RISK FACTORS
Investing in our securities involves a high degree of risk. You should carefully consider the risks and uncertainties
described below, together with all of the other information in this prospectus, including the financial statements and the related notes incorporated by reference in this prospectus, before deciding
whether to invest in shares of our Common Stock. If any of the following risks or other risks actually occur, our business, financial condition, results of operations and future prospects could be
materially harmed. In that event, the market price of our Common Stock could decline, and you could lose all or part of your investment. Please also see "Cautionary Notes Regarding Forward-Looking
Statements."
Risks Related to Our Business
Our quarterly and annual results may fluctuate significantly, may not fully reflect the underlying
performance of our business and may result in decreases in the price of our Common Stock.
Our quarterly and annual results of operations, including our revenues, profitability and cash flow, may vary significantly in the future and
period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results of any one quarter or period should not be relied upon as an indication of future performance. Our
quarterly and annual financial results may fluctuate as a result of a variety of factors, many of which are outside our control and, as a result, may not fully reflect the underlying performance of
our business. Fluctuation in quarterly and annual results may decrease the value of our Common Stock. Factors that may cause fluctuations in our quarterly and annual results include, without
limitation:
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our ability to obtain and maintain FDA clearance and approval from foreign regulatory authorities for our products, and the timing of such
clearances and approvals, particularly with respect to current and future generations of Pantheris;
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market acceptance of our Lumivascular platform and products, including Pantheris;
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the availability of reimbursement for our Lumivascular platform products;
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our ability to attract new customers and increase the amount of business we generate from existing customers;
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results of our clinical trials;
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the timing and success of new product and feature introductions by us or our competitors or any other change in the competitive dynamics of our
industry, including consolidation among competitors, customers or strategic partners;
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the amount and timing of costs and expenses related to the maintenance and expansion of our business and operations;
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changes in our pricing policies or those of our competitors;
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general economic, political, industry and market conditions, including economic and political uncertainty caused by the recent U.S.
presidential election;
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the regulatory environment;
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the hiring, training and retention of key employees, including our sales team;
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the cost and potential outcomes of existing and future litigation;
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our ability to obtain additional financing; and
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advances and trends in new technologies and industry standards.
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We have a history of net losses and we may not be able to achieve or sustain profitability.
We have incurred significant losses in each period since our inception in 2007. We incurred net losses of $16.1 million for the six
months ended June 30, 2018, $48.7 million in 2017, $56.1 million in 2016 and $47.3 million in 2015. As of June 30, 2018, we had an accumulated deficit of
approximately $317.4 million. These losses and our accumulated deficit reflect the substantial investments we have made to develop our Lumivascular platform and acquire customers.
We
expect our losses to continue for the foreseeable future as we continue to make significant future expenditures to develop and expand our business. In addition, as a public company,
we will continue to incur significant legal, accounting and other expenses. Accordingly, we cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we
will sustain profitability. Our failure to achieve and sustain profitability would negatively impact the market price of our Common Stock.
We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital
needs and our failure to obtain additional financing when needed could force us to delay, reduce or eliminate our product development programs and commercialization efforts or cause us to become
insolvent.
We believe that the net proceeds from the recently completed offerings of our Series B preferred stock and Common Stock, together with
our cash and cash equivalents at June 30, 2018 and expected revenues from operations, will be sufficient to satisfy our capital requirements and fund our operations for at least the next five
months. Even though we sold $18.0 million in Series B preferred stock and warrants in our February 2018 offering, and $3.5 million of Common Stock and warrants in our July 2018
offering, we will need to raise additional funds through future equity or debt financings within the next five months to meet our operational needs and capital requirements for product development,
clinical trials and commercialization and may subsequently require additional fundraising. We can provide no assurance that we will be successful in raising funds pursuant to additional equity or debt
financings or that such funds will be raised at prices that do not create substantial dilution for our existing stockholders. Given the recent decline in our stock price, any financing that we
undertake in the next five months could cause substantial dilution to our existing stockholders.
To
date, we have financed our operations primarily through sales of our products and net proceeds from the issuance of our preferred stock and debt financings, our "at-the-market"
program, our initial public offering, or IPO, and our follow-on public offerings. The warrants issued pursuant to the Series B Purchase Agreement entered into in connection with the
Series B preferred stock follow-on in February 2018 (the "Series B Offering") prohibit us from entering into certain transactions involving the issuance of securities for a price
determined by reference to the trading price of our Common Stock or otherwise subject to modification following the date of issuance, in each case for a period of three years from the closing date of
the Series B Offering (and excluding purchases pursuant to the Series B Purchase Agreement, which may be made on the 120 day anniversary of the closing date of the offering). This
prohibition may be waived by holders of two-thirds of the outstanding Series 1 and Series 2 warrants at any time. We do not know when or if our operations will generate sufficient cash
to fund our ongoing operations. We cannot be certain that additional capital will be available as needed on acceptable terms, or at all. In the future, we may require additional capital in order to
(i) continue to conduct research and development activities, (ii) conduct post-market clinical studies, as well as clinical trials to obtain regulatory clearances and approvals necessary
to commercialize our Lumivascular platform products, (iii) expand our sales and marketing infrastructure and (iv) acquire complementary businesses technologies or products; or
(v) respond to business opportunities,
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challenges,
a decline in sales, increased regulatory obligations or unforeseen circumstances. Our future capital requirements will depend on many factors,
including:
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the degree of success we experience in commercializing our Lumivascular platform products, particularly next-generation Pantheris, and any
future versions of such products;
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the costs, timing and outcomes of clinical trials and regulatory reviews associated with our future products;
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the costs and expenses of maintaining or expanding our sales and marketing infrastructure and our manufacturing operations;
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the costs and timing of developing variations of our Lumivascular platform products, especially Pantheris and, if necessary, obtaining FDA
clearance of such variations;
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the extent to which our Lumivascular platform is adopted by hospitals for use by interventional cardiologists, vascular surgeons and
interventional radiologists in the treatment of PAD;
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the number and types of future products we develop and commercialize;
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the costs of defending ourselves against existing and future litigation;
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the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related
claims; and
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the extent and scope of our general and administrative expenses.
We
may raise additional funds in equity or debt financings or enter into credit facilities in order to access funds for our capital needs. Any debt financing obtained by us in the future
would cause us to incur additional debt service expenses and could include restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make
it more difficult for us to obtain additional capital and pursue business opportunities. In addition, due to our current level of debt, future equity investors may require that we convert all or a
portion of our debt to equity, and our debtholders may not agree to such terms. If we raise additional funds through further issuances of equity or convertible debt securities, and/or if we convert
all or a portion of our existing debt to equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could
have rights, preferences and privileges senior to those of holders of our Common Stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, we
may terminate or delay the development of one or more of our products, delay clinical trials necessary to market our products, delay establishment of sales and marketing capabilities or other
activities necessary to commercialize our products, and significantly scale back our operations, or we may become insolvent. If this were to occur, our ability to continue to grow and support our
business and to respond to business challenges could be significantly limited.
We have a significant amount of debt, which may adversely affect our ability to operate our business and our
financial position and our ability to secure additional financing in the future.
As of June 30, 2018, we had $7.8 million in principal and interest outstanding under a Term Loan Agreement, or the Loan Agreement,
with CRG Partners III L.P. and certain of its affiliated funds (collectively "CRG"). This amount reflects the completion of the Series B Offering and CRG's conversion of
$38 million in outstanding principal and interest into Series A preferred stock (the "CRG Conversion"). Our significant amount of debt may:
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make it more difficult for us to satisfy our obligations with respect to the Loan Agreement;
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increase our vulnerability to adverse changes in general economic, industry and competitive conditions;
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require us to dedicate a substantial portion of our cash flow from operations to make payments on our debt, thereby reducing the availability
of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
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limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
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restrict us from exploiting business opportunities;
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make it more difficult to satisfy our financial obligations, including payments on the Loan Agreement
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place us at a competitive disadvantage compared to our competitors that have less debt obligations; and
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limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of
our business strategy or other general corporate purposes on satisfactory terms or at all.
The
existence of a substantial amount of debt may make it difficult for us to run our business effectively or raise the capital we need to continue our operations.
Covenants under the Loan Agreement will restrict our business in many ways.
The Loan Agreement contains various covenants that limit, subject to certain exceptions, our ability to, among other
things:
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incur or assume liens;
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incur additional debt or provide guarantees in respect of obligations of other persons;
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issue redeemable stock and preferred stock;
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pay dividends or make distributions on capital stock, repurchase, redeem or make payments on capital stock or repay, repurchase, redeem,
retire, defease, acquire or cancel debt prior to the stated maturity thereof;
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make loans, investments or acquisitions;
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create or permit restrictions on the ability of our subsidiaries to pay dividends or make other distributions to us or to guarantee our debt,
limit our or any of our subsidiaries ability to create liens, or make or pay intercompany loans or advances;
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enter into certain transactions with affiliates;
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sell, transfer, license, lease or dispose of our or our subsidiaries' assets, including the capital stock of our subsidiaries; and
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dissolve, liquidate, consolidate or merge with or into, or sell substantially all the assets of us and our subsidiaries, taken as a whole, to,
another person.
In
particular, the Loan Agreement, as amended, includes a covenant that we maintain a minimum of $3.5 million of cash and certain cash equivalents, and we will have to achieve
minimum revenue of $15.0 million in 2020, $20.0 million in 2021 and $25.0 million in 2022. If we fail to meet the applicable minimum revenue target in any calendar year, the Loan
Agreement provides a cure right if we prepay a portion of the outstanding principal equal to 2.0 times the revenue shortfall. There can be no assurance as to our future compliance with the covenants
under the Loan Agreement, as amended.
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The
covenants contained in the Loan Agreement could adversely affect our ability to:
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finance our operations;
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make needed capital expenditures;
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make strategic acquisitions or investments or enter into alliances;
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withstand a future downturn in our business or the economy in general;
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refinance our outstanding indebtedness prior to maturity;
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engage in business activities, including future opportunities, that may be in our interest; and
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plan for or react to market conditions or otherwise execute our business strategies.
We
are also subject to standard event of default provisions under the Loan Agreement that, if triggered, would allow the debt to be accelerated, which could significantly deplete our
cash resources, cause us to raise additional capital at unfavorable terms, require us to sell portions of our business or result in us becoming insolvent. The existing collateral pledged under the
Loan Agreement may prevent us from being able to secure additional debt or equity financing on favorable terms, or at all, or to pursue business opportunities, including potential acquisitions. If we
default under any of these debt
covenants and are unable to cure the default within the relevant cure period, we would need relief from default or else our creditors could exercise their remedies. There can be no assurance that our
debtholders would accord any relief from default. In addition, potential sources of equity financing may decline to invest in our company given the amount of debt and the rights that debt holders have
to get paid before equity holders. In order to facilitate equity investments, future equity investors may require that we convert all or a portion of our debt to equity, and our debtholders may not
agree to such terms. The amount of debt could therefore affect our ability to finance our company and prevent us from obtaining necessary operating capital as a result.
We may not be able to generate sufficient cash to service our credit facility with CRG. If we fail to comply
with the obligations under our credit facility, the lender may be able to accelerate amounts owed under the facility and may foreclose upon the assets securing our obligations.
Borrowings under our credit facility are secured by substantially all of our personal property, including our intellectual property. Our ability
to make scheduled payments or to refinance our debt obligations depends on numerous factors, including the amount of our cash reserves and our actual and projected financial and operating performance.
These amounts and our performance are subject to numerous risks, including the risks in this section, some of which may be beyond our control. We cannot assure you that we will maintain a level of
cash reserves or cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our existing or future indebtedness. If our cash flows and capital
resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or
refinance our indebtedness. We cannot assure you that we would be able to take any of these actions, or that these actions would permit us to meet our scheduled debt service obligations. In addition,
in the event of our breach of the Loan Agreement, we may be required to repay any outstanding amounts earlier than anticipated. If we fail to comply with our obligations under the Loan Agreement, the
lender would be able to accelerate the required repayment of amounts due and, if they are not repaid, could foreclose upon our assets securing our obligations under the Loan Agreement.
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CRG has the right to acquire a significant percentage of our stock upon conversion of its Series A
preferred stock and has the ability to exert significant control over matters pursuant to the protective provisions therein as well as the covenants and other restrictions in the Loan Agreement.
Even though Series A preferred stock is non-voting stock, and has beneficial ownership restrictions, the Series A Certificate of
Designations has protective provisions that will require CRG to consent to certain significant Company events. For example, CRG's consent would be necessary to create additional shares of
Series A preferred stock, amend our organizational documents, or approve any merger, sale of assets, or other major corporate transaction. This consent requirement could delay or prevent any
acquisition of our company on terms that other stockholders may desire, and may adversely affect the market price of our Common Stock.
The Series A preferred stock has a liquidation preference senior to our Common Stock and the
Series B preferred stock.
Series A preferred stock has a liquidation preference that gets paid prior to any payment on our Common Stock (including shares issuable
upon the exercise of the Series 1 or Series 2 warrants) and Series B preferred stock. As a result, if we were to dissolve, liquidate, merge with another company or sell our
assets, the holders of our Series A preferred stock would have the right to receive up to approximately $41,800,000 from any such transaction before any amount is paid to the holders of our
Series B preferred stock or Common Stock or pursuant to the redemption rights in the warrants for fundamental transactions. The payment of the liquidation preferences could result in Common
Stockholders, Series B preferred stockholders and warrantholders not receiving any consideration if we were to liquidate, dissolve or wind up, either voluntarily or involuntarily.
The
existence of the liquidation preferences may reduce the value of our Common Stock, make it harder for us to sell shares of Common Stock in offerings in the future, or prevent or
delay a change of control. Furthermore, any conversion of Series A preferred stock into Common Stock will cause substantial dilution to our Common Stock holders.
Our limited commercialization experience and number of approved products makes it difficult to evaluate our
current business, predict our future prospects, assess the long-term performance of our products, and forecast our financial performance.
We were incorporated in 2007, began commercializing our initial non-Lumivascular platform products in 2009 and introduced our first Lumivascular
platform products in
the United States in late 2012. We received 510(k) clearance from the FDA, for commercialization of Pantheris in October 2015, an additional 510(k) clearance for an enhanced version of Pantheris in
March 2016 and commenced sales of Pantheris in the United States and select international markets promptly thereafter. Our current version of Pantheris, Pantheris 3.0, received FDA clearance in May
2018. Our limited commercialization experience and number of approved products make it difficult to evaluate our current business and predict our future prospects. We have encountered and will
continue to encounter risks and difficulties frequently experienced by companies in rapidly-changing industries. These risks and uncertainties include the risks inherent in clinical trials, market
acceptance of our products, and increasing and unforeseen expenses as we continue to attempt to grow our business.
In
addition, we have in the past, and may in the future, become aware of performance issues with our products. For example, prior to becoming commercially available on March 1,
2016, Pantheris had been used in clinical trials mainly in controlled situations. Since its commercialization and as more physicians have used Pantheris, we have received additional feedback on its
performance, both positive and negative. We have attempted to address certain of these concerns with Pantheris 3.0. However, there can be no assurance that the changes and improvements will fully
address the performance issues that have been raised by earlier versions of Pantheris. Even if these issues are resolved and physician
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concerns
addressed, future product performance issues may occur and our reputation could suffer, which could lead to decreased sales of our products. Our revenue has been and continues to be adversely
impacted by these product performance issues. We also had to incur additional expenses to make product changes and improvements, and to replace products in accordance with our warranty policy. This
additional expense, and any future expense that we may incur as a result of future product performance issues, will negatively impact our financial performance and results of operations. If we are
unable to improve the performance of our products to meet the concerns of physicians our revenue may decline further or fail to increase.
Our
short commercialization experience and limited number of approved products also make it difficult for us to forecast our future financial performance and such forecasts are limited
and subject to a number of uncertainties, including our ability to obtain FDA clearance for new versions of Pantheris and other Lumivascular platform products we intend to commercialize in the United
States. If our assumptions regarding the risks and uncertainties we face, which we use to plan our business, are incorrect or change due to circumstances in our business or our markets, or if we do
not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer.
Our success depends in large part on a limited number of products, particularly Pantheris, all of which have
a limited commercial history. If these products fail to gain, or lose, market acceptance, our business will suffer.
Ocelot, Ocelot PIXL, Ocelot MVRX, Lightbox, Wildcat, Kittycat 2 and Pantheris are our only products currently cleared for sale, and our current
revenues are wholly dependent on them. Sales of Wildcat and Kittycat 2 have declined and are continuing to decline as we focus on the promotion of our Lumivascular platform products. In addition, the
long-term viability of our company is largely dependent on the successful commercialization and continued development of Pantheris and we expect that sales of next-generation Pantheris and our other
current and future Lumivascular platform products in the United States will account for substantially all of our revenues for the foreseeable future. Accordingly, our success depends on the continued
and growing acceptance and use of Pantheris and our other Lumivascular platform products by the medical community. All of our products have a limited commercial history. For example, we received
510(k) clearance from the FDA to commercialize Pantheris in October 2015 as well as a separate FDA approval to market enhanced versions of Pantheris in March 2016 and May 2018, and those versions of
Pantheris became commercially available in the United States and select international markets promptly thereafter. As such acceptance among physicians of these products may not increase or may
decline.
Our
ability to successfully market Pantheris will also be limited due to a number of factors including regulatory restrictions in our labeling. We cannot assure you that demand for
Pantheris and our other Lumivascular platform products will continue to grow and our products may not significantly penetrate current or new markets. Market demand for Pantheris and physician adoption
of this product also may be negatively impacted by product performance issues that we have experienced and the need to replace certain products in accordance with our warranty policy. Utilization of
our products has been less than we anticipated historically. If demand for Pantheris and our other Lumivascular platform products does not increase and we cannot sell our products as planned, our
financial results will be harmed. In addition, market acceptance may be hindered if physicians are not presented with compelling data from long-term studies of the safety and efficacy of our
Lumivascular platform products compared to alternative procedures, such as angioplasty, stenting, bypass surgery or other atherectomy procedures. For example, if patients undergoing treatment with our
Lumivascular platform products have retreatment rates higher than or comparable with the retreatment rates of alternative procedures, it will be difficult to demonstrate the value of our Lumivascular
platform products. Any studies we may conduct comparing our Lumivascular platform with alternative procedures will be
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expensive,
time consuming and may not yield positive results. Physicians will also need to appreciate the value of real-time imaging in improving patient outcomes in order to change current methods
for treating PAD patients. In addition, demand for our Lumivascular platform products may decline or may not increase as quickly as we expect. Failure of our Lumivascular platform products to
significantly penetrate current or new markets, or our failure to successfully commercialize Pantheris, would harm our business, financial condition and results of operations.
We
are also aware of certain characteristics and features of our Lumivascular platform that may prevent widespread market adoption. For example, in procedures using the current model of
Pantheris, some physicians may prefer to have a technician or second physician assisting with the operation of the catheter as well as a separate technician to operate the Lightbox, potentially making
it less financially attractive for physicians and their hospitals and medical facilities. It may take significant time and expense to modify our products to allow a single physician to operate the
entire system and we can provide no guarantee that we will be able to make such modifications, or obtain any additional and necessary regulatory clearances for such modifications. Although the OCT
images created by our Lightbox may make it possible for physicians to reduce the degree to which fluoroscopy and contrast dye are used when using our Lumivascular platform products compared to
competing endovascular products, physicians are still using both fluoroscopy and contrast dye, particularly with Pantheris. As a result, risks of complications from radiation and contrast dye are
still present and may limit the commercial success of our products. Finally, it will require training for technicians and physicians to effectively operate our Lumivascular platform products,
including interpreting the OCT images created by our Lightbox, which may affect adoption of our products by physicians. These or other characteristics and features of our Lumivascular platform may
cause our products not to be widely adopted and harm our business, financial condition and results of operation.
We rely heavily on our sales professionals to market and sell our products. If we are unable to hire,
effectively train, manage, improve the productivity of, and retain our sales professionals, our business will be harmed, which would impair our future revenue and profitability.
Our success largely depends on our ability to hire, train, manage and improve the productivity levels of our sales professionals. We have
experienced direct sales employee and sales management turnover in the past. The loss of any member of our sales team's senior management could weaken our sales expertise and harm our business, and we
may not be able to find adequate replacements on a timely basis, or at all. The changes in senior management that have occurred over the past several years may continue to create instability in our
sales force leading to attrition in sales representatives in the future.
Competition
for sales professionals who are familiar with and trained to sell our products continues to be strong. We train our sales professionals to better understand our existing and
new product technologies and how they can be positioned against our competitors' products. These initiatives are intended to improve the productivity of our sales professionals and our revenue and
profitability. It takes time for the sales professionals to become productive following their hiring and training and there can be no assurance that sales representatives will reach adequate levels of
productivity, or that we will not experience significant levels of attrition in the future. Measures we implement to improve the productivity may not be successful and may instead contribute to
instability in our operations, additional departures from our sales organization, or further reduce our revenue, profitability, and harm our business and our stock price may be adversely impacted as a
result.
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If our revenue does not improve, or if our cost of revenue and/or operating expenses increase by a greater
percentage than our revenue, our gross margins and operating margins may be adversely impacted, our loss from operations will increase, and our cash used in operating activities will increase, which
could reduce our assets and have a material adverse effect on our stock price.
Our gross margin was (5%) for the three months ended June 30, 2018 compared to (59%) for the three months ended June 30, 2017. Our
gross margin was 7% for the six months ended June 30, 2018 compared to (34%) for the six months ended June 30, 2017. Gross margin for the three and six month periods ended
June 30, 2017 was negatively impacted by increases in charges related to excess and obsolete Lightbox and Pantheris inventories.
Our
gross margin is impacted by the revenue that we generate and the costs incurred to generate the revenue. To the extent that our revenue does not grow or declines, it is difficult to
improve our gross margins as our fixed costs must be spread over a lower revenue base. Our future revenue may be adversely affected by a number of factors including the competitive market environment
in which we operate, which may result in a decrease in the number of products sold or a decrease in the average selling prices achieved for our product sales. If our revenue does not improve, or if
our cost of revenue increases by a greater percentage than our revenue, or if we are not able to reduce expenses in the event of a decline in revenue, we may continue to generate losses from
operations and use cash, which could reduce our cash faster than budgeted, cause us to need to obtain additional financing and have a material adverse effect on our operations and stock price.
Our ability to compete is highly dependent on demonstrating the benefits of our Lumivascular platform to
physicians, hospitals and patients.
In order to generate sales, we must be able to clearly demonstrate that our Lumivascular platform is both a more effective treatment system and
more cost-effective than the alternatives offered by our competitors. If we are unable to convince physicians that our Lumivascular platform leads to significantly lower rates of restenosis, or
narrowing of the artery, and leads to fewer adverse events during treatment than those using competing technologies, our business will suffer. In order to use Pantheris or our Ocelot family of
catheters, hospitals must make an investment in our Lightbox. Accordingly, we must convince hospitals and physicians that our Lumivascular platform results in significantly better patient outcomes at
a competitive overall cost. For example, we may need to demonstrate that the investment hospitals must make when purchasing our Lightbox and the
incremental costs of having a technician or a second physician operate Pantheris can be justified based on the benefits to patients, physicians and hospitals. If we are unable to develop robust
clinical data to support these claims, we will be unable to convince hospitals and third-party payors of these benefits and our business will suffer.
Our
value proposition to physicians and hospitals is largely dependent upon our contention that the rate of arterial damage when physicians are using our products is lower than with
competing products. If minimizing arterial damage does not significantly impact patient outcomes, meaning either (i) that restenosis is often triggered without disrupting healthy arterial
structures, or (ii) arteries can be damaged during treatment without triggering restenosis, then we may be unable to demonstrate our Lumivascular platform's benefits are any different than
competing technologies. Furthermore, physicians may find our imaging system difficult to use, and we may not be able to provide physicians with adequate training to be able to realize the benefits of
our Lumivascular platform. If physicians do not value the benefits of on-board imaging and the enhanced visualization enabled by our products during an endovascular intervention as compared to our
competitor's products, or do not believe that such benefits improve clinical outcomes, our Lumivascular platform products may not be widely adopted.
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The use, misuse or off-label use of the products in our Lumivascular platform may result in injuries that
lead to product liability suits, which could be costly to our business.
We require limited training in the use of our Lumivascular platform products because we market primarily to physicians who are experienced in
the interventional techniques required to use our device. If demand for our Lumivascular platform continues to grow, less experienced physicians will likely use the devices, potentially leading to
more injury and an increased risk of product liability claims. The use or misuse of our Lumivascular platform products has in the past resulted, and may in the future result, in complications,
including damage to the treated artery, infection, internal bleeding, and limb loss, potentially leading to product liability claims. Our Lumivascular platform products are contraindicated for use in
the carotid, cerebral, coronary, iliac, or renal arteries. Our sales force does not promote the use of our products for off-label indications, and our U.S. instructions for use specify that our
Lumivascular platform products are not intended for use in the carotid, cerebral, coronary, iliac or renal arteries. However, we cannot prevent a physician from using our Lumivascular platform
products for these off-label applications. The application of our Lumivascular platform products to coronary arteries, as opposed to peripheral arteries, is more likely to result in complications that
have serious consequences. For example, if excised plaque were not
captured properly in our device, it could be carried by the bloodstream to a more narrow location, blocking a coronary artery, leading to a heart attack, or blocking an artery to the brain, leading to
a stroke. If our Lumivascular platform products are defectively designed, manufactured or labeled, contain defective components or are misused, we may become subject to costly litigation initiated by
our customers or their patients. Product liability claims are especially prevalent in the medical device industry and could harm our reputation, divert management's attention from our core business,
be expensive to defend and may result in sizable damage awards against us. Although we maintain product liability insurance, the amount or breadth of our coverage may not be adequate for the claims
that are made against us.
The expense and potential unavailability of insurance coverage for liabilities resulting from our products
could harm us and our ability to sell our Lumivascular platform products.
We may not have sufficient insurance coverage for future product liability claims. We may not be able to obtain insurance in amounts or scope
sufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought against us, with or without merit, could increase our product liability
insurance rates or prevent us from securing continuing coverage, harm our reputation in the industry, significantly increase our expenses, and reduce product sales. Product liability claims in excess
of our insurance coverage would be paid out of cash reserves, harming our financial condition and operating results.
Some
of our customers and prospective customers may have difficulty in procuring or maintaining liability insurance to cover their operations and use of our Lumivascular platform
products. Medical malpractice carriers are also withdrawing coverage in certain states or substantially increasing premiums. If this trend continues or worsens, our customers may discontinue using our
Lumivascular platform products and potential customers may opt against purchasing our Lumivascular platform products due to the cost or inability to procure insurance coverage.
Our ability to compete depends on our ability to innovate successfully.
The market for medical devices in general, and in the PAD market in particular, is highly competitive, dynamic, and marked by rapid and
substantial technological development and product innovation. There are few barriers that would prevent new entrants or existing competitors from developing products that compete directly with ours.
Demand for our Lumivascular platform products could be diminished by equivalent or superior products and technologies offered by competitors. If we are unable to innovate successfully, our
Lumivascular platform products could become obsolete and our revenues would decline as our customers purchase our competitors' products.
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In
order to remain competitive, we must continue to develop new product offerings and enhancements to our existing Lumivascular platform products. In particular, we are currently
developing two next-generation versions of our Pantheris atherectomy device, Pantheris 3.0 and a lower profile Pantheris. We believe these versions will represent significant improvements in
reliability and usability compared to our existing products. We anticipate that Pantheris 3.0 and the lower profile Pantheris will translate into revenue growth and achieve increased physician
acceptance. Because we believe they are important to our future revenues, we are devoting a significant portion of our resources to their development. However, we do not yet know whether these or any
other new offerings will be well received and broadly accepted by physicians, and if so, whether sales will be sufficient for us to offset costs of development, implementation, support, operation,
sales and marketing. Additionally, new products may subject us to additional risks of product performance, customer complaints and litigation. If sales of our new product offerings, including
Pantheris 3.0 and the lower profile Pantheris, are lower than we expect, fail to gain anticipated market acceptance or cause us to expend additional resources to fix unforeseen problems and develop
modifications, our revenues and results of operations may not improve and our business will be adversely affected.
Maintaining
adequate research and development personnel and resources to meet the demands of the market is essential. If we are unable to develop products, applications or features due
to certain constraints, such as insufficient cash resources, inability to raise sufficient cash in future equity or debt financings, high employee turnover, inability to hire sufficient research and
development personnel or a lack of other research and development resources, we may miss market opportunities. Furthermore, many of our competitors expend a considerably greater amount of funds on
their research and development programs than we do, and those that do not may be acquired by larger companies that would allocate greater resources to our competitors' research and development
programs. Our failure or inability to devote adequate research and development resources or compete effectively with the research and development programs of our competitors could harm our business.
We compete against companies that have longer operating histories, more established products and greater
resources, which may prevent us from achieving significant market penetration, increasing our revenues or becoming profitable.
Our products compete with a variety of products and devices for the treatment of PAD, including other CTO crossing devices, stents, balloons and
atherectomy catheters, as well as products used in vascular surgery. Large competitors in the CTO crossing, stent and balloon markets include Abbott Laboratories, Boston Scientific, Cardinal Health,
Cook Medical, CR Bard and Medtronic. Competitors in the atherectomy market include Boston Scientific, Cardiovascular Systems, Medtronic and Philips. Some competitors have previously attempted to
combine intravascular imaging with atherectomy and may have current programs underway to do so. These and other companies may
attempt to incorporate on-board visualization into their products in the future and may remain competitive with us in marketing traditional technologies. Other competitors include pharmaceutical
companies that manufacture drugs for the treatment of symptoms associated with mild to moderate PAD and companies that provide products used by surgeons in peripheral and coronary bypass procedures.
These competitors and other companies may introduce new products that compete with our products. Many of our competitors have significantly greater financial and other resources than we do and have
well-established reputations, as well as broader product offerings and worldwide distribution channels that are significantly larger and more effective than ours. Competition with these companies
could result in price-cutting, reduced profit margins and loss of market share, any of which would harm our business, financial condition and results of operations.
Our
ability to compete effectively depends on our ability to distinguish our company and our Lumivascular platform from our competitors and their products, and includes such factors
as:
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procedural safety and efficacy;
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acute and long-term outcomes;
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ease of use and procedure time;
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price;
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size and effectiveness of sales force;
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radiation exposure for physicians, hospital staff and patients; and
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third-party reimbursement.
In
addition, competitors with greater financial resources than ours could acquire other companies to gain enhanced name recognition and market share, as well as new technologies or
products that could effectively compete with our existing products, which may cause our revenues to decline and would harm our business.
If our clinical trials are unsuccessful or significantly delayed, or if we do not complete our clinical
trials, our business may be harmed.
Clinical development is a long, expensive, and uncertain process and is subject to delays and the risk that products may ultimately prove unsafe
or ineffective in treating the indications for which they are designed. Completion of clinical trials may take several years or more and failure of the trial can occur at any time. We cannot provide
any assurance that our clinical trials will meet their primary endpoints or that such trials or their results will be accepted by the FDA or foreign regulatory authorities. Even if we achieve positive
early or preliminary results in clinical trials, these results do not necessarily predict final results, and positive results in early trials may not indicate success in later trials. Many companies
in the medical device industry have suffered significant setbacks in late-stage clinical trials, even after receiving promising results in earlier trials or in the preliminary results from these
late-stage clinical trials.
We
may experience numerous unforeseen events during, or because of, the clinical trial process that could delay or prevent us from receiving regulatory clearance or approval for new
products or modifications of existing products, including new indications for existing products, including:
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negative or inconclusive results that may cause us to decide, or regulators may require us, to conduct additional clinical and/or preclinical
testing which may be expensive and time consuming;
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trial results that do not meet the level of statistical significance required by the FDA or other regulatory authorities;
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findings by the FDA or similar foreign regulatory authorities that the product is not sufficiently safe for investigational use in humans;
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interpretations of data from preclinical testing and clinical testing by the FDA or similar foreign regulatory authorities that may be
different from our own;
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delays or failure to obtain approval of our clinical trial protocols from the FDA or other regulatory authorities;
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delays in obtaining institutional review board approvals or government approvals to conduct clinical trials at prospective sites;
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findings by the FDA or similar foreign regulatory authorities that our or our suppliers' manufacturing processes or facilities are
unsatisfactory;
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changes in the review policies of the FDA or similar foreign regulatory authorities or the adoption of new regulations that may negatively
affect or delay our ability to bring a product to market or receive approvals or clearances to treat new indications;
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trouble in managing multiple clinical sites;
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delays in agreeing on acceptable terms with third-party research organizations and trial sites that may help us conduct the clinical trials;
and
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the suspension or termination by us, or regulators, of our clinical trials because the participating patients are being exposed to unacceptable
health risks.
Failures
or perceived failures in our clinical trials will delay and may prevent our product development and regulatory approval process, damage our business prospects and negatively
affect our reputation and competitive position.
From time to time, we engage outside parties to perform services related to certain of our clinical studies
and trials, and any failure of those parties to fulfill their obligations could increase costs and cause delays.
From time to time, we engage consultants to help design, monitor, and analyze the results of certain of our clinical studies and trials. The
consultants we engage interact with clinical
investigators to enroll patients in our clinical trials. We depend on these consultants and clinical investigators to help facilitate the clinical studies and trials and monitor and analyze data from
these studies and trials under the investigational plan and protocol for the study or trial and in compliance with applicable regulations and standards, commonly referred to as good clinical
practices. We may face delays in our regulatory approval process if these parties do not perform their obligations in a timely, compliant or competent manner. If these third parties do not
successfully carry out their duties or meet expected deadlines, or if the quality, completeness or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical trial
protocols or for other reasons, our clinical studies or trials may be extended, delayed or terminated or may otherwise prove to be unsuccessful, and we may have to conduct additional studies, which
would significantly increase our costs, in order to obtain the regulatory clearances that we need to commercialize our products.
We have limited long-term data regarding the safety and efficacy of our Lumivascular platform products,
including Pantheris. Any long-term data that is generated by clinical trials involving our Lumivascular platform may not be positive or consistent with our short-term data, which would harm our
ability to obtain clearance to market and sell our products.
Our Lumivascular platform is a novel system, and our success depends on its acceptance by the medical community as being safe and effective, and
improving clinical outcomes. Important factors upon which the efficacy of our Lumivascular platform products, including Pantheris, will be measured are long-term data on the rate of restenosis
following our procedure, and the corresponding duration of patency, or openness of the artery, and publication of that data in peer-reviewed journals. Another important factor that physicians will
consider is the rate of reintervention, or retreatment, following the use of our Lumivascular platform products. The long-term clinical benefits of procedures that use our Lumivascular platform
products, including Pantheris, are not known.
The
results of short-term clinical experience of our Lumivascular platform products, including Pantheris, do not necessarily predict long-term clinical benefit. Restenosis rates
typically increase over time. We believe that physicians will compare the rates of long-term restenosis and reintervention for procedures using our Lumivascular platform products against alternative
procedures, such as angioplasty, stenting, bypass surgery and other atherectomy procedures. If the long-term rates of restenosis and reintervention do not meet physicians' expectations, our
Lumivascular platform products may not become widely adopted and physicians may recommend alternative treatments for their
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patients.
Another significant factor that physicians will consider is acute safety data on complications that occur during the use of our Lumivascular platform products. If the results obtained from
any post-market studies that we conduct or post-clearance surveillance indicate that the use of our
Lumivascular platform products are not as safe or effective as other treatment options or as current short-term data would suggest, adoption of our product may suffer and our business would be harmed.
Even if we believe the data collected from clinical studies or clinical experience indicate positive results, each physician's actual experience with our products will vary. Physicians who are
technically proficient participate in our clinical trials and are high-volume users of our Lumivascular platform products. Consequently, the results of our clinical trials and their experiences using
our products may lead to better patient outcomes than those of physicians that are less proficient, perform fewer procedures or who use our products infrequently.
Our ability to market our current products in the United States is limited to use in peripheral vessels, and
if we want to market our products for other uses, we will need to file for FDA clearances or approvals and may need to conduct trials to support expanded use, which would be expensive, time-consuming
and may not be successful.
Our current products are cleared in the United States only for crossing sub-total and chronic total occlusions and for performing atherectomy in
the peripheral vasculature. These clearances prohibit our ability to market or advertise our products for any other indication within the peripheral vasculature, which restricts our ability to sell
these products and could affect our growth. Additionally, our products are contraindicated for use in the cerebral, carotid, coronary, iliac, and renal arteries. While off-label uses of medical
devices are common and the FDA does not regulate physicians' choice of treatments, the FDA does restrict a manufacturer's communications regarding such off-label use. We are not allowed to actively
promote or advertise our products for off-label uses. In addition, we cannot make comparative claims regarding the use of our products against any alternative treatments without conducting
head-to-head comparative clinical studies, which would be expensive and time consuming. If our promotional activities fail to comply with the FDA's regulations or guidelines, we may be subject to FDA
warnings or enforcement action by the FDA and other government agencies. In the future, if we want to market a variation of Ocelot or Pantheris in the United States for use in other applications for
which we do not currently have clearance, such as the coronary arteries, we will need to make modifications to these products, conduct further clinical trials and obtain new clearances or approvals
from the FDA. There can be no assurance that we will successfully develop these modifications, that future clinical studies will be successful or that the expense of these activities will be offset by
additional revenues.
The continuing development of many of our products, including Pantheris, depends upon maintaining strong
working relationships with physicians.
The development, marketing, and sale of our products, including Pantheris, depends upon our ability to maintain strong 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 in clinical
trials and 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 harm our business, financial condition and results of operations. The medical device industry's relationship with physicians is under increasing scrutiny by
the Office of Inspector General, or OIG, the Department of Justice, or DOJ, state attorneys general, and other foreign and domestic government agencies. Our failure to comply with laws, rules and
regulations governing our relationships with physicians, or an investigation into our compliance by the OIG, DOJ, state attorneys general and other government agencies, could significantly harm our
business.
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We have limited experience manufacturing our Lumivascular platform products in commercial quantities, which
could harm our business.
Because we have only limited experience in manufacturing our Lumivascular platform products in commercial quantities, we may encounter
production delays or shortfalls. Such production delays or shortfalls may be caused by many factors, including the following:
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any expansion in our manufacturing capacity, could require changes to our production processes;
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key components and sub-assemblies of our Lumivascular platform products are currently provided by a single supplier or limited number of
suppliers, and we do not maintain large inventory levels of these components and sub-assemblies; 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 expenses and result in manufacturing delays;
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we may experience a delay in completing validation and verification testing for new controlled-environment rooms at our manufacturing
facilities; and
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we have limited experience in complying with the FDA's QSR, which applies to the manufacture of our Lumivascular platform products.
If
we are unable to keep up with demand for our Lumivascular platform products, our revenues could be impaired, market acceptance for our Lumivascular platform products could be harmed
and our customers might instead purchase our competitors' products. Our inability to successfully manufacture our Lumivascular platform products would materially harm our business.
Our
manufacturing facilities and processes and those of our third-party suppliers are subject to unannounced FDA and state regulatory inspections for compliance with QSR. Developing and
maintaining a compliant quality system is time consuming and expensive. Failure to maintain, or not fully comply with the requirements of, a quality system could result in regulatory authorities
initiating enforcement actions against us and our third-party suppliers, which could include the issuance of warning letters, seizures, prohibitions on product sales, recalls and civil and criminal
penalties, any one of which could significantly impact our manufacturing supply and impair our financial results.
If our manufacturing facility becomes damaged or inoperable, or we are required to vacate the facility, or
our electronic systems are compromised, our ability to manufacture and sell our Lumivascular platform products and to pursue our research and development efforts may be jeopardized.
We currently manufacture and assemble our Lumivascular platform products in-house. Our products are comprised of components sourced from a
variety of contract manufacturers, with final assembly completed at our facility in Redwood City, California. Our facility and equipment, or those of our suppliers, could be harmed or rendered
inoperable by natural or man-made disasters, including fire, earthquake, terrorism, flooding and power outages. Further, our electronic systems may experience service interruptions, denial-of-service
and other cyber-attacks, computer viruses or other events. Any of these may render it difficult or impossible for us to manufacture products, pursue our research and development efforts or otherwise
run our business for some 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. 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.
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We depend on third-party vendors to manufacture some of our components and sub-assemblies, which could make
us vulnerable to supply shortages and price fluctuations that could harm our business.
We currently manufacture some of our components and sub-assemblies at our Redwood City facility and rely on third-party vendors for other
components and sub-assemblies used in our Lumivascular platform. Our reliance on third-party vendors subjects us to a number of risks that could impact our ability to manufacture our products and harm
our business, including:
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interruption of supply resulting from modifications to, or discontinuation of, a supplier's operations;
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delays in product shipments resulting from uncorrected defects, reliability issues or a supplier's failure to consistently produce quality
components;
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price fluctuations due to a lack of long-term supply arrangements with our suppliers for key components;
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inability to obtain adequate supply in a timely manner or on commercially reasonable terms;
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difficulty identifying and qualifying alternative suppliers for components in a timely manner;
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inability of the manufacturer or supplier to comply with QSR as enforced by the FDA and state regulatory authorities;
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inability to control the quality of products manufactured by third parties;
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production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications; and
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delays in delivery by our suppliers due to changes in demand from us or their other customers.
Any
significant delay or interruption in the supply of components or sub-assemblies, or our inability to obtain substitute components, sub-assemblies or materials from alternate sources
at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and harm our business.
We depend on single and 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 and sub-assemblies or supply them in the quantities that we need, we would experience manufacturing delays.
We rely on single and limited source suppliers for several of our components and sub-assemblies. For example, we rely on single vendors for our
optical fiber and drive cables that are key components of our catheters, and we rely on single vendors for our laser and data acquisition card that are key components of our Lightbox. These components
are critical to our products and there are relatively few alternative sources of supply. We do not carry a significant inventory of these
components. Identifying and qualifying additional or replacement suppliers for any of the components or sub-assemblies used in our products could involve significant time and cost. Any supply
interruption from our vendors or failure to obtain additional vendors for any of the components or sub-assemblies incorporated into our products would limit our ability to manufacture our products and
could therefore harm our business, financial condition and results of operations.
Our future growth depends on physician adoption of our Lumivascular platform products, which may require
physicians to change their current practices.
We educate physicians on the capabilities of our Lumivascular platform products and advances in treatment for PAD patients. We target our sales
efforts to interventional cardiologists, vascular surgeons and interventional radiologists because they are often the physicians diagnosing and treating both
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coronary
artery disease and PAD. However, the initial point of contact for many patients may be general practitioners, podiatrists, nephrologists and endocrinologists, each of whom commonly treat
patients experiencing complications or symptoms resulting from PAD. If these physicians are not made aware of our Lumivascular platform products, they may not refer patients to interventional
cardiologists, vascular surgeons and interventional radiologists for treatment using our Lumivascular platform procedure, and those patients may instead be surgically treated or treated with an
alternative interventional procedure. In addition, there is a significant correlation between PAD and coronary artery disease, and many physicians do not routinely screen for PAD while screening for
coronary artery disease. If we are not successful in educating physicians about screening for PAD and about the capabilities of our Lumivascular platform products, our ability to increase our revenues
may be impaired.
We depend on our senior management team and the loss of one or more key employees or an inability to attract
and retain highly skilled employees could harm our business.
Our success largely depends upon the continued services of our executive management team and key employees and the loss of one or more of our
executive officers or key employees could harm us and directly impact our financial results. Our employees may terminate their employment with us at any time. Changes in our executive management team
resulting from the hiring or departure of executives could disrupt our business.
We
must attract and retain highly qualified personnel. Competition for skilled personnel is intense, especially for engineers with high levels of experience in designing and developing
medical devices and for sales professionals. We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate
qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former
employers may attempt to assert that these employees or we have breached legal obligations, resulting in a diversion of our time and resources and, potentially, damages. In addition, job candidates
and existing employees, particularly in the San Francisco Bay Area, often consider the value of the stock awards they receive in connection with their employment. If the perceived value of our stock
awards declines, it may harm our ability to recruit and retain highly skilled employees. In addition, we invest significant time and expense in training our employees, which increases their value to
competitors who may seek to recruit them. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business would be harmed.
We do not currently intend to devote significant additional resources in the near-term to market our
Lumivascular platform internationally, which will limit our potential revenues from our Lumivascular platform products.
Marketing our Lumivascular platform outside of the United States would require substantial additional sales and marketing, regulatory and
personnel expenses. As part of our product development and regulatory strategy, we plan to expand into select international markets, but we do not currently intend to devote significant additional
resources to market our Lumivascular platform internationally in order to focus our resources and efforts on the U.S. market. Our decision to market our products primarily in the United States in the
near-term will limit our ability to reach all of our potential markets and will limit our potential sources of revenue. In addition, our competitors will have an opportunity to further penetrate and
achieve market share outside of the United States until such time, if ever, that we devote significant additional resources to market our Lumivascular platform products or other products
internationally.
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Our ability to utilize our net operating loss carryforwards may be limited.
As of December 31, 2017, we had federal and state net operating loss carryforwards, or NOLs, due to prior period losses of
$258.4 million and $191.9 million, respectively, which if not utilized will begin to expire in 2027 for federal purposes and 2018 for state purposes. Generally, subject to certain
limitations, NOLs can be used to offset taxable income for U.S. federal income tax purposes. However, Section 382 of the Internal Revenue Code of 1986, as amended, may limit the NOLs we may use
in any year for U.S. federal income tax purposes in the event of certain changes in ownership of our company. A Section 382 "ownership change" generally occurs if one or more stockholders or
groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period.
Similar rules may apply under state tax laws. It is possible that prior transactions with respect to our stock may have caused, and that future issuances or sales of our stock (including certain
transactions involving our stock that are outside of our control) could cause, an "ownership change." The sale of our Common Stock to Lincoln Park Capital Fund, LLC ("Lincoln Park") pursuant to
the Purchase Agreement, dated as of November 3, 2017, between us and Lincoln Park (the "Purchase Agreement") and the sale of Series B preferred stock and warrants pursuant to the
Series B Offering
may affect our ability to use NOLs. If an "ownership change" occurs, Section 382 would impose an annual limit on the amount of pre-ownership change NOLs and other tax attributes we can use to
reduce our taxable income, potentially increasing and accelerating our liability for income taxes, and also potentially causing those tax attributes to expire unused. Any limitation on using NOLs
could (depending on the extent of such limitation and the NOLs previously used) result in our retaining less cash after payment of U.S. federal income taxes during any year in which we have taxable
income (rather than losses) than we would be entitled to retain if such NOLs were available as an offset against such income for U.S. federal income tax reporting purposes, which could harm our
profitability. On December 22, 2017, the Tax Cuts and Jobs Act, or Tax Act, was enacted into law with many significant changes to the U.S. tax laws. The Tax Act limits the utilization of NOLs
arising in tax years beginning after December 31, 2017 to 80% of taxable income per year. However, existing NOLs that arose in years prior to December 31, 2017 are not affected by these
provisions. Our ability to utilize NOLs arising in future tax periods may be limited by the Tax Act.
We may acquire other companies or technologies or be the target of strategic transactions, which could divert
our management's attention, result in additional dilution to our stockholders and otherwise disrupt our operations and harm our operating results.
We may in the future seek to acquire or invest in businesses, applications or technologies that we believe could complement or expand our
Lumivascular platform, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur
various costs and expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. We may not be able to identify desirable acquisition targets or be
successful in entering into an agreement with any particular target or obtain the expected benefits of any acquisition or investment.
To
date, our technology and product development efforts have been organic, and we have no experience in acquiring other businesses. In any acquisition, we may not be able to successfully
integrate acquired personnel, operations and technologies, or effectively manage the combined business following the acquisition. Acquisitions could also result in dilutive issuances of equity
securities, the use of our available cash, or the incurrence of debt, which could harm our operating results. In addition, if an acquired business fails to meet our expectations, our operating
results, business and financial condition may suffer.
In
addition, we sometimes receive inquiries relating to potential strategic transactions, including from third parties who may seek to acquire us. We will continue to consider and
discuss such
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transactions
as we deem appropriate. Such potential transactions may divert the attention of management, and cause us to incur various costs and expenses in investigating and evaluating such
transactions, whether or not they are consummated.
Risks Related to Our Intellectual Property
We may in the future be a party to intellectual property litigation or administrative proceedings that could
be costly and could interfere with our ability to sell our Lumivascular platform products.
The medical device industry has been characterized by extensive litigation regarding patents, trademarks, trade secrets, and other intellectual
property rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage. It is possible that U.S. and foreign patents and pending patent applications
or trademarks controlled by third parties may be alleged to cover our products, or that we may be accused of misappropriating third parties' trade secrets. Additionally, our products include hardware
and software components that we purchase from vendors, and may include design components that are outside of our direct control. Our competitors, many of which have substantially greater resources and
have made substantial investments in patent portfolios, trade secrets, trademarks, and competing technologies, may have applied for or obtained or may in the future apply for or obtain, patents or
trademarks that will prevent, limit or otherwise interfere with our ability to make, use, sell and/or export our products or to use product names. They may devote substantial resources towards
obtaining claims that cover the design of our atherectomy products to prevent the marketing and selling of competitive products. We may become a party to patent or trademark infringement or trade
secret claims and litigation as a result of these and other third-party intellectual property rights being asserted against us. The defense and prosecution of these matters are both costly and time
consuming. Vendors from whom we purchase hardware or software may not indemnify us in the event that such hardware or software is accused of infringing a third-party's patent or trademark or of
misappropriating a third-party's trade secret.
Further,
if such patents, trademarks, or trade secrets are successfully asserted against us, this may harm our business and result in injunctions preventing us from selling our products,
license fees, damages and the payment of attorney fees and court costs. In addition, if we are found to willfully infringe third-party patents or trademarks or to have misappropriated trade secrets,
we could be required to pay treble damages in addition to other penalties. Although patent, trademark, trade secret, and other intellectual property disputes in the medical device area have often been
settled through licensing or
similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. We may be unable to obtain necessary licenses on satisfactory terms, if at all. If
we do not obtain necessary licenses, we may not be able to redesign our Lumivascular platform products to avoid infringement.
Similarly,
interference or derivation proceedings provoked by third parties or brought by the U.S. Patent and Trademark Office, or USPTO, may be necessary to determine the priority of
inventions or other matters of inventorship with respect to our patents or patent applications. We may also become involved in other proceedings, such as re-examination, inter partes review, or
opposition proceedings, before the USPTO or other jurisdictional body relating to our intellectual property rights or the intellectual property rights of others. Adverse determinations in a judicial
or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our Lumivascular platform products or using product names, which would have a
significant adverse impact on our business.
Additionally,
we may need to commence proceedings against others to enforce our patents or trademarks, to protect our trade secrets or know-how, or to determine the enforceability, scope
and validity of the proprietary rights of others. These proceedings would result in substantial expense to us and significant diversion of effort by our technical and management personnel. We may not
prevail in
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any
lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. We may not be able to stop a competitor from marketing and selling products that
are the same or similar to our products or from using product names that are the same or similar to our product names, and our business may be harmed as a result.
We are aware of patents held by third parties that may be asserted against us in litigation that could be
costly and could limit our ability to sell our Lumivascular platform products.
We are aware of patent families related to catheter positioning, optical coherence tomography, occlusion cutting and atherectomy owned by third
parties. With regard to atherectomy patents, one of our founders, Dr. John Simpson, founded FoxHollow Technologies prior to founding our company. FoxHollow Technologies developed an atherectomy
device that is currently sold by Medtronic, and Dr. Simpson and our Chief Technology Officer, Himanshu Patel, are listed as inventors on patents covering that device that are now held by
Medtronic. We are not currently aware of any claims Medtronic has made or intends to make against us with respect to Pantheris or any other product or product under development. Because of a doctrine
known as "assignor estoppel," if any of
Dr. Simpson's earlier patents are asserted against us by Medtronic, we may be prevented from asserting an invalidity defense regarding those patents, and our defense may be compromised.
Medtronic has significantly greater financial resources than we do to pursue patent litigation and could assert these patent families against us at any time. Adverse determinations in any such
litigation could prevent us from manufacturing or selling Pantheris or other products or products under development, which would significantly harm our business.
Intellectual property rights may not provide adequate protection, which may permit third parties to compete
against us more effectively.
In order to remain competitive, we must develop and maintain protection of the proprietary aspects of our technologies. We rely on a combination
of patents, copyrights, trademarks, trade secret laws and confidentiality and invention assignment agreements to protect our intellectual property rights. As of June 30, 2018, we held 21 issued
and allowed U.S. patents and had 25 U.S. utility patent applications and 6 PCT applications pending. As of June 30, 2018, we also had 34 issued and allowed patents outside of the United States.
As of June 30, 2018, we had 41 pending patent applications outside of the United States, including in Australia, Canada, China, Europe, India and Japan. Our patents and patent applications
include claims covering key aspects of the design, manufacture and therapeutic use of OCT imaging catheters, occlusion-crossing catheters, atherectomy devices and our imaging console. Our patent
applications may not result in issued patents and our patents may not be sufficiently broad to protect our technology. Any patents issued to us may be challenged by third parties as being invalid, or
third parties may independently develop similar or competing technology that avoids our patents. Should such challenges be successful, competitors might be able to market products and use
manufacturing processes that are substantially similar to ours. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants,
vendors or former or current employees, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized use and disclosure of our intellectual
property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be adequate. In addition, the laws of many foreign countries will not protect our
intellectual property rights to the same extent as the laws of the United States. Consequently, we may be unable to prevent our proprietary technology from being exploited abroad, which could affect
our ability to expand to international markets or require costly efforts to protect our technology. To the extent our intellectual property protection is incomplete, we are exposed to a greater risk
of direct competition. In addition, competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts or design around
our protected technology. Our failure to secure, protect and enforce our intellectual property rights could
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substantially
harm the value of our Lumivascular platform, brand and business. We use certain open source software in Lightbox. We may face claims from companies that incorporate open source
software into their products or from open source licensors, claiming ownership of, or demanding release of, the source code, the open source software or derivative works that were developed using such
software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to cease offering Lightbox unless and until we
can re- engineer it to avoid infringement. This re-engineering process could require significant additional research and development resources, and we may not be able to complete it successfully.
These risks could be difficult to eliminate or manage, and, if not addressed, could harm our business, financial condition and operating results.
Risks Related to Government Regulation
Failure to comply with laws and regulations could harm our business.
Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for
monitoring and enforcing employment and labor laws, workplace safety, environmental laws, consumer protection laws, anti-bribery laws, import/export controls, federal securities laws and tax laws and
regulations. In certain jurisdictions, these regulatory requirements may be more stringent than those in the United States and in other circumstances these requirements may be more stringent in the
United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory recalls, enforcement actions, adverse publicity, disgorgement of
profits, fines, damages, civil and criminal penalties or injunctions and administrative actions. If any governmental sanctions, fines or penalties are imposed, or if we do not prevail in any possible
civil or criminal litigation, our business, operating results and financial condition could be harmed. In addition, responding to any action will likely result in a significant diversion of
management's attention and resources and substantial costs. Enforcement actions and sanctions could further harm our business, operating results and financial condition.
If we fail to obtain and maintain necessary regulatory clearances or approvals for our Lumivascular platform
products, or if clearances or approvals for future products and indications are delayed or not issued, our commercial operations would be harmed.
Our Lumivascular platform products are medical devices that are subject to extensive regulation by FDA in the United States and by regulatory
agencies in other countries where
we do business. Government regulations specific to medical devices are wide-ranging and govern, among other things:
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product design, development and manufacture;
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laboratory, preclinical and clinical testing, labeling, packaging, storage and distribution;
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pre-marketing clearance or approval;
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record keeping;
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product marketing, promotion and advertising, sales and distribution; and
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post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals.
Before
a new medical device, or a new intended use for, an existing product can be marketed in the United States, a company must first submit and receive either 510(k) clearance or
pre-marketing approval from FDA, unless an exemption applies. Either process can be expensive, lengthy and unpredictable. We may not be able to obtain the necessary clearances or approvals or may be
unduly delayed in doing so, which could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for
the product,
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which
may limit the market for the product. Although we have obtained 510(k) clearance to market Pantheris, our image-guided atherectomy device, and our Ocelot family of catheters for crossing sub and
total occlusions in the peripheral vasculature, our clearance can be revoked if safety or efficacy problems develop. We obtained 510(k) clearance for Pantheris 3.0 in May 2018, and we submitted for
FDA clearance of a lower-profile device for small vessel peripheral vascular applications in August 2018. Delays in obtaining clearance or approval could increase our costs and harm our revenues and
growth.
In
addition, we are required to timely file various reports with the FDA, including reports required by the MDRs that require that we report to the regulatory authorities if our devices
may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. If these
reports are not filed timely, regulators may impose sanctions and sales of our products may suffer, and we may be subject to product liability or regulatory enforcement actions, all of which could
harm our business
If
we initiate a correction or removal for one of our devices to reduce a risk to health posed by the device, we would be required to submit a publicly available Correction and Removal
report to the FDA and in many cases, similar reports to other regulatory agencies. This report could be classified by the FDA as a device recall which could lead to increased scrutiny by the FDA,
other international regulatory agencies and our customers regarding the quality and safety of our devices. Furthermore, the submission of these reports has been and could be used by competitors
against us in competitive situations and cause customers to delay purchase decisions or cancel orders and would harm our reputation.
The
FDA and the Federal Trade Commission, or FTC, also regulate the advertising and promotion of our products to ensure that the claims we make are consistent with our regulatory
clearances, that there are adequate and reasonable scientific data to substantiate the claims and that our promotional labeling and advertising is neither false nor misleading in any respect. If the
FDA or FTC determines that any of our advertising or promotional claims are misleading, not substantiated or not permissible, we may be subject to enforcement actions, including Warning Letters,
adverse publicity, and we may be required to revise our promotional claims and make other corrections or restitutions.
The
FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA or state
agencies, which may include any of the following sanctions:
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adverse publicity, warning letters, fines, injunctions, consent decrees and civil penalties;
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repair, replacement, refunds, recall or seizure of our products;
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operating restrictions, partial suspension or total shutdown of production;
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refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses or modifications to existing products;
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withdrawing 510(k) clearance or pre-market approvals that have already been granted; and
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criminal prosecution.
If
any of these events were to occur, our business and financial condition would be harmed.
Material modifications to our Lumivascular platform products may require new 510(k) clearances or pre-market
approvals or may require us to recall or cease marketing our Lumivascular platform products until clearances or approvals are obtained.
Material modifications to the intended use or technological characteristics of our Lumivascular platform products will require new 510(k)
clearances or pre-market approvals or require us to recall or
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cease
marketing the modified devices until these clearances or approvals are obtained. Based on published FDA guidelines, the FDA requires device manufacturers to initially make and document a
determination of whether or not a modification requires a new approval, supplement or clearance; however, the FDA can review 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 pre-market approval. We may not be able
to obtain additional 510(k) clearances or pre-market approvals for new products or for modifications to, or additional indications for, our Lumivascular platform products in a timely fashion, or at
all. Delays in obtaining required future clearances would harm our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth. We have made
modifications to our Lumivascular platform products in the past and will make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If
the FDA disagrees and requires new clearances or approvals for the modifications, we may be required to recall and to stop selling or marketing our Lumivascular platform products as modified, which
could harm our operating results and require us to redesign our Lumivascular platform products. In these circumstances, we may be subject to significant enforcement actions. We plan to make further
modifications to the design of Pantheris to enhance cutting efficiency and access smaller vessels. Future versions of Pantheris incorporating these enhancements may require additional regulatory
clearances or approvals.
If we or our suppliers fail to comply with the FDA's QSR, our manufacturing operations could be delayed or
shut down and Lumivascular platform sales could suffer.
Our manufacturing processes and those of our third-party suppliers are required to comply with the FDA's QSR, which covers the procedures and
documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of our Lumivascular platform products. We are also subject to similar state
requirements and licenses. In addition, we must engage in extensive recordkeeping and reporting and must make available our manufacturing facilities
and records for periodic unannounced inspections by governmental agencies, including the FDA, state authorities and comparable agencies in other countries. If we fail a QSR inspection, our operations
could be disrupted and our manufacturing interrupted. Failure to take adequate corrective action in response to an adverse QSR inspection could result in, among other things, a shut-down of our
manufacturing operations, significant fines, suspension of marketing clearances and approvals, seizures or recalls of our device, operating restrictions and criminal prosecutions, any of which would
cause our business to suffer. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with applicable regulatory requirements, which may result in
manufacturing delays for our products and cause our revenues to decline.
We
have registered with the FDA as a medical device manufacturer and have obtained a manufacturing license from the CDHS. The FDA has broad post-market and regulatory enforcement powers.
We are subject to unannounced inspections by the FDA and the Food and Drug Branch of CDHS to determine our compliance with the QSR and other regulations, and these inspections may include the
manufacturing facilities of our suppliers. Our current facility has been inspected by the FDA in 2009, 2011 and 2013, and two, three and zero observations, respectively, were noted during those
inspections. BSI, our European Notified Body, inspected our facility in 2014 and 2015 and found zero non-conformances. BSI conducted four external audits in 2016 and zero non-conformances were found
in all except for one audit, for which four minor non-conformances were found. The BSI audit performed in January 2017 resulted in zero non-conformances. We can provide no assurance that we will
continue to remain in substantial compliance with the QSR. If the FDA, CDHS or BSI inspect our facility and discover compliance problems, we may have to shut down our facility and cease manufacturing
until we can take the appropriate remedial steps to correct the audit findings. Taking corrective action may be expensive, time consuming and a distraction for management and if we
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experience
a shutdown or delay at our manufacturing facility we may be unable to produce our Lumivascular platform products, which would harm our business.
Our Lumivascular platform products may in the future be subject to product recalls that could harm our
reputation.
FDA and similar governmental authorities in other countries have the authority to require the recall of commercialized products in the event of
material regulatory deficiencies or defects in design or manufacture. A government mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors or design or
labeling defects. Recalls of our Lumivascular platform products would divert managerial attention, be expensive, harm our reputation with customers and harm our financial condition and results of
operations. A recall announcement would negatively affect our stock price.
Changes in coverage and reimbursement for procedures using our Lumivascular platform products could affect
the adoption of our Lumivascular platform and our future revenues.
Currently, our Lumivascular platform procedure is typically reimbursed by third-party payors, including Medicare and private healthcare
insurance companies, under existing reimbursement codes. These payors may change their coverage and reimbursement policies, as well as payment amounts, in a way that would prevent or limit
reimbursement for our products, which would significantly harm our business. Also, healthcare reform legislation or regulation may be proposed or enacted in the future, which may adversely affect such
policies and amounts. We cannot predict whether and to what extent existing coverage and reimbursement will continue to be available. If physicians, hospitals and other providers are unable to obtain
adequate coverage and reimbursement for procedures performed using our Lumivascular platform products, they are significantly less likely to use our Lumivascular platform products and our business
would be harmed.
Healthcare reform measures could hinder or prevent our planned products' commercial success.
In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare
system in ways that could harm our future revenues and profitability and the future revenues and profitability of our potential customers. Federal and state lawmakers regularly propose and, at times,
enact legislation that would result in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. For example, one of the
most significant healthcare reform measures in decades, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or Affordable Care
Act, was enacted in 2010. The Affordable Care Act contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse
measures, all of which will impact existing government healthcare programs and will result in the development of new programs. The Affordable Care Act, among other things, imposed an excise tax of
2.3% on the sale of most medical devices, including ours, and any failure to pay this amount could result in the imposition of an injunction on the sale of our products, fines and penalties. Although
this tax has been suspended through 2019, it is expected to apply to sales of our products in 2020 and thereafter. The current presidential administration and Congress may continue to attempt broad
sweeping changes to the current health care laws. We face uncertainties that might result from modifications or repeal of any of the provisions of the Affordable Care Act, including as a result of
current and future executive orders and legislative actions. The impact of those changes on us and potential effect on the medical device industry as a whole is currently unknown. Any changes to the
Affordable Care Act are likely to have an impact on our results of operations, and may have a material adverse effect on our results of operations. We cannot predict what other health care programs
and regulations will ultimately be implemented at the
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federal
or state level or the effect of any future legislation or regulation in the United States may have on our business.
The
continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of health care may
harm:
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our ability to set a price that we believe is fair for our products;
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our ability to generate revenues and achieve or maintain profitability; and
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the availability of capital.
If we fail to comply with healthcare regulations, we could face substantial penalties and our business,
operations and financial condition could be adversely affected.
Even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors,
certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients' rights are and will be applicable to our business. We could be subject to healthcare fraud and
abuse and patient privacy regulation by both the federal government and the states in which we conduct our business. The regulations that will affect how we operate
include:
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the federal healthcare program Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering,
soliciting, receiving or providing remuneration, directly or indirectly, in exchange for or to induce 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 the Medicare and Medicaid programs;
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the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be
presented, false claims, or knowingly using false statements, to obtain payment from the federal government;
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federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to
healthcare matters;
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the Sunshine Act, created under the Affordable Care Act, and its implementing regulations, which require manufacturers of drugs, medical
devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid, or the Children's Health Insurance Program to report annually to the HHS information related to
payments or other transfers of value made to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members;
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HIPAA, as amended by the HITECH Act, which protects the security and privacy of protected health information; and
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state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services
reimbursed by any third-party payor, including commercial insurers.
The
Affordable Care Act, among other things, amends the intent requirement of the Federal Anti-Kickback Statute and criminal healthcare fraud statutes. A person or entity no longer needs
to have actual knowledge of this statute or specific intent to violate it. In addition, the Affordable Care Act provides that 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 False Claims Act.
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Efforts
to ensure that our business arrangements will comply with applicable healthcare laws may involve substantial costs. It is possible that governmental and enforcement authorities
will conclude that our business practices do not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If
any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the
imposition of civil, criminal and administrative penalties, damages, disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs,
contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could harm our ability to operate our business and our results of
operations. In addition, the clearance or approval and commercialization of any of our products outside the United States will also likely subject us to foreign equivalents of the healthcare laws
mentioned above, among other foreign laws.
Compliance with environmental laws and regulations could be expensive. Failure to comply with environmental
laws and regulations could subject us to significant liability.
Our research and development and manufacturing operations involve the use of hazardous substances and are subject to a variety of federal,
state, local and foreign environmental laws and regulations relating to the storage, use, discharge, disposal, remediation of, and human exposure to, hazardous substances and the sale, labeling,
collection, recycling, treatment and disposal of products containing hazardous substances. In addition, our research and development and manufacturing operations produce biological waste materials,
such as human and animal tissue, and waste solvents, such as isopropyl alcohol. These operations are permitted by regulatory authorities, and the resultant waste materials are disposed of in material
compliance with environmental laws and regulations. Liability under environmental laws and regulations can be joint and several and without regard to fault or negligence. Compliance with environmental
laws and regulations may be expensive and non-compliance could result in substantial liabilities, fines and penalties, personal injury and third party property damage claims and substantial
investigation and remediation costs. Environmental laws and regulations could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with
violations. We cannot assure you that violations of these laws and regulations will not occur in the future or have not occurred in the past as a result of human error,
accidents, equipment failure or other causes. The expense associated with environmental regulation and remediation could harm our financial condition and operating results.
Regulations related to "conflict minerals" may force us to incur additional expenses, may result in damage to
our business reputation and may adversely impact our ability to conduct our business.
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC promulgated final rules regarding disclosure of the use of
certain minerals, known as conflict minerals, that are mined from the Democratic Republic of the Congo and adjoining countries, as well as procedures regarding a manufacturer's efforts to prevent the
sourcing of such minerals and metals produced from those minerals. These disclosure requirements require ongoing due diligence efforts and disclosure obligations. We have incurred and expect to incur
additional costs to comply with these disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Additional costs could
include the cost of remediation and other changes to products, processes, or sources of supply as a consequence of such verification activities. In addition, our implementation of these rules could
adversely affect the sourcing, supply, and pricing of materials used in our products. We may face reputational harm if we determine that certain of our components contain minerals not determined to be
conflict free or if we are unable to alter our processes or sources of supply to avoid using such materials. Reputational harm could adversely affect our business, financial condition or results of
operations.
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Risks Related to Our Common Stock and Preferred Stock
Our stock price may be volatile, and purchasers of our Common Stock could incur substantial losses.
Our stock price has fluctuated significantly since our IPO and is likely to continue to fluctuate substantially. As a result of this price
fluctuation, investors may experience losses on their investments in our stock. In addition, the development stage of our operations may make it difficult for investors to evaluate the success of our
business to date and to assess our future viability. The market price for our Common Stock may be influenced by many factors, including:
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sales of stock by our existing stockholders, including our affiliates;
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market acceptance of our Lumivascular platform and products, including Pantheris;
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the results of our clinical trials;
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changes in analysts' estimates, investors' perceptions, recommendations by securities analysts or our failure to achieve analysts' and our own
estimates;
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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
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actual or anticipated fluctuations in our financial condition and operating results;
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quarterly variations in our or our competitors' results of operations;
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general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors;
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changes in operating performance and stock market valuations of other technology companies generally, or those in the medical device industry
in particular;
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the loss of key personnel, including changes in our board of directors and management;
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legislation or regulation of our business;
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lawsuits threatened or filed against us;
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the announcement of new products or product enhancements by us or our competitors;
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announcements related to patents issued to us or our competitors and to litigation; and
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developments in our industry.
From
time to time, our affiliates may sell stock for reasons due to their personal financial circumstances. These sales may be interpreted by other stockholders as an indication of our
performance and result in subsequent sales of our stock that have the effect of creating downward pressure on the market price of our Common Stock. In addition, the stock prices of many companies in
the medical device industry have experienced wide fluctuations that have often been unrelated to the operating performance of those companies.
Our
stock price has decreased significantly over the course of the past year. As a result of the decrease in our stock price, the options held by our employees are less valuable which
make it more likely that certain of our employees may leave our company. The loss of key employees could have an adverse effect on our business.
We may fail to meet our publicly announced guidance or other expectations about our business and future
operating results, which would cause our stock price to decline.
We have provided in the past and may provide guidance in the future about our business and future operating results. In developing this
guidance, our management must make certain assumptions
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and
judgments about our future performance, including projected revenues and the timing of regulatory approvals. Furthermore, analysts and investors may develop and publish their own projections of
our business, which may form a consensus about our future performance. Our business results may vary significantly from such guidance or that consensus due to a number of factors, many of which
are outside of our control, and which could adversely affect our operations and operating results. Furthermore, if we make downward revisions of our previously announced guidance, or if our publicly
announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our Common Stock would decline.
If securities or industry analysts do not publish research or reports about our business, or publish negative
reports about our business, our share 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, our market and our competitors. We do not have any control over these analysts. The analysts who previously published research reports on our stock following our IPO have discontinued
coverage. Although one new analyst initiated coverage of our business in March 2018, if additional analysts do not begin regularly
publishing reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline. If our operating results fail to meet the forecast of
analysts, our stock price will likely decline.
Sales of a substantial number of shares of our Common Stock in the public market, including by our existing
stockholders, could cause our stock price to fall.
Sales of a substantial number of shares of our Common Stock in the public market, or the perception that these sales might occur, could depress
the market price of our Common Stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that these sales and others may
have on the prevailing market price of our Common Stock.
We
will need to raise additional funds through future equity or debt financings within the next five months to meet our operational needs and capital requirements for product
development, clinical trials and commercialization. We can provide no assurance that we will be successful in raising funds pursuant to additional equity or debt financings or that such funds will be
raised at prices that do not create substantial dilution for our existing stockholders. Given the recent decline in our stock price, any financing that we undertake in the next nine months could cause
substantial dilution to our existing stockholders. On February 3, 2016, we filed a universal shelf registration statement (the "Shelf Registration Statement") to offer up to
$150.0 million of our securities and entered into an "at-the-market" program pursuant to a Sales Agreement with Cowen and Company ("Cowen"), through which we issued and sold approximately
200,000 shares of Common Stock having an aggregate offering value of approximately $8.7 million between the Shelf Registration Statement's effectiveness on March 8, 2016 and September
2017. In July 2018, we sold a further 2,166,180 shares of our Common Stock (excluding the Warrants to purchase an additional 1,083,091 shares of our Common Stock issued in a concurrent private
placement) pursuant to the Shelf Registration Statement, for gross proceeds of approximately $3.5 million. In addition, in August 2016, we issued and sold 200,000 shares of our Common Stock in
our follow-on public offering at a public offering price of $140.00 per share, for net proceeds of approximately $31.5 million after deducting underwriting discounts and commissions of
approximately $2.4 million and other expenses of approximately $0.6 million. We have established, and may in the future establish, "at-the-market" programs pursuant to which we may offer
and sell shares of our Common Stock pursuant to the Shelf Registration Statement. During the year ended December 31, 2016, we sold 27,374 shares of Common Stock under our "at-the-market"
program with Cowen at an average price of $194.74 and raised net proceeds of $5.2 million, after payment of $0.2 million in commissions and fees to Cowen. During the three and six months
ended June 30, 2018,
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we
sold no shares of Common Stock through the "at-the-market" program. Due to the SEC's "baby shelf rules," which prohibit companies with a public float of less than $75 million from issuing
securities under a shelf registration statement in excess of one-third of such company's public float in a twelve-month period, we are unable to issue more shares using the Shelf Registration
Statement at this time. Accordingly, it was necessary to register the shares sold pursuant to the Purchase Agreement, the CRG Conversion and Series B Purchase Agreement on Form S-1. This
has increased our transaction expenses and the number of shares required to be sold to finance our operations.
In
addition, pursuant to our Securities Purchase Agreement with CRG, the Shelf Registration Statement also registered for resale 8,705 shares of Common Stock held by CRG, which may be
sold freely in the public market. On November 3, 2017, we also entered into the Lincoln Park Purchase Agreement with Lincoln Park, pursuant to which Lincoln Park is obligated to purchase, at
our request, up to $15.0 million of our Common Stock over a 30-month period, subject to certain limitations set forth in the Purchase Agreement. The warrants issued in connection with the
Series B preferred stock prohibits us from entering into certain transactions involving the issuance of securities for a price determined by reference to the trading price of our Common Stock
or otherwise subject to modification following the date of issuance, in each case for a period of three years from the closing date of the Series B Offering, other than purchases pursuant to
the Series B Purchase Agreement, which may be made on the 120 day anniversary of the closing date of the Series B Offering. This prohibition may be waived by holders of two-thirds
of the outstanding Series 1 and Series 2 warrants at any time. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price
of our Common Stock could decline. Sales of newly issued securities under any registration statement will result in dilution of our stockholders and could cause our stock price to fall.
Our
directors and employees may sell our stock through 10b5-1 trading plans or in the market during open windows under our insider trading policy without such plans in place. Sales of
our Common Stock by our directors and employees could be perceived negatively by investors or cause downward pressure on our Common Stock and cause a reduction in the price of our Common Stock as a
result. We have also registered shares of our Common Stock that we may issue under our employee equity incentive plans. These shares will be able to be sold freely in the public market upon issuance.
Our 2017 financial statements contained disclosure that there is substantial doubt about our ability to
continue as a going concern, and we will need additional financing to execute our business plan, to fund our operations and to continue as a going concern.
Since inception, we have experienced recurring operating losses and negative cash flows and we expect to continue to generate operating losses
and consume significant cash resources for the foreseeable future. There is substantial doubt regarding our ability to continue as a going concern. Our independent registered public accounting firm
has expressed in its auditors' report on our
2017 financial statements, included in our Annual Report on Form 10-K, as filed with the SEC on March 30, 2018, a "going concern" opinion, meaning that we have recurring losses from
operations and negative cash flows from operations that raise substantial doubt regarding our ability to continue as a going concern. We have prepared our financial statements on a going concern
basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Our 2017 financial statements do not include any adjustment to
reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
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The requirements of being a public company may strain our resources, divert management's attention and affect
our ability to attract and retain executive management and qualified board members.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the
Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of Nasdaq and other applicable securities laws, rules and regulations. Compliance with these laws, rules and regulations have increased
our legal and financial compliance costs and will make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an
"emerging growth company." The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act
requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure
controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. Our management and other personnel now need
to devote a substantial amount of time to these compliance initiatives. As a result, management's attention may be diverted from other business concerns and our costs and expenses will increase, which
could harm our business and operating results. We may need to hire more employees in the future or engage outside consultants to comply with these requirements, which will increase our costs and
expenses.
In
addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial
compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity and, as a
result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and
higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may
result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with
new laws, regulations and standards
differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and
our business may be harmed.
We
will incur additional compensation costs in the event that we decide to pay our executive officers cash compensation closer to that of executive officers of other public medical
device companies, which would increase our general and administrative expense and could harm our profitability. Any future equity awards will also increase our compensation expense. We also expect
that being a public company and compliance with applicable rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept
reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our
board of directors, particularly to serve on our audit committee and compensation committee.
As
a result of disclosure of information in this Quarterly Report on Form 10-Q and in filings required of a public company, our business and financial condition will become more
visible, which could be advantageous to our competitors and clients and could result in threatened or actual litigation, including by competitors and other third parties. If such claims are
successful, our business and operating results could be harmed, and even if the claims are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the
resources of our management and harm our business and operating results.
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We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable
to emerging growth companies will make our Common Stock less attractive to investors.
We are an emerging growth company. For as long as we continue to be an emerging growth company, we may take advantage of certain exemptions from
reporting requirements that are applicable to other public companies including, but not limited to, 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 our periodic reports and proxy 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 cannot predict if investors will find our Common Stock less attractive because we
will rely on these exemptions. If some investors find our Common Stock less attractive as a result, there may be a less active trading market for our Common Stock and our stock price may be more
volatile or decline.
We
will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of our IPO, (b) in which we
have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Common Stock that is held by
non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the
prior three-year period. 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 suffer or be more volatile.
Nasdaq may delist our securities from its exchange, which could harm our business and limit our stockholders'
liquidity.
Our Common Stock is currently listed on the Nasdaq Capital Market, which has qualitative and quantitative listing criteria.
On
March 1, 2018, we regained compliance with all applicable Nasdaq listing criteria; however, there can be no assurance that we will continue to be compliant with such listing
criteria. In the event of a delisting, we can provide no assurance that any action taken by us to restore compliance with listing requirements would allow our Common Stock to become listed again,
stabilize the market price or improve the liquidity of our Common Stock, prevent our Common Stock from dropping below the Nasdaq minimum market value of listed securities and minimum closing bid price
requirements or prevent future non-compliance with Nasdaq's listing requirements.
Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws and Delaware law
could discourage a takeover.
Our amended and restated certificate of incorporation and bylaws contain provisions that might enable our management to resist a takeover. These
provisions include:
-
-
a classified board of directors;
-
-
advance notice requirements applicable to stockholders for matters to be brought before a meeting of stockholders and requirements as to the
form and content of a stockholder's notice;
-
-
a supermajority stockholder vote requirement for amending certain provisions of our amended and restated certificate of incorporation and
bylaws;
-
-
the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile
acquirer;
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allowing stockholders to remove directors only for cause;
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a requirement that the authorized number of directors may be changed only by resolution of the board of directors;
-
-
allowing all vacancies, including newly created directorships, to be filled by the affirmative vote of a majority of directors then in office,
even if less than a quorum, except as otherwise required by law;
-
-
a requirement that our stockholders may only take action at annual or special meetings of our stockholders and not by written consent;
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-
limiting the forum for certain litigation against us to Delaware; and
-
-
limiting the persons that can call special meetings of our stockholders to our board of directors, the chairperson of our board of directors,
the chief executive officer or the president (in the absence of a chief executive officer).
These
provisions might discourage, delay or prevent a change in control of our company or a change in our management. The existence of these provisions could adversely affect the voting
power of holders of Common Stock and limit the price that investors might be willing to pay in the future for shares of our Common Stock. In addition, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business
combinations with any "interested" stockholder for a period of three years following the date on which the stockholder became an "interested" stockholder.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of
Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for
disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that, unless we consent to the selection of an alternative forum, the Court of
Chancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of
fiduciary duty owed by any of our directors, officers or other employees to us or to our stockholders, (iii) any action asserting a claim arising pursuant to the Delaware General Corporation
Law or our certificate of incorporation or bylaws (iv) any action to interpret apply, enforce or determine the validity of our certificate of incorporation or bylaws or (v) any action
asserting a claim governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes
with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice
of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action,
we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.
We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on
investment may be limited to the value of our stock.
We have never paid cash dividends and do not anticipate paying cash dividends in the foreseeable future, except the cumulative dividend payable
on our Series A preferred stock. The payment of all other dividends will depend on our earnings, capital requirements, financial condition, prospects and other factors our board of directors
may deem relevant. In addition, our Loan Agreement with CRG prohibits us from, among other things, paying any dividends or making any other distribution or payment on account of our Common Stock. The
terms of our Series A preferred stock and our
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Series B
preferred stock provide that we may not pay dividends on our Common Stock without concurrently declaring dividends on each. If we do not pay dividends, our stock may be less valuable
because a return on your investment will only occur if you sell our Common Stock after our stock price appreciates. For more information on restrictions governing our ability to pay dividends, see the
section titled "
Dividend Policy
" in our Annual Report on Form 10-K, as filed with the SEC on March 30, 2018.
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DESCRIPTION OF CAPITAL STOCK
The following description summarizes the most important terms of our capital stock and does not purport to be complete and is qualified in its
entirety by the provisions of our amended and restated certificate of incorporation and amended and restated bylaws, which documents are incorporated by reference as exhibits to the registration
statement of which this prospectus is a part, and the applicable provisions of the Delaware General Corporation Law (the "DGCL").
General
Our authorized capital stock consists of 100,000,000 shares of Common Stock, $0.001 par value per share, and 5,000,000 shares of Preferred
Stock, $0.001 par value per share. Of our 5,000,000 shares of authorized Preferred Stock, 60,000 shares have been designated as Series A Preferred Stock, 18,000 have been designated as
Series B Preferred Stock, and the remainder are as-yet undesignated.
Common Stock
Outstanding Shares
On June 30, 2018, there were 9,305,872 shares of Common Stock outstanding, held of record by 175 stockholders. Our board of directors is
authorized, without stockholder approval, to issue additional shares of our capital stock.
As
of June 30, 2018, there were 17,742,215 shares of Common Stock subject to outstanding warrants other than the Warrants, 1,083,091 shares of Common Stock subject to the
outstanding Warrants, and 84,842 shares of Common Stock subject to outstanding options.
Dividend Rights
Subject to preferences that may be applicable to any then outstanding preferred stock, holders of our Common Stock are entitled to receive
dividends, if any, as may be declared from time to time by our board of directors out of legally available funds. We have never declared or paid
cash dividends on any of our capital stock and currently do not anticipate paying any cash dividends after this offering or in the foreseeable future.
Voting Rights
There are 100,000,000 shares of Common Stock authorized for issuance. Pursuant to our amended and restated certificate of incorporation, each
holder of our Common Stock is entitled to one vote for each share on all matters submitted to a vote of stockholders; provided, however, that, except as otherwise required by law, holders of our
Common Stock, as such, shall not be entitled to vote on any amendment to our amended and restated certificate of incorporation that relates solely to the terms of one or more outstanding series of
preferred stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to our amended and
restated certificate of incorporation. Pursuant to our amended and restated certificate of incorporation and amended and restated bylaws, corporate actions can generally be taken by a majority of our
board and/or stockholders holding a majority of our outstanding shares, except as otherwise indicated in the section entitled "Anti-takeover Effects of Delaware Law and Our Certificate of
Incorporation and Bylaws," where certain amendments to our amended and restated certificate of incorporation and amended and restated bylaws require the vote of at least 66
2
/
3
% of our
then outstanding voting securities. Additionally, our stockholders do not have cumulative voting rights in the election of directors. Accordingly, holders of a plurality of the votes cast at a meeting
of stockholders will be able to elect all of the directors then standing for election.
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Right to Receive Liquidation Distributions
In the event of our liquidation, dissolution or winding up, holders of our Common Stock are entitled to share ratably in the net assets legally
available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then outstanding
shares of preferred stock.
Rights and Preferences
Holders of our Common Stock have no preemptive, conversion, subscription or other rights, and there are no redemption or sinking fund provisions
applicable to our Common Stock. The rights, preferences and privileges of the holders of our Common Stock are subject to, and may be adversely affected by, the rights of the holders of our outstanding
preferred stock and shares of any series of our preferred stock that we may designate in the future.
Fully Paid and Nonassessable
All of our outstanding shares of Common Stock are, and the shares of Common Stock to be issued pursuant to this offering, when paid for, will be
fully paid and nonassessable.
Preferred Stock
Under our restated certificate of incorporation, we have authority, subject to any limitations prescribed by law and without further stockholder
approval, to issue from time to time up to 5,000,000 shares (less any Series A Preferred Stock and Series B Preferred Stock issued) of preferred stock, par value $0.001 per share, in one
or more series. As of June 30, 2018, 60,000 shares of preferred stock were designated Series A preferred stock and 18,000 shares of preferred stock were designated Series B
preferred stock. As of June 30, 2018, 41,800 shares of Series A preferred stock were issued and outstanding and 1,701 shares of Series B preferred stock were issued and
outstanding.
Pursuant
to our restated certificate of incorporation, we are authorized to issue "blank check" preferred stock, which may be issued from time to time in one or more series upon
authorization by our board of directors. Our board of directors, without further approval of the stockholders, is authorized to fix the designation, powers, preferences, relative, participating
optional or other special rights, and any qualifications, limitations and restrictions applicable to each series of the preferred stock. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes could, among other things, adversely affect the voting power or rights of the holders of our Common Stock and, under certain
circumstances, make it more difficult for a third party to gain control of us, discourage bids for our Common Stock at a premium or otherwise adversely affect the market price of the Common Stock.
Series A Preferred Stock
The preferences and rights of the Series A preferred stock are as set forth in a Certificate of Designation of Series A preferred
stock (the "Series A Certificate of Designation") filed as Exhibit 3.1 to our Current Report on Form 8-K, filed with the SEC on February 23, 2018. The following is a
summary of the material terms of our Series A Preferred stock and is qualified in its entirety by the Series A Certificate of Designation. Please refer Series A Certificate of
Designation for more information on the preferences, rights and limitations of Series A preferred stock.
Liquidation.
Upon any dissolution, liquidation or winding up, whether voluntary or involuntary, holders of Series A preferred stock
will be
entitled to receive distributions out of our assets, whether capital or surplus, of the greater of (i) an amount equal to $1,000 per share plus accrued and unpaid dividends thereon or
(ii) such amount as would be payable if the Series A preferred stock had been
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converted
to Common Stock. Amounts payable to the Series A preferred stock upon any dissolution, liquidation or winding up are payable prior and in preference to the payment of any amounts to
the holders of Series B preferred stock or Common Stock.
Dividends.
Holders of the Series A preferred stock are entitled to receive accruing dividends of 8% per annum, which dividends are
cumulative
and annually compounded. The holders of Series A preferred stock will be entitled to receive an amount equal (on an "as converted to Common Stock" basis) to and in the same form as dividends
actually paid on shares of our Common Stock when, as and if such dividends are paid on shares of our Common Stock. We have an option to pay the Series A preferred stock's accruing dividend in
additional shares of Series A preferred stock.
Conversion.
Each share of Series A preferred stock is convertible, at any time and from time to time at the option of the holder
thereof, into
that number of shares of Common Stock determined by dividing
$1,000 by the assumed conversion price of $2.00 (subject to adjustment as described below). This right to convert is limited by the beneficial ownership limitation described below.
Forced Conversion.
Beginning on January 1, 2019, if the Company's average market capitalization is at least $100,000,000 both
(i) on a
given date, based on the closing price and number of shares outstanding and (ii) for the prior quarter, based on the volume-weighted average closing price during such quarter and number of
shares outstanding on the last day of such quarter, the Series A preferred stock is subject to mandatory conversion (subject to the beneficial ownership limitation below).
Beneficial Ownership Limitation.
A holder shall have no right to convert any portion of Series A preferred stock, to the extent
that, after
giving effect to such conversion, such holder, together with such holder's affiliates, and any persons acting as a group together with such holder or any such affiliate, would beneficially own in
excess of 4.99% (or, upon election by a holder any higher or lower percentage) of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common
Stock upon such conversion. A holder of Series A preferred stock may adjust the percentage of the beneficial ownership upon not less than 61 days prior notice. Beneficial ownership of
the holder and its affiliates will be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
Holders of Series B preferred stock who are subject to such beneficial ownership limitation are and will remain responsible for ensuring their own compliance with Regulation 13D-G
promulgated under the Securities Exchange Act of 1934, as amended, consistent with their individual facts and circumstances. In addition, pursuant to Rule 13d-3(d)(1)(i) promulgated under the
Securities Exchange Act of 1934, as amended, any person who acquires Series A preferred stock with the purpose or effect of changing or influencing the control of our company, or in connection
with or as a participant in any transaction having such purpose or effect, immediately upon such acquisition will be deemed to be the beneficial owner of the underlying Common Stock.
Optional Redemption.
Subject to the terms of the certificate of designation, the Company holds an option to redeem some or all the
Series A
preferred stock for the amount per share otherwise payable upon a liquidation, dissolution or winding up of the Company, upon 30 days prior written notice to the holder of the Series A
preferred stock.
Stock Dividends and Stock Splits.
If we pay a stock dividend or otherwise make a distribution payable in shares of Common Stock on
shares of Common
Stock or any other Common Stock equivalents, subdivide or combine outstanding Common Stock, or reclassify Common Stock, the conversion price will be adjusted by multiplying the then effective
conversion price by a fraction, the numerator of which shall be the number of shares of Common Stock (including shares issuable upon conversion of the Series B preferred stock) outstanding
immediately before such event, and the denominator of which
shall be the number of shares outstanding immediately after such event (assuming conversion of the Series B preferred stock).
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Fundamental Transaction.
In the event we consummate a merger or consolidation with or into another person or other reorganization event
in which our
Common Stock is converted or exchanged for securities, cash or other property, or we sell, lease, license, assign, transfer, convey or otherwise dispose of all or substantially all of our assets or we
or another person acquire 50% or more of our outstanding shares of Common Stock, then following such event, the holders of the Series A preferred stock will be entitled to receive upon
conversion of the Series A preferred stock the same kind and amount of securities, cash or property which the holders would have received had they converted the Series A preferred stock
immediately prior to such fundamental transaction. Any successor to us or surviving entity shall assume the obligations under the Series A Preferred Shares.
Voting Rights, etc.
Except as otherwise provided in the Series A Certificate of Designation or required by law, the Series A
preferred
stock has no voting rights. However, as long as any shares of Series A preferred stock are outstanding, we may not, without the affirmative vote of the holders of a majority of the then
outstanding shares of the Series A preferred stock, (i) liquidate, dissolve, or wind up the Company; (ii) alter or amend the certificate of incorporation, Series A
Certificate of Designation or bylaws of the Company in a manner adverse to the Series A preferred stock; (iii) create or amend the terms of any securities so as to create, securities
pari passu or senior to the Series A Preferred Stock; (iv) purchase, redeem or make any dividend upon shares of capital stock other than certain limited exceptions; or (v) issue
any additional Series A preferred stock.
Fractional Shares.
No fractional shares of Common Stock will be issued upon conversion of Series A preferred stock. Rather, we
shall pay a
cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the fair market value of a share of Common Stock.
The
Series A preferred stock will be issued in book-entry form under a preferred stock agent agreement between American Stock Transfer & Trust as preferred stock agent, and
us, and shall initially be represented by one or more book-entry certificates deposited with The Depository Trust Company, or DTC, and registered in the name of Cede & Co., a nominee of
DTC, or as otherwise directed by DTC. There is no established public trading market for the Series A preferred stock and we do not expect a market to develop. We do not plan on applying to list
the Series A preferred stock on The Nasdaq
Capital Market, any other national securities exchange or any other nationally recognized trading system.
The
transfer agent for our Series A preferred stock is American Stock Transfer & Trust Company, LLC.
Series B Preferred Stock
The preferences and rights of the Series B preferred stock are as set forth in a Certificate of Designation of Series B preferred
stock (the "Series B Certificate of Designation") filed as Exhibit 3.2 to our Current Report on Form 8-K, filed with the SEC on February 23, 2018. The following is a
summary of the material terms of our Series B Preferred stock and is qualified in its entirety by the Series B Certificate of Designation. Please refer Series B Certificate of
Designation for more information on the preferences, rights and limitations of Series B preferred stock.
Liquidation.
Upon any dissolution, liquidation or winding up, whether voluntary or involuntary, holders of Series B preferred stock
will be
entitled to receive distributions out of our assets, whether capital or surplus, of an amount equal to $0.001 per share of Series B preferred stock before any distributions shall be made on the
Common Stock or any series of preferred stock ranked junior to the Series B preferred stock, but after distributions shall be made on any outstanding Series A preferred stock and any of
our existing or future indebtedness.
Dividends.
Holders of the Series B preferred stock will be entitled to receive dividends equal (on an "as converted to Common
Stock" basis) to
and in the same form as dividends actually paid on
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shares
of our Common Stock when, as and if such dividends are paid on shares of our Common Stock. No other dividends will be paid on shares of Series B preferred stock.
Conversion.
Each share of Series B preferred stock is convertible, at any time and from time to time at the option of the holder
thereof, into
that number of shares of Common Stock determined by dividing $1,000 by the assumed conversion price of $1.58 (which reflects an anti-dilution adjustment triggered by the issuance of the Warrants).
This right to convert is limited by the beneficial ownership limitation described below.
Forced Conversion.
Subject to certain ownership limitations as described below and certain equity conditions being met, until such time
that during
any 30 consecutive trading days, the volume weighted average price of our Common Stock exceeds 300% of the conversion price and the daily dollar trading volume during such period exceeds $500,000 per
trading day, we shall have the right to force the conversion of the Series B preferred stock into Common Stock.
Beneficial Ownership Limitation.
A holder shall have no right to convert any portion of Series B preferred stock, to the extent
that, after
giving effect to such conversion, such holder, together with such holder's affiliates, and any persons acting as a group together with such holder or any such affiliate, would beneficially own in
excess of 4.99% (or, upon election by a holder prior to the issuance of any shares of Series B preferred stock, 9.99%) of the number of shares of Common Stock outstanding immediately after
giving effect to the issuance of shares of Common Stock upon such conversion (subject to the right of the holder to increase such beneficial ownership limitation upon not less than 61 days
prior notice provided that such limitation can never exceed 9.99% and such 61 day period cannot be waived). Beneficial ownership of the holder and its affiliates will be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. Holders of Series B preferred stock who are
subject to such beneficial ownership limitation are and will remain responsible for ensuring their own compliance with Regulation 13D-G promulgated under the Securities Exchange Act of 1934, as
amended, consistent with their individual facts and circumstances. In addition, pursuant to Rule 13d-3(d)(1)(i) promulgated under the Securities Exchange Act of 1934, as amended, any person who
acquires Series B preferred stock with the purpose or effect of changing or influencing the control of our company, or in connection with or as a participant in any transaction having such
purpose or effect, immediately upon such acquisition will be deemed to be the beneficial owner of the underlying Common Stock.
Optional Redemption.
Subject to the terms of the certificate of designation, the Company holds an option to redeem some or all the
Series B
preferred stock six months after its issuance date at a 200% premium to the stated value of the Series B preferred stock subject to the redemption, upon 30 days prior written notice to
the holder of the Series B preferred stock. The Series B preferred stock would be redeemed by the Company for cash.
Subsequent Equity Sales.
The Series B preferred stock has full ratchet price based anti-dilution protection, subject to customary
carve outs,
in the event of a down-round financing at a price per share below the conversion price of the Series B preferred stock. If during any 20 of 30 consecutive trading days the volume weighted
average price of our Common Stock exceeds 300% of the then-effective conversion price of the Series B preferred stock and the daily dollar trading volume for each trading day during such
30 day period exceeds $500,000, the anti-dilution protection in the Series B preferred stock will expire and cease to apply.
Stock Dividends and Stock Splits.
If we pay a stock dividend or otherwise make a distribution payable in shares of Common Stock on
shares of Common
Stock or any other Common Stock equivalents, subdivide or combine outstanding Common Stock, or reclassify Common Stock, the conversion price will be adjusted by multiplying the then conversion price
by a fraction, the numerator
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of
which shall be the number of shares of Common Stock outstanding immediately before such event, and the denominator of which shall be the number of shares outstanding immediately after such event.
Fundamental Transaction.
In the event we consummate a merger or consolidation with or into another person or other reorganization event
in which our
Common Stock is converted or exchanged for securities, cash or other property, or we sell, lease, license, assign, transfer, convey or otherwise dispose of all or substantially all of our assets or we
or another person acquire 50% or more of our outstanding shares of Common Stock, then following such event, the holders of the Series B preferred stock will be entitled to receive upon
conversion of the Series B preferred stock the same kind and amount of securities, cash or property which the holders would have received had they converted the Series B preferred stock
immediately prior to such fundamental transaction. Any successor to us or surviving entity shall assume the obligations under the Series B Preferred Shares.
Voting Rights, etc.
Except as otherwise provided in the Series B Certificate of Designation or required by law, the Series B
preferred
stock has no voting rights. However, as long as any shares of Series B preferred stock are outstanding, we may not, without the affirmative vote of the holders of a majority of the then
outstanding shares of the Series B preferred stock, alter or change adversely the powers, preferences or rights given to the Series B preferred stock, amend the Series B
Certificate of Designation, amend our certificate of incorporation or other charter documents in any manner that
adversely affects any rights of the holders, increase the number of authorized shares of Series B preferred stock, or enter into any agreement with respect to any of the foregoing. The
Series B Certificate of Designation provides that if any party commences an action or proceeding to enforce any provisions thereunder, then the prevailing party in such action or proceeding
shall be reimbursed by the other party for its attorneys' fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding. This provision may,
under certain circumstances, be inconsistent with federal securities laws and Delaware general corporation law.
Fractional Shares.
No fractional shares of Common Stock will be issued upon conversion of Series B preferred stock. Rather, we
shall pay a
cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the conversion price.
The
Series B preferred stock will be issued in book-entry form under a preferred stock agent agreement between American Stock Transfer & Trust as preferred stock agent, and
us, and shall initially be represented by one or more book-entry certificates deposited with The Depository Trust Company, or DTC, and registered in the name of Cede & Co., a nominee of
DTC, or as otherwise directed by DTC. There is no established public trading market for the Series B preferred stock and we do not expect a market to develop. We do not plan on applying to list
the Series B preferred stock on The Nasdaq Capital Market, any other national securities exchange or any other nationally recognized trading system.
The
transfer agent for our Series B preferred stock is American Stock Transfer & Trust Company, LLC.
Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws
The provisions of Delaware law, our amended and restated certificate of incorporation and our amended and restated bylaws may have the effect of
delaying, deferring or discouraging another person from acquiring control of our company. These provisions, which are summarized below, may have the effect of discouraging takeover bids. They are also
designed, in part, to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of increased protection of our potential ability
to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire us because negotiation of these proposals could result in an improvement of
their terms.
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Delaware Law
We are governed by the provisions of Section 203 of the DGCL. In general, Section 203 prohibits a public Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales or other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and associates, owns, or within three years of the date on which it is sought to be determined whether such person is an "interested
stockholder," did own, 15% or more of the corporation's outstanding voting stock. These provisions may have the effect of delaying, deferring or preventing a change in our control.
Amended and Restated Certificate of Incorporation and Amended and Restated Bylaw Provisions
Our amended and restated certificate of incorporation and our amended and restated bylaws include a number of provisions that could deter
hostile takeovers or delay or prevent changes in control of our management team, including the following:
-
-
Board of directors vacancies.
Our amended and restated certificate of
incorporation and amended and restated bylaws authorize only our board of directors to fill vacant directorships, including newly created seats. In addition, the number of directors constituting our
board of directors is permitted to be set only by a resolution adopted by our board of directors. These provisions prevent a stockholder from increasing the size of our board of directors and then
gaining control of our board of directors by filling the resulting vacancies with its own nominees. This makes it more difficult to change the composition of our board of directors but promotes
continuity of management.
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-
Classified board.
Our amended and restated certificate of incorporation and
amended and restated bylaws provide that our board is classified into three classes of directors. A third party may be discouraged from making a tender offer or otherwise attempting to obtain control
of us as it is more difficult and time consuming for stockholders to replace a majority of the directors on a classified board of directors.
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Stockholder action; special meeting of stockholders.
Our amended and
restated certificate of incorporation provides that our stockholders may not take action by written consent, but may only take action at annual or special meetings of our stockholders. As a result, a
holder controlling a majority of our capital stock may not be able to amend our amended and restated bylaws or remove directors without holding a meeting of our stockholders called in accordance with
our amended and restated bylaws. Our amended and restated bylaws further provide that special meetings of our stockholders may be called only by our board of directors, the Chairman of our Board of
Directors, our Chief Executive Officer or our President, thus prohibiting a stockholder from calling a special meeting. These provisions might delay the ability of our stockholders to force
consideration of a proposal or for stockholders controlling a majority of our capital stock to take any action, including the removal of directors.
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Advance notice requirements for stockholder proposals and director
nominations.
Our amended and restated bylaws provide advance notice procedures for stockholders seeking to bring business before our annual
meeting of stockholders or to nominate candidates for election as directors at our annual meeting of stockholders. Our amended and restated bylaws also specify certain requirements regarding the form
and content of a stockholder's notice. These provisions might preclude our stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our
annual meeting of stockholders if the proper procedures are not followed. We expect that these provisions may also discourage or deter a
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