What changed in this filing

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Item 1A. Risk Factors

2020-05-12 compared with 2019-11-08 · 108 added, 52 removed, 482 unchanged (25% of the section changed)

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Risks Relating to our Business

The effects of the COVID-19 pandemic have disrupted, and may continue to significantly disrupt, our operations, including our ability to manufacture and supply products and perform research and development activities, our customers’ usage of our products as demand declines in elective surgeries in response to COVID-19, all of which have had and expected to continue to have a m aterial and adverse effect on our business, future revenues and financial condition.

We are unable to predict the extent to which the pandemic and related impacts will continue to adversely impact our business operations, financial performance, results of operations, financial position and the achievement of our strategic objectives.

Our business, results of operation and financial performance have been negatively impacted by the COVID-19 pandemic and related public health responses, such as shelter-in-place orders, social distancing protocols, and travel restrictions in many of the countries and regions in which we have operations or manufacturing partners.

Due to these impacts and measures, we have experienced and may continue to experience significant and unpredictable reductions in the demand for our products as healthcare customers divert medical resources and priorities towards the treatment of diseases related to COVID-19.

In addition, our customers may delay, cancel or redirect planned capital expenditures in order to focus resources on COVID-19 or in response to economic disruption related to COVID-19.

For example, in the last month of the fiscal quarter ended March 28, 2020, we experienced significant decline in treatment and procedure volume worldwide, as healthcare systems diverted resources to meet the increasing demands of managing COVID-19.

In addition, the American College of Surgeons, U.S.

surgeon general, and medical societies are evaluating the risks of minimally invasive surgeries in the presence of infectious diseases, which we expect will continue to negatively impact the usage of our products and the number of ophthalmic treatments and procedures performed.

If these recommendations continue to remain in place and the volume of elective procedures remains low, our results of operations and financial condition will continue to be adversely affected.

As a result of the COVID-19 outbreak around the world, we implemented certain travel restrictions, temporarily limited the number of employees permitted onsite in our offices and implemented work-from-home rules.

This has caused disruption and delays in our ability to operate and manufacture, test and assemble products in our internal facilities, particularly in our Mountain View, California facility, and has limited our ability to continue certain research and development activities which could materially and adversely affect our ability to develop new products and technologies on the timelines we previously anticipated.

The COVID-19 pandemic has created economic uncertainty and volatility in the financial markets around the wo rld, resulting in an economic downturn that has affected and will likely continue to affect demand for our products and impact our results of operations.

As a result, this may lead to a period of regional, national, and global economic slowdown or regional , national, or global recessions that would curtail or delay spending by hospitals and affect demand for our products as well as increase the risk of customer defaults or delays in payments.

Our customers may terminate or amend their agreements for the pur chase, lease, or service of our products due to bankruptcy, lack of liquidity, lack of funding, operational failures, or other reason.

The ultimate impact of the COVID-19 pandemic on our operations and financial performance depends on many factors that are not within our control, including, but not limited, to:

the recommendations by medical authorities on whether hospitals should and may perform elective surgical procedures;

hospitals abilities and willingness to devote resources to elective surgical proce dures;

governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic (including restrictions on travel and transport and workforce pressures);

the impact of the pandemic and actions taken in response on global and regional economies, travel, and economic activity;

the availability of federal, state, local or non-U.S.

funding programs;

general economic uncertainty in key global markets and financial market volatility;

global economic conditions and levels of economic growth;

and the pace of recovery when the COVID-19 pandemic subsides.

Although the magnitude of the impact of COVID-19 on our business operations remains uncertain and difficult to predict, and this remains a highly dynamic situation, we have experienced and will continue to experience in subsequent periods, disruptions to our business that will likely continue to adversely impact our business, financial condition and results of operations.

We have incurred indebtedness under the CARES Act which may be subject to audit, may not be forgivable and may eventually have to be repaid.

Any repayment of such indebtedness may limit the funds available to us and may restrict our flexibility in operating our business or otherwise adversely affect our results of operations.

In April 2020, the Company received a $2.5 million U.S.

Small Business Administration Loan (the “SBA Loan”) pursuant to the Payroll Protection Program (“PPP”), established under the CARES Act.

The Company may apply for forgiveness of the amount due on the loan if it fulfills certain conditions and applies the loan proceeds to payroll and certain other enumerated items under the CARES Act.

Amounts outstanding under the loan will bear a fixed interest rate of 1.00% per annum with a maturity date of April 22, 2022, two years from commencement date.

All payments are deferred for six months with interest accruing over the entire period of the SBA Loan.

Department of the Treasury has announced that it will conduct audits for PPP loans that exceed $2 million.

Should we be audited or reviewed by the U.S.

Department of the Treasury or the U.S.

Small Business Administration as a result of the SBA Loan or filing an application for forgiveness or otherwise, such audit or review could result in the diversion of management’s time and attention, generate negative publicity and cause us to incur legal and reputational costs.

If we were to be audited and receive an adverse outcome in such an audit, we could be required to return the full amount of the SBA Loan and may potentially be subject to civil and criminal fines and penalties.

We may not have the resources to repay the SBA Loan if required to do so by the federal government.

If all or substantially all of the SBA Loan is not forgiven or it is subsequently determined that it must be repaid, we may be required to use a substantial portion of our cash flows from operations to pay interest and principal on the SBA Loan.

Although we have no current intention of repaying the SBA Loan, we may decide to repay it in the future.

Any such repayment of the SBA Loan will reduce the funds available to us for working capital, capital expenditures, and other corporate purposes and may limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans, and other investments or divert funds that are otherwise necessary to run our business.

We cannot assure you that our business will generate sufficient cash flow from operations or that future financing will be available to us in amounts sufficient to enable us to make required and timely repayments on our indebtedness, or to fund our operations.

To date, we have used a substantial amount of cash for operating activities, and we cannot assure you when we will begin to generate cash from operating activities in amounts sufficient to service our debt.

Additionally, though we believe we are eligible for the SBA Loan under the PPP, our receipt of the SBA Loan could result in negative publicity, or expose us to liability under the federal False Claims Act, which prohibits the known filing of a false claim or the known use of false statements to obtain payment from the federal government, if it is determined that we were in fact not eligible to take the SBA Loan in the first instance.

In addition, although we are reviewing and may seek additional available benefits under the CARES Act, we cannot predict the manner in which such benefits will be allocated or administered and we cannot assure you that we will be able to access such benefits in a timely manner or at all.

Certain of the benefits under the CARES Act have not previously been administered on the present scale or at all.

Government or third party program administrators may be unable to cope with the volume of applications in the near term and any benefits we receive may not be as extensive as those for which we apply, may impose additional conditions and restrictions on our operations or may otherwise provide less relief than we contemplate.

government or any other governmental authority agrees to provide additional crisis relief assistance that we accept, it may impose certain requirements on the recipients of the aid, including restrictions on executive officer compensation, dividends, prepayment of debt, limitations on debt and other similar restrictions that will apply for a period of time after the aid is repaid or redeemed in full.

We cannot assure you that any such government crisis relief assistance will not significantly limit our corporate activities or be on terms that are favorable to us.

Such restrictions and terms could adversely impact our business and limit our operations and revenue as a result.

We face quality control and other production issues that could materially and adversely impact our sales and financial results and the acceptance of our products.

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In the past several years, we have experienced supply chain, production and training issues as we have expanded our product lines and sales volumes, and may experience similar issues in the future as we continue to grow our business.

For example, we have contracted with a manufacturing company located in Wuhan, China for certain laser systems scheduled for release in the latter half of 2020.

Due to the COVID-19 or coronavirus outbreak in China, release of our manufacturing process and launch of these new laser systems may be delayed or disrupted, and we may need to incur costs to replace or shift this manufacturing process elsewhere.

These issues have caused, and may in the future cause, us to reduce or delay the shipment of our products and incur costs to service or replace products already shipped to customers.

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legal actions by our customers.

The occur rence of any one or more of the foregoing factors could seriously harm our business, financial condition and results of operations.

The occurrence of any one or more of the foregoing factors could seriously harm our business, financial condition and results of operations.

We rely on our direct and independent sales forces and network of international distributors to sell our products and any failure to maintain our sales force and distributor relationships could harm our business.

Our ability to sell our products and generate revenues depends upon our direct and independent sales forces within the United States, direct sales force in Germany and relationships with independent international distributors.

Currently our direct and independent sales forces within the United States consist of approximately 19 employees and one independent representative, respectively and our direct sales force in Germany consists of 3 employees.

Currently our direct and independent sales forces within the United States consist of approximately 17 employees and one independent representative, respectively and our direct sales force in Germany consists of one employee.

Our international independent distributors are managed by a team of 5 people.

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Our international sales are largely dependent on the efforts of these third parties.

If any distributor breaches the terms of its distribution agreement with us or fails to generate sales of our products, we may be forced to replace the distributor and our ability to sell our products into that exclusive sales territory would be adversely affected.

If any distributor breaches the terms of its distribution agreement with

us or fails to generate sales of our products, we may be forced to replace the distributor and our ability to sell our products into that exclusive sales territory would be adversely affected.

We do not have any long-term employment contracts with the members of our direct sales force.

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Similarly, our independent and distributor agreements are generally terminable at will by either party and independents and distributors may terminate their relationships with us, which would affect our sales and results of operations.

We may be unable to recruit and retain qualified personnel in in Germany as part of our direct sales team.

We may be unable to recruit and retain qualified personnel in Germany as part of our direct sales team.

Any loss of the members of our existing direct or indirect sales organizations, or any failure to execute on our plans to further develop our sales function, could have an adverse impact on our business, results of operations and financial condition.

Additionally, our sales forces’ operations have been disrupted by the COVID-19 pandemic, as many are no longer allowed to travel and must instead perform their services from home, which could have an impact on their ability to sell and distribute our products.

Growth in our sales and marketing organization may create operational challenges without immediately offsetting benefits.

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We derive, and expect to continue to derive, a large portion of our revenues from international sales.

For the third quarter of fiscal year 2019, our international sales were $4.8 million, or 45.3% of total revenues.

For the first quarter of fiscal year 2020, our international sales were $4.6 million, or 50.8% of total revenues.

We anticipate that international sales will continue to account for a significant portion of our revenues in the foreseeable future.

All of our international revenues and costs for the fiscal quarter ended September 28, 2019 have been denominated in U.S.

All of our international revenues and costs for the first quarter of fiscal year 2020 have been denominated in U.S.

dollars except for a sale transacted through our German subsidiary.

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Our international operations and sales are subject to a number of risks and potential costs, including:

the impact of the COVID-19 pandemic on the global economy and financial markets;

fluctuations in foreign currency exchange rates;

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foreign certification requirements, including continued ability to use the “CE” mark in Europe, and other local regulatory requirements;

differing lo cal product preferences and product requirements;

differing local product preferences and product requirements;

cultural differences;

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reduced or limited protections of intellectual property rights in jurisdictions outside the United States;

potentially adverse tax consequences;

potentially adverse tax consequences, such as those related to changes in tax laws or tax rates or their interpretations;

protectionist, adverse and changing foreign governmental laws and regulations;

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Due to the complexities and uncertainties associated with ophthalmic research and development, products we are currently developing may not complete the development process or obtain the regulatory approvals required to market such products successfully.

In addition, our research and development process has been slowed by the impact of COVID-19, and should the COVID-19 pandemic continue, it could delay and disrupt our research and development processes even further.

Successful commercialization of new products and new applications will require that we effectively transfer production processes from research and development to manufacturing and effectively coordinate with our suppliers.

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Concerns about consumer and investor confidence, volatile corporate profits and reduced capital spending, international conflicts, terrorist and military activity, civil unrest and pandemic illness could reduce customer orders or cause customer order cancellations.

For example, the COVID-19 pandemic has and may continue to cause adverse impacts on global economic activity which could negatively impact our business.

In addition, political and social turmoil related to international conflicts and terrorist acts may put further pressure on economic conditions in the United States and abroad.

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Factors contributing to these fluctuations include the following:

general economic uncertainties and political concerns, including the impact of COVID-19;

changes in the prices at which we can sell our products, including the impact of changes in exchange rates;

general economic uncertainties and political concerns;

introduction of new products, product enhancements and new applications by our competitors, including new drugs, entry of new competitors into our markets, pricing pressures and other competitive factors;

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We believe that continued and increased sales, if any, of these medical laser systems is dependent upon a number of factors including the following:

the impact of COVID-19 pandemic on timing of ophthalmic treatment procedures;

acceptance of product performance, features, ease of use, scalability and durability, including with respect to our MicroPulse laser photocoagulation systems;

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level of reimbursement for treatments administered with our products.

In addition, we derive a meaningful portion of our sales in the form of r ecurring revenues from selling consumable instrumentation, including our MP3 and EndoProbe devices.

In addition, we derive a meaningful portion of our sales in the form of recurring revenues from selling consumable instrumentation, including our MP3 and EndoProbe devices.

Our ability to increase recurring revenues from the sale of consumable products will depend primarily upon the features of our current products and product innovation, the quality of, ease of use and prices of our products, including the relationship to prices of competing products.

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Ltd., Quantel Medical SA, and Topcon Corporation.

We also compete with alternative glaucoma surgical device companies such as Alcon, Allergan, Glaukos, New World Medical and Ivantis, Inc.

We also compete with alternative glaucoma surgical device companies such as Alcon, Inc., Allergan, Inc., Glaukos Corporation, New World Medical, Inc.

and Ivantis, Inc.

Pharmaceuticals represent alternative treatments to our laser procedures.

Some of our principal pharmaceutical competitors are Alcon, Allergan, Astellas Pharma Inc., Pfizer Inc., Regeneron Pharmaceuticals, Roche (Genentech) and Bausch Health Companies Inc.

Some of our principal pharmaceutical competitors are Alcon, Inc., Allergan, Inc., Astellas Pharma Inc., Pfizer Inc., Regeneron Pharmaceuticals, Inc., Roche Holdings Ltd.

(Genentech) and Bausch Health Companies Inc.

Some of our competitors have substantially greater financial, engineering, product development, manufacturing, marketing and technical resources than we do.

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Any such developments could have a material adverse effect on our business, financial condition and results of operations.

Our ability to raise capital in the future may be limited, and future sales and issuances of securities could negatively affect our stock price and dilute the ownership interest of our existing investors.

Our business and operations may consume resources faster than we anticipate.

We may need in the future to raise additional funds through future equity or debt financings to meet our operational needs and capital requirements for product development, clinical trials and commercialization and may subsequently require additional fundraising.

Additional financing may not be available on favorable terms, if at all.

If adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which could seriously harm our business and operating results.

Future sales or issuances of securities by us could decrease the value of our common stock, dilute stockholders’ voting power and reduce future potential earnings per share.

To raise capital, we may sell common stock, convertible securities or other equity-linked securities in one or more transactions at prices and in a manner we determine from time to time.

If we sell additional equity securities, our existing stockholders may be materially diluted.

Additionally, new investors could gain rights, preferences and privileges senior to those of existing holders of our common stock.

We may also issue debt securities, which may impose restrictive covenants on our operations or otherwise adversely affect the holdings or the rights of our stockholders.

Sales or issuances of a substantial amount of securities, or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.

As of March 28, 2020, we had 13,787,969 shares of common stock outstanding, all of which shares were, and continue to be, eligible for sale in the public market, subject in some cases to compliance with the requirements of Rule 144, including the volume limitations and manner of sale requirements.

Future resales of our common stock by our existing stockholders could cause the market price of our common stock to decline.

As of March 28, 2020, holders of an aggregate of 973,204 shares of our common stock have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our other stockholders.

In addition, the shares of common stock subject to outstanding options and Restricted Stock Units under our 2008 Equity Incentive Plan and the shares reserved for future issuance under the Incentive Plan may become eligible for sale in the public markets in the future, subject to certain legal and control limitations.

We may sell shares or other securities in any offering at a price per share that is less than the price per share paid by existing investors, and investors purchasing shares or other securities in the future could have rights superior to existing stockholders.

The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower than the price per share paid by existing investors.

Our operating results may be adversely affected by uncertainty regarding healthcare reform measures and changes in third-party coverage and reimbursement policies.

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presidential administration has announced certain policy changes that could impact the availability of benefits under the Affordable Care Act.

For example, tax reform legislation enacted at the end of 2017 eliminates the tax penalty for individuals who do not maintain sufficient health insurance coverage beginning in 2019 (the “individual mandate”).

For example, tax reform legislation enacted at the end of 2017 eliminated the tax penalty for individuals who did not maintain sufficient health insurance coverage beginning in 2019 (the “individual mandate”).

We anticipate continued Congressional interest in modifying provisions of the Affordable Care Act, particularly given the recent ruling in Texas v.

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While we believe that the laser procedures using our products have generally been reimbursed, payers may deny coverage and reimbursement for our products if they determine that the device was not reasonable and necessary for the purpose used, was investigational or was not cost-effective.

If we fail to comply with healthcare laws, we could face substantial penalties and financial exposure, and our business, operations and financial conditio n could be adversely affected.

If we fail to comply with healthcare laws, we could face substantial penalties and financial exposure, and our business, operations and financial condition could be adversely affected.

While we do not bill directly to Medicare, Medicaid or other third-party payors, because payment is in many cases available for our products from such payors, many healthcare laws place limitations and requirements on the manner in which we conduct our business (including our sales and promotional activities and interactions with healthcare professionals and facilities) and could result in liability and exposure for us.

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and/or (iv) state law equivalents of each of the above federal laws, including, without limitation anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, many of which differ from their federal counterparts in significant ways, thus complicating compliance efforts.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, exclusion from participation in government healthcare programs, damages, fines and the curtailment or restructuring of our operations.

Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civi l and criminal penalties, exclusion from participation in government healthcare programs, damages, fines and the curtailment or restructuring of our operations.

Any penalties, damages, fines, curtailment or restructuring of our operations could adversely a ffect our ability to operate our business and our financial results.

The risk of our being found in violation of these laws is increased by the fact that their provisions are open to a variety of evolving interpretations and enforcement discretion.

Compliance with Open Payments, commonly known as the Sunshine Act, has presented a number of challenges to companies such as ours, in terms of interpretation of the law and its implementation.

Complia nce with Open Payments, commonly known as the Sunshine Act, has presented a number of challenges to companies such as ours, in terms of interpretation of the law and its implementation.

Under the Sunshine Act, Centers for Medicare & Medicaid Services (“CMS ”) has the potential to impose penalties of up to $1.15 million per year for violations, depending on the circumstances, although enforcement has been negligible to date.

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The risk that we are our being found in violation of these laws may be increased by the fact that we do not have a formal healthcare compliance program in place.

Further, while safe harbors may in some instances be available and utilized by companies to reduce risks associated with the Anti-Kickback Statute and certain other healthcare laws, we have not necessarily utilized such safe harbors nor fully followed all elements required to claim the benefit of such safe harbors in all possible instances.

Further, while safe harbors may in some instances be available and utilized by companies to reduce risks associated with the Anti-Kickback Statute and certain other healthcare laws, we have not necessarily utilized s uch safe harbors nor fully followed all elements required to claim the benefit of such safe harbors in all possible instances.

Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

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If we cannot maintain our gross margins our business could be seriously harmed, particularly if the average selling price of our products decreases significantly without a corresponding increase in sales.

Our promotional practices are subject to extensi ve government scrutiny.

Our promotional practices are subject to extensive government scrutiny.

We may be subject to governmental, regulatory and other legal proceedings relative to advertising, promotion, and marketing that could have a significant negative effect on our business.

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In addition, the integration of replacement personnel could be time consuming, may cause additional disruptions to our operations, and may be unsuccessful.