, 2017 and 2018—By reportable segments

We organize our business into two operating segments based on the product specialties: the vascular segment and the dermatology segment. In deciding how to allocate resources and assess performance, we regularly evaluate the net revenue and gross profit of these segments. Amounts included within selling, general and administrative expense and research and development expense are general to us and not specific to a particular segment; therefore, these amounts are not evaluated by us on a segmented basis. Additional information on our reportable segments is contained in Note 11 to the interim condensed financial statements appearing elsewhere in this prospectus.

 

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Net revenue

The following table shows our net revenue from our two segments for the six months ended June 30, 2017 and 2018 (in thousands):

 

     Six months ended
June 30,
     Change  
       2017          2018        $     %  

Vascular

   $ 25        184      $ 159       624

Dermatology

     2,618        2,021        (597     (23 %) 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total net revenue

   $ 2,643      $ 2,205      $ (438     (17 %) 
  

 

 

    

 

 

    

 

 

   

 

 

 

Vascular

Net revenue was $25,000 and $0.2 million for the six months ended June 30, 2017 and 2018, respectively. The $0.2 million increase was primarily due to increased laser and catheter sales following the FDA clearance of our DABRA system in May 2017 and the commencement of our 12-month commercial launch period in June 2017.

Dermatology

Net revenue was $2.6 million and $2.0 million for six months ended June 30, 2017 and 2018, respectively. The decrease of approximately $0.6 million was due primarily to a decrease of $0.8 million in direct unit product sales as a result of us devoting more of our sales resources in 2018 to commercializing the DABRA laser aggregated in our vascular segment, partially offset by an increase of $0.2 million in income from service contracts on our lasers. We anticipate hiring additional sales resources in the dermatology segment devoted to addressing direct unit product sales.

Cost of revenue

The following table shows our cost of revenue from our two segments for the six months ended June 30, 2017 and 2018 (in thousands):

 

     Six months ended
June 30,
     Change  
       2017          2018        $     %  

Vascular

   $ 7    $ 471      $ 464       *  

Dermatology

     1,806        1,255        (551     (30 %) 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total cost of revenues

   $ 1,813      $ 1,726      $ (87     (5 %) 
  

 

 

    

 

 

    

 

 

   

 

 

 

 

*

Not applicable

Vascular

Cost of revenue was $7,000 and $0.5 million for the six months ended June 30, 2017 and 2018, respectively. The $0.5 million increase was primarily due increased labor, material and overhead costs to support the increased sales of our vascular products.

Dermatology

Cost of revenue was $1.8 million and $1.3 million for the six months ended June 30, 2017 and 2018, respectively. The decrease of $0.6 million was primarily due to a $0.8 million decrease in labor, materials and overhead due to the reduced number of product shipments, partially offset by an increase in service costs and depreciation of $0.2 million due to an increase in the number of leased machines under service agreements.

 

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Gross profit (loss)

The following table shows our gross profit (loss) from our two segments for the six months ended June 30, 2017 and 2018 (in thousands):

 

     Six months ended
June 30,
    Change  
       2017          2018       $     %  

Vascular

   $ 18      $ (287   $ (305     *  

Dermatology

     812        766       (46     (6 %) 
  

 

 

    

 

 

   

 

 

   

 

 

 

Total gross profit

   $ 830      $ 479     $ (351     (42 %) 
  

 

 

    

 

 

   

 

 

   

 

 

 

 

*

Not applicable

Vascular

Gross profit was $18,000 for the six months ended June 30, 2017 and gross loss was $0.3 million for the six months ended June 30, 2018. The $0.3 million change was primarily due to increased costs for labor, material and overhead which exceeded our revenue in the first six months of 2018 due to us staffing ahead of customer adoption and us providing evaluation catheters during this phase of product launch. We expect our gross loss to improve as our customers exhaust their evaluation supplies and purchase production catheters and as our growing sales force and marketing efforts establish a larger customer base.

Dermatology

Gross profit was $0.8 million for both the six months ended June 30, 2017 and 2018. The decrease of $0.6 million in revenue was offset by a $0.6 million decrease in cost of revenues.

Comparison of the Six Months Ended June 30, 2017 and 2018—General

Selling, general and administrative expenses.    SG&A expenses were $10.0 million and $10.3 million for the six months ended June 30, 2017 and 2018, respectively. The $0.2 million increase was primarily related to an increase of $1.4 million in personnel costs due to expanding our sales force and hiring administrative staff as we prepare to operate as a public company, an increase of $0.9 million in legal and consulting fees as we prepare to operate as a public company, an increase of $0.3 million in travel and trade shows, $0.2 million in increased facility costs due to our expansion to a larger facility, an increase of $0.1 million in provision for doubtful accounts and an increase of $0.4 million in various other administrative costs, partially offset by a $3.2 million decrease in stock-based compensation expense.

Research and development expenses.    R&D expenses were $3.7 million and $1.3 million for the six months ended June 30, 2017 and 2018, respectively. The $2.4 million decrease was primarily due to a decrease of $2.2 million in stock-based compensation expense and $0.2 million less personnel and resources devoted to catheter research in 2018 as a result of the completion of our initial commercial product development in 2017.

 

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Comparison of the Years Ended December 31, 2016 and 2017

The following table shows our results of operations for the years ended December 31, 2016, and 2017 (in thousands):

 

     Year ended
December 31,
    Change  
     2016     2017     $     %  

Statements of operations data:

        

Net revenue

        

Product sales

   $ 3,817     $ 3,067     $ (750     (20 %) 

Service and other

     2,159       2,803       644       30
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     5,976       5,870       (106     (2 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

        

Product

     2,289       2,854       565       25

Service and other

     849       1,311       462       54
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     3,138       4,165       1,027       33
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     2,838       1,705       (1,133     (40 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Selling, general and administrative

     5,321       14,947       9,626       181

Research and development

     1,715       4,518       2,803       163
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     7,036       19,465       12,429       177
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (4,198     (17,760     (13,562     323

Interest expense

     3       4       1       33
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (4,201     (17,764     (13,563     323

Income tax expense

     1       1       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (4,202   $ (17,765   $ (13,563     323
  

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of years ended December 31, 2016 and 2017—By reportable segments

We organize our business into two operating segments based on the product specialties: the vascular segment and the dermatology segment. In deciding how to allocate resources and assess performance, we regularly evaluate the net revenue and gross profit of these segments. Amounts included within selling, general and administrative expense and research and development expense are general to us and not specific to a particular segment; therefore, these amounts are not evaluated by us on a segmented basis. Additional information on our reportable segments is contained in Note 14 to the financial statements appearing elsewhere in this prospectus.

Net revenue

The following table shows our net revenue from our two segments for the years ended December 31, 2016 and 2017 (in thousands):

 

     Year ended
December 31,
     Change  
     2016      2017      $     %  

Vascular

   $ —        $ 259      $ 259       *  

Dermatology

     5,976        5,611        (365     (6%)  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total net revenue

   $ 5,976      $ 5,870      $ (106     (2%)  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

*

Not applicable

 

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Vascular

DABRA was introduced to the market in 2017 resulting in net revenue of $0.3 million for the year ended December 31, 2017, predominantly from the sale of catheters.

Dermatology

Net revenue was $6.0 million and $5.6 million for the years ended December 31, 2016 and 2017, respectively. The decrease of approximately $0.4 million was due primarily to a decrease of $1.0 million in direct unit product sales as a result of us devoting a portion of our sales resources in 2017 to commercializing the DABRA laser, aggregated in our vascular segment, partially offset by an increase of $0.3 million in service contract revenue and $0.3 million in income from the rental of our lasers.

Cost of revenue

The following table shows our cost of revenue from our two segments for the years ended December 31, 2016 and 2017 (in thousands):

 

     Year ended
December 31,
     Change  
     2016      2017      $      %  

Vascular

   $ —        $ 193      $ 193        *    

Dermatology

     3,138        3,972        834        27%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of revenues

   $ 3,138      $ 4,165      $ 1,027        33%  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

Not applicable

Vascular

DABRA was introduced to the market in 2017 resulting in cost of revenue of $0.2 million for the year ended December 31, 2017, predominantly from catheter shipments.

Dermatology

Cost of revenue was $3.1 million and $4.0 million for the years ended December 31, 2016 and 2017, respectively. The increase of $0.9 million was primarily due to a $0.6 million increase in stock-based compensation due to the increased fair market value of stock-based compensation awards and additional grants, a $0.4 million increase in maintenance costs due to the increased number of machines under service contracts, partially offset by a decrease in direct and indirect product costs of $0.2 million due to a decrease in the number of direct product sales as a result of us devoting a portion of our sales and production resources in 2017 to commercializing the DABRA laser, aggregated in our vascular segment.

Gross profit

The following table shows our gross profit from our two segments for the years ended December 31, 2016 and 2017 (in thousands):

 

     Year ended
December 31,
     Change  
     2016      2017      $     %  

Vascular

   $ —        $ 66      $ 66       *    

Dermatology

     2,838        1,639        (1,199     (42%)  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total gross profit

   $ 2,838      $ 1,705      $ (1,133     (40%)  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

*

Not applicable

 

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Vascular

DABRA was introduced to the market in 2017 resulting in gross profit of $0.1 million for the year ended December 31, 2017, predominantly from catheter shipments.

Dermatology

Gross profit was $2.8 million and $1.6 million for the years ended December 31, 2016 and 2017, respectively. The decrease of $1.2 million was primarily due to a $0.6 million increase in stock-based compensation due to the increased fair market value of stock-based compensation awards and additional grants, a $0.5 million decrease in product sales and a decrease of $0.1 million due to increases in the cost of revenue driven by higher maintenance costs for devices under service contracts. Notes 2 and 11 to the financial statements appearing elsewhere in this prospectus more fully describe the accounting treatment for stock-based compensation awards.

Comparison of years ended December 31, 2016 and 2017—General

Selling, general and administrative expenses.     SG&A expenses were $5.3 million and $14.9 million for the years ended December 31, 2016 and 2017, respectively. The $9.6 million increase was primarily related to an increase of $7.4 million in stock-based compensation due to the increased fair market value of stock-based compensation awards and additional grants, $0.8 million related to increased sales personnel costs as a result of increased headcount, $0.5 million in travel and trade shows related to selling and marketing activities, $0.4 million in facility costs due to the addition of leased locations, which included a charge of $0.2 million for abandoning the lease on a facility that was consolidated and $0.5 million in professional fees, freight and various other administrative costs. Notes 2 and 11 to the financial statements appearing elsewhere in this prospectus more fully describe the accounting treatment for stock-based compensation awards.

Research and development expenses.     R&D expenses were $1.7 million and $4.5 million for the years ended December 31, 2016 and 2017, respectively. The $2.8 million increase was primarily due to an increase of $2.3 million in stock-based compensation due to the increased fair market value of stock-based compensation awards and additional grants and $0.5 million due to increased personnel costs as a result of increased headcount and consulting costs related to technology development of the DABRA laser and catheters. Notes 2 and 11 to the financial statements appearing elsewhere in this prospectus more fully describe the accounting treatment for stock-based compensation awards.

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures. These Non-GAAP Measures exclude the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Comparability to our results of operations to other companies may be impacted by our stock-based compensation which was classified as a liability and revalued at each reporting period with the change in fair value recorded to compensation expense in the statement of operations.

 

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We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. Some of these limitations are that:

 

   

EBITDA excludes certain recurring, non-cash charges such as depreciation of fixed assets and amortization of acquired intangible assets and, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future; and

 

   

Adjusted EBITDA further excludes stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy as well as certain non-recurring items which may affect comparability of our core operations such as the loss on abandonment of facility.

In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison.

A reconciliation for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with U.S. GAAP is included below. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business. We define Adjusted EBITDA as our GAAP net loss as adjusted to exclude depreciation, amortization, interest expense, income tax expense, stock-based compensation and loss on abandonment of facility.

The following is a reconciliation of Net loss to Adjusted EBITDA (in thousands):

 

     Year Ended
December 31,
    Six Months Ended
June 30,
 
     2016     2017     2017     2018  
     (in thousands)  

Statement of Operations Data:

        

Net loss

   $ (4,202   $ (17,765   $ (12,947   $ (11,088

Depreciation and amortization

     95       218       86       231  

Interest expense

     3       4       2       2  

Income tax expense

     1       1       1       3  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     (4,103     (17,542     (12,858     (10,852

Stock-based compensation

     2,300       12,706       10,884       5,204  

Loss on abandonment of facility

     —         212       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     (1,803     (4,624   $ (1,974   $ (5,648
  

 

 

   

 

 

   

 

 

   

 

 

 

For fiscal 2016, Adjusted EBITDA was $(1.8) million compared to $(4.6) million for fiscal 2017. The decrease in Adjusted EBITDA primarily reflects lower gross profit and higher employee and consulting costs due to increased sales personnel and research and development efforts related to DABRA in fiscal 2017 compared to fiscal 2016.

For the six months ended June 30, 2017, Adjusted EBITDA was $(2.0) million compared to $(5.9) million for the six months ended June 30, 2018. The decrease in Adjusted EBITDA primarily reflects lower gross profit and higher personnel costs due to expanding our sales force and hiring

 

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administrative staff as we prepare to operate as a public company in the first half of 2018 compared to the first half of 2017. In the first half of 2018 we also incurred increased facility costs due to our expansion to a larger facility and higher legal and consulting fees as we prepare to operate as a public company compared to the first half of 2017.

Liquidity and Capital Resources

As of June 30, 2018, we had cash and cash equivalents of $9.8 million and an accumulated deficit of $40.5 million. Our primary sources of capital have been from the sale of our products and services and, to a lesser extent, private placements of common stock and debt financing arrangements. Through June 30, 2018, we raised an aggregate of $27.5 million in proceeds from private placements of our common stock.

We believe that cash and cash equivalents as of June 30, 2018 and the proceeds raised in this offering will be sufficient to fund our operations for at least the next 12 months. As we continue to commercialize DABRA, we expect our costs and expenses to increase in the future as we continue the development of a direct sales force, the expansion of our manufacturing facilities, and as we continue to make substantial expenditures on research and development, including the costs of any future clinical studies. Additionally, we expect to incur additional costs as a result of operating as a public company. Our future capital requirements will depend on many factors, including:

 

   

the revenue generated by sales of our DABRA and Pharos products, related consumables, and other products that may be approved in the U.S. and select non-U.S. markets;

 

   

the costs and expenses of expanding our U.S. and international sales and marketing infrastructure and our manufacturing operations;

 

   

the extent to which our excimer lasers are adopted by the physician community;

 

   

the ability of our customers to obtain adequate reimbursement from third party payors for procedures performed using DABRA;

 

   

the degree of success we experience in commercializing our excimer lasers and related consumables;

 

   

the costs, timing and outcomes of any future clinical studies and regulatory reviews, including to seek and obtain approvals for new indications for our products;

 

   

the costs and timing of developing variations of our excimer lasers, and, if necessary, obtaining FDA clearance to market such variations;

 

   

the emergence of competing or complementary technologies;

 

   

the number and types of future products we develop and commercialize;

 

   

the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; and

 

   

the level of our selling, general and administrative expenses.

 

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Cash Flows

 

     Year ended December 31,     Six Months Ended June 30,  
     Actual     Change     Actual     Change  
     2016     2017     $     %     2017     2018     $     %  

Net cash (used in) provided by:

                

Operating activities

   $ (1,886   $ (5,523   $ (3,637     (193 %)    $ (2,771   $ (5,966   $ (3,195     (115 %) 

Investing activities

     (210     (547     (337     (160 %)      (241     (251     (10     (4 %) 

Financing activities

     5,373       10,386       5,013       93     28       7,749       7,721       *  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 3,277     $ 4,316     $ 1,039       32   $ (2,984   $ 1,532     $ 4,516       151
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*

Not applicable

Net cash used in operating activities

During the year ended December 31, 2016, net cash used in operating activities was $1.9 million, consisting primarily of a net loss of $4.2 million and an increase in net operating assets of $0.1 million primarily related to decreases in accounts receivables, accrued expenses and inventories partially offset by increases in accounts payable and deferred revenue. These items were partially offset by non-cash charges of $2.4 million consisting of depreciation, stock-based compensation expense and common stock issued in exchange for services.

During the year ended December 31, 2017, net cash used in operating activities was $5.5 million, consisting primarily of a net loss of $17.8 million and an increase in net operating assets of $0.8 million, primarily related to decreases in accounts receivable, inventory and deferred revenue. These items were partially offset by non-cash charges of $13.1 million, consisting of depreciation, stock-based compensation expense, common stock issued in exchange for services and a loss on disposal of property and equipment.

Net cash used in operating activities was $2.8 million for the six months ended June 30, 2017. The use of cash in operating activities in the six months ended June 30, 2017, was primarily a result of a net loss of $12.9 million partially offset by non-cash charges of $10.9 million of stock-based compensation and $0.1 million of depreciation expense. Adding to the use of cash was $0.7 million payments for inventory and $0.1 million for other net operating assets and liabilities.

Net cash used in operating activities was $6.0 million for the six months ended June 30, 2018. The use of cash in operating activities in the six months ended June 30, 2018, was primarily a result of a net loss of $11.1 million, partially offset by non-cash charges of $5.2 million of stock-based compensation, $0.2 million of depreciation expense and $0.1 million provision of doubtful accounts. Adding to the use of cash was payments of $0.4 million in net operating asset and liabilities.

Net cash used in investing activities

During the year ended December 31, 2016, net cash used in investing activities was $0.2 million consisting primarily of purchases of manufacturing equipment and selling and accounting software.

During the year ended December 31, 2017, net cash used in investing activities was $0.5 million consisting primarily of purchases of manufacturing equipment.

 

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Net cash used in investing activities was $0.2 million for the six months ended June 30, 2017, consisting primarily of purchases of manufacturing equipment.

Net cash used in investing activities was $0.3 million for the six months ended June 30, 2018, consisting primarily of purchases of manufacturing equipment, tenant improvements and vehicles for our sales force.

Net cash provided by financing activities

During the year ended December 31, 2016, net cash provided by financing activities was $5.4 million, consisting primarily of net proceeds of $5.3 million from the issuance of common stock related to a private placement financing and $0.1 million in equipment financing proceeds.

During the year ended December 31, 2017, net cash provided by financing activities was $10.4 million from the issuance of common stock related to a private placement financing.

Net cash provided by financing activities was $28,000 for the six months ended June 30, 2017, and was primarily a result of proceeds of $0.1 million from the issuance of common stock related to a private placement financing, partially offset by $22,000 of payments on our financed equipment.

Net cash provided by financing activities was $7.8 million for the six months ended June 30, 2018, and was primarily a result of proceeds of $7.9 million from the issuance of common stock related to a private placement financing, partially offset by $0.1 million in payments related to our planned initial public offering and $20,000 of payments on our financed equipment.

OFF-BALANCE SHEET ARRANGEMENTS

We do not engage in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, as a part of our ongoing business. Accordingly, we did not have any off-balance sheet arrangements during any of the periods presented.

RELATED PARTY TRANSACTIONS

Information concerning related party transactions is set forth in the section captioned “Certain relationships and related party transactions.”

Contractual Obligations

Our principal obligations consist of the operating lease for our facilities. The following table sets out, as of December 31, 2017, our contractual obligations due by period (in thousands):

 

     Payments due by period  
     Total      Less than
1 Year
     1-3
Years
     3-5
Years
     More than
5 Years
 
     (in thousands)  

Operating lease obligations(1)

   $ 4,855      $ 517      $ 1,014      $ 961      $ 2,363  

Equipment Financing

     63        44        19        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,918      $ 561      $ 1,033      $ 961      $ 2,363  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  

Consists of obligations under multi-year, non-cancelable building leases for our facilities in Carlsbad, California. One lease expired in May 2018 and the remaining two leases expire in December 2021 and December 2027.

 

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Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.

While our significant accounting policies are more fully described in the notes to our financial statements appearing elsewhere in this prospectus, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and require our most difficult, subjective and complex judgments.

Revenue recognition

Product Sales

We recognize revenue from product sales when the following four criteria have been met: (i) the product has been shipped or services have been performed and we have no significant remaining obligations; (ii) persuasive evidence of an arrangement exists; (iii) the price to the buyer is fixed or determinable; and (iv) collection is reasonably assured. Revenues from product sales are recorded net of provisions for expected returns and cash discounts.

None of our sales contain right-of-return provisions and we have historically only experienced nominal returns. However, we estimate a provision for expected returns for the catheter sales used in our DABRA laser system. The provision is based on our best estimate of the number of products that will be returned as defective products based on the nature of the consumable. No provision is made for expected returns from other product sales, including the sales of devices, as we do not have a history of returns. If it becomes known that actual return rates deviate from our original estimates, the provision for expected returns will be adjusted accordingly. The provision for expected returns is recorded as a reduction of accounts receivable and product sales.

We also offer certain cash discounts associated with the sales of our products. These discounts are negotiated on a transaction by transaction basis and therefore do not include any estimate at the time of sale. The discounts are recorded as a reduction to accounts receivable and product sales.

For shipment of our products, we take into account the time at which to recognize revenue, generally this is when title and risk of loss is transferred.

Multiple Element Arrangements

We regularly enter into contracts where revenue is derived from multiple deliverables, including products or services. These contracts typically include an instrument and extended service contracts. Revenue recognition for contracts with multiple deliverables is based on the individual units of accounting determined to exist in the contract. A delivered item is considered a separate unit of accounting when the delivered item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis.

 

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Arrangement consideration is then allocated to those separate units of account based on their relative selling price. When applying the relative selling price method, the selling price for each deliverable is determined using the following hierarchy: (i) vendor-specific objective evidence, or VSOE, of the selling price; (ii) third-party evidence of selling price; or (iii) best estimated selling price. Our records revenue related to these multiple deliverables as products are delivered and services are performed. In order to establish VSOE of selling price, we must regularly sell the product or service on a standalone basis with a substantial majority priced within a relatively narrow range. In cases where there are not a sufficient number of standalone sales and VSOE of selling price cannot be determined, then we utilize best estimated selling price, or BESP.

We determine BESP for an individual element based on our average selling price of that discrete element during the annual period, excluding transactions that are not representative of standalone sales. We regularly review and maintain our BESP and update these estimates at least annually.

Billable Service Arrangements

Revenue from billable services, including repair activity, is recognized when the service is provided.

Extended Warranty Arrangements

Revenues received with respect to extended warranties on products are recognized over the duration of the extended warranty period on a straight-line basis.

Lease Arrangements

We also derive revenue pursuant to product lease agreements. These leases are classified as operating leases in accordance with the relevant accounting guidelines, and the related revenue is recognized on a straight-line basis.

Distributor Transactions

In certain markets, we sell products and provide services to customers through distributors that specialize in medical device products. In cases where the product is delivered to a distributor, revenue recognition generally occurs when title transfers to the distributor. The terms of sales transactions through distributors are generally consistent with the terms of direct sales to customers. These transactions are accounted for in accordance with our revenue recognition policy described herein.

Stock-based compensation expense

We evaluate whether an award should be classified and accounted for as a liability award or equity award for all stock-based compensation awards granted.

Stock-based compensation for liability awards issued to employees and nonemployee service providers is measured based on fair value of the award using the Black Scholes option pricing model. Changes in the fair value of a liability incurred under a share-based payment arrangement that occur during the requisite service period are recognized as compensation cost over that period. The percentage of the fair value that is accrued as compensation cost at the end of each period is equal to the percentage of the requisite service that has been rendered at that date. Any difference between the amount for which a liability award is settled and its fair value at the settlement date is recorded as an adjustment to compensation cost in the period of settlement.

Stock-based compensation expense for equity instruments issued to employees and nonemployee service providers is measured based on estimating the fair value of each stock option on the date of grant using the Black Scholes option pricing model. Equity instruments issued to nonemployees are valued using the

 

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Black Scholes option pricing model and are subject to revaluation as the underlying equity instruments vest.

We recognize stock-based compensation expense as follows:

 

    

Employees

  

Nonemployees

Service condition only    Straight-line    Re-value through the performance commitment date
Performance criterion is probable of being met:      
Service criterion is complete    Recognize the grant date fair value of the award once the performance criterion is considered probable of occurrence    Re-value the award once the performance criterion is considered probable of occurrence and recognize expense for the then fair value of the award
Service criterion is not complete    Straight-line    Straight-line, except the award is re-valued through the performance commitment date
Performance criterion is not probable of being met    No expense is recognized until the performance criterion is considered probable, at which point expense is recognized per above    No expense is recognized until the performance criterion is considered probable, at which point expense is recognized per above

As of December 31, 2016 and 2017, all stock-based compensation awards have been classified as liabilities in the financial statements which is revalued at each reporting period with the change in fair value recorded to compensation expense. The fair value of the stock-based compensation liability was estimated using the Black Scholes option pricing model and the assumptions used in the model are noted below:

 

   

Fair value of our common stock—Our shares are not traded in any public market. The common stock value as of the date of grant was based on the share price of recent equity issuances, if available. If there were no such recent transactions, our share valuation was estimated using both the income and market approaches, which were weighted 50% each. A discount of 35% was then applied for lack of marketability for our common stock. As of the reporting date for each period presented, the dates at which the stock-based compensation liability was remeasured at fair value, the common stock price was based on the recent equity issuances with new third party investors who were not previous shareholders of Ra Medical.

 

   

Risk-free interest rate—The risk free interest rate approximates the implied yield available on United States Treasury securities with an equivalent remaining term.

 

   

Volatility—Expected volatility is based on the historical volatilities of certain “guideline” companies.

 

   

Expected dividend yield—Expected dividend yield is based on dividends historically paid by us.

 

   

Expected life—The expected life is based on the “simplified” method using the average of the term and vesting period.

 

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As described in Note 9 of the unaudited interim condensed financial statements, on June 4, 2018, our board of directors authorized replacement equity awards of stock options and, effective June 8, 2018, restricted stock units, or collectively, the Replacement Awards. The issuance of the Replacement Awards and cancellation of the stock-based compensation awards classified as liabilities was treated as a modification. As of the date of the modification, which resulted in the settlement of the stock-based compensation liability, the fair value of the stock-based compensation liability was estimated using the Black Scholes option pricing model and the assumptions used in the model are noted below:

 

   

Fair value of our common stock—The common stock price was estimated utilizing a hybrid method, a combination of the Probability Weighted Expected Return Method, or PWERM, and Option Pricing Model, or OPM. The estimate incorporated a near-term IPO scenario using PWERM weighted at 80%. Other near-term exit events, a long-term stay private case, and dissolution were all considered as non-IPO scenarios using OPM, and were weighted at 20%. The estimate also reflected a 10% and 15% discount for lack of marketability under PWERM and OPM, respectively.

 

   

Risk-free interest rate—The risk free interest rate approximates the implied yield available on United States Treasury securities with an equivalent remaining term.

 

   

Volatility—Expected volatility is based on the historical volatilities of certain “guideline” companies.

 

   

Expected dividend yield—Expected dividend yield is based on dividends historically paid by us.

 

   

Expected life—The expected life is based on the “simplified” method using the average of the term and vesting period.

For stock awards after the completion of this offering, our board of directors intends to determine the fair value of each share of underlying common stock based on the closing price of our common stock as reported on the date of grant.

If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. To the extent that our assumptions are incorrect, the amount of stock-based compensation recorded will change.

Income taxes

We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We assess the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, the net deferred tax assets have been fully offset by a valuation allowance.

In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or IRC, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, and certain other tax assets to offset future taxable income, and an ownership change is generally defined as a cumulative change of 50% or more in the ownership positions of certain stockholders during a rolling three-year period. We have not completed a formal study to determine if any ownership changes within the meaning of IRC Section 382 have occurred.

 

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If ownership changes within the meaning of IRC Section 382 have occurred, it could restrict our ability to use NOL carryforwards and research and development tax credits generated since inception. Limitations on our ability to use NOL carryforwards and research and development tax credits to offset future taxable income could require us to pay U.S. federal income taxes earlier than would be required if such limitations were not in effect. Similar rules and limitations may apply for state income tax purposes.

Internal Control Over Financial Reporting

In connection with our 2017 audit, as part of the restatement to the 2016 financial statements described in Note 3 to the annual financial statements, we identified a material weakness in the design of our internal controls related to the administration of capital stock transactions, including stock issuances and a reverse stock split which were not effected in accordance with the requirements of applicable law and the communication and authorization of stock option awards which were not validly authorized. While we have designed and implemented, or expect to implement, measures that we believe address these control weaknesses, we continue to develop our internal controls, processes and reporting systems by, among other things:

 

   

hiring qualified personnel with expertise to perform specific functions, including our Chief Financial Officer;

 

   

the engagement of third party legal counsel to assist in the administration of capital stock transactions; and

 

   

designing and implementing improved processes and internal controls, including ongoing senior management review and audit committee oversight.

We cannot assure you that the measures we have taken to date, and are continuing to implement, will be sufficient to remediate the material weakness we have identified or avoid potential future material weaknesses. If the steps we take do not correct the material weakness in a timely manner, we will be unable to conclude that we maintain effective internal control over financial reporting. Accordingly, there could continue to be a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis.

Jobs Act Accounting Election

In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, therefore, we are not subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption. See Note 2 to the interim condensed financial statements included elsewhere in this prospectus for a description of relevant new accounting pronouncements.

 

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Quantitative And Qualitative Disclosures About Market Risk

We are exposed to market risks in the ordinary course of our business, including the effects of interest rate changes and foreign currency fluctuations. Information relating to quantitative and qualitative disclosures about these market risks is described below.

Interest Rate Sensitivity

We had cash and cash equivalents of $9.8 million as of June 30, 2018, which came from sales of our products and services and, to a lesser extent, private placements of common stock and debt financing arrangements. The goals of our investment policy are liquidity and capital preservation; we do not enter into investments for trading or speculative purposes. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short term nature of our cash and cash equivalents. A hypothetical 10% relative change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.

Foreign Currency Exchange Risk

As we expand internationally our results of operations and cash flows may become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Most of our revenue is denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States. As of June 30, 2018, the effect of a 10% adverse change in exchange rates on foreign denominated cash, receivables and payables would not have been material for the periods presented. As our operations in countries outside of the United States grow, our results of operations and cash flows may be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. To date, we have not entered into any material foreign currency hedging contracts although we may do so in the future.

 

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BUSINESS

Overview

We are a commercial-stage medical device company leveraging our advanced excimer laser-based platform for use in the treatment of vascular and dermatological diseases. We believe our products enhance patients’ quality of life by restoring blood-flow in arteries and clearing chronic skin conditions. In June 2018, we completed our 12 month commercial launch period, which included training, production, and staffing for the marketing of the DABRA laser system and disposable catheter, together referred to as DABRA, in the United States. Following the temporary placement period for DABRA and once our customers decide to continue using DABRA in their facilities, we typically enter into DABRA laser commercial usage agreements or DABRA laser placement acknowledgements with each customer, which we refer to collectively as Usage Agreements. The terms of the Usage Agreements vary by customer, but each Usage Agreement provides for the specific terms of continued use of DABRA, including periodic maintenance fees. As of June 30, 2018, we had a U.S. installed base of 31 DABRA laser systems, eight of which have signed Usage Agreements with us, and the remainder of which are temporarily placed for use in demonstrations, trials, or training. DABRA is cleared by the U.S. Food and Drug Administration, or FDA, as a device for crossing chronic total occlusions, or CTOs, in patients with symptomatic infrainguinal lower extremity vascular disease and with an intended use for ablating a channel in occlusive peripheral vascular disease. DABRA is used as a tool in the treatment of peripheral artery disease, or PAD, a form of peripheral vascular disease, which commonly occurs in the legs. These procedures are typically referred to in the medical community as atherectomy procedures, which the medical community commonly defines as any removal by surgery or specialized catheterization of an atheroma, or blockage, in an artery. Even though the medical community refers to it as atherectomy, DABRA is not cleared for atherectomy. Nevertheless, third party health payers can reimburse a procedure performed by a device which is not cleared or approved for a specific indication or procedure, if the physician determines the device and procedure are medically appropriate for a particular patient. Payers and the medical community can take a broader view than FDA in recognizing the scope of appropriate device use. We currently intend to pursue expanded indications for use for DABRA to include an atherectomy indication for use, which FDA currently defines to include a prespecified improvement in luminal patency, or a prespecified increase in the openness of the artery at a pre-defined time point, and an indication for use for the treatment of in-stent restenosis. To satisfy FDA’s data requirements to support an atherectomy indication, we believe that we will need to perform a new clinical study or collect real-world data that demonstrates an acceptable level of openness of the artery at a pre-defined time point, such as six months following a DABRA procedure, using a consistent assessment tool, e.g., an ultrasound. We believe this will allow FDA to evaluate the clinical success of a DABRA atherectomy procedure. At this time, our strategy to collect the data necessary to expand our indications is not yet certain based on numerous factors, including potential feedback from FDA. If we need to conduct a new clinical study, we may need to obtain FDA approval for an Investigational Device Exemption, or IDE, prior to initiating the study. However, we believe that while these activities will take time to complete, the incremental cost of obtaining an atherectomy indication will not be material. In addition, we intend to pursue additional uses for DABRA, including seeking regulatory clearance for the use of DABRA as a tool for the treatment of vascular blockages associated with coronary artery disease, or CAD, in-stent restenosis, and other venous and arterial occlusions, or blockages in the veins or arteries. However, there can be no assurance that DABRA will receive the necessary clearances for these additional indications. The DABRA laser system is based on the same core technology and utilizes a similar excimer laser as Pharos, a medical device that we have marketed as a tool for the treatment of proliferative skin conditions since October 2004. Pharos is designed for use in the treatment of inflammatory skin conditions and is FDA cleared as a tool used in the treatment of psoriasis, vitiligo, atopic dermatitis, and leukoderma. Because DABRA and Pharos are both based on our core excimer laser technology platform and deploy similar mechanisms of action, we benefit from economies of scale in product development, manufacturing, quality assurance and distribution.

 

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DABRA.    DABRA (Destruction of Arteriosclerotic Blockages by Laser Radiation Ablation) is our minimally-invasive excimer laser and disposable catheter system that is used by physicians as a tool in the endovascular treatment of vascular blockages resulting from lower extremity vascular disease, a form of PAD, both above- and below-the-knee, by breaking down plaque to its fundamental chemistry, such as proteins, lipids and other chemical compounds, eliminating blockages by essentially dissolving them without generating potentially harmful particulates. The accumulation of plaque in arteries, which is a result of lower extremity vascular disease, most commonly occurs in the pelvis and legs. Plaque accumulation, known as atherosclerosis, causes the narrowing of arteries, thereby reducing the flow of oxygenated blood to tissue and organs. If vascular blockages are left untreated, they can increase the risk of heart attack, stroke, amputation or death. Major risk factors for PAD include age, smoking, diabetes and obesity. Despite its prevalence, PAD is underdiagnosed and undertreated relative to many other serious vascular conditions, including CAD, in part because up to half of the PAD population is asymptomatic, or shows no symptoms, and many dismiss symptoms as normal signs of aging. Recent analysis suggests that 17.6 million people in the U.S. suffer from PAD. However, only 20-30% of PAD patients are actively being treated.

Current treatments for vascular blockages associated with PAD are largely endovascular and include angioplasty, stenting and atherectomy. Bypass surgery, which was frequently used in the past, is costly and often results in complications, including high levels of post-surgery pain and lengthy hospital stays and recovery times. Endovascular treatments employ catheter-based products for the displacement or removal of plaque. These treatments also have limitations in their safety or efficacy profiles and frequently result in recurrence of the disease. We believe one of the main contributing factors to high restenosis, or the reaccumulation of blockages, rates for PAD patients treated with endovascular technologies is the amount of vascular injury that occurs during an intervention. Angioplasty balloons, invented in the 1970’s, held a great deal of promise, but the trauma due to their inflation often causes the vessel to reocclude either immediately or over time. Stents, invented in the 1980’s, were developed to help keep the arteries open. However, stents can also promote reocclusion and are susceptible to fractures. Devices that remove plaque, including the excimer laser, invented in the 1990’s, were developed to overcome the drawbacks of angioplasty balloons and stents, which push the plaque to the side of the vessel. DABRA was designed to remove the plaque with less trauma in order to improve patient outcomes when compared to other competing devices.

DABRA is a novel technology for use in the endovascular treatment of vascular blockages resulting from lower extremity vascular disease. We believe that our liquid-filled, full aperture ratio catheter allows for a less traumatic endovascular treatment for the removal of vascular blockages and offers significant benefits over competing treatments and therapies. DABRA is easy to use and can cross and debulk, or reduce or remove, a broad range of blockage types without the use of a guidewire. Although DABRA is suitable for use as a monotherapy, or a therapy that uses one type of treatment, it is predominantly used with angioplasty balloons and also can be used adjunct to drug-eluting balloons, stents, and other endovascular treatments. DABRA employs photochemical ablation, or the removal of body tissue by using photons, to remove blockages by breaking the bonds of the obstructing plaque directly. Unlike many treatments for PAD and other vascular diseases that may damage the arterial wall, DABRA quickly photochemically dissolves plaque with minimal vascular trauma. DABRA is minimally invasive and designed to not stretch the arterial walls or penetrate the layers of arterial tissue known as the subintimal space, which can lead to dissection, or a tear in the inner lining of the vessel wall, or perforation, or a hole or a break in the vessel wall, although these events may still occur with DABRA and other competing products. We believe that endovascular treatments using DABRA may be more durable and longer lasting than treatments using other devices because of the reduced mechanical trauma, thermal trauma, and barometric trauma, or trauma due to change in pressure inside the vessel. Independent in vivo and in vitro research studies have demonstrated that 308 nanometer excimer laser light, which is the same wavelength used in DABRA, increases T-cell apoptosis, or cell death, which may produce an immunosuppressive effect. While we have not established the benefits of this potential

 

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immunosuppressant effect in the vasculature, or blood vessels such as arteries or veins, we intend to conduct a registry or study to identify any immunotherapeutic benefits.

The safety and effectiveness of the DABRA laser system and disposable DABRA catheter is supported by our pivotal study, a non-randomized, single-arm, prospective, multi-site study conducted to evaluate plaque photoablation using DABRA in the endovascular treatment of chronic total occlusions resulting from lower extremity vascular disease. The study enrolled 64 patients at four sites with both above-the-knee and below-the-knee lesions. The final study results demonstrated 94% effectiveness in successful crossing of the target lesion based on angiographic analysis, or a medical imaging technique used to visualize the inside of blood vessels, at time of the procedure with 0% reported serious adverse events. In a study conducted by Spectranetics Corporation, or Spectranetics, as part of its 510(k) application for its CLiRpath Excimer Laser Catheter device, which was the predicate device for our 510(k) application, Spectranetics reported a 79% crossing success with its catheter device and a 72% procedure success in a total of 47 cases. Cumulatively, Spectranetics reported that there were 16, or 34%, serious adverse events reported during the six month follow-up period with the most frequently observed event being reintervention, which occurred in six, or 13%, of cases. The endpoints of both studies were at the time of procedure and at 30 days. Although our pivotal study was not head-to-head with the Spectranetics study, and we may not claim superiority of safety or efficacy, we believe that the patient population in our pivotal study that supported our 510(k) application was substantially similar to the patient population in the Spectranetics study.

In May 2017, we received FDA 510(k) clearance to market the DABRA laser system and disposable DABRA catheter in the U.S. for crossing chronic total occlusions in patients with symptomatic infrainguinal lower extremity vascular disease and with an intended use for ablating a channel in occlusive peripheral vascular disease. In June 2018, we completed our 12 month commercial launch period, which included training, production, and staffing for the marketing of DABRA in the United States. We market DABRA in the U.S. through our direct sales force, comprised of 15 sales representatives as of June 30, 2018, which places lasers in catheterization laboratories that perform high volumes of endovascular procedures, including plaque removal in peripheral arteries. We have plans to increase sales by further expanding this organization. We are initially focused on placing DABRA in outpatient based laboratories, or OBLs, and subsequently we intend to expand into the hospital catheterization laboratory market. Reimbursement claims for DABRA procedures are typically submitted by the provider to Medicare or another third-party payor using established Current Procedural Terminology, or CPT, codes. DABRA was granted CE mark clearance in September 2016 for the endovascular treatment of infrainguinal arteries via atherectomy and for crossing total occlusions, and we sell systems through distributors in select non-U.S. countries.

Pharos.    Pharos is our excimer laser device that emits highly concentrated ultraviolet light and is used as a tool in the treatment of dermatological skin disorders. Physicians use Pharos by applying 308 nanometer ultraviolet light to the skin. The FDA has granted 510(k) clearance to market Pharos in the U.S. for psoriasis, vitiligo, atopic dermatitis, and leukoderma. Pharos was granted CE mark clearance in September of 2016 for use in the treatment of psoriasis, vitiligo, atopic dermatitis and leukoderma by the application of UVB ultraviolet light. We have also received clearance to market Pharos from the China Food and Drug Administration, or CFDA, and South Korea Ministry of Drug Safety, or KFDA, in the applicable jurisdictions. Pharos offers significant benefits to patients. The targeted nature of our treatment allows the operator to spare healthy tissue from exposure to the ultraviolet light making the treatment faster and safer than some other forms of phototherapy, or light therapy. The light induces T-cell apoptosis which we believe may produce an immunosuppressant effect. For instance, Pharos is not contraindicated for children and pregnant women, allowing for their treatment. In addition, we believe excimer laser treatments can put patients into remission from certain diseases. Treatment with Pharos differs from topical treatments, such as steroids and vitamin D derivatives, which may require frequent

 

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ongoing application. Treatment with Pharos also differs from pharmaceuticals treatments, which may be associated with systemic side effects.

Psoriasis is a chronic autoimmune disorder that causes cells to build up rapidly and affects the surface of the skin. The National Psoriasis Foundation reports that psoriasis affects approximately 7.5 million people in the U.S., which accounts for over 2% of the domestic population. Vitiligo is an autoimmune condition in which the skin turns white due to the loss of melanocytes, cells that produce the pigment melanin, which gives skin color. Vitiligo affects 1-2% of the population globally. Atopic dermatitis, more commonly known as eczema, is a chronic eczematous skin disease. There are approximately 17.8 million people in the U.S. suffering from atopic dermatitis. Leukoderma is the localized loss of pigment in the skin due to several causes including vitiligo.

Vascular Disease

Vascular disease refers to diseases of the heart and blood vessels located throughout the body. The most common cause of vascular disease is atherosclerosis. Atherosclerosis is a progressive, degenerative condition in which plaque, consisting of lipids, cholesterol, calcium and other substances found in the blood stream, accumulates on the arterial wall. Plaque occurs in several different forms and may be located throughout the arterial system. Plaque varies in composition, with portions that are hard and brittle, referred to as calcified plaque, and other portions that are fatty or fibrous. Endovascular treatments for atherosclerosis are performed in a catheterization laboratory located in an OBL or hospital. These patients are diagnosed by their primary care physician, podiatrist, or other specialist, and then treatment is performed an interventional cardiologist, interventional radiologist, or vascular surgeon.

PAD is atherosclerosis of the extremities, most commonly in the legs. Smoking, genetic predisposition, diabetes, aging, and obesity may significantly increase the risk of developing PAD. Plaque build-up reduces blood-flow to the surrounding tissue, causing claudication, pain or cramping in the leg, the most common early symptom of PAD. Symptoms may progress to include numbness, tingling or weakness in the legs and, in severe cases, burning or aching pain in the feet or toes.

As PAD progresses, additional symptoms may develop on the legs, including cooling, color changes, or sores that do not heal. If untreated, PAD can lead to critical limb ischemia, or CLI, a condition where there is not enough oxygenated blood being delivered to the limb to keep the tissue alive. As of June 2017, the SAGE Group reported that conservatively 22 to 30 million people suffer from CLI worldwide. If untreated, CLI may result in ulceration, infection, or gangrene in the feet and legs and eventually limb amputation or death.

Market Overview

Recent analysis suggests that 17.6 million people in the U.S. suffer from PAD. Despite its prevalence, PAD is underdiagnosed and undertreated relative to many other serious vascular conditions, including CAD, in part because up to half of the PAD population is asymptomatic and many dismiss symptoms as normal signs of aging. Research indicates only 20-30% of PAD patients are actively being treated.

Without treatment, the disease can result in severe complications and lead to amputation. The most common reason for amputation today is PAD, and up to 180,000 amputations are performed annually in the U.S. Despite the relative undertreatment of PAD, the atherectomy devices industry achieved a $1.08 billion market in 2017 and is estimated to grow at CAGR of over 6% from 2018 to 2022. Higher diagnosis and intervention rates resulting from greater physician and patient awareness of PAD, as well as higher prevalence, are helping drive the market opportunity for PAD treatments.

 

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We believe that the following factors are contributing to a growing diagnosed patient population:

 

   

Increased Awareness.    Recent emphasis on PAD education from medical associations, insurance companies and online medical communities, as well as publication in medical journals is increasing public and physician awareness of PAD risk factors, symptoms and treatment options.

 

   

Evolving Physician Practice Patterns.    Given that many patients with CAD also have PAD, we believe that interventional cardiologists and vascular surgeons are increasingly screening patients for both diseases. As a consequence, we believe that physicians are diagnosing more cases of PAD. In addition, we believe that heightened awareness of PAD, its symptoms and treatment options is leading to increased referrals.

Conventional Means of Treatment and Their Limitations

Physicians typically treat patients with mild to moderate PAD through non-invasive management, including exercise and prescription medication, and, if symptoms worsen, may recommend interventional or surgical procedures. Some patients who initially are diagnosed with severe PAD are treated immediately through interventional or surgical procedures.

Non-Invasive Management.    For many diagnosed cases of PAD in the U.S., lifestyle changes, including improved diet, regular exercise and smoking cessation, as well as drug treatment are often prescribed. Although these measures can be effective, many people are unable to sustain them. In addition, these measures may reduce the symptoms, but do not treat the underlying causes of the disease. Physicians may also prescribe medications that lower cholesterol and reduce blood pressure. These drug therapies are generally prescribed for the life of the patient and do not treat the obstruction, making them an ineffective treatment for many patients. As a result, many of these patients will ultimately require more aggressive treatments.

Interventional Procedures.    When PAD progresses beyond claudication, physicians may advise intervention, often beginning with minimally-invasive procedures. Minimally invasive endovascular treatments include balloon angioplasty, stents, and plaque removal devices. These treatments have limitations in their safety or efficacy profiles and frequently result in recurrence of the disease. We believe that there are over 500,000 annual endovascular procedures for the treatment of PAD in the U.S. Angioplasty and stenting are the most commonly performed minimally-invasive interventional treatments.

 

   

Angioplasty.    In an angioplasty procedure, a long, thin tube, or catheter, with a balloon tip is inserted into the blocked or narrowed part of the artery over a previously positioned guide wire that directs the catheter to the affected area. The balloon is then inflated, compressing the plaque and stretching the arterial wall. While angioplasty catheters are relatively easy to use, they stretch the arterial wall, often leading to dissections of, and damage to, the arterial walls. Angioplasty does not remove the plaque, which remains in the artery. In addition, angioplasty is not well suited to treat highly calcified lesions, lesions concentrated on one side of the arterial wall, or lesions that occur at bifurcations, all common manifestations of PAD in the leg. Further, most angioplasty procedures for PAD are performed with the additional use of a stent.

 

   

Stenting.    Stenting is performed in tandem with angioplasty. A stent is a wire-mesh tube that acts as a scaffold inside the artery to keep it open. Stents are currently available in a wide range of varieties. Despite their widespread use, stents may cause injury and inflammation to the arterial wall during placement and continued trauma post-procedure. Stents placed in the legs are subject to forces and compression that may fracture or crush them, leading to reduced blood-flow and further vessel trauma. Once a stent is implanted, it

 

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cannot be removed, which may limit future treatment options such as angioplasty, additional stenting, atherectomy and bypass.

 

   

Plaque Removal Devices.    Procedures to remove plaque are often referred to in the medical field as atherectomy procedures. There are several types of atherectomy devices, including directional, rotational and laser, each with different mechanisms of action to remove plaque. Atherectomy treatments are frequently used with a stent or balloon. Atherectomy technologies can damage the vessel walls, which may increase the risk of restenosis. For example, cutting devices, such as directional or rotational devices, introduce significant mechanical trauma and other commercial laser devices have a significant thermal component due to the arrangement of the delivery catheter, both causing trauma to the artery.

Surgical Procedures.    Most PAD patients are treated endovascularly. Many of these patients, including diabetics, are not candidates for surgical procedures. However, surgery is used when non-invasive management or interventional procedures have failed or if the patient is diagnosed when PAD has progressed to an advanced state.

 

   

Bypass Surgery.    More severe cases of PAD may be treated by surgeons with bypass surgery. The blood-flow is diverted around the occluded area using a synthetic graft or harvested vessel. Bypass surgery is performed by physicians in an operating room with the patient under general anesthesia and requires multi-day hospital stays for healing and rehabilitation. General anesthesia and the potential for surgical infections make this approach less suitable for patients with conditions such as high blood pressure, heart failure, chronic obstructive pulmonary disease or poor kidney function.

 

   

Amputation.    CLI is a serious form of PAD caused by severe lack of blood-flow to the legs. Physicians may recommend full or partial amputation of the leg or foot for patients with CLI. Up to 180,000 amputations occur annually in the U.S. as a result of PAD.

Our Solution

Strengths of Our Approach

DABRA includes a portable excimer laser system combined with proprietary, single-use catheters that together represent a competitive plaque removal solution for the minimally invasive endovascular treatment of blockages in the vasculature. DABRA represents a novel approach to the treatment of a broad range of vascular blockages that is safe and effective, easy to use, and competitively priced. We believe that the principal benefits of DABRA are:

 

   

Safety.    DABRA is designed to track the patient’s true lumen, or the center of the artery, and not to penetrate between the layers of arterial structure known as the subintimal space. Damage or stretching of the arterial walls, which can lead to dissection or perforation, may be reduced. No serious adverse events were reported in our 2017 pivotal study, which followed 38 subjects for 180 days, or reported in our post-market surveillance for DABRA. In our post-market surveillance, the most frequent complication reported to us has been clinically non-significant vessel perforation.

 

   

Efficacy.    Unlike many treatments for PAD that do not remove plaque, DABRA employs photochemical ablation to disintegrate plaque by breaking its chemical bonds, thereby reducing the plaque to the components of its fundamental chemistry without generating potentially harmful particulates. We believe that eliminating plaque while minimizing injury to the arterial wall may minimize the rate of restenosis. We followed 38 subjects from our pivotal study to 180 days thereafter and all of the subjects were determined to be completely free of target lesion revascularization, or the need to retreat the lesion.

 

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Utility.    DABRA enables physicians to remove plaque from long and calcified lesions in arteries located in the lower extremities both above- and below-the-knee. DABRA is able to cross and debulk a wide variety of plaque, removing vascular blockages that other products are unable to cross without the use of a guidewire. For example, in patients with a CTO the physician may use DABRA to cross the CTO prior to alternative treatments consisting of balloon angioplasty and possibly stenting.

 

   

Ease of Use.    DABRA employs techniques similar to those used in angioplasty, which are familiar to the approximately 10,000 interventional cardiologists, vascular surgeons and interventional radiologists in the U.S. who are generally trained in endovascular techniques. This significantly increases the number of physicians who are able to perform the procedure compared to surgical alternatives that must be performed by highly-trained vascular surgeons.

 

   

Cost and Time Efficient.    We believe that because our single-use DABRA catheters are priced competitively and because we provide the DABRA laser system for a nominal periodic fee without requiring the purchase of capital equipment, DABRA is a cost-effective solution for providers. Providers are also eligible for reimbursement for procedures that are performed using DABRA by using existing Current Procedural Terminology, or CPT, codes. The existence of a CPT code does not guarantee reimbursement, and payors impose restrictions on the use of codes. In addition, DABRA’s easy setup and fast ablation speed reduce both treatment and fluoroscopy time, or x-ray exposure time, for the patient, physician, and staff, improving the providers’ patient throughput. The average lasing time in our pivotal study was approximately two and a half minutes per procedure. Cost and time efficiencies can trigger Medicare payment reductions based on the resource based relative value payment methodology.

 

   

Immunotherapeutic Benefits.    Research performed using 308 nanometer laser energy, the wavelength of Pharos, demonstrated increased T-cell apoptosis, which may produce an immunosuppressant effect. Unlike with Pharos, where we can measure the degree and speed of clearance of disease and quantify the remission time, with DABRA we have not established the benefits of this immunosuppressant effect in the vasculature. We intend to conduct a registry or study to identify any immunotherapeutic benefits.

Our Strategy

Our goal is to become the leading medical device company marketing excimer lasers as tools for the treatment of endovascular diseases. Key elements of our strategy to achieve this goal are:

 

   

Driving physician awareness of DABRA.    Our program to educate physicians regarding DABRA’s value proposition consists of presentations and exhibits at industry conferences, advertising in medical journals, direct visits, webinars, and calls.

 

   

Creating patient awareness of DABRA.    We are establishing marketing and support programs with physicians and patient advocacy organizations to create patient awareness of PAD treatment options in order to generate demand for our products.

 

   

Expanding DABRA sales.    We provide physicians with clinical training to drive adoption and utilization of DABRA. We believe that a strong sales team to train physicians on the use and the benefits of DABRA will increase sales. We expect to continue to expand the clinical sales team through 2018 and beyond.

 

   

Extending DABRA to additional indications.    We plan to leverage our product technology and research and development expertise to develop DABRA for additional vascular indications, such as CAD and in-stent restenosis.

 

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