RISK FACTORS
Your investment in our common stock involves a high degree of risk. In consultation with your own financial and legal
advisors, you should carefully consider, among other matters, the factors set forth below as well as the risk factors discussed in our Annual Report on Form 10-K for the year ended
December 31, 2016 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 (which are incorporated by reference into this prospectus supplement and the
accompanying prospectus) before deciding whether an investment in the common stock is suitable for you. Additional risks and uncertainties not currently known to us or those we currently view to be
immaterial may also materially and adversely affect our business, financial condition or results of operations. In such a case, you may lose all or part of your original
investment.
Risks Related to This Offering and Our Common Stock
The trading price of the shares of our common stock has been and could continue to be highly volatile, and
purchasers of our common stock may not be able to resell the shares of our common stock at or above the price at which they purchased their shares and could incur substantial losses.
Our stock price has been and is likely to continue to be volatile. The stock market in general has experienced extreme volatility that has often
been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their shares of our common stock at or above the price at which
they purchased their shares. The market price for our common stock may be influenced by many factors, including:
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the passage of legislation or other regulatory developments in the United States and foreign countries;
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actual or anticipated variations in our financial results or those of companies that are perceived to be similar to us;
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changes in the structure of healthcare payment systems, especially in light of current reforms to the U.S. healthcare system;
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our ability to develop and commercialize additional products;
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announcements by us or our competitors of significant acquisitions, strategic collaborations, joint ventures or capital commitments;
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market conditions in medical device sectors and issuance of securities analysts' research reports or recommendations;
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sales of our stock by us, our insiders and our other stockholders;
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the trading volume of our common stock;
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speculation in the press or investment community;
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general economic, industry and market conditions, or other events or factors, many of which are beyond our control;
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additions or departures of key personnel; and
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intellectual property, product liability or other litigation against us.
In
addition, the stock market has recently experienced significant volatility with respect to medical device and other life sciences company stocks. The volatility of medical device and
other medical technology company stocks often does not relate to the operating performance of the companies represented by the stock. As we operate in a single industry, we are especially vulnerable
to these factors to the extent that they affect our industry or our products, or to a lesser extent our markets.
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We are an "emerging growth company," and the reduced disclosure requirements applicable to emerging growth
companies may make our common stock less attractive to investors.
We are an "emerging growth company," as defined in the JOBS Act and may remain an emerging growth company for up to five years following our
initial public offering. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public
companies that are not emerging growth companies. These exemptions include:
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not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;
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not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory
audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements;
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reduced disclosure obligations regarding executive compensation; and
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exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden
parachute payments not previously approved.
We
cannot predict whether investors will find our common stock less attractive if we 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 reduced or more volatile.
In
addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows
an emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, as a
result, our financial statements may not be comparable to the financial statements of issuers that are required to comply with the effective dates for new or revised accounting standards that are
applicable to public companies. We cannot predict whether investors will find our common stock less attractive if we 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 reduced or more volatile.
Future sales, or the perception of future sales, by us or our existing stockholders in the public market
could cause our stock price to fall.
Sales of a substantial number of shares of our common stock in the public market by us or our existing stockholders, or the perception that
these sales might occur, could significantly reduce the market price of our common stock and impair our ability to raise adequate capital through the sale of additional equity securities. Of the
shares outstanding as of September 11, 2017, 3,336,670 shares (or 2,841,670 shares if the underwriters exercise in full their option to purchase additional shares) will be subject to lock-up
agreements with the underwriters for a period of 60 days following the date of this prospectus supplement. William Blair & Company, L.L.C. and Piper Jaffray & Co. may, in their
discretion, release the lock-up restrictions on any such shares at any time without notice. In addition, after this offering, 2,403,534 remaining shares (or 1,908,534 shares if the underwriters
exercise in full their option to purchase additional shares) held by the selling stockholders will still be registered for resale and therefore will not be subject to the volume and other trading
restrictions of Rule 144 under the Securities Act.
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You may experience future dilution as a result of future equity offerings.
In order to raise additional capital, we may in the future offer shares of our common stock or other securities convertible into or exchangeable
for our common stock at prices that may not be the same as the price per share in this offering. We may sell shares or other securities in any other offering at a price per share that is less than the
price per share paid by investors in this offering, 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 investors in
this offering. Furthermore, if outstanding stock options or warrants are exercised, and when outstanding restricted stock units are settled in shares, you would experience further dilution.
We do not intend to pay dividends on our common stock, and, consequently, your ability to achieve a return on
your investment will depend on appreciation, if any, in the price of our common stock.
We have never declared or paid any cash dividend on our common stock and do not currently intend to do so for the foreseeable future. We
currently anticipate that we will retain future earnings for the development, operation and expansion of our business. In addition, any future debt financing arrangement may contain terms prohibiting
or limiting the amount of dividends that may be declared or paid on our common stock. Any return to stockholders will therefore be limited to any appreciation of their stock. Therefore, the success of
an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the
price at which our stockholders purchased their shares.
We are incurring increased costs and are subject to additional regulations and requirements as a result of
being a public company, which could lower our profits or make it more difficult to run our business.
As a public company, we are incurring significant legal, accounting and other expenses that we did not incur as a private company, including
costs associated with public company reporting requirements. We also have incurred and will continue to incur costs associated with the Sarbanes-Oxley Act and related rules implemented by the SEC and
Nasdaq. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and
financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations
also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to
serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of
our common stock, fines, sanctions, other regulatory action and potentially civil litigation.
If we fail to maintain proper and effective internal control over financial reporting in the future, our
ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, investors' views of us and, as a result, the value of our common stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act, our management is required to report upon the effectiveness of our internal control
over financial reporting beginning with the Annual Report on Form 10-K for our fiscal year ending December 31, 2017. When and if we are a "large accelerated filer" or an "accelerated
filer" and are no longer an "emerging growth company," each as defined in the Exchange Act, our independent registered public accounting firm will be required to attest to the effectiveness of our
internal control over financial reporting. However, for so long as we remain an
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emerging
growth company, we intend to take advantage of an exemption available to emerging growth companies from these auditor attestation requirements. We could be an "emerging growth company" for up
to five years following our initial public offering. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require
significant documentation, testing, and possible remediation. To comply with the requirements of being
a reporting company under the Exchange Act, we will need to upgrade our systems, including information technology; implement additional financial and management controls, reporting systems, and
procedures; and hire additional accounting and finance staff.
Any
failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations. In addition,
any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in
our internal control over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for
further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading
price of our common stock.
In
addition, we may encounter problems or delays in implementing any changes necessary to make a favorable assessment of our internal control over financial reporting. Further, once we
are no longer an emerging growth company, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation in connection with
the attestation provided by our independent registered public accounting firm. If we cannot favorably assess the effectiveness of our internal control over financial reporting, or if our independent
registered public accounting firm is unable to provide an unqualified attestation report on our internal controls, investors could lose confidence in our financial information and the trading price of
our common stock could decline.
In
connection with our future evaluation of our internal control over financial reporting, we may need to upgrade our systems or create new systems, implement additional financial and
management controls, update our reporting systems and procedures, create or outsource an internal audit function or hire additional accounting and finance staff. If we are unable to accomplish these
objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to
maintain effective internal control over financial reporting could have a material adverse effect on our business, financial condition and results of operations and the trading price of our common
stock.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us,
which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, may
delay or prevent an acquisition of us or a change in our management. These provisions include:
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authorizing the issuance of "blank check" preferred stock, the terms of which may be established and shares of which may be issued without
stockholder approval;
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limiting the removal of directors by the stockholders;
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prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect
director candidates;
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prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
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eliminating the ability of stockholders to call a special meeting of stockholders; and
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establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon
at stockholder meetings.
These
provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of
our board of directors, who are responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203
of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. These provisions would apply even
if an offer rejected by our board were considered beneficial by some stockholders. Any provision of our amended and restated certificate of incorporation or our amended and restated bylaws or Delaware
law that has the effect of delaying or deterring a change of control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect
the price that some investors are willing to pay for our common stock.
Our executive officers, directors and principal stockholders, if they choose to act together, have the
ability to control all matters submitted to stockholders for approval and may take actions that may not be in the best interests of our other stockholders.
Following this offering, our executive officers, directors and stockholders who hold more than 5% of our outstanding common stock will
beneficially own, in the aggregate, shares representing approximately 18.9% of our outstanding capital stock (or 16.1% if the underwriters exercise in full their option to purchase additional shares).
As a result, if these stockholders were to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these
persons, if they act together, would control the election of directors and decisions on any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power
could delay or prevent an acquisition of our company on terms that other stockholders may desire or result in management of our company with which our public stockholders disagree.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research,
about our business, the price of our common stock and our trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our
business. If too few securities or industry analysts commence or maintain coverage of our company, the trading price for our common stock would likely be negatively affected. If one or more of the
analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, the price of our common stock would likely decline. If one or more of these analysts
cease coverage of our company or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause the price of our shares and trading volume to decline.
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful
third-party claims against us and may reduce the amount of money available to us.
Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers,
in each case to the fullest extent permitted by Delaware law.
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In
addition, as permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws and our indemnification agreements with our directors and
officers provide that:
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We will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to
the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to
be in or not opposed to the best interests of the corporation and, with respect to any criminal proceeding, had no reasonable cause to believe such person's conduct was unlawful.
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We may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law.
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We are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such
directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification.
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We will not be obligated pursuant to our amended and restated bylaws to indemnify a person with respect to proceedings initiated by that person
against us or our other indemnitees, except with respect to proceedings authorized by our board of directors or brought to enforce a right to indemnification.
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The rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with
our directors, officers, employees and agents and to obtain insurance to indemnify such persons.
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We may not retroactively amend our bylaw provisions to reduce our indemnification obligations to directors, officers, employees and agents.
Risks Related to Our Business
Our revenues are primarily generated from our Flexitouch System and we are therefore highly dependent on only
one product.
Our Flexitouch System accounted for 87% of our revenues for each of the years ended December 31, 2016 and 2015. We expect that sales of
this product will continue to account for the substantial majority of our revenues going forward. Therefore, our ability to execute our growth strategy will depend not only upon increasing awareness
of lymphedema, but also on the adoption of our Flexitouch System to treat this condition. Many physicians and clinicians may have experience with, and/or invested substantial resources in, developing
expertise in traditional treatments for lymphedema, which may make them less willing to adopt our Flexitouch System. If our Flexitouch System fails to achieve wide market acceptance for any reason,
our business, financial condition and results of operations could be adversely affected.
Our long-term growth depends on awareness and adoption of our products.
A primary growth strategy is to establish our products as the standard of care for the treatment of lymphedema and chronic venous insufficiency.
In order to achieve this growth strategy, we must:
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increase clinician and consumer awareness of these diseases, which are often undertreated;
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introduce the clinical and economic benefits of our solutions to physicians, therapists and other clinicians across several specialties and in
various clinical settings; and
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demonstrate consistent coverage and reimbursement for our solutions by private payers, Medicare, the Veterans Administration and certain
Medicaid programs.
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Clinicians
may not adopt our solutions as the standard of care for lymphedema and chronic venous insufficiency or may not prescribe our products for a number of reasons,
including:
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our inability to educate a sufficient number of clinicians on these diseases or our products;
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the unavailability or inadequacy of insurance coverage or reimbursement for our products;
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failure of evidence supporting clinical benefits or cost-effectiveness of our products over existing alternatives to convince clinicians to
change their treatment methods; and
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resistance from clinicians to replace traditional treatments with our solutions.
We
believe recommendations and support of our products by key opinion leaders can influence market acceptance and adoption. If these key opinion leaders choose to not support our
products, our ability to achieve broad market acceptance for our products may be impaired.
If we are unable to achieve and maintain adequate levels of coverage or reimbursement for our products, our
business and results of operations will be adversely affected.
Any decline in the amount payers are willing to reimburse patients for our products could cause difficulty for patients to purchase our products
and could create pricing pressure for us. If we are forced to lower the price we charge for our products, our gross margins will decrease, which will adversely affect our business, financial condition
and results of operations.
Third-party
payers, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In the United States,
no uniform policy of coverage and reimbursement for our products exists among third-party payers. Therefore, reimbursement for our products can differ significantly from payer to payer and our
products are not universally covered by third-party commercial payers. In addition, payers, including Medicare, continually review existing technologies for continued coverage and can, without notice,
deny or reverse coverage for existing products. We believe a reduction or elimination of coverage or reimbursement of our products by Medicare would likely cause commercial third-party payers to
implement similar reductions in their coverage or reimbursement of our products. If we are unable to expand coverage of our products by additional commercial payers, or if third-party payers that
currently cover or reimburse
for our products reverse or limit their coverage in the future, our business and results of operations could be adversely affected.
Further,
we believe that future coverage and reimbursement may be subject to increased restrictions, such as additional preauthorization requirements, both in the United States and in
international markets. If we are unable to satisfy any new preauthorization requirements or adjust to any future new restrictions on our products, third-party coverage and reimbursement may be limited
in the future, which could have an adverse impact on our business.
A change to the criteria for Medicare coverage for our products could have an adverse effect on our business
and results of operations.
The Medicare Administrative Contractors, or MACs, responsible for processing Medicare claims for durable medical equipment released a Local
Coverage Determination, or LCD, document that included additional restrictive criteria that limit Medicare coverage of our products for certain patients. This LCD, released by the MACs on
December 17, 2015, was retroactively effective, beginning December 1, 2015. The LCD increased the severity of lymphedema symptoms that a patient must exhibit before such patient is
eligible for Medicare reimbursement for a pneumatic compression device, or PCD. The LCD also inserted more restrictive criteria that require a patient to potentially endure a longer period of
conservative therapy to prove that it fails to control their lymphedema, instead of requiring completion of just one four-week round of conservative therapy as stated in the National
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Coverage
Determination, or NCD. The LCD states that to qualify for any PCD, the patient must complete four consecutive weeks of conservative therapy with no significant improvement in symptoms during
those four weeks. Further, the LCD does not cover use of an advanced pneumatic compression device, such as our Flexitouch System, unless the patient's lymphedema is present in the chest, trunk or
abdomen. Although many patients with lymphedema likely do have some level of chest, trunk or abdominal involvement, this criteria in the LCD means that patients with lymphedema that is confined to the
limb do not have access to advanced pneumatic compression devices until the lymphedema progresses to impact the trunk, chest or abdomen. The LCD pneumatic compression device coverage criteria for
chronic venous insufficiency with venous stasis ulcers largely track existing NCD criteria, while defining the elements of a required conservative therapy trial. Under this LCD, advanced
pneumatic compression devices like our Flexitouch System are no longer covered at all for the treatment of venous stasis ulcers. Since the LCD was released, we continue to work with physicians,
advocacy groups, patients and legislators regarding the potentially negative consequences to patients that the LCD could cause. Although we have not experienced a significant negative impact on our
Medicare fee-for-service business, the LCD could yet have an adverse effect on our business and results
of operations. In addition, private payers often follow Medicare's lead in setting reimbursement criteria, and private payers may adopt the same or similar coverage standards as set forth in the LCD.
The U.S. patent protection for our Flexitouch System will expire in 2017, which may subject us to increased
competition and reduce or eliminate our opportunity to generate product revenues.
The four U.S. patents for our Flexitouch System will expire in 2017. Upon expiration of such patents, our Flexitouch System could be subject to
increased competition from products attempting to replicate our technology and our opportunity to increase or maintain revenues from our Flexitouch System could be substantially reduced.
If we are unable to expand, manage and maintain our direct sales and marketing organizations, we may not be
able to generate anticipated revenues.
Our operating results are directly dependent upon the sales and marketing efforts of our employees. If our direct sales force fails to
adequately promote, market and sell our products, our sales may suffer. Our direct sales force has grown from three representatives in March 2005 to a team of over 145 people as of June 30,
2017.
In
order to generate future sales growth, we will need to expand the size and geographic scope of our direct sales organization. Accordingly, our future success will depend largely on
our ability to continue to hire, train, retain and motivate skilled sales personnel with significant technical knowledge of lymphedema and chronic venous insufficiency. Because the competition for
their services is high, we cannot assure you we will be able to hire and retain additional personnel on favorable or commercially reasonable terms, if at all. Failure to hire or retain qualified sales
personnel would prevent us from building awareness of our solutions, expanding our business and generating additional sales. If we are unable to expand our sales and marketing capabilities, we may not
be able to effectively commercialize our products, which could have an adverse impact on our business.
Increases in our operating costs could have an adverse effect on our financial condition and results of
operations.
Reimbursement rates are established by fee schedules mandated by private payers, Medicare, the Veterans Administration and certain Medicaid
programs and are likely to remain constant or decrease due, in part, to federal and state government budgetary constraints. As a result,
with respect to Medicare and Medicaid related revenues, we may not be able to offset the effects of general inflation on our operating costs through increases in prices for our products. In
particular, labor and related costs account for a significant portion of our operating costs and we compete with other healthcare
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providers
to attract and retain qualified or skilled personnel, and with various industries for administrative and service employees. This competitive environment could result in increased labor
costs. As such, we must control our operating costs, particularly labor and related costs, and failing to do so could adversely affect our financial conditions and results of operations.
Our
operating costs may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. These factors
include:
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increased sales and marketing costs to increase awareness of our products;
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costs to develop new and enhanced features for current products and research and development costs for new products;
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the time, resources, and expense required to develop and conduct clinical trials and seek additional regulatory clearances and approvals for
additional treatment indications for our products and for any additional products we develop;
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the costs of preparing, filing, prosecuting, defending, and enforcing patent claims and other patent related costs, including litigation costs
and the results of such litigation;
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any product liability or other lawsuits related to our products and the costs associated with defending them or the costs related to the
results of such lawsuits;
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the costs to attract and retain personnel with the skills required for effective operations;
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the costs associated with being a public company; and
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costs associated with entering international markets.
Our
failure to anticipate and minimize the impact of these costs could adversely affect our business and results of operations.
We compete and may compete in the future against other companies, some of which have longer operating
histories, more established products or greater resources than we do, which may harm our business.
The medical device industry is highly competitive. Our success depends, in part, upon our ability to maintain a competitive position in the
development of technologies and solutions for the at-home treatment of lymphedema and chronic venous insufficiency or for market adjacencies. Any product we develop will have to compete for market
acceptance and market share. We face significant competition in the United States, and we expect the intensity of competition will increase over time. Our primary competitors are Bio Compression
Systems, Inc. and Lympha Press USA. Other competitors include Wright Therapy Products (which was acquired by BSN Medical GmbH in 2015), Devon Medical Products and NormaTec Industries. If
we expand internationally, we expect that ArjoHuntleigh, an affiliate of the Getinge Group, would become a competitor, in addition to other potential international competitors. Many of the companies
developing or marketing competing products enjoy several competitive advantages, including:
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significantly greater name recognition;
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established relations with healthcare professionals, customers, and third-party payers;
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established distribution networks;
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additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or other incentives to gain a
competitive advantage;
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greater history in conducting research and development, manufacturing, marketing, and obtaining regulatory approval for homecare devices; and
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greater financial and human resources for product development, sales and marketing, patent litigation and customer financing.
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Our competitors may develop and patent processes or products earlier than us, obtain regulatory clearance or approvals for competing devices more rapidly than us
or develop more effective or less expensive products or technologies that render our technology or products obsolete or less competitive. We also face fierce competition in recruiting and retaining
qualified sales, scientific, reimbursement and management personnel, particularly those with direct-to-patient and -provider experience. If our competitors are more successful than us in these
matters, our business may be harmed.
Physicians and payers may require additional clinical studies prior to prescribing our products or to
providing or maintaining coverage and reimbursement for our products. Any subsequent clinical studies that are conducted and published may not be positive or consistent with our existing data, which
would adversely affect the rate of adoption of our products.
Our success depends in large part on the medical and third-party payer community's acceptance of our products as being useful in treating
patients with lymphedema or chronic venous insufficiency. While the results of our studies collectively indicate a favorable safety and efficacy profile, the study designs and results may not be
viewed as compelling to physicians and insurers. In particular, payers and physicians may see limitations in the design and results of the studies because certain studies were not specifically based
on our products, involved a limited number of total subjects or subjects outside the control group and made "quality of life" conclusions based upon criteria contained in patient questionnaires that
required subjective conclusions. Certain physicians and insurers may also prefer to see longer-term efficacy data than we have produced or are able to produce. If physicians or insurers do not find
our data compelling or wish to wait for additional or independently-performed studies, they may choose not to prescribe or to provide coverage and reimbursement for our products.
We
cannot assure you that any data that we or others generate will be consistent with that observed in the existing studies or that results will be maintained beyond the time points
studied. We also cannot assure you that any data that may be collected will be compelling to the medical community because the data may not be scientifically meaningful or may not demonstrate that our
products are attractive alternatives to traditional treatments. If subsequent studies are not positive or consistent with our existing data, adoption of our products may suffer and, accordingly, our
business could be adversely impacted.
Our long-term growth depends on our ability to develop and commercialize additional products.
The medical device industry is highly competitive and subject to rapid change and technological advancements. Therefore, it is important to our
business that we continue to enhance our product offerings and introduce new products. Developing products is expensive and time-consuming and could divert management's attention away from our
business. We may not be successful in developing new products or enhancements to existing products. Our ability to develop and commercialize additional products or enhancements to existing products
will depend on several factors, including our ability to:
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properly identify and anticipate physician and patient needs;
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develop and introduce new products or product enhancements in a timely manner;
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avoid infringing upon the intellectual property rights of third-parties;
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demonstrate the safety and efficacy of new products with data from clinical studies;
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obtain the necessary regulatory clearances or approvals for new products or product enhancements;
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be fully FDA-compliant with the development, manufacturing and marketing of new devices or modified products;
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provide adequate training to potential users of our products;
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secure adequate coverage and reimbursement for our products; and
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develop an effective and dedicated sales and marketing team.
If
we are unsuccessful in developing and commercializing new products, our ability to increase our revenues may be impaired.
It is difficult to forecast future performance and our financial results may vary from forecasts and may
fluctuate from quarter to quarter.
Our limited operating history and commercial experience make it difficult for us to predict future performance. A number of factors over which
we have limited control, such as seasonal variations in revenues, may contribute to fluctuations in our financial results. In the first and second quarters, our results of operations have been
negatively impacted by resetting of annual patient healthcare insurance plan deductibles, which may cause patients to delay purchases of elective products. In the third and fourth quarters, our
revenues have been higher because patients often spend the remaining balances in their flexible-spending accounts or because of lower out-of-pocket costs to patients who have met their annual
deductibles under their health insurance plans. To the extent that the prevalence of high deductible insurance plans and higher copay and coinsurance plans continue to grow in the private payer
market, the seasonal variations in our revenues could become even more pronounced.
Other
factors that may cause fluctuation in our quarterly results or variations from our forecasts include:
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physician adoption of our products;
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timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;
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unanticipated pricing pressure;
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the hiring, retention and continued productivity of our sales representatives;
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our ability to expand the geographic reach of our sales and marketing efforts;
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our ability to obtain regulatory clearance or approval for our products in development or for our current products outside the United States;
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the impact of results from clinical research and trials on our existing products and products in development;
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delays in receipt of anticipated purchase orders;
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delays in, or failure of, component deliveries from our suppliers; and
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positive or negative coverage in the media or clinical publications of our products or products of our competitors or our industry.
In
the event our actual revenues and operating results do not meet our forecasts or the forecasts or estimates of the research analysts that cover us for a particular period, the market
price of our common stock may decline substantially.
We utilize third-party, single-source suppliers for some components and materials used in our products, and
the loss of any of these suppliers could have an adverse impact on our business.
We rely on third-party manufacturers and suppliers to supply all components and materials used in our Flexitouch, Actitouch and Entre Systems.
We rely on a single-source supplier for the controller in our Actitouch System. Our ability to supply our products commercially depends, in part, on our ability to obtain components and materials in
accordance with our specifications and with regulatory
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requirements
and in sufficient quantities to meet demand for our products. Our ability to obtain components and materials may be affected by matters outside our control, including that our suppliers
may cancel our arrangements on short notice, we may be relatively less important as a customer to certain suppliers and our suppliers may have disruptions to their operations.
If
we are required to establish additional or replacement suppliers for any of our components or materials, it may not be accomplished quickly and our operations could be disrupted. Even
if we are able to find replacement suppliers, the replacement suppliers would need to be qualified and may require additional regulatory authority approval, which could result in further delay. In the
event of a supply disruption, our product inventories may be insufficient to supply our patients.
If
our third-party suppliers fail to deliver the required commercial quantities of materials on a timely basis and at commercially reasonable prices, and we are unable to find one or
more replacement suppliers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality on a timely basis, the continued commercialization of our products,
the supply of our products to customers and the development of any future products would be delayed, limited or prevented, which could have an adverse impact on our business.
Consolidation in the healthcare industry could lead to demands for price concessions, which may impact our
ability to sell our products at prices necessary to support our current business strategies.
Healthcare costs have risen significantly over the past decade, which has resulted in or led to numerous cost reform initiatives by legislators,
regulators and third-party payers. Cost reform has triggered a consolidation trend in the healthcare industry to aggregate purchasing power, which may create more requests for pricing concessions in
the future. We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the healthcare industry worldwide,
resulting in further business consolidations and alliances among our payers, which may exert increasing downward pressure on the prices of our products in the future.
We may be unable to collect all of our Medicare accounts receivable.
At December 31, 2016, we had approximately $3.8 million of accounts receivable for sales of our Flexitouch System to patients
covered by Medicare. A portion of the related claims to Medicare are initially denied and enter the appeals process, where many are ultimately reviewed by an Administrative Law Judge. The appeal
process can be lengthy, lasting more than a year in most cases. At December 31, 2016, we classified $2.8 million of our Medicare accounts receivable related to Flexitouch System sales as
long-term assets on our balance sheet due to the estimated amount of receivables that will be paid more than one year from December 31, 2016, as a result of delays with the Administrative Law
Judge appeal process. A significant increase in Medicare denial of submitted claims or an increase in the proportion of Medicare denials that are upheld by an Administrative Law Judge could adversely
affect our results of operations or cause us to reduce the carrying value of our Medicare accounts receivable related to Flexitouch System sales.
As
an alternative to individual appeals, Medicare may seek to settle a number of outstanding appeals at one time through a settlement conference. On September 3, 2015, we entered
into a settlement agreement with the Centers for Medicare and Medicaid Services, or CMS, for 247 claims, representing approximately $1.5 million of original claims based on the Medicare
allowable rates, in which we had submitted a request for an Administrative Law Judge hearing in 2013. The settlement entitled us to receive a payment of approximately $0.9 million. We received
this full amount during the fourth quarter of 2015. The settlement resulted in a reduction in the fourth quarter of 2015 of $0.8 million in our accounts receivable for shipment of products to
patients covered by Medicare. The settlement was part of a pilot program, facilitated by the Office of Medicare Hearings and Appeals, to address a backlog of overdue claims awaiting Administrative Law
Judge adjudication. Because the
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settlement
was part of a pilot program, we cannot predict whether we will be able to conclude future settlements with Medicare or achieve settlements on similar terms. Any future settlement of claims
for amounts less than the corresponding amounts receivable could result in a write off.
If physicians fail to properly document medical records for patients using our products, our business could
be adversely impacted.
We bill Medicare Part B and other insurers directly for each sale to patients. As a result, we must comply with all laws, rules and
regulations associated with filing claims with the Medicare program, including the Social Security Act, Medicare regulations, the Federal False Claims Act and the Civil Monetary Penalties Law, as well
as a variety of additional federal and state laws. During an audit, insurers typically expect to find explicit documentation in the medical record to support a claim. Physicians and other clinicians,
who are responsible for prescribing our products for patients, are expected to create and maintain the medical records that form the basis for the claims we submit to Medicare and other insurers. Any
failure by physicians and other clinicians to properly document the medical records for patients using our products could invalidate claims, impair our ability to collect submitted claims and subject
us to overpayment liabilities, False Claims Act liabilities and other penalties including exclusion from the Medicare, Medicaid or private insurance programs. Our payer relations group is responsible
for verifying and managing patient claims. This group works with physicians and other clinicians to educate physicians and other clinicians on their record keeping responsibilities. From time to time
our payer relations group identifies situations where the physician documentation could be questioned by Medicare or other insurers, and revises its procedures to strengthen our compliance systems
based on our experience with Medicare contractors, Medicaid, insurers, physicians and other clinicians. If our procedures are not sufficient to detect deficiencies in the medical records of patients
or such procedures are not updated in a timely manner before claims are submitted to Medicare or other insurers, or if the Medicare program or other insurer disagrees with the way physicians and other
clinicians document the medical necessity support for prescribing our products, we could face potential liabilities for submitting claims based on inadequate records, even though those records are
prepared and maintained by physicians and other clinicians.
Changes to the level of Medicare coverage for our products could have an adverse effect on our business and
results of operations.
Determinations of which products or services will be reimbursed under Medicare can be developed at the national level through an NCD, by CMS, or
at the local level through an LCD, by one or all of the four regional Medicare Administrative Contractors, which are private contractors that process and pay claims on behalf of CMS for different
regions. These NCDs and LCDs may be
subject to review and revision from time to time, which revisions may not be favorable for coverage of our products, and the NCDs and LCDs may not always be consistent. We have in the past been
required to respond to potential changes in LCDs for our products, which, if enacted, would have had adverse effects on our business. Further, we believe that a reduction in coverage by Medicare would
likely cause some commercial third-party payers to implement similar reductions in their coverage or reimbursement of our products. Given the evolving nature of the healthcare industry and on-going
healthcare cost reforms, we are and will continue to be subject to changes in the level of Medicare coverage for our products, and unfavorable coverage determinations at the national or local level
could adversely affect our business and results of operations. See also the risk factor entitled "
A change to the criteria for Medicare coverage for our products could have an
adverse effect on our business and results of operations."
The size of the market for our products is an estimate, and may be smaller than we believe.
Our estimate of the annual total addressable market for our products is based on a number of internal and third-party estimates. In addition,
our internal estimates are based in large part on current trends in diagnosing lymphedema and chronic venous insufficiency. While we believe these factors have
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historically
provided and may continue to provide us with effective tools in estimating the total market for lymphedema, chronic venous insufficiency and our products, these estimates may not be
correct and the conditions supporting our estimates may change at any time, thereby reducing the predictive accuracy of these underlying factors. As a result, our estimates of the annual total
addressable market for our products may prove to be incorrect. If the actual number of patients who would benefit from our products and the annual total addressable market for our products is smaller
than we have estimated, our future growth could be adversely impacted.
We may be unable to manage our growth effectively.
Our past growth has provided, and our future growth may create, challenges to our organization. For instance, from March 2005 to
December 31, 2016, the number of our employees increased from 10 to 335. We intend to continue to grow and may experience periods of rapid growth and expansion. Future growth will impose
significant added responsibilities on management, including the need to identify, recruit, train, integrate, retain and motivate additional employees. In addition,
rapid and significant growth will place a strain on our administrative personnel, information technology systems and other operational infrastructure. Any failure by us to manage our growth
effectively could have an adverse effect on our ability to achieve our development and commercialization goals.
Successful
growth is also dependent upon our ability to implement appropriate financial and management controls, systems and procedures. In order to manage our operations and growth, we
will need to continue to improve our operational and management controls, reporting and information technology systems and financial internal control procedures. If we are unable to manage our growth
effectively, it may be difficult for us to execute our business strategy and there could be an adverse impact on our business.
Our ability to maintain our competitive position depends on our ability to attract, integrate and retain key
executives and highly qualified personnel.
We believe that our continued success depends to a significant extent upon the efforts and abilities of our executive officers and other key
personnel. Our executive officers and other key personnel are critical to the strategic direction and overall management of our company as well as our research and development process. Some key
personnel have only joined us in the last year as part of our investment in the expansion of our business, including a new Vice President of Business Development who joined us in January 2016, a new
Chief Financial Officer who joined us in April 2016, and a new Vice President of Supply Chain and Manufacturing who joined us in September 2016.
Our
future success also depends on our ability to continue to attract and retain additional executive officers and other key employees. We invest significant time and expense in training
our employees, which increases their value to competitors who may seek to recruit them. Many of our competitors have greater resources than we have that allows them to offer more competitive
remuneration, which could adversely impact our ability to attract and retain experienced executives and other key employees. We carry a "key person" insurance policy on only our Chief Executive
Officer. The replacement of any of our key personnel likely would involve significant time and costs and may significantly delay or prevent the achievement of our business objectives and would harm
our business. Our productivity may be adversely affected if we do not integrate and train our new employees quickly and effectively
Many
of our employees have become or will soon become vested in a substantial amount of our common stock or a number of common stock options. Our employees may be more likely to leave us
if the shares they own have significantly appreciated in value relative to the original purchase prices of the shares, or if the exercise prices of the options that they hold are significantly below
the market price of our common stock, particularly after the expiration of the lock-up agreements described herein.
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We face the risk of product liability claims that could be expensive, divert management's attention and harm
our reputation and business. We may not be able to maintain adequate product liability insurance.
Our business exposes us to the risk of product liability claims that are inherent in the testing, manufacturing and marketing of medical
devices. This risk exists even if a device is cleared or approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory
authority. Our products are designed to affect, and any future products will be designed to affect, important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse
associated with our products or our products in development could result in patient injury or death. The medical device industry has historically been subject to extensive litigation over product
liability claims, and we cannot offer any assurance that we will not face product liability suits. We may be subject to product liability claims if our products cause, or merely appear to have caused,
patient injury or death. In addition, an injury that is caused by the activities of our suppliers, such as those who provide us with components and materials, may be the basis for a claim against us.
Product liability claims may be brought against us by patients, clinicians or others selling or otherwise coming into contact with our products, among others. If we cannot successfully defend
ourselves against product liability claims, we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result
in:
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costs of litigation;
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distraction of management's attention from our primary business;
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the inability to commercialize our existing or new products;
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decreased demand for our products or, if cleared or approved, products in development;
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damage to our business reputation;
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product recalls or withdrawals from the market;
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withdrawal of clinical trial participants;
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substantial monetary awards to patients or other claimants; or
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loss of revenues.
While
we may attempt to manage our product liability exposure by proactively recalling or withdrawing from the market any defective products, any recall or market withdrawal of our
products would delay the supply of those products to our clinicians and patients and may impact our reputation. We can provide no assurance that we will be successful in initiating appropriate market
recall or market withdrawal efforts that may be required in the future or that these efforts will have the intended effect of preventing product malfunctions and the accompanying product liability
that may result. Such recalls and withdrawals may also be used by our competitors to harm our reputation for safety or be perceived by patients as a safety risk when considering the use of our
products, either of which could have an adverse impact on our business.
In
addition, our product liability insurance is subject to deductibles and coverage limitations. Our current product liability insurance may not continue to be available to us on
acceptable terms, if at all,
and, if available, coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms or
otherwise protect against potential product liability claims, we could be exposed to significant liabilities. A product liability claim, recall or other claim with respect to uninsured liabilities or
for amounts in excess of insured liabilities could have an adverse impact on our business.
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Changes in reimbursement coding could impair our ability to receive reimbursement for our products.
Our Flexitouch System is reimbursed under Healthcare Common Procedure Coding System (HCPCS) code E0652, and our Actitouch System and Entre
System are reimbursed under HCPCS code E0651. Garments that cover various parts of the body are used with these systems and billed using HCPCS codes E0667, E0668 and E0669. These are tied to specific
existing International Statistical Classification of Diseases and Related Health Problems Revision 10 (ICD-10) diagnoses. Many private payers have paid for our products using these codes as well.
These contracts allow us to be an in-network provider for these payers, which eases our administrative burden in processing at both prior authorization and billing levels. With the ICD-10
requirements, it is possible the we or our patients may have difficulty properly submitting claims for reimbursement and, even if the claims are properly submitted, private payers, Medicare and
Medicaid may have problems processing the claims. This could have an adverse impact on our reimbursement rates, results of operations and cash flows.
If the quality of our products does not meet the expectations of physicians or patients, then our brand and
reputation could suffer and our business could be adversely impacted.
In the course of conducting our business, we must adequately address quality issues that may arise with our products, as well as defects in
third-party components included in our products. There can be no assurance that our internal procedures to minimize risks that may arise from quality issues will be able to eliminate or mitigate
occurrences of these issues and associated liabilities. If the quality of our products does not meet the expectations of physicians or patients, then our brand and reputation could suffer with those
physicians or patients and our business could be adversely impacted.
If our facilities are damaged or become inoperable, we will be unable to continue to research, develop,
manufacture and commercialize our products and, as a result, there will be an adverse impact on our business until we are able to secure a new facility.
We do not have redundant facilities. We perform substantially all of our research and development, assembly and back office activity and
maintain all our finished goods inventory at two locations in Minneapolis, Minnesota. Our facilities and equipment would be costly to replace and could require substantial lead time to repair or
replace. The facilities may be harmed or rendered inoperable by natural or man-made disasters, including, but not limited to, tornadoes, flooding, fire and power outages, which may render it difficult
or impossible for us to perform our research, development, manufacturing and commercialization activities for some period of time. The inability to perform those activities, combined with our limited
inventory of reserve raw materials and finished product, may result in the inability to continue manufacturing our products during such periods and the loss of customers or harm to our reputation. Our
insurance for damage to our property and the disruption of our business may not be sufficient to cover all of our potential losses, and this insurance may not continue to be available to us on
acceptable terms, or at all.
We may be adversely affected by natural disasters and other catastrophic events, and by man-made problems
such as terrorism, that could disrupt our business operations.
Natural disasters or other catastrophic events may also cause damage or disruption to our operations, including causing delays in completing
sales, continuing production or performing other critical functions of our business, which could have an adverse effect on our business, operating results and financial condition. Our business
operations are subject to interruption by natural disasters, fire, power shortages, pandemics, and other events beyond our control. In addition, acts of terrorism and other geo-political unrest could
cause disruptions in our business or the businesses of our partners or the economy as a whole. In the event of a natural disaster, including a major earthquake, blizzard or hurricane, or a
catastrophic event such as a fire, power loss, or telecommunications failure, we may be unable to continue our operations for a period of time in the affected area, which could have an
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adverse
effect on our future operating results. For example, recent and impending hurricanes, such as Hurricane Harvey and Hurricane Irma, may disrupt orders for our products and our ability to
fulfill orders for a period of time.
If we choose to acquire new and complementary businesses, products or technologies, we may be unable to
complete these acquisitions or to successfully integrate them in a cost-effective and non-disruptive manner.
Our success depends on our ability to continually enhance and broaden our product offerings in response to changing customer demands,
competitive pressures and advances in technologies. Accordingly, although we have no current commitments with respect to any acquisition or investment, we may in the future pursue the acquisition of,
or joint ventures relating to, complementary businesses, products or technologies instead of developing them ourselves. We do not know if we will be able to successfully complete any future
acquisitions or joint ventures, or whether we will be able to successfully integrate any acquired business, product or technology or retain any key employees related thereto. Integrating any business,
product or technology we acquire could be expensive and time-consuming, disrupt our ongoing business and distract our management. If we are unable to integrate any acquired businesses, products or
technologies effectively, our business will suffer. In addition, any amortization or charges resulting from the costs of acquisitions could increase our expenses.
Failure to protect our information technology infrastructure against cyber-based attacks, network security
breaches, service interruptions or data corruption could significantly disrupt our operations and adversely affect our business and operating results.
We rely extensively on information technology systems and telephone networks and systems, including the Internet, to process and transmit
sensitive electronic information and to manage or support a variety of business processes and activities, including sales, billing, customer service, procurement and supply chain, manufacturing, and
distribution. We use enterprise information technology systems to record, process, and summarize financial information and results of operations for internal reporting purposes and to comply with
regulatory financial reporting, legal, and tax requirements. Our information technology systems, some of which are managed by third-parties, may be susceptible to damage, disruptions or shutdowns due
to computer viruses, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, telecommunication
failures, user errors or catastrophic events. Despite the precautionary measures we have taken to prevent breakdowns in our information technology and telephone systems, if our systems suffer severe
damage or disruption or shutdown and we are unable to effectively resolve the issues in a timely manner, our business and operating results may suffer.
In
addition, we accept payments for many of our sales through credit and debit card transactions, which are handled through a third-party payment processor. As a result, we are subject
to a number of risks related to credit and debit card payments, including that we pay interchange and other fees, which may increase over time and could require us to either increase the prices we
charge for our products or experience an increase in our costs and expenses. In addition, as part of the payment processing process, we transmit our patients' and clinicians' credit and debit card
information to our third-party
payment processor. We may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our patients' credit or
debit card information if the security of our third-party credit card payment processor is breached. We and our third-party credit card payment processor are also subject to payment card association
operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we or our
third-party credit card payment processor fail to comply with these rules or requirements, we may be subject to
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fines
and higher transaction fees and lose our ability to accept credit and debit card payments from our patients, and there may be an adverse impact on our business.
We have no experience selling our products outside of the United States and cannot predict if we will be
successful in achieving adoption of our products and revenue growth outside of the United States in a timely manner or at all. If we commercialize any products outside of the United States, a variety
of risks associated with international operations could impact our strategy and adversely affect our future growth.
We expect that we would be subject to additional risks related to entering into international markets,
including:
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difficulty successfully training patients and physicians on using our products;
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difficulty hiring a qualified direct-sales force or finding and entering into commercially-acceptable agreements with suitable third-parties to
market our products;
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reduced protection for intellectual property rights;
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unexpected changes in tariffs, trade barriers and regulatory requirements;
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economic weakness, including inflation, or political instability in particular foreign economies and markets;
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compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
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foreign taxes, including withholding of payroll taxes;
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foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing
business in another country;
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workforce uncertainty in countries where labor unrest is more common than in the United States;
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international regulators and third-party payers may require additional clinical studies prior to approving or allowing reimbursement for our
products;
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disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the U.S. Foreign
Corrupt Practices Act, regulations of the U.S. Office of Foreign Assets Controls, and U.S. anti-money laundering regulations, as well as exposure of our foreign operations to liability under these
regulatory regimes; and
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business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons,
floods and fires.
If
we experience any of these risks, our strategy to expand internationally could be impacted and our future growth could be adversely affected.
Our employees, independent contractors, consultants, collaborators and suppliers may engage in misconduct or
other improper activities, including noncompliance with regulatory standards and requirements and insider trading.
We are exposed to the risk that our employees and other third parties may engage in fraudulent conduct or other illegal activity. Misconduct by
employees and other third parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violate FDA regulations, including those laws
requiring the reporting of true, complete and accurate information to the FDA, manufacturing standards, federal and state healthcare fraud and abuse laws and regulations, or laws that require the
reporting of financial information or data accurately. In particular, sales, marketing and business arrangements in the healthcare industry are subject to
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extensive
laws intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and
promotion, sales commission, customer incentive programs and other business arrangements. Activities subject to these laws also involve the improper use of information obtained in the course of
clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee and other third-party misconduct, and the
precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions
or lawsuits stemming from a failure to
be in compliance with such laws. 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 significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement, possible exclusion from participation in Medicare,
Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment or restructuring of our operations, any of which could
adversely affect our ability to operate.
A reclassification of our independent contractor home trainers by tax authorities could require us to pay
retroactive taxes and penalties, which could have a material adverse effect on our business, financial condition and operating results.
We contract with over 400 licensed healthcare practitioners as home trainers, who educate our patients on the proper use of our solutions.
Because we consider these licensed practitioners to be independent contractors, as opposed to employees, we do not withhold federal or state income or other employment related taxes or make federal or
state unemployment tax or Federal Insurance Contributions Act payments. Our contracts with these independent contractors obligate them to pay these taxes. The classification of healthcare
practitioners as independent contractors depends on the facts and circumstances of the relationship. In the event federal or state taxing authorities determine that the healthcare practitioners are
employees, our business may be adversely affected and subject to retroactive taxes and penalties. Under current federal tax law, a safe harbor from reclassification, and consequently retroactive taxes
and penalties, is available if our current treatment is consistent with a long-standing practice of a significant segment of our industry and if we meet certain other requirements. If challenged, we
may not prevail in demonstrating the applicability of the safe harbor to our operations. Further, interested persons have recently proposed to eliminate the safe harbor and may do so again in the
future. If such proposals are reintroduced and passed by Congress, they could impact our classification of healthcare practitioners as independent contractors, which could have a material adverse
effect on our business, financial condition and results of operations.
We may be subject to liabilities related to state income, sales and use taxes, which could adversely affect
our financial condition and results of operations and could decrease demand for our products.
State income tax and sales and use tax laws, statutes, rules and regulations vary greatly by jurisdiction and are complex and subject to
uncertainty. We are in the process of reviewing the various requirements related to these types of taxes, but at this time we cannot predict the outcome of that review. If it is determined that
certain of these tax rules apply to us, we could be required to pay substantial tax amounts, and significant penalties and interest for past amounts that may have been due, in addition to taxes going
forward. These tax assessments, penalties and interest, and future requirements, may adversely affect our financial condition and results of operations. In addition, the imposition of sales and use
taxes on our products going forward would effectively increase the cost of our products to our customers and may adversely affect demand for our products.
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Risks Relating to Government Regulation
We are subject to extensive federal and state regulation, and if we fail to comply with applicable
regulations, we could suffer severe criminal or civil sanctions or be required to make significant changes to our operations that could adversely affect our business, financial condition and operating
results.
The federal government and all states in which we currently operate regulate various aspects of our business. Our operations also are subject to
state laws governing, among other things, distribution of medical equipment and certain types of home health activities, and we are required to obtain and maintain licenses in each state to act as a
durable medical equipment supplier.
As
a healthcare provider participating in governmental healthcare programs, we are subject to laws directed at preventing fraud and abuse, which subject our marketing, billing,
documentation and other practices to government scrutiny. To ensure compliance with Medicare, Medicaid and other regulations, government agencies or their contractors often conduct routine audits and
request customer records and other documents to support our claims submitted for payment of services rendered. Government agencies or their contractors also periodically open investigations and obtain
information from healthcare providers. Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including debarment, suspension or
exclusion from Medicare, Medicaid and other government reimbursement programs, any of which would have a material adverse effect on our business.
Changes
in healthcare laws and regulations and new interpretations of existing laws and regulations may affect permissible activities, the relative costs associated with doing business,
and reimbursement amounts paid by federal, state and other third-party payers. There have been and will continue to be regulatory initiatives affecting our business and we cannot predict the extent to
which future legislation and regulatory changes could have a material adverse effect on our business, financial condition and results of operations.
We are subject to significant regulation by numerous government agencies, including the FDA. We cannot market
or commercially distribute our products without obtaining and maintaining necessary regulatory clearances or approvals.
Our products are medical devices subject to extensive regulation in the United States. The FDA and other U.S. and foreign governmental agencies
regulate, among other things, with respect to medical devices:
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design, development and manufacturing;
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establishment registration and product listing;
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testing, labeling, content and language of instructions for use and storage;
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clinical trials;
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product safety;
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marketing, sales and distribution;
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unique device identifiers;
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premarket clearance and approval;
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record keeping procedures;
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advertising and promotion;
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recalls and field safety corrective actions;
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post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death
or serious injury;
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post-market approval studies; and
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product import and export.
Unless
an exemption applies, each medical device we seek to distribute commercially in the United States requires marketing authorization from the FDA prior to distribution. The two
primary types of FDA marketing authorization applicable to a device are premarket notification, also called 510(k) clearance, and premarket approval. The type of marketing authorization is generally
linked to the classification of the device. When a 510(k) clearance is required, we must submit a premarket notification to the FDA demonstrating that our proposed device is "substantially equivalent"
to a legally marketed device previously found substantially equivalent through a 510(k) premarket notification, a legally marketed device which has been reclassified from high to low or moderate risk
or a legally marketed device in commercial distribution before May 28, 1976 for which the FDA does not require the submission of a premarket approval application. Such a device is commonly
known as a "predicate device." The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence. A medical device may be found not to be
equivalent if it has different intended uses from the predicate device or possesses different technological characteristics from the predicate device which raise new questions of safety and
effectiveness. A premarket approval application must be submitted to the FDA if the device cannot be cleared through the 510(k) process. The premarket approval application process is much more
demanding than the 510(k) premarket notification process and requires the payment of significant user fees. A premarket approval application must be supported by valid scientific evidence, which
typically requires extensive data to demonstrate the reasonable assurance of safety and effectiveness of the device. The approval process involves FDA review of information, including but not limited
to, technical, preclinical (bench and/or animal), clinical trials, manufacturing and labeling. The FDA clearance and approval processes frequently take longer than anticipated due to increasing FDA
demands for clarification of data or new data requirements.
If
there is no predicate device that would permit the device to be cleared through the 510(k) path, then the FDA will automatically classify the device as a Class III high risk
premarket approval device. In the event of this possibility, the sponsor can request a risk-based classification determination for the device in accordance with the de novo process, which is a route
to market for novel medical devices that are low to moderate risk and are not substantially equivalent to a predicate device. A company files a de novo request when it does not have a predicate
to which it can claim substantial equivalence. The FDA reviews the request for a de novo decision and grants or denies the request. If the request is granted, the FDA issues an order indicating that
the device may legally be marketed and the device is classified as a Class I or II device, depending on risk. Once a device is classified through the de novo process, future devices from the
company or a competitor may use that device as a 510(k) predicate. The advantage of the de novo process is that it generally requires less data than a premarket approval. The disadvantage is that it
may require more data than a 510(k) and most often will include human clinical data. The FDA is increasingly moving devices with slightly different proposed indication statements or different
technological features off the 510(k) path and on to the de novo path resulting in more time and expense for the company.
Both
the 510(k) and premarket approval processes can be expensive and lengthy and require the payment of significant fees, unless an exemption applies. The FDA's 510(k) clearance process
usually takes from approximately three to 12 months, but may take longer. The process of obtaining a premarket approval is much more costly and uncertain than the 510(k) clearance process and
generally takes from approximately one to five years, or longer, from the time the application is submitted to the FDA until an approval is obtained. The process of obtaining regulatory clearances or
approvals to market a medical device can be costly and time consuming, and we may not be able to obtain these clearances or approvals on a timely basis, if at all.
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In the United States, our currently commercialized products are marketed pursuant to premarket clearance under Section 510(k) of the Federal Food, Drug and
Cosmetic Act, or FDCA. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, our product
introductions or modifications could be delayed or canceled, which could cause our sales to decline. In addition, the FDA may determine that future products will require the more costly, lengthy and
uncertain premarket approval process. Although we do not currently market any devices under a premarket approval, the FDA may demand that we obtain a premarket approval prior to marketing certain of
our future products. In addition, if the FDA disagrees with our determination that a product we currently market is subject to an exemption from premarket review, the FDA may require us to submit a
510(k) or premarket approval application in order to continue marketing the product. Further, even with respect to those future products where a premarket approval is not required, we cannot assure
you that we will be able to obtain the 510(k) clearances required with respect to those products.
The
FDA can delay, limit or deny clearance or approval of a device for many reasons, including:
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for non-premarket approval devices, failure of the applicant to demonstrate to the FDA's satisfaction that its products meet the definition of
"substantial equivalence" or meet the standard for the FDA to grant a petition for de novo classification;
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failure of the applicant to demonstrate that there is reasonable assurance that the medical device is safe or effective under the conditions of
use prescribed, recommended or suggested in the proposed labeling;
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insufficient data from the preclinical studies and clinical trials; or
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the manufacturing processes, methods, controls or facilities used for the manufacture, processing, packing or installation of the device do not
meet applicable requirements.
Any
delay in, or failure to receive or maintain, clearances or approvals for our products could prevent us from generating revenue from these products or achieving profitability.
Additionally, the FDA and other governmental authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could lead governmental authorities or a court to
take action against us, including, but not limited to:
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issuing untitled (notice of violation) letters or public warning letters to us;
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imposing fines and penalties on us;
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obtaining an injunction or administrative detention preventing us from manufacturing or selling our products;
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seizing products to prevent sale or transport or export;
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bringing civil or criminal charges against us;
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recalling our products or mandating a product correction;
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detaining our products at U.S. Customs;
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delaying the introduction of our products into the market;
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delaying pending requests for clearance or approval of new uses or modifications to our existing products; and
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withdrawing or denying approvals or clearances for our products.
If
we fail to obtain and maintain regulatory clearances or approvals, our ability to sell our products and generate revenue will be materially harmed.
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In
addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions which may prevent or delay
approval or clearance of our products under development or impact our ability to modify our currently approved or cleared products on a timely basis. For example, in response to industry and
healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) regulatory pathway, the FDA published new guidance on the 510(k) regulatory pathway in 2014, which alters
the manner in which the 510(k) regulatory pathway is administered and interpreted. The FDA intends these reform actions to improve the efficiency and transparency of the clearance process, as well as
bolster patient safety. This new guidance could impose additional regulatory requirements upon us which could delay our ability to obtain new 510(k) clearances, increase the costs of compliance or
restrict our ability to maintain our current clearances. In addition, as part of the Food and Drug Administration Safety and Innovation Act, Congress reauthorized the Medical Device User Fee
Amendments with various FDA performance goal commitments and enacted several "Medical Device Regulatory Improvements" and miscellaneous reforms which are further intended to clarify and improve
medical device regulation both pre- and post-market.
Medical
devices may only be promoted and sold for the indications for which they are approved or cleared. In addition, even if the FDA has approved or cleared a product, it can take
action affecting such product approvals or clearances if serious safety or other problems develop in the marketplace. Delays in obtaining clearances or approvals could adversely affect our ability to
introduce new products or modifications to our existing products in a timely manner, which would delay or prevent commercial sales of our products. Additionally, the FDA and other regulatory
authorities have broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny on us, could affect the perceived safety and efficacy of our products and dissuade patients
and clinicians from using our products.
If we modify our FDA cleared devices, we may need to seek additional clearances or approvals, which, if not
granted, would prevent us from selling our modified products.
The FDA regulations require the submission and clearance of a new 510(k) premarket notification, or possibly, premarket approval, for
significant changes or modifications made in the design, components, method of manufacture or intended use of a device including changes or modifications to a 510(k)-cleared device that could
significantly affect the device's safety or
effectiveness, or would constitute a major change or modification in the device's intended use. The FDA requires each manufacturer to make this determination, but the FDA may review any manufacturer's
decision. The FDA may not agree with our decisions regarding whether new clearances or approvals are necessary. We have modified some of our 510(k) cleared products, and have determined based on our
review of the applicable FDA guidance that in certain instances new 510(k) clearances or premarket approval are not required. If the FDA disagrees with our determination and requires us to submit new
510(k) notifications or premarket approval for modifications to our previously cleared products for which we have concluded that new clearances or approvals are unnecessary, we may be required to
cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties.
Furthermore,
the FDA's ongoing review of the 510(k) program may make it more difficult for us to make modifications to our previously cleared products, either by imposing more strict
requirements on when a manufacturer must submit a new 510(k) for a modification to a previously cleared product, or by applying more onerous review criteria to such submissions. If the FDA requires us
to cease marketing a modified device until we obtain a new 510(k) clearance or premarket approval, our business, financial condition, operating results and future growth prospects could be materially
adversely affected. Further in this situation, our products could be subject to recall. Any recall or FDA requirement that we seek additional approvals or clearances could result in significant
delays, fines,
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increased
costs associated with modification of a product, loss of revenue and potential operating restrictions imposed by the FDA.
The misuse or off-label use of our products may harm our image in the marketplace, result in injuries that
lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be
costly to our business.
The products we currently market have been cleared by the FDA for specific treatments. We train our marketing and direct sales force to not
promote our products for uses outside of the FDA-cleared indications for use, known as "off-label uses." We cannot, however, prevent a physician from using our products off-label, when in the
physician's independent professional medical judgment he or she deems it appropriate. The FDA does not restrict or regulate a physician's choice of treatment. There may be increased risk of injury to
patients if physicians use our products off-label. Furthermore, the use of our products for indications other than those cleared by the governing regulatory body may not effectively treat such
conditions, which could harm our reputation in the marketplace among physicians and patients.
If
the FDA determines that our promotional materials, communications or training constitute promotion of or encourage off-label uses, it could request that we modify our training or
promotional materials or subject us to regulatory or enforcement actions, including the issuance of untitled letters, warning letters, injunctions, seizures, civil fines or criminal penalties. It is
also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in
significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, and
the curtailment of our operations.
In
addition, physicians or patients may misuse our products or use improper techniques, potentially leading to injury and an increased risk of product liability. If our products are
misused or used with improper technique, we may become subject to costly litigation by our clinicians or their patients. As noted above, we can be subject to lawsuits, whether or not our product is
proven to be defective and whether or not our employees have adequately trained the physicians. Similarly, in an effort to decrease costs, physicians may also reuse those of our products that are
intended for a single use or may purchase reprocessed products from third-party reprocessors in lieu of purchasing new products from us, which could result in product failure and liability. As
described immediately above, product liability claims could divert management's attention from our core business, be expensive to defend and result in sizeable damage awards against us that may not be
covered by insurance.
Our products may cause or contribute to adverse medical events that we are required to report to the FDA, and
if we fail to do so, we would be subject to sanctions that would materially harm our business.
Our marketed products are subject to Medical Device Reporting, or MDR, obligations, which require that we report to the FDA any incident in
which our products may have caused or contributed to a death or serious injury, or in which our products malfunctioned and, if the malfunction were to recur, it could likely cause or contribute to a
death or serious injury. The timing of our obligation to report under the MDR regulations is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail
to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not
reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we fail to comply with our reporting obligations, the FDA could
take action including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearances, seizure of our
products, or delay in clearance of future products.
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Our products may in the future be subject to product recalls. A recall of our products, either voluntarily or
at the direction of the FDA or another governmental authority, or the discovery of serious safety issues with our products, could have a significant adverse impact on us.
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of
material deficiencies or defects in their design or manufacture. The FDA's authority to require a recall must be based on a finding that there is reasonable probability that the device would cause
serious, adverse health consequences or death. We may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall could occur as a result
of an unacceptable risk to health, component failures, malfunctions, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert
managerial and financial resources and have an adverse effect on our reputation and business, which could impair our ability to produce our products in a cost-effective and timely manner in order to
meet our patients' demands. We may also be subject to liability claims, be required to bear other costs, or take other actions that may have a negative impact on our future sales and our ability to
generate profits.
Companies
are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA. We may initiate voluntary recalls or corrections for our
products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls and we may be
subject to enforcement action.
If we or our component manufacturers fail to comply with the FDA's Quality System Regulation, our
manufacturing operations could be interrupted, and our product sales and operating results could suffer.
We and many of our component manufacturers are required to comply with the FDA's Quality System Regulation, or QSR, which covers the procedures
and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our devices. The FDA audits compliance with the QSR
through periodic announced and unannounced inspections of manufacturing and other facilities. We and our component manufacturers have been, and anticipate in the future being, subject to such
inspections. We cannot provide assurance that any future inspection will not result in adverse findings with respect to our QSR compliance. If our manufacturing facilities or those of any of our
component manufacturers or suppliers are found to be in violation of applicable laws and regulations, or we or our manufacturers or suppliers fail to take satisfactory corrective action in response to
an adverse inspection, the FDA could take enforcement action, including one or more of the following non-exclusive sanctions:
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untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
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customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;
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operating restrictions or partial suspension or total shutdown of production;
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refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;
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withdrawing 510(k) clearances or premarket approvals that have already been granted;
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refusal to grant export approval for our products; or
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criminal prosecution.
Any
of these sanctions could adversely affect our business, financial condition and results of operations.
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If
we begin selling our products outside the United States, our products and operations would also be required to comply with standards set by industrial standards bodies, such as the
International Organization for Standardization, or ISO. Foreign regulatory bodies may evaluate our products or the testing that our products undergo against these or other standards. The specific
standards, types of evaluation and scope of review differ among foreign regulatory bodies. If we fail to adequately comply with any of these standards, a foreign regulatory body may take adverse
actions similar to those within the power of the FDA.
Any
of these actions could prevent us from marketing, distributing or selling our products and would likely harm our business.
If clinical studies of our future products do not produce results necessary to support regulatory clearance
or approval in the United States or, with respect to our current or future products, elsewhere, we will be unable to expand the indications for or commercialize these products.
We will likely need to conduct additional clinical studies in the future to support new indications for our products or for clearances of new
product lines, or for the approval of the use of our products in some foreign countries. Clinical testing can take many years, can be expensive and carries uncertain outcomes. The initiation and
completion of any of these studies may be prevented, delayed, or halted for numerous reasons.
Clinical
failure can occur at any stage of testing. Our clinical studies may produce negative, unanticipated or inconclusive results, and we may decide, or regulators may require us, to
conduct additional clinical and non-clinical testing in addition to those we have planned. Our failure to adequately demonstrate the safety and efficacy of any of our devices would prevent receipt of
regulatory clearance or approval and, ultimately, the commercialization of that device or indication for use. Even if our future products are cleared in the United States, commercialization of our
products in foreign countries would require approval by regulatory authorities in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review
periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials. Any of these occurrences could have an adverse impact on our
business.
If the third parties on which we rely to conduct our clinical trials and to assist us with pre-clinical
development do not perform as contractually required or expected, we may not be able to obtain regulatory clearance or approval for or commercialize our products.
We often must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract
laboratories to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or regulatory obligations, have difficulty recruiting sufficient subjects for
clinical studies or fail to meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to
our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be
able to obtain regulatory approval for, or successfully commercialize, our products on a timely basis, if at all, and our business, operating results and prospects may be adversely affected.
Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control.
Future regulatory actions may adversely affect our ability to sell our products profitably.
From time to time, legislation is drafted and introduced that could significantly change the statutory provisions governing the clearance or
approval, manufacture and marketing of a medical device. In addition, FDA and other regulations and guidance are often revised or reinterpreted in ways
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that
may significantly affect our business and our products, and new regulations or guidance documents may be promulgated. It is impossible to predict whether legislative changes will be enacted or
regulations, guidance or interpretations changed or added, and what the impact of such changes or additions, if any, may be.
Healthcare regulatory reform may affect our ability to sell our products profitably
.
In the United States, the legislative landscape, particularly as it relates to healthcare regulation and reimbursement coverage, continues to
evolve. In March 2010, the Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act, which we refer to as the Patient Protection and Affordable Care Act, was passed,
which has the potential to substantially change healthcare financing by both governmental and private insurers, and significantly impact the U.S. medical device industry. The Patient Protection and
Affordable Care Act, among other things, imposes a new excise tax, which began in 2013, on entities that manufacture, produce or import medical devices in an amount equal to 2.3% of the price for
which such devices are sold in the United States. While we believe that our current products are exempt from this tax under an exemption for retail products, if our belief is determined to be
incorrect, we could be subject to significant tax liabilities and penalties, which could have a material adverse effect on our results of operations and cash position. Moreover, products that we
introduce in the future could be subject to this tax.
In
addition, the Patient Protection and Affordable Care Act also expands the round two of competitive bidding to a total of 91 competitive bidding areas, and by 2016, the process must be
nationalized or prices in non-competitive bidding areas must be adjusted to match competitive bidding prices. Other legislative changes have been proposed and adopted in the United States since the
Patient Protection and Affordable Care Act was enacted. On August 2, 2011, the Budget Control Act of 2011 among other things, created measures for spending reductions by Congress. A Joint
Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby
triggering the legislation's automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year, which went into effect
on April 1, 2013. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 which, among other things, further reduced Medicare payments to certain
providers, including physicians, hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from
three to five years. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will
pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressures.
There
have been judicial and Congressional challenges to certain aspects of the Patient Protection and Affordable Care Act. Additional state and federal health care reform measures that
may be adopted in the future could have a material adverse effect on our industry generally and on our customers. Any changes in, or uncertainty with respect to future reimbursement rates, or changes
in hospital admission rates could impact our customers' demand for our products and services, which in turn could impact our ability to successfully commercialize our products, or could limit or
eliminate our spending on certain development projects. These changes could adversely affect our business and results of operations.
Healthcare reform measures could hinder or prevent the commercial success of our products and product
candidates.
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 that could affect our future revenues and profitability and the future revenues and profitability of our customers. Federal and state lawmakers
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regularly
propose and, at times, enact legislation that results in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and
services. The new presidential administration and U.S. Congress have sought, and we expect that they will continue to seek, to modify, repeal, or otherwise invalidate all, or certain provisions of,
the Patient Protection and Affordable Care Act. There is still uncertainty with respect to the impact that the current administration and legislative action may have, if any, and any changes will
likely take time to unfold and could have an impact on coverage and reimbursement for healthcare items and services covered by plans that were authorized by the Patient Protection and Affordable Care
Act. Such uncertainty and any changes could negatively impact our ability to successfully commercialize our products or product candidates, and could result in reduced demand for our products and
additional pricing pressures.
While our products are not currently subject to the competitive bidding process under Medicare, if our
products were to become subject to such process in the future, it could negatively affect our business and financial condition.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 required the Secretary of Health and Human Services to establish and
implement programs under which competitive acquisition areas are established throughout the United States for purposes of awarding contracts for the furnishing of competitively priced items of durable
medical equipment.
CMS,
the agency responsible for administering the Medicare program, conducts a competition for each competitive acquisition area under which providers submit bids to supply certain
covered items of durable medical equipment. Successful bidders must meet certain program quality standards in order to be awarded a contract and only successful bidders can supply the covered items to
Medicare beneficiaries in the acquisition area. There are, however, regulations in place that allow non-contracted providers to continue to provide products and services to their existing customers at
the new competitive bidding payment amounts. The contracts are expected to be re-bid every three years. CMS
is required to award contracts to multiple entities submitting bids in each area for an item or service, but has the authority to limit the number of contractors in a competitive acquisition area to
the number it determines to be necessary to meet projected demand.
Although
CMS concluded the bidding process for the first round of Metropolitan Statistical Areas in September 2007, in July 2008, Congress enacted Medicare Improvements for Patients and
Providers Act of 2008, which retroactively delayed the implementation of competitive bidding. Medicare Improvements for Patients and Providers Act of 2008 also reduced Medicare prices nationwide by
9.5% beginning in 2009 for the product categories that were initially included in competitive bidding.
The
Patient Protection and Affordable Care Act legislation requires CMS to expand competitive bidding further to additional geographic markets or to use competitive bid pricing
information to adjust the payment amounts otherwise in effect for areas that are not competitive acquisition areas by January 1, 2016.
Although
we continue to monitor developments regarding the implementation of the competitive bidding program, we cannot predict the outcome of the competitive bidding program on our
business when fully implemented, nor the Medicare payment rates that will be in effect in future years for the items subjected to competitive bidding, including our products. We expect that payment
rates will continue to fluctuate, and a large negative payment adjustment could adversely affect our business, financial conditions and results of operations.
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We are subject to additional federal, state and foreign laws and regulations relating to our healthcare
business; our failure to comply with those laws could have an adverse impact on our business.
We are subject to healthcare fraud and abuse regulation and enforcement by federal and state governments, which could adversely impact our
business. Healthcare fraud and abuse and health information privacy and security laws potentially applicable to our operations include:
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the federal Anti-Kickback Statute, which applies to our marketing practices, educational programs, pricing policies and relationships with
healthcare providers, by prohibiting, among other things, soliciting, receiving, offering or providing remuneration, whether directly or indirectly and overtly or covertly, intended to induce the
referral of an individual for (i) the furnishing or the arranging for the furnishing of items or services reimbursable under a federal healthcare program, such as Medicare or Medicaid; or
(ii) the purchase, lease or order of, or the arrangement or recommendation of the purchasing, leasing or ordering of, of an item or service reimbursable under a federal healthcare program. A
person or entity does not need to have actual knowledge of this statute or specific intent to violate it to have committed a violation;
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federal civil and criminal false claims laws and civil monetary penalty laws, including civil whistleblower or qui tam actions that prohibit,
among other things, knowingly presenting, or causing to be presented, claims for payment or approval to the federal government that are false or fraudulent, knowingly making a false statement material
to an obligation to pay or transmit money or property to the federal government, knowingly concealing or knowingly and improperly avoiding or decreasing an obligation to pay or transmit money or
property to the federal government or knowingly offering remuneration to influence a Medicare or Medicaid beneficiary's selection of health care providers. 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 statutes;
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HIPAA and its implementing regulations, which created federal criminal laws that prohibit, among other things, executing a scheme to defraud
any healthcare benefit program or making false statements relating to healthcare matters;
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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, also imposes certain regulatory and contractual
requirements regarding the privacy, security and transmission of individually identifiable health information;
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federal Open Payments (the Physician Payments Sunshine Act) requirements imposed by the Patient Protection and Affordable Care Act on device
manufacturers regarding certain "transfers of value" made or distributed to physicians and teaching hospitals. Failure to submit required information may result in civil monetary penalties of up to an
aggregate of $150,000 per year (or up to an aggregate of $1.0 million per year for "knowing failures"), for all payments, transfers of value or ownership or investment interests that are not
timely, accurately, and completely reported in an annual submission. The period between August 1, 2013 and December 31, 2013 was the first reporting period, and manufacturers were
required to report aggregate payment data by March 31, 2014, and to report detailed payment data and submit legal attestation to the accuracy of such data by June 30, 2014. Thereafter,
manufacturers must submit reports by the 90th day of each subsequent calendar year;
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federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm
consumers; and
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state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services
reimbursed by any third-party payer, including commercial insurers; state laws that require device companies to comply with the industry's
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voluntary
compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers; state laws that
require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state laws governing the
privacy and security of certain health information, many of which differ from each other in significant ways and often are not preempted by HIPAA.
The
risk of our being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the
courts, and their provisions are open to a variety of interpretations. We are unable to predict what additional federal or state legislation or regulatory initiatives may be enacted in the future
regarding our business or the
healthcare industry in general, or what effect such legislation or regulations may have on us. Federal or state governments may impose additional restrictions or adopt interpretations of existing laws
that could have a material adverse effect on us.
Because
of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of our business activities,
including certain sales and marketing practices and financial arrangements, including the provision of stock options as partial compensation for consulting services, with physicians, some of whom use
or purchase our products, and other customers, could be subject to challenge under one or more of such laws. 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. 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, damages, fines, exclusion from governmental healthcare
programs, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely impact our
business.
Failure to comply with regulations affecting the transmission, security and privacy of health information
could result in significant penalties.
Numerous federal and state laws and regulations, including HIPAA and the Health Information Technology for Economic and Clinical Health Act, or
the HITECH Act, govern the collection, dissemination, security, use and confidentiality of patient-identifiable health information. HIPAA and the HITECH Act require us to comply with standards for the
use and disclosure of health information within our company and with third parties. The Privacy Standards and Security Standards under HIPAA establish a set of basic national privacy and security
standards for the protection of individually identifiable health information by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and the
business associates with whom such covered entities contract for services. Notably, whereas HIPAA previously directly regulated only these covered entities, the HITECH Act, which was signed into law
as part of the stimulus package in February 2009, makes certain of HIPAA's privacy and security standards also directly applicable to covered entities' business associates. As a result, both covered
entities and business associates are now subject to significant civil and criminal penalties for failure to comply with Privacy Standards and Security Standards.
HIPAA
and the HITECH Act also include standards for common healthcare electronic transactions and code sets, such as claims information, plan eligibility, payment information and the use
of electronic signatures, and privacy and electronic security of individually identifiable health information. Covered entities, such as healthcare providers, are required to conform to such
transaction set standards pursuant to HIPAA.
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HIPAA requires healthcare providers like us to develop and maintain policies and procedures with respect to protected health information that is used or
disclosed, including the adoption of administrative, physical and technical safeguards to protect such information. The HITECH Act expands the notification requirement for breaches of
patient-identifiable health information, restricts certain disclosures and sales of patient-identifiable health information and provides a tiered system for civil monetary penalties for HIPAA
violations. The HITECH Act also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons and gave state attorneys general
new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney fees and costs associated with pursuing federal civil actions.
Additionally, certain states have adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA.
If
we do not comply with existing or new laws and regulations related to patient health information, we could be subject to criminal or civil sanctions. New health information standards,
whether implemented pursuant to HIPAA, the HITECH Act, congressional action or otherwise, could have a significant effect on the manner in which we handle healthcare related data and communicate with
payors, and the cost of complying with these standards could be significant.
The
2013 final HITECH omnibus rule modifies the breach reporting standard in a manner that will likely make more data security incidents qualify as reportable breaches. Any liability
from a failure to comply with the requirements of HIPAA or the HITECH Act could adversely affect our financial condition. The costs of complying with privacy and security related legal and regulatory
requirements are burdensome and could have a material adverse effect on our results of operations. These new provisions, as modified, will be subject to interpretation by various courts and other
governmental authorities, thus creating potentially complex compliance issues for us, as well as our clients and strategic partners. In addition, we are unable to predict what changes to the HIPAA
Privacy Standards and Security Standards might be made in the future or how those changes could affect our business. Any new legislation or regulation in the area of privacy and security of personal
information, including personal health information, could also adversely affect our business operations.
Additionally,
the Federal Trade Commission has issued and several states have issued or are considering new regulations to require holders of certain types of personally identifiable
information to implement formal policies and programs to prevent, detect and mitigate the risk of identity theft and other unauthorized access to or use of such information. Further, the U.S. Congress
and a number of states have considered or are considering prohibitions or limitations on the disclosure of medical or other information to individuals or entities located outside of the United States.
If we begin selling our products outside the United States, we will need to comply with applicable laws in those jurisdictions that regulate the use and disclosure of individually identifiable
information.
If we fail to comply with state and federal fraud and abuse laws, including anti-kickback, false claims and
anti-inducement laws, we could face substantial penalties and our business, operations, and financial condition could be adversely affected.
The federal anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration,
whether directly or indirectly and overtly or covertly, to induce or in return for purchasing, leasing, ordering, or arranging for the purchase, lease or order of any healthcare item or service
reimbursable under Medicare, Medicaid, or other federal financed healthcare programs. The statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution are
drawn narrowly, and any remuneration to or from a prescriber or purchaser of healthcare products or services may be subject to scrutiny if they do not qualify for an exception or safe harbor. Our
practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.
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Federal
false claims laws prohibit, in part, any person from knowingly presenting or causing to be presented a false claim for payment to the federal government, or knowingly making or
causing to be made a false statement to get a false claim paid. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to
items or services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of payer. These false claims statutes allow any person to bring suit in the name of the
government alleging false and fraudulent claims presented to or paid by the government (or other violations of the statutes) and to share in any amounts paid by the entity to the government in fines
or settlement. Such suits, known as
qui tam
actions, have increased significantly in the healthcare industry in recent years. Sanctions under these
federal and state laws may include civil monetary penalties, exclusion of a manufacturer's products from reimbursement under government programs, criminal fines and imprisonment. In addition, the
Patient Protection and Affordable Care Act, among other things, amends the intent requirement of the federal anti-kickback 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 Patient Protection and 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 statutes. Because of the breadth of these
laws and the narrowness of the safe harbors and exceptions, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Such a challenge,
regardless of the outcome, could have a material adverse effect on our business, business relationships, reputation, financial condition and results of operations.
In
addition, there has been a recent trend of increased federal and state regulation of payments made to physicians. The Patient Protection and Affordable Care Act imposed new reporting
and disclosure requirements on device and drug manufacturers for any "transfer of value" made or distributed to prescribers and other healthcare providers. Device and drug manufacturers will also be
required to report and disclose any investment interests held by physicians and their immediate family members during the preceding calendar year. Failure to submit required information may result in
civil monetary penalties of up to an aggregate of $150,000 per year (and up to an aggregate of $1.0 million per year for "knowing failures to report"), for all payments, transfers of value or
ownership or investment interests not reported in an annual submission. As of August 1, 2013, manufacturers are required to collect data and are required to submit their data reports to CMS by
the 90th day of each calendar year.
Certain
states mandate implementation of compliance programs and/or the tracking and reporting of gifts, compensation and other remuneration to physicians. The shifting compliance
environment and the need to build and maintain robust and expandable systems to comply with different compliance and/or reporting requirements in multiple jurisdictions increase the possibility that a
healthcare company many violate one or more of the requirements.
The
Federal Civil Monetary Penalties Law prohibits, in part, the offering or giving of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely
to influence the beneficiary's selection of a particular supplier of items or services reimbursable by a Federal or state governmental program. We sometimes offer customers various discounts and other
financial incentives in connection with the sales of our products. While it is our intent to comply with all applicable laws, the government may find that our marketing activities violate the Civil
Monetary Penalties Law. If we are found to be in noncompliance, we could be subject to civil money penalties of up to $10,000 for
each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs.
The
scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable
precedent and regulations. If our operations are found to be in violation of any of the laws described above or any
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other
government regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment, restructuring, or restricting of our
operations. Any penalties, damages, fines, curtailment or restructuring or our operations could harm our ability to operate our business and our financial results. 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 operation of our business. Moreover, achieving
and sustaining compliance with applicable federal and state fraud laws may prove costly.
Failure to maintain the licenses and accreditations necessary to operate under our direct-to-patient and
-provider model would adversely affect our business.
To continue operating our business under our direct-to-patient and -provider model, we must maintain our Durable Medical Equipment license and
certification from the Accreditation Commission for Health Care. In May 2008, we became a Durable, Medical Equipment, Prosthetics, Orthotics, and Supplies accredited Medicare supplier by the
Accreditation Commission for Health Care for our solutions and our Medicare accreditation must be renewed every three years through passage of an on-site inspection. Our current accreditation with
Medicare is due to expire in May 2017. In addition to maintaining our Durable Medical Equipment license and certification from the Accreditation Commission for Health Care, we also must maintain
certain state-required licenses. If we were found to be noncompliant, we could lose our licensure in that state. Losing our licensure could prohibit us from selling our current or future products to
patients in such state and our business, financial condition and results of operations could be adversely affected as a result of any such prohibition.
Our products are currently made available to authorized users of the Department of Veterans Affairs Federal
Supply Schedule and if we were no longer eligible to sell our products through such channel, our business may be adversely affected.
For our products to be eligible for reimbursement by the Veterans Administration, we must participate in the Department of Veterans Affairs
Federal Supply Schedule pricing program, established by Section 603 of the Veterans Health Care Act of 1992. To be eligible for this program, we must comply with additional laws and
requirements applicable to our operations and manufacturing processes. If we were to lose eligibility for reimbursement by the Veterans Administration, our business, financial condition and results of
operations could be adversely affected.
We may be unable to obtain or maintain international regulatory registrations or approvals for our current or
future products and indications, which could adversely impact our business.
Any future sales of our devices outside the United States are subject to foreign regulatory requirements that vary widely from country to
country. In addition, the FDA regulates exports of medical devices from the United States. Complying with international regulatory requirements can be an expensive and time-consuming process and
approval is not certain. The time required to obtain registration or approvals, if required by other countries, may be longer than that required for FDA clearance, and requirements for such
registrations or approvals may significantly differ from FDA requirements. In certain countries we intend to rely upon third-party distributors to obtain all required regulatory registrations and
approvals, and these distributors may be unable to obtain or maintain such registrations or approvals. Our distributors in these countries may also incur significant costs in attempting to obtain and
in maintaining foreign regulatory approvals or registrations, which could increase the difficulty of attracting and retaining qualified distributors. If these distributors experience delays in
receiving necessary registrations or approvals to market our products outside the United States, or if they fail to receive those registrations or approvals, we may be unable to market our products or
enhancements in certain international markets effectively, or at all.
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Our operations involve the use of hazardous and toxic materials, and we must comply with environmental,
health and safety laws and regulations, which can be expensive, and could have an adverse impact on our business.
Our operations use or generate small volumes of hazardous or toxic materials. We are therefore subject to a variety of federal, state and local
regulations relating to the use, handling, storage, disposal and human exposure to hazardous and toxic materials. Liability under environmental laws can be joint and several and without regard to
comparative fault, and environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations, which could have an
adverse impact on our business. There can be no assurance that violations of environmental, health and safety laws will not occur in the future as a result of human error, accident, equipment failure
or other causes. The failure to comply with past, present or future laws could result in the imposition of fines, third-party property damage and personal injury claims, investigation and remediation
costs, the suspension of production or a cessation of operations. We also expect that our operations will be affected by other new environmental and health and safety laws and regulations on an
ongoing basis. Although we cannot predict the ultimate impact of any such new laws and regulations, they will likely result in additional costs, and may require us to change how we manufacture our
products, which could have an adverse impact on our business.
Risks Related to Our Financial Condition
We may need substantial additional funding and may be unable to raise capital when needed, which could force
us to delay or reduce our commercialization efforts or product development programs.
We believe our existing cash and cash equivalents and revenues will be sufficient to meet our capital requirements and fund our operations
indefinitely. However, we have based these estimates on assumptions that may prove to be incorrect, and we could spend our available financial resources much faster than we currently expect. Any
future funding requirements will depend on many factors, including:
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market acceptance of our products;
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the scope, rate of progress and cost of our clinical studies;
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the cost of our research and development activities;
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the cost of filing and prosecuting patent applications and defending and enforcing our patent or other intellectual property rights;
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the cost of defending, in litigation or otherwise, any claims that we infringe third-party patents or other intellectual property rights;
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the cost and timing of additional regulatory clearances or approvals;
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the cost and timing of establishing additional sales, marketing and distribution capabilities;
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costs associated with any product recall that may occur;
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the effect of competing technological and market developments;
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the extent to which we acquire or invest in products, technologies and businesses, although we currently have no commitments or agreements
relating to any of these types of transactions; and
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the costs of operating as a public company.
If
we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter may impose upon us covenants that
restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends,
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repurchase
our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms
that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our
technologies or our products, or grant licenses on terms that are not favorable to us.
Furthermore,
we cannot be certain that additional funding will be available on acceptable terms, if at all. If we do not have, or are not able to obtain, sufficient funds, we may have to
delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have
to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could harm our operating results.
Risks Related to Our Intellectual Property
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on products in all countries throughout the world would be prohibitively expensive, and our
intellectual property rights in some countries outside the United States may be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect
intellectual property rights to the same extent as federal and state laws in the United States. For example, many foreign countries have compulsory licensing laws, under which a patent owner must
grant licenses to third parties. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing
products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop
their own products, and further, competitors may export otherwise infringing products to territories where we have patent protection but enforcement rights are not as strong as those in the United
States. These products may compete with our products in jurisdictions where we do not have any issued patents, and our patent claims or other intellectual rights may not be effective or sufficient to
prevent them from so competing.
Many
companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries do not
favor the enforcement of patents and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents generally. Proceedings to enforce our patent
rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or
interpreted narrowly and our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the
damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a
significant commercial advantage from the intellectual property that we develop or license.
The patent protection for our products may expire before we are able to maximize their commercial value,
which may subject us to increased competition and reduce or eliminate our opportunity to generate product revenues.
The patents for our products have varying expiration dates and, if these patents expire, we may be subject to increased competition and we may
not be able to recover our development costs or market any of our approved products profitably. For instance, our patents for our Flexitouch System will expire in 2017. Upon expiration of our patents,
we may be subject to increased competition and our opportunity to establish or maintain product revenues could be substantially reduced or eliminated.
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Further,
we may not have sufficient time to recover our development costs prior to the expiration of our U.S. and foreign patents.
We may not identify relevant patents or may incorrectly interpret the relevance, scope or expiration of a
patent, which may adversely affect our ability to develop and market our products.
We cannot guarantee that any of our patent searches or analyses, including but not limited to the identification of relevant patents, the scope
of patent claims or the expiration of relevant patents, are complete or thorough, nor can we be certain that we have identified each and every patent and pending application in the United States and
abroad that is relevant to or necessary for the commercialization of our products in any jurisdiction.
The
scope of a patent claim is determined by an interpretation of the law, the written disclosure in a patent and the patent family's prosecution history. Our interpretation of the
relevance or the scope of a patent or a pending application may be incorrect, which may negatively impact our ability to market our products. We may incorrectly determine that our products are not
covered by a third-party patent.
Many
patents may cover a marketed product, including but not limited to patents covering the product or portions thereof, methods of use or methods relating to the product, and
production processes of or for the product. The identification of all patents and their expiration dates relevant to the production and sale of a therapeutic product is extraordinarily complex and
requires sophisticated legal knowledge in the relevant jurisdiction. It may be impossible to identify all patents in all jurisdictions relevant to a marketed product. Our determination of the
expiration date of any patent in the United States or abroad that we consider relevant may be incorrect, which may negatively impact our ability to develop and market our products.
Obtaining and maintaining our patent protection depends on compliance with various procedural, documentary,
fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The United States Patent and Trademark Office, or USPTO, and various foreign governmental patent agencies require compliance with a number of
procedural, documentary, fee payment and other similar provisions during the patent prosecution process. Periodic maintenance fees,
renewal fees, annuity fees and various other governmental fees on any issued patent and/or pending patent applications are due to be paid to the USPTO and foreign patent agencies in several stages
over the lifetime of a patent or patent application. We have systems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees. While an
inadvertent lapse may sometimes be cured by payment of a late fee or by other means in accordance with the applicable rules, there are many situations in which noncompliance can result in abandonment
or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If we fail to maintain the patents and patent applications directed
to our products, our competitors might be able to enter the market earlier than should otherwise have been the case, which would have a material adverse effect on our business.
We may become involved in lawsuits to protect our patents or other intellectual property rights, which could
be expensive, time-consuming and ultimately unsuccessful.
Competitors may infringe our patents or other intellectual property rights. To counter infringement or unauthorized use, we may be required to
file infringement claims, which can be expensive and time consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may
refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any
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litigation
or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.
Various
proceedings brought before the USPTO may be necessary to determine the priority of inventions with respect to our patents and patent applications or those of our current or
future collaborators. An unfavorable outcome could require us to cease using the technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if a
prevailing party does not offer us a license on terms that are acceptable to us. Litigation or other proceedings may fail and, even if successful, may result in substantial costs and distraction of
our management and other employees. We may not be able to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect those rights as fully as in the
United States.
Furthermore,
because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential and proprietary
information could be compromised by disclosure during this type of litigation. In addition, there could be public
announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial
adverse effect on the price of our common stock.
Third-party claims of intellectual property infringement or misappropriation may adversely affect our
business and could prevent us from developing or commercializing our products.
Our commercial success depends in part on us not infringing the patents and proprietary rights of third parties. There is a substantial amount
of litigation, both within and outside the United States, involving patent and other intellectual property rights in the medical device industry, including patent infringement lawsuits, interferences,
oppositions,
ex-parte
review and
inter partes
reexamination and post-grant review proceedings before the
USPTO and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the fields in which we are developing and may
develop our products. As the medical device industry expands and more patents are issued, the risk increases that our products may be subject to claims of infringement of the patent rights of third
parties. If a third party claims that we infringe on their products or technology, we could face a number of issues, including:
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infringement and other intellectual property claims which, with or without merit, can be expensive and time-consuming to litigate and can
divert management's attention from our core business;
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substantial damages for past infringement, which we may have to pay if a court decides that our product infringes on a competitor's patent;
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a court prohibiting us from selling or licensing our product, unless the patent holder licenses the patent to us;
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if a license is available from a patent holder, we may have to pay substantial royalties or grant cross licenses to our patents; and
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redesigning our processes so they do not infringe, which may not be possible or could require substantial funds and time.
Third
parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to products,
materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our products, that we failed to identify. For example, applications filed before
November 29, 2000 and certain applications filed after that date that will not be filed outside the United States remain confidential until issued as patents. Except for the preceding
exceptions, patent applications in the
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United
States and elsewhere are generally published only after a waiting period of approximately 18 months after the earliest filing. Therefore, patent applications covering our technology or
our products could have been filed by others without our knowledge. Additionally, pending patent applications that have been published can, subject to certain limitations, be later amended in a manner
that could cover our technologies, our products or the use or manufacture of our products. We may also face a claim of misappropriation, if a third party believes that we inappropriately obtained and
used trade secrets of such third parties. If we are found to have misappropriated a third party's trade secrets, we may be prevented from further using such trade secrets, limiting our ability to
develop our products, and we may be required to pay damages.
If
any third-party patents were held by a court of competent jurisdiction to cover aspects of our products, materials, formulations, methods of manufacture or methods for treatment, the
holders of any such patents would be able to block our ability to develop and commercialize the applicable product candidate until such patent expired or unless we obtain a license. These licenses may
not be available on acceptable terms, if at all. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual
property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement
claims, we are unable to enter into licenses on acceptable terms. In addition, during the course of any patent or other intellectual property litigation, there could be public announcements of the
results of hearings, rulings on motions, and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of our
products, programs, or intellectual property could be diminished. Accordingly, the market price of our common stock may decline.
Parties
making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our
products. Defending against
claims of patent infringement or misappropriation of trade secrets could be costly and time-consuming, regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle at an early
stage, such litigation could burden us with substantial unanticipated costs. In addition, litigation or threatened litigation could result in significant demands on the time and attention of our
management team, distracting them from the pursuit of other company business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble
damages and attorneys' fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial
time and monetary expenditure. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical
trials, continue our research programs, license necessary technology from third parties, or enter into development collaborations that would help us bring our products to market.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to
protect our products.
As is the case with other medical device companies, our success is heavily dependent on intellectual property, particularly on obtaining and
enforcing patents. Obtaining and enforcing patents in the medical device industry involves both technological and legal complexity, and therefore is costly, time-consuming and inherently uncertain. In
addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation. Further, several recent judicial rulings have either narrowed the scope of patent
protection available in certain circumstances or weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the
future, this combination of events has created uncertainty with respect to the value of patents, once obtained.
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For
our U.S. patent applications containing a claim not entitled to priority before March 16, 2013, there is a greater level of uncertainty in the patent law. In September 2011,
the Leahy-Smith America Invents Act, or the American Invents Act, or AIA, was signed into law. The AIA includes a number of significant changes to U.S. patent law, including provisions that affect the
way patent applications will be prosecuted, reviewed after issuance, and may also affect patent litigation. The USPTO is currently developing regulations and procedures to govern administration of the
AIA and many of the substantive changes to patent law associated with the AIA. It is not clear what other, if any, impact the AIA will have on the operation of our business. Moreover, the AIA and its
implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a
material adverse effect on our business and financial condition.
An
important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a "first-inventor-to-file" system for deciding which party should be
granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO after that date but
before us could therefore be awarded a patent covering an invention of ours, even if we had made the invention before it was made by the third party. This will require us to be cognizant, going
forward, of the time from invention to filing of a patent application, but early filing of patent applications may not always be possible. Furthermore, our ability to obtain and maintain valid and
enforceable patents depends on whether the differences between our technology and the prior art allow our technology to be patentable over the prior art. Since patent applications in the United States
and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to either (a) file any patent application related to our products or
(b) invent any of the inventions claimed in our patents or patent applications.
Among
some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and provide opportunities for third parties to
challenge any issued patent in the USPTO. This applies to all of our U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared
to the evidentiary standard in United States federal court necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to
hold a claim invalid as unpatentable, even though the same evidence may be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to
use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action.
Depending
on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our
ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.
Because of the expense and uncertainty of litigation, we may not be in a position to enforce our intellectual
property rights against third parties.
We have become aware from time to time that third parties may be infringing on our patents or other intellectual property rights. Because of the
expense and uncertainty of litigation, we have concluded in the past and may conclude in the future that even if a third party is infringing our patents or other intellectual property rights, the
risk-adjusted cost of bringing and enforcing such a claim or action may be too high or not in the best interest of our company or our stockholders. In such cases, we may decide that the more prudent
course of action is to simply monitor the situation or initiate or seek some other non-litigious action or solution.
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Intellectual property rights do not address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain, because intellectual property rights have limitations
and may not adequately protect our business or permit us to maintain our competitive advantage. The following examples are illustrative:
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Others may be able to make products that are similar to our products but that are not covered by the claims of the patents that we own or
license from others.
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Others may independently develop similar or alternative technologies or otherwise circumvent any of our technologies without infringing our
intellectual property rights.
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We might not have been the first to conceive and reduce to practice the inventions covered by the patents or patent applications that we own,
license or will own or license.
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We might not have been the first to file patent applications covering certain subject matter of the patents or patent applications that we own
or for which we have obtained a license, or will own or for which we will obtain a license.
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It is possible that our pending patent applications will not lead to issued patents.
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Issued patents that we own may not provide us with any competitive advantage, or may be held invalid or unenforceable, as a result of legal
challenges by our competitors.
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Our competitors might conduct research and development activities in countries where we do not have patent rights, or in countries where
research and development safe harbor laws exist, and then use the information learned from such activities to develop competitive products for sale in our major commercial markets.
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Ownership of our patents or patent applications may be challenged by third parties.
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The patents of third parties or pending or future applications of third parties, if issued, may have an adverse effect on our business.
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets
and protect other proprietary information.
We consider proprietary trade secrets and/or confidential know-how and unpatented know-how to be important to our business. We may rely on trade
secrets and/or confidential know-how to protect our technology, especially where patent protection is believed by us to be of limited value. However, trade secrets and/or confidential know-how can be
difficult to maintain as confidential.
To
protect this type of information against disclosure or appropriation by competitors, our policy is to require our employees, consultants, contractors and advisors to enter into
confidentiality agreements
with us. However, current or former employees, consultants, contractors and advisers may unintentionally or willfully disclose our confidential information to competitors, and confidentiality
agreements may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Enforcing a claim that a third party obtained illegally and is using trade secrets
and/or confidential know-how is expensive, time consuming and unpredictable. The enforceability of confidentiality agreements may vary from jurisdiction to jurisdiction.
Failure
to obtain or maintain trade secrets and/or confidential know-how trade protection could adversely affect our competitive position. Moreover, our competitors may independently
develop substantially equivalent proprietary information and may even apply for patent protection in respect of the same. If successful in obtaining such patent protection, our competitors could limit
our use of our trade secrets and/or confidential know-how.
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We may need to license certain intellectual property from third parties, and such licenses may not be
available or may not be available on commercially reasonable terms.
A third party may hold intellectual property, including patent rights that are important or necessary to the development or commercialization of
any future products. It may be necessary for us to use the patented or proprietary technology of third parties to commercialize our products, in which case we would be required to obtain a license
from these third parties. Such a license may not be available on commercially reasonable terms or at all, which could materially harm our business.
We may be subject to claims that our employees, consultants or independent contractors have wrongfully used
or disclosed confidential information of third parties.
We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at
other medical device companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise improperly used or disclosed confidential
information of these third parties or our employees' former employers. Further, we may be subject to ownership disputes in the future, arising, for example, from conflicting obligations of consultants
or others who are involved in developing our products. We may also be subject to claims that former employees, consultants, independent contractors, collaborators or other third parties have an
ownership interest in our patents or other intellectual property. Litigation may be necessary to defend against these and other claims challenging our right to and use of confidential and proprietary
information. If we fail in defending any such claims, in addition to paying monetary damages, we may lose our rights therein. Such an outcome could have a material adverse effect on our business. Even
if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.
We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual
property.
We may also be subject to claims that former employees, collaborators or other third parties have an ownership interest in our patents or other
intellectual property. We may be subject to ownership disputes in the future, arising, for example, from conflicting obligations of consultants or others who are involved in developing our products.
Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose
valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we
are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a
competitor will discover them or that our trade secrets will be misappropriated or disclosed.
Because we rely on third parties to assist with research and development and to manufacture our products, we must, at times, share trade secrets
with them. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material
transfer agreements, consulting agreements or other similar agreements with our advisors, employees, third-party contractors and consultants, prior to beginning research or disclosing proprietary
information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, including our trade secrets. Despite the contractual provisions employed
when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently
incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our
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proprietary
position is based, in part, on our know-how and trade secrets, a competitor's discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive position
and may have a material adverse effect on our business.
In
addition, these agreements typically restrict the ability of our advisors, employees, third-party contractors and consultants to publish data potentially relating to our trade
secrets, although our agreements may contain certain limited publication rights. For example, any academic institution that we may collaborate with in the future will usually expect to be granted
rights to publish data arising out of such collaboration, provided that we are notified in advance and given the opportunity to delay publication for a limited time period in order for us to secure
patent protection of intellectual property rights arising from the collaboration, in addition to the opportunity to remove confidential or trade secret information from any such publication. In the
future, we may also conduct joint research and development programs that may require us to share trade secrets under the terms of our research and development or similar agreements. Despite our
efforts to protect our trade secrets, our competitors may discover our trade secrets, either through breach of our agreements with third parties, independent development or publication of information
by any of our third-party collaborators. A competitor's discovery of our trade secrets would impair our competitive position and have an adverse impact on our business.
If our trademarks and trade names are not adequately protected, then we may not be able to build name
recognition in our markets of interest and our business may be adversely affected.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest,
and our business may be adversely affected. We currently have registered and unregistered trademarks in the United States. Our trademarks or trade names may be challenged, infringed, circumvented or
declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential
collaborators or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly
leading to market
confusion. Further, there could be potential trade name or trademark infringement claims brought by owners of other trademarks or trade names that incorporate variations of our trademarks or trade
names. In addition, we have not registered our trademarks internationally, and the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United
States. Over the long term, if we are unable to successfully register our trademarks and trade names and/or establish name recognition based on our trademarks and trade names, then we may not be able
to compete effectively and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names, copyrights or other
intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely impact our financial condition or results of operations.
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DESCRIPTION OF DEBT SECURITIES
This section describes the general terms and provisions of our debt securities, which could be senior debt securities or subordinated debt
securities. A prospectus supplement will describe the specific terms of the debt securities offered through that prospectus supplement and any general terms outlined in this section that will not
apply to those debt securities.
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The
senior debt securities will be issued under an indenture, referred to herein as the "senior indenture," between us and the trustee named in the applicable prospectus supplement. The
subordinated debt securities will be issued under an indenture, referred to herein as the "subordinated indenture," between us and the trustee named in the applicable prospectus supplement.
We
have summarized the anticipated material terms and provisions of the senior and subordinated indentures in this section. We have also filed the form of the indentures summarized in
this section as exhibits to the registration statement of which this prospectus is a part. You should read the applicable indenture for additional information before you buy any debt securities. The
summary that follows includes references to section numbers of the indentures so that you can more easily locate these provisions.
General
The debt securities will be our direct unsecured obligations. Neither of the indentures limits the amount of debt securities that we may issue.
Both indentures permit us to issue debt securities from time to time and debt securities issued under an indenture will be issued as part of a series that has been established by us under such
indenture. (Section 301)
The
senior debt securities will be unsecured and will rank equally with all of our other unsecured unsubordinated debt. The subordinated debt securities will be unsecured and will rank
equally with all of our other subordinated debt securities and, together with such other subordinated debt securities, will be subordinated to all of our existing and future Senior Debt (as defined
below). See "Subordination" below.
The
debt securities are our unsecured senior or subordinated debt securities, as the case may be, but our assets include equity in our subsidiaries. As a result, our ability to make
payments on our debt securities may depend in part on our receipt of dividends, loan payments and other funds from our subsidiaries. In addition, if any of our subsidiaries becomes insolvent, the
direct creditors of that subsidiary will have a prior claim on its assets. Our rights and the rights of our creditors, including your rights as an owner of our debt securities, will be subject to that
prior claim, unless we are also a direct creditor of that subsidiary. This subordination of creditors of a parent company to prior claims of creditors of its subsidiaries is commonly referred to as
structural subordination.
Unless
otherwise specified in the applicable prospectus supplement, we may, without the consent of the holders of a series of debt securities, issue additional debt securities of that
series having the same ranking and the same interest rate, maturity date and other terms (except for the price to public and issue date) as such debt securities. Any such additional debt securities,
together with the initial debt securities, will constitute a single series of debt securities under the applicable indenture. No additional debt securities of a series may be issued if an event of
default under the applicable indenture has occurred and is continuing with respect to that series of debt securities.
A
prospectus supplement relating to a series of debt securities being offered will include specific terms relating to the offering. (Section 301) These terms will include some or
all of the following:
-
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the title and type of the debt securities;
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-
any limit on the total principal amount of the debt securities of that series;
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the price at which the debt securities will be issued;
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the date or dates on which the principal of and premium, if any, on the debt securities will be payable;
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the maturity date or dates of the debt securities or the method by which those dates can be determined;
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if the debt securities will bear interest:
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the interest rate on the debt securities or the method by which the interest rate may be determined;
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the date from which interest will accrue;
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the record and interest payment dates for the debt securities; and
-
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the first interest payment date;
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the place or places where:
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we can make payments on the debt securities;
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the debt securities can be surrendered for registration of transfer or exchange; and
-
-
notices and demands can be given to us relating to the debt securities and under the applicable indenture;
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any optional redemption provisions that would permit us to elect redemption of the debt securities, or the holders of the debt securities to
elect repayment of the debt securities, before their final maturity;
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any sinking fund provisions that would obligate us to redeem the debt securities before their final maturity;
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whether the debt securities will be convertible and, if so, the terms and conditions of any such conversion;
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if the debt securities will be issued in bearer form, the terms and provisions contained in the bearer securities and in the applicable
indenture specifically relating to the bearer securities;
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-
whether all or part of the debt securities will not be issued as permanent global securities and the extent to which the description of the
book-entry procedures described below under "Book-Entry, Delivery and Form" will not apply to such global securitiesa "global security" is a debt security that we issue in
accordance with the applicable indenture to represent all or part of a series of debt securities;
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whether all or part of the debt securities will be issued in whole or in part as temporary global securities and, if so, the depositary for
those temporary global securities and any special provisions dealing with the payment of interest and any terms relating to the ability to exchange interests in a temporary global security for
interests in a permanent global security or for definitive debt securities;
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whether any additional amounts will be payable;
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the denominations of the debt securities, if other than $1,000 and any integral multiple thereof for registered securities, and $5,000 for
bearer securities;
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any portion of the principal amount of debt securities that shall be payable upon acceleration;
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the currency or currencies in which the debt securities will be denominated and payable, if other than U.S. dollars and, if a composite
currency, any special provisions relating thereto;
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any circumstances under which the debt securities may be paid in a currency other than the currency in which the debt securities are
denominated and the manner in which the exchange rate shall be determined;
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whether the provisions described below under the heading "Defeasance" will not apply to the debt securities;
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any events of default that will apply to the debt securities in addition to those contained in the applicable indenture;
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any additions or changes to the covenants contained in the applicable indenture and the ability, if any, of the holders to waive our compliance
with those additional or changed covenants;
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the identity of the trustee, security registrar and paying agent for the debt securities;
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any material tax implications of the debt securities;
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any special provisions relating to the payment of any additional amounts on the debt securities; and
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any other terms of the debt securities.
When
we use the term "holder" in this prospectus with respect to a registered debt security, we mean the person in whose name such debt security is registered in the security register.
(Section 101)
Exchange and Transfer
At the option of the holder, any debt securities of a series can be exchanged for other debt securities of that series so long as the other debt
securities are denominated in authorized denominations and have the same aggregate principal amount and same terms as the debt securities that were surrendered for exchange, subject to limitations
with respect to bearer securities in global form. The debt securities may be presented for registration of transfer, duly endorsed or accompanied by a satisfactory written instrument of transfer, at
the office or agency maintained by us for that purpose in any place of payment that we may designate. However, holders of global securities may transfer and exchange global securities only in the
manner and to the extent set forth under "Book-Entry, Delivery and Form" below. There will be no service charge for any registration of transfer or exchange of the debt securities, but we
may require holders to pay any tax or other governmental charge payable in connection with a transfer or exchange of the debt securities. (Sections 305, 1002) If the applicable prospectus
supplement refers to any office or agency, in addition to the security registrar, initially designated by us where holders can surrender the debt securities for registration of transfer or exchange,
we may at any time rescind the designation of any such office or
agency or approve a change in the location. However, we will be required to maintain an office or agency in each place of payment for that series. (Section 1002)
We
will not be required to:
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issue, register the transfer of or exchange debt securities to be redeemed for a period of 15 calendar days preceding the mailing of the
relevant notice of redemption; or
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register the transfer of or exchange any registered debt security selected for redemption, in whole or in part, except the unredeemed or unpaid
portion of that registered debt security being redeemed in part. (Section 305)
Interest and Principal Payments
Payments.
Holders may present debt securities for payment of principal, premium, if any, and interest, if any, register the
transfer of the debt
securities and exchange the debt securities at the agency maintained by us for such purpose and identified in the applicable prospectus supplement. We refer to the applicable trustee acting in the
capacity of a paying agent for the debt securities as the "paying agent."
Any
money that we pay to the paying agent for the purpose of making payments on the debt securities and that remains unclaimed two years after the payments were due will, at our request,
be
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returned
to us and after that time any holder of a debt security can only look to us for the payments on the debt security. (Section 1003)
Recipients of Payments.
The paying agent will pay interest to the person in whose name the debt security is registered at the
close of business on
the applicable record date. However, upon maturity, redemption or repayment, the paying agent will pay any interest due to the paying agent in trust for the benefit of the person entitled to such
principal, premium or interest of the debt security. The paying agent will make the payment on the date of maturity, redemption or repayment, whether or not that date is an interest payment date. An
"interest payment date" for any debt security means a date on which, under the terms of that debt security, regularly scheduled interest is payable. (Section 307, 1003)
Book-Entry Debt Securities.
The paying agent will make payments of principal, premium, if any, and interest, if any, to the
account of The Depository
Trust Company, referred to herein as "DTC," or other depositary specified in the applicable prospectus supplement, as holder of book-entry debt securities, by wire transfer of immediately available
funds. The "depositary" means the depositary for global securities issued under the applicable indenture and, unless provided otherwise in the applicable prospectus supplement, means DTC. We expect
that the depositary, upon receipt of any payment, will immediately credit its participants' accounts in amounts proportionate to their respective beneficial interests in the book-entry debt securities
as shown on the records of the depositary. We also expect that payments by the depositary's participants to owners of beneficial interests in the book-entry debt securities will be governed by
standing customer instructions and customary practices and will be the responsibility of those participants.
Certificated Debt Securities.
Except as indicated below for payments of interest at maturity, redemption or repayment, the
paying agent will make
payments of interest either:
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by check mailed to the address of the person entitled to payment as shown on the security register; or
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by wire transfer to an account designated by a holder, if the holder has given written notice not later than 10 calendar days prior to the
applicable interest payment date. (Section 307)
Redemption and Repayment of Debt Securities
Optional Redemption by Us.
If applicable, the prospectus supplement will indicate the terms of our option to redeem the debt
securities. We will mail
a notice of redemption to each holder which, in the case of global securities, will be the depositary, as holder of the global securities, by first-class mail, postage prepaid, at least 30 days
and not more than 60 days prior to the date fixed for redemption, or within the redemption notice period designated in the applicable prospectus supplement, to the address of each holder as
that address appears upon the books maintained by the security registrar. (Section 1104)
A
partial redemption of the debt securities may be effected by such method as required by us, the registrar or the trustee, and may provide for the selection for redemption of a portion
of the principal amount of debt securities held by a holder equal to an authorized denomination. (Section 1107) If we redeem less than all of the debt securities and the debt securities are
then held in book-entry form, the redemption will be made in accordance with the depositary's customary procedures. We have been advised that it is DTC's practice to determine by the lot the amount of
each participant in the debt securities to be redeemed.
Unless
we default in the payment of the redemption price, on and after the redemption date interest will cease to accrue on the debt securities called for redemption.
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Repayment at Option of Holder.
If applicable, the prospectus supplement relating to a series of debt securities will indicate
that the holder has the
option to have us repay a debt security of that series on a date or dates specified prior to its stated maturity date. Unless otherwise specified in the applicable prospectus supplement, the repayment
price will be equal to 100% of the principal amount of the debt security, together with accrued interest to the date of repayment.
Each
holder desiring to exercise such holder's option for repayment shall surrender the debt security to be repaid, together with written notice of the exercise, at least 30 days
but not more than 45 days prior to the repayment date, at any of our offices or agencies in a place of payment, setting forth the principal amount of the debt security, the principal amount of
the debt security to be repaid, and in the case of partial repayment, shall specify the denomination or denominations of the debt securities of the same series and the portion of the principal amount
which is not to be repaid. (Section 1303)
Exercise
of the repayment option by the holder of a debt security will be irrevocable. The holder may exercise the repayment option for less than the entire principal amount of the debt
security but, in that
event, the principal amount of the debt security remaining outstanding after repayment must be an authorized denomination. (Section 1303)
If
a debt security is represented by a global security, the depositary or the depositary's nominee will be the holder of the debt security and therefore will be the only entity that can
exercise a right to repayment. In order to ensure that the depositary's nominee will timely exercise a right to repayment of a particular debt security, the beneficial owner of the debt security must
instruct the broker or other direct or indirect participant through which it holds an interest in the debt security to notify the depositary of its desire to exercise a right to repayment. Different
firms have different cut-off times for accepting instructions from their customers and, accordingly, each beneficial owner should consult the broker or other direct or indirect participant through
which it holds an interest in a debt security in order to ascertain the cut-off time by which an instruction must be given in order for timely notice to be delivered to the depositary.
We
may purchase debt securities at any price in the open market or otherwise. Debt securities so purchased by us may, at our discretion, be held or resold or surrendered to the
applicable trustee for cancellation.
Denominations
Unless we state otherwise in the applicable prospectus supplement, the debt securities may be issued in registered form in denominations of
$1,000 each and integral multiples of $1,000 in excess thereof, or in bearer form in denominations of $5,000. (Section 302).
Consolidation, Merger or Sale
Each of the indentures permits a consolidation or merger between us and another entity, subject to certain conditions. They also permit the sale
or transfer by us of all or substantially all of our property and assets. These transactions are permitted if:
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-
the resulting or acquiring entity, if other than us, is organized and existing under the laws of a domestic jurisdiction and assumes all of our
responsibilities and liabilities under the applicable indenture, including the payment of all amounts due on the debt securities and performance of the covenants in the applicable indenture; and
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immediately after giving effect to the transaction, no event of default under the applicable indenture exists. (Section 801)
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If
we consolidate or merge with or into any other entity or sell or lease all or substantially all of our assets according to the terms and conditions of the indentures, the resulting or
acquiring entity will be substituted for us in the indentures with the same effect as if it had been an original party to the indentures. As a result, such successor entity may exercise our rights and
powers under the indentures, in our name and, except in the case of a lease of all or substantially all of our properties, we will be released from all our liabilities and obligations under the
indentures and under the debt securities. (Section 802)
Modification and Waiver
Under each of the indentures, certain of our rights and obligations and certain of the rights of holders of the debt securities may be modified
or amended with the consent of the holders of at least a majority of the aggregate principal amount of the outstanding debt securities of all series of debt securities affected by the modification or
amendment, acting as one class. However, the following modifications and amendments will not be effective against any holder without its consent:
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a change in the stated maturity date of any payment of principal or interest;
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a reduction in payments due on the debt securities;
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a change in the place of payment or currency in which any payment on the debt securities is payable;
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a limitation of a holder's right to sue us for the enforcement of payments due on the debt securities;
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a reduction in the percentage of outstanding debt securities required to consent to a modification or amendment of the applicable indenture or
required to consent to a waiver of compliance with certain provisions of the applicable indenture or certain defaults under the applicable indenture;
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-
a reduction in the requirements contained in the applicable indenture for quorum or voting;
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a limitation of a holder's right, if any, to repayment of debt securities at the holder's option; and
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a modification of any of the foregoing requirements contained in the applicable indenture. (Section 902)
Under
each of the indentures, the holders of at least a majority of the aggregate principal amount of the outstanding debt securities of all series of debt securities affected by a
particular covenant or
condition, acting as one class, may, on behalf of all holders of such series of debt securities, waive compliance by us with any covenant or condition contained in the applicable indenture unless we
specify that such covenant or condition cannot be so waived at the time we establish the series.
In
addition, under each of the indentures, the holders of a majority in aggregate principal amount of the outstanding debt securities of any series of debt securities may, on behalf of
all holders of that series, waive any past default under the applicable indenture, except:
-
-
a default in the payment of the principal of or any premium or interest on any debt securities of that series; or
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a default under any provision of the applicable indenture which itself cannot be modified or amended without the consent of the holders of each
outstanding debt security of that series. (Section 513)
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Events of Default
Unless otherwise specified in the applicable prospectus supplement, an "event of default," when used in the senior indenture or the subordinated
indenture with respect to any series of debt securities issued thereunder, means any of the following:
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failure to pay interest on any debt security of that series for 30 days after the payment is due;
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failure to pay the principal of or any premium on any debt security of that series when due;
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-
failure to deposit any sinking fund payment on debt securities of that series when due;
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-
failure to perform any other covenant in the applicable indenture that applies to debt securities of that series for 90 days after we
have received written notice of the failure to perform in the manner specified in the applicable indenture;
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certain events in bankruptcy, insolvency or reorganization; or
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-
any other event of default that may be specified for the debt securities of that series when that series is created. (Section 501)
If
an event of default for any series of debt securities occurs and continues, the trustee or the holders of at least 25% in aggregate principal amount of the outstanding debt securities
of the series may declare the entire principal of all the debt securities of that series to be due and payable immediately. If such a declaration occurs, the holders of a majority of the aggregate
principal amount of the outstanding debt securities of that series can, subject to conditions, rescind the declaration. (Sections 502, 513)
Each
of the indentures requires us to file an officers' certificate with the applicable trustee each year that states, to the knowledge of the certifying officers, whether or not any
defaults exist under the terms of the applicable indenture. (Section 1005) The applicable trustee may withhold notice to the holders of debt securities of any default, except defaults in the
payment of principal, premium, interest or any sinking fund installment, if it considers the withholding of notice to be in the interest of the holders. For purposes of this paragraph, "default" means
any event which is, or after notice or lapse of time or both would become, an event of default under the applicable indenture with respect to the debt securities of the applicable series.
(Section 602)
Other
than its duties in the case of a default, a trustee is not obligated to exercise any of its rights or powers under the applicable indenture at the request, order or direction of
any holders, unless the holders offer that trustee security or indemnity satisfactory to the trustee. (Sections 601, 603) If satisfactory indemnification is provided, then, subject to other
rights of the trustee, the holders of a majority in principal amount of the outstanding debt securities of any series may, with respect to the debt securities of that series, direct the time, method
and place of:
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conducting any proceeding for any remedy available to the trustee; or
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exercising any trust or power conferred upon the trustee. (Sections 512, 601)
The
holder of a debt security of any series will have the right to begin any proceeding with respect to the applicable indenture or for any remedy only
if:
-
-
the holder has previously given the trustee written notice of a continuing event of default with respect to that series;
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the holders of at least 25% in aggregate principal amount of the outstanding debt securities of that series have made a written request of, and
offered reasonable indemnification to, the trustee to begin such proceeding;
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the trustee has not started such proceeding within 60 days after receiving the request; and
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the trustee has not received directions inconsistent with such request from the holders of a majority in aggregate principal amount of the
outstanding debt securities of that series during those 60 days. (Section 507)
However,
the holder of any debt security will have an absolute right to receive payment of principal of and any premium and interest on the debt security when due and to institute suit
to enforce this payment, subject to limitations with respect to subordinated debt securities.
Defeasance
Defeasance and Discharge.
At the time that we establish a series of debt securities under the applicable indenture, we can
provide that the debt
securities of that series are subject to the defeasance and discharge provisions of that indenture. Unless we specify otherwise in the applicable prospectus supplement, the debt securities offered
thereby will be subject to the defeasance and discharge provisions of the applicable indenture, and we will be discharged from our obligations on the debt securities of that series
if:
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we deposit with the applicable trustee, in trust, sufficient money or, if the debt securities of that series are denominated and payable in
U.S. dollars only, Eligible Instruments, to pay the principal, any interest, any premium and any other sums due on the debt securities of that series, such as sinking fund payments, on the dates the
payments are due under the applicable indenture and the terms of the debt securities;
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we deliver to the applicable trustee an opinion of counsel that states that the holders of the debt securities of that series will not
recognize income, gain or loss for federal income tax purposes as a result of the deposit and will be subject to federal income tax on the same amounts and in the same manner and at the same times as
would have been the case if no deposit, defeasance and discharge had been made; and
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if the debt securities of that series are listed on any domestic or foreign securities exchange, the debt securities will not be delisted as a
result of the deposit. (Section 403)
When
we use the term "Eligible Instruments" in this section, we mean monetary assets, money market instruments and securities that are payable in U.S. dollars only and essentially risk
free as to collection of principal and interest, including:
-
-
monetary assets, money market instruments and securities that are payable in U.S. dollars only and essentially risk free as to collection of
principal and interest; or
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direct obligations of the United States for the payment of which its full faith and credit is pledged , or obligations of a person controlled
or supervised by and acting as an agency or instrumentality of the United States if the timely payment of the obligation is unconditionally guaranteed as a full faith and credit obligation by the
United States. (Section 101)
In
the event that we deposit money and/or Eligible Instruments in trust and discharge our obligations under a series of debt securities as described above,
then:
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the applicable indenture, including, in the case of subordinated debt securities, the subordination provisions contained in the subordinated
indenture, will no longer apply to the debt securities of that series; however, certain obligations to compensate, reimburse and indemnify the trustee, to register the transfer and exchange of debt
securities, to replace lost, stolen or mutilated debt securities, to maintain paying agencies and the trust funds and to pay additional amounts, if any, required as a result of U.S. withholding taxes
imposed on payments to non-U.S. persons will continue to apply; and
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holders of debt securities of that series can only look to the trust fund for payment of principal, any premium and any interest on the debt
securities of that series. (Section 403)
Defeasance of Certain Covenants and Certain Events of Default.
At the time that we establish a series of debt securities under
the applicable
indenture, we can provide that the debt securities of that series are subject to the covenant defeasance provisions of that indenture. Unless we specify otherwise in the applicable prospectus
supplement, the debt securities offered thereby will be subject to the covenant defeasance provisions of the applicable indenture, and if we make the deposit and deliver the opinion of counsel
described above in this section under the heading "Defeasance and Discharge," we will not have to comply with any covenant we designate when we establish the series of debt securities. In
the event of a covenant defeasance, our obligations under the applicable indenture and the debt securities, other than with respect to the covenants specifically designated upon establishing the debt
securities, will remain in effect. (Section 1501)
If
we exercise our option not to comply with certain covenants as described above and the debt securities of the series become immediately due and payable because an event of default has
occurred, other than as a result of an event of default specifically relating to any of such covenants, the amount of money and/or Eligible Instruments on deposit with the applicable trustee will be
sufficient to pay the principal, any interest, any premium and any other sums, due on the debt securities of that series, such as sinking fund payments, on the date the payments are due under the
applicable indenture and the terms of the debt securities, but may not be sufficient to pay amounts due at the time of acceleration. However, we would remain liable for the balance of the payments.
(Section 1501)
Subordination
The subordinated debt securities will be subordinate to all of our existing and future Senior Debt, as defined below. Our "Senior Debt" includes
the senior debt securities and means the principal of, premium, if any, and interest on, rent under, and any other amounts payable on or in or in respect of any of our indebtedness (including, without
limitation, any obligations in respect of such indebtedness and any interest accruing after the filing of a petition by or against us under any bankruptcy law, whether or not allowed as a claim after
such filing in any proceeding under such bankruptcy law), whether outstanding on the date of the senior indenture or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by us
(including all deferrals, renewals, extensions, refinancings or refundings of, or amendments, modifications or supplements to the foregoing). However, Senior Debt does not
include:
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any liability for federal, state, local or other taxes owed or owing by us;
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our indebtedness to any of our subsidiaries;
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our trade payables and accrued expenses (including, without limitation, accrued compensation) for goods, services or materials purchased or
provided in the ordinary course of business; and
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any particular indebtedness in which the instrument creating or evidencing the same expressly provides that such indebtedness shall not be
senior in right of payment to, or is pari passu with, or is subordinated or junior to, the subordinated debt securities. (Section 101 of the subordinated indenture)
If
certain events in bankruptcy, insolvency or reorganization occur, we will first pay all Senior Debt, including any interest accrued after the events occur, in full before we make any
payment or distribution, whether in cash, securities or other property, on account of the principal of or interest on
the subordinated debt securities. In such an event, we will pay or deliver directly to the holders of Senior Debt any payment or distribution otherwise payable or deliverable to holders of the
subordinated debt securities. We will make the payments to the holders of Senior Debt according to priorities existing among those holders until we have paid all Senior Debt, including accrued
interest, in
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full.
Notwithstanding the subordination provisions discussed in this paragraph, we may make payments or distributions on the subordinated debt securities so long
as:
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the payments or distributions consist of securities issued by us or another company in connection with a plan of dissolution, reorganization,
readjustment or winding up; and
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payment on those securities is subordinate to outstanding Senior Debt and any securities issued with respect to Senior Debt under such plan of
dissolution, reorganization, readjustment or winding up at least to the same extent provided in the subordination provisions of the subordinated debt securities. (Section 1601 of the
subordinated indenture)
If
such events in bankruptcy, insolvency or reorganization occur, after we have paid in full all amounts owed on Senior Debt:
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the holders of subordinated debt securities,
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together with the holders of any of our other obligations ranking equal with those subordinated debt securities,
will
be entitled to receive from our remaining assets any principal, premium or interest due at that time on the subordinated debt securities and such other obligations before we make
any payment or other distribution on account of any of our capital stock or obligations ranking junior to those subordinated debt securities.
If
we violate the subordinated indenture by making a payment or distribution to holders of the subordinated debt securities before we have paid all of the Senior Debt in full, then such
holders of the subordinated debt securities will be deemed to have received the payments or distributions in trust for the benefit of, and will have to pay or transfer the payments or distributions
to, the holders of the Senior Debt outstanding at the time. The payment or transfer to the holders of the Senior Debt will be made according to the priorities existing among those holders.
Notwithstanding the subordination provisions discussed in this paragraph, holders of subordinated debt securities will not be required to pay, or transfer payments or distributions to, holders of
Senior Debt so long as:
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the payments or distributions consist of securities issued by us or another company in connection with a plan of reorganization or
readjustment; and
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payment on those securities is subordinated to outstanding Senior Debt and any securities issued with respect to Senior Debt under such plan of
reorganization or readjustment at least to the same extent provided in the subordination provisions of those subordinated debt securities. (Section 1601 of the subordinated indenture)
Because
of the subordination, if we become insolvent, holders of Senior Debt may receive more, ratably, and holders of the subordinated debt securities having a claim pursuant to those
securities may receive less, ratably, than our other creditors.
We
may modify or amend the subordinated indenture as provided under "Modification and Waiver" above. However, the modification or amendment may not, without the consent of
the holders of all Senior Debt outstanding, modify any of the provisions of the subordinated indenture relating to the subordination of the subordinated debt securities in a manner that would
adversely affect the holders of Senior Debt. (Section 902 of the subordinated indenture)
Payment of Additional Amounts
Unless we specify otherwise in the applicable prospectus supplement, we will not pay any additional amounts on the debt securities offered
thereby to compensate any beneficial owner for any United States tax withheld from payments on such debt securities.
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Book-Entry, Delivery and Form
We have obtained the information in this section concerning DTC, Clearstream Banking S.A., or "Clearstream," and Euroclear
Bank S.A./N.V., as operator of the Euroclear System, or "Euroclear," and the book-entry system and procedures from sources that we believe to be reliable, but we take no responsibility for the
accuracy of this information. This information could change at any time. In addition, we have no control over DTC, Clearstream or Euroclear, or any of their participants, and therefore we take no
responsibility for their activities.
Unless
otherwise specified in the applicable prospectus supplement, the debt securities will be issued as fully registered global securities that will be deposited with, or on behalf of,
DTC and registered, at the request of DTC, in the name of Cede & Co. Beneficial interests in the global securities will be represented through book-entry accounts of financial
institutions acting on behalf of beneficial owners as direct or indirect participants in DTC. The direct and indirect participants will remain responsible for keeping account of their holdings on
behalf of their customers. Investors may elect to hold their interests in the global securities through either DTC (in the United States) or (in Europe) through Clearstream or through Euroclear.
Investors may hold their interests in the global securities directly if they are participants of such systems, or indirectly through organizations that are participants in these systems. Interests
held through Clearstream and Euroclear will be recorded on DTC's books as being held by the U.S. Depositary for each of Clearstream and Euroclear (the "U.S. Depositaries"), which U.S. Depositaries
will, in turn, hold interests on behalf of their participants' customers' securities accounts. Unless otherwise specified in the applicable prospectus supplement, beneficial interests in the global
securities will be held in denominations of $1,000 and multiples of $1,000 in excess thereof. Except as set forth below, the global securities may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee.
Debt
securities represented by a global security can be exchanged for definitive securities in registered form only if:
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DTC notifies us that it is unwilling or unable to continue as depositary for that global security and we do not appoint a qualified successor
depositary within 90 days after receiving that notice;
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at any time DTC ceases to be a clearing agency registered under the Exchange Act and we do not appoint a successor depositary within
90 days after becoming aware that DTC has ceased to be registered as a clearing agency;
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we in our sole discretion determine that such global security will be exchangeable for definitive securities in registered form or elect to
terminate the book-entry system through DTC and notify the applicable trustee of our decision; or
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an event of default with respect to the debt securities represented by that global security has occurred and is continuing.
A
global security that can be exchanged as described in the preceding sentence will be exchanged for definitive securities issued in authorized denominations in registered form for the
same aggregate amount. The definitive securities will be registered in the names of the owners of the beneficial interests in the global security as directed by DTC.
We
will make principal and interest payments on all debt securities represented by a global security to the paying agent which in turn will make payment to DTC or its nominee, as the
case may be, as the sole registered owner and the sole holder of the debt securities represented by a global security for all purposes under the applicable indenture. Accordingly, we, the applicable
trustee and any paying agent will have no responsibility or liability for:
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any aspect of DTC's records relating to, or payments made on account of, beneficial ownership interests in a debt security represented by a
global security;
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any other aspect of the relationship between DTC and its participants or the relationship between those participants and the owners of
beneficial interests in a global security held through those participants; or
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the maintenance, supervision or review of any of DTC's records relating to those beneficial ownership interests.
We
understand that DTC's current practice is to credit direct participants' accounts on each payment date with payments in amounts proportionate to their respective beneficial interests
in the principal amount of such global security as shown on DTC's records, upon DTC's receipt of funds and corresponding detail information. The underwriters or agents for the debt securities
represented by a global security will initially designate the accounts to be credited. Payments by participants to owners of beneficial interests in a global security will be governed by standing
instructions and customary practices, as is the case with securities held for customer accounts registered in "street name," and will be the sole responsibility of those participants, and not of DTC
or its nominee, the trustee, any agent of ours, or us, subject to any statutory or regulatory requirements. Book-entry notes may be more difficult to pledge because of the lack of a physical note.
DTC
So long as DTC or its nominee is the registered owner of a global security, DTC or its nominee, as the case may be, will be considered the sole
owner and holder of the debt securities represented by that global security for all purposes of the debt securities. Owners of beneficial interests in the debt securities will not be entitled to have
debt securities registered in their names, will not receive or be entitled to receive physical delivery of the debt securities in definitive form and will not be considered owners or holders of debt
securities under the applicable indenture. Accordingly, each
person owning a beneficial interest in a global security must rely on the procedures of DTC and, if that person is not a DTC participant, on the procedures of the participant through which that person
owns its interest, to exercise any rights of a holder of debt securities. The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of the securities in
certificated form. These laws may impair the ability to transfer beneficial interests in a global security. Beneficial owners may experience delays in receiving distributions on their debt securities
since distributions will initially be made to DTC and must then be transferred through the chain of intermediaries to the beneficial owner's account.
We
understand that, under existing industry practices, if we request holders to take any action, or if an owner of a beneficial interest in a global security desires to take any action
which a holder is entitled to take under the applicable indenture, then DTC would authorize the participants holding the relevant beneficial interests to take that action and those participants would
authorize the beneficial owners owning through such participants to take that action or would otherwise act upon the instructions of beneficial owners owning through them.
Beneficial
interests in a global security will be shown on, and transfers of those ownership interests will be effected only through, records maintained by DTC and its participants for
that global security. The conveyance of notices and other communications by DTC to its participants and by its participants to owners of beneficial interests in the debt securities will be governed by
arrangements among them, subject to any statutory or regulatory requirements in effect.
We
understand that DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of
the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered under the Exchange Act. DTC is a wholly owned
subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company
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for
DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries.
DTC
holds the securities of its participants and facilitates the clearance and settlement of securities transactions among its participants in such securities through electronic
book-entry changes in accounts of its participants. The electronic book-entry system eliminates the need for physical certificates. DTC's participants include securities brokers and dealers, including
underwriters, banks, trust companies, clearing corporations and certain other organizations, some of which, and/or their representatives, own DTCC. Banks, brokers, dealers, trust companies and others
that clear through or maintain a custodial
relationship with a participant, either directly or indirectly, also have access to DTC's book-entry system. The rules applicable to DTC and its participants are on file with the SEC.
The
above information with respect to DTC has been provided for informational purposes only and is not intended to serve as a representation, warranty or contract modification of any
kind.
Clearstream
We understand that Clearstream was incorporated under the laws of Luxembourg as an international clearing system. Clearstream holds securities
for its participating organizations, or "Clearstream Participants," and facilitates the clearance and settlement of securities transactions between Clearstream Participants through electronic
book-entry changes in accounts of Clearstream Participants, thereby eliminating the need for physical movement of certificates. Clearstream provides to Clearstream Participants, among other things,
services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Clearstream interfaces with domestic securities markets in
several countries. As a professional depositary, Clearstream is subject to regulation by the Luxembourg Commission for the Supervision of the Financial Sector (
Commission de
Surveillance du Secteur Financier
). Clearstream Participants are recognized financial institutions around the world, including underwriters, securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations. Clearstream's U.S. Participants are limited to securities brokers and dealers and banks. Indirect access to Clearstream
is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Clearstream Participant either directly or indirectly.
Distributions
with respect to debt securities held beneficially through Clearstream will be credited to cash accounts of Clearstream Participants in accordance with its rules and
procedures, to the extent received by the U.S. Depositary for Clearstream.
Euroclear
We understand that Euroclear was created in 1968 to hold securities for participants of Euroclear, or "Euroclear Participants," and to clear and
settle transactions between Euroclear Participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of certificates and any risk
from lack of simultaneous transfers of securities and cash. Euroclear performs various other services, including securities lending and borrowing and interacts with domestic markets in several
countries. Euroclear is operated by Euroclear Bank S.A./N.V., or the "Euroclear Operator," under contract with Euroclear plc, a U.K. corporation. All operations are conducted by the
Euroclear Operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator, not Euroclear plc. Euroclear plc establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks, including central banks, securities brokers and dealers and other professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial relationship with a Euroclear Participant, either directly or indirectly. Euroclear is an indirect participant in DTC.
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The
Euroclear Operator is a Belgian bank. As such it is regulated by the Belgian Banking and Finance Commission and the National Bank of Belgium.
Securities
clearance accounts and cash accounts with the Euroclear Operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of
the Euroclear System, and applicable Belgian law, which we will refer to herein as the "Terms and Conditions." The Terms and Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear Operator acts under the Terms and Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions
with respect to debt securities held beneficially through Euroclear will be credited to the cash accounts of Euroclear Participants in accordance with the Terms and
Conditions, to the extent received by the Euroclear Operator.
We
further understand that investors that acquire, hold and transfer interests in the debt securities by book-entry through accounts with the Euroclear Operator or any other securities
intermediary are subject to the laws and contractual provisions governing their relationship with their intermediary, as well as the laws and contractual provisions governing the relationship between
such an intermediary and each other intermediary, if any, standing between themselves and the global securities.
Global Clearance and Settlement Procedures
Unless otherwise specified in the applicable prospectus supplement, initial settlement for the debt securities will be made in immediately
available funds. Secondary market trading between DTC participants will occur in the ordinary way in accordance with DTC rules and will be settled in immediately available funds using DTC's Same-Day
Funds Settlement System. Secondary market trading between Clearstream Participants and/or Euroclear Participants will occur in the ordinary way in accordance with the applicable rules and operating
procedures of Clearstream and Euroclear and will be settled using the procedures applicable to conventional eurobonds in immediately available funds.
Cross-market
transfers between persons holding directly or indirectly through DTC, on the one hand, and directly or indirectly through Clearstream Participants or Euroclear Participants,
on the other, will be effected through DTC in accordance with DTC rules on behalf of the relevant European international clearing system by its U.S. Depositary; however, such cross-market transactions
will require delivery of instructions to the relevant European international clearing system by the counterparty in such system in accordance with its rules and procedures and within its established
deadlines (European time). The relevant European international clearing system will, if the transaction meets its settlement requirements, deliver instructions to its U.S. Depositary to take action to
effect final settlement on its behalf by delivering or receiving debt securities through DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement
applicable to DTC. Clearstream Participants and Euroclear Participants may not deliver instructions directly to their respective U.S. Depositaries.
Because
of time-zone differences, credits of debt securities received through Clearstream or Euroclear as a result of a transaction with a DTC participant will be made during subsequent
securities settlement processing and dated the business day following the DTC settlement date. Such credits or any transactions in such debt securities settled during such processing will be reported
to the relevant Euroclear Participants or Clearstream Participants on such business day. Cash received in Clearstream or Euroclear as a result of sales of debt securities by or through a Clearstream
Participant or a Euroclear Participant to a DTC participant will be received with value on the DTC settlement date but
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will
be available in the relevant Clearstream or Euroclear cash account only as of the business day following settlement in DTC.
If
the debt securities are cleared only through Euroclear and Clearstream (and not DTC), you will be able to make and receive through Euroclear and Clearstream payments, deliveries,
transfers, exchanges, notices, and other transactions involving any securities held through those systems only on days when those systems are open for business. Those systems may not be open for
business on days when banks, brokers, and other institutions are open for business in the United States. In addition, because of time-zone differences, U.S. investors who hold their interests in the
securities through these systems and wish to transfer their interests, or to receive or make a payment or delivery or exercise any other right with respect to their interests, on a particular day may
find that the transaction will not be effected until the next business day in Luxembourg or Brussels, as applicable. Thus, U.S. investors who wish to exercise rights that expire on a particular day
may need to act before the expiration date.
Although
DTC, Clearstream and Euroclear have agreed to the foregoing procedures in order to facilitate transfers of debt securities among participants of DTC, Clearstream and Euroclear,
they are under no obligation to perform or continue to perform such procedures and such procedures may be modified or discontinued at any time. Neither we nor any paying agent will have any
responsibility for the performance by DTC, Euroclear or Clearstream or their respective direct or indirect participants of their obligations under the rules and procedures governing their operations.
Conversion and Exchange
If any offered debt securities are convertible at the option of the holders or exchangeable at our option, the prospectus supplement relating to
those debt securities will include the terms and conditions governing any conversions and exchanges.
Governing Law
The indentures are, and the debt securities will be, governed by and will be construed in accordance with New York law.
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