| CANDELA CORP /DE/ Item 1A Risk Factors |
| The following important factors, among others, could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-K or presented elsewhere by management from time to time |
| Unfavorable results in our intellectual property litigation with Palomar Medical Technologies may result in significant decline to our stock price |
| On August 9, 2006, one of our competitors, Palomar Medical Technologies (“Palomar”), alleged that the manufacture, use and sale of our products for laser hair removal infringe a certain United States patent |
| Public announcements concerning this litigation that are unfavorable to us may result in significant declines in our stock price |
| An adverse ruling or judgment in this matter could cause our stock price to decline significantly |
| Litigation with Palomar will be expensive and protracted, and our intellectual property position may be weakened as a result of an adverse ruling or judgment |
| Whether or not we are successful in the pending lawsuits, litigation consumes substantial amounts of our financial resources and diverts management’s attention away from our core business |
| See Item 3—“Legal Proceedings |
| ” Because we derive more than half of our revenue from international sales, including approximately 20prca of our revenue from Japan and the Asia-Pacific marketplace in fiscal 2006, we are susceptible to currency fluctuations, negative economic changes taking place in Japan and the Asia-Pacific marketplace, and other risks associated with conducting business overseas |
| We sell more than half of our products and services outside the United States |
| International sales, consisting of sales from our subsidiaries in Germany, Spain, Italy, France and Japan, and sales shipped directly to international locations from the United States, accounted for 56prca of our revenue for fiscal year 2006, and we expect that they will continue to be significant |
| As a result, a major part of our revenues and operating results could be adversely affected by risks associated with international sales |
| In particular, significant fluctuations in the exchange rates between the United States dollar and foreign currencies could cause us to lower our prices and thus reduce our profitability, or could cause prospective customers to push 18 ______________________________________________________________________ out orders to later dates because of the increased relative cost of our products in the aftermath of a currency devaluation or currency fluctuation |
| Other risks associated with international sales that we currently face or have faced in the past include: · longer payment cycles common in foreign markets · failure to obtain or significant delays in obtaining necessary import or foreign regulatory approvals for our products · difficulties in staffing and managing our foreign operations The failure to obtain Alexandrite rods for the GentleLASE® system from our sole supplier would impair our ability to manufacture and sell the GentleLASE® system |
| We use Alexandrite rods to manufacture the GentleLASE® system, which accounts for a significant portion of our total revenues |
| We depend exclusively on our contract manufacturer to supply these rods, for which no alternative supplier meeting our quality standards exists |
| We cannot be certain that our contract manufacturer will be able to meet our future requirements at current prices or at all |
| To date, we have been able to obtain adequate supplies of Alexandrite rods in a timely manner, but any extended interruption in our supplies could hurt our results |
| Disappointing quarterly revenue or operating results could cause the price of our common stock to fall |
| Our quarterly revenue and operating results are difficult to predict and may swing sharply from quarter to quarter |
| Historically, our first fiscal quarter has typically had the least amount of revenue in any quarter of our fiscal year |
| The results of the first quarter are directly impacted by the seasonality of the purchasing cycle |
| If our quarterly revenue or operating results fall below the expectations of investors or public market analysts, the price of our common stock could fall substantially |
| Our quarterly revenue is difficult to forecast for many reasons, some of which are outside of our control, including the following: Market supply and demand · potential increases in the level and intensity of price competition between our competitors and us · potential decrease in demand for our products · possible delays in market acceptance of our new products Customer behavior · changes in or extensions of our customers’ budgeting and purchasing cycles · changes in the timing of product sales in anticipation of new product introductions or enhancements by us or our competitors Company operations · absence of significant product backlogs · our effectiveness in our manufacturing process · unsatisfactory performance of our distribution channels, service providers, or customer support organizations · timing of any acquisitions and related costs 19 ______________________________________________________________________ Our failure to respond to rapid changes in technology and intense competition in the laser industry could make our lasers obsolete |
| The aesthetic and cosmetic laser equipment industry is subject to rapid and substantial technological development and product innovations |
| To be successful, we must be responsive to new developments in laser technology and new applications of existing technology |
| Our financial condition and operating results could be hurt if our products fail to compete favorably in response to such technological developments, or we are not agile in responding to competitors’ new product introductions or product price reductions |
| In addition, we compete against numerous companies offering products similar to ours, some of which have greater financial, marketing, and technical resources than we do |
| We cannot be sure that we will be able to compete successfully with these companies and our failure to do so could hurt our business, financial condition, and results of operations |
| Like other companies in our industry, we are subject to a regulatory review process and our failure to receive necessary government clearances or approvals could affect our ability to sell our products and remain competitive |
| The types of medical devices that we seek to market in the United States generally must receive either “510(k) clearance” or “PMA approval” in advance from the United States Food and Drug Administration (FDA) pursuant to the Federal Food, Drug, and Cosmetic Act |
| The FDA’s 510(k) clearance process usually takes from four to twelve months, but it can last longer |
| The process of obtaining PMA approval is much more costly and uncertain and generally takes from one to three years or even longer |
| To date, the FDA has deemed our products eligible for the 510(k) clearance process |
| We believe that most of our products in development will receive similar treatment |
| However, we cannot be sure that the FDA will not impose the more burdensome PMA approval process upon one or more of our future products, nor can we be sure that 510(k) clearance or PMA approval will ever be obtained for any product we propose to market |
| Many foreign countries in which we market or may market our products have regulatory bodies and restrictions similar to those of the FDA We cannot be certain that we will be able to obtain (or continue to obtain) any such government approvals or successfully comply with any such foreign regulations in a timely and cost-effective manner, if at all, and our failure to do so could adversely affect our ability to sell our products |
| We have modified some of our products without FDA clearance |
| The FDA could retroactively decide the modifications were improper and require us to cease marketing and/or recall the modified products |
| Any modification to one of our 510(k) cleared devices that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance |
| The FDA requires every manufacturer to make this determination in the first instance, but the FDA can review any such decision |
| We have modified some of our marketed devices, but we believe that new 510(k) clearances are not required |
| We cannot be certain that the FDA would agree with any of our decisions not to seek 510(k) clearance |
| If the FDA requires us to seek 510(k) clearance for any modification, we also may be required to cease marketing and/or recall the modified device until we obtain a new 510(k) clearance |
| Achieving complete compliance with FDA regulations is difficult, and if we fail to comply, we could be subject to FDA enforcement action |
| We are subject to inspection and market surveillance by the FDA to determine compliance with regulatory requirements |
| The FDA’s regulatory scheme is complex, especially the Quality System Regulation (“QSR”), which requires manufacturers to follow elaborate design, testing, control, documentation, and other quality assurance procedures |
| This complexity makes complete compliance difficult to achieve |
| Also, the determination as to whether a QSR violation has occurred is often subjective |
| If the FDA finds that we have failed to comply with the QSR or other applicable requirements, the agency 20 ______________________________________________________________________ can institute a wide variety of enforcement actions, including a public warning letter or other stronger remedies, such as: · fines, injunctions, and civil penalties against us · recall or seizure of our products · operating restrictions, partial suspension, or total shutdown of our production · refusing our requests for 510(k) clearance or PMA approval of new products · withdrawing product approvals already granted · criminal prosecution Claims by others that our products infringe their patents or other intellectual property rights could prevent us from manufacturing and selling some of our products or require us to incur substantial costs from litigation or development of non-infringing technology |
| Our industry has been characterized by frequent litigation regarding patent and other intellectual property rights |
| Patent applications are maintained in secrecy in the United States until such patents are issued and are maintained in secrecy for a period of time outside the United States |
| Accordingly, we can conduct only limited searches to determine whether our technology infringes any patents or patent applications of others |
| Any claims of patent infringement would be time-consuming and could: · result in costly litigation · divert our technical and management personnel · cause product shipment delays · require us to develop non-infringing technology · require us to enter into royalty or licensing agreements Although patent and intellectual property disputes in the laser industry have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and often require the payment of ongoing royalties, which could hurt our gross margins |
| In addition, we cannot be sure that the necessary licenses would be available to us on satisfactory terms, or that we could redesign our products or processes to avoid infringement, if necessary |
| Accordingly, an adverse determination in a judicial or administrative proceeding, or the failure to obtain necessary licenses, could prevent us from manufacturing and selling some of our products, which could hurt our business, results of operations, and financial condition |
| On the other hand, we may have to start costly and time consuming litigation in order to enforce our patents, to protect trade secrets, and know-how owned by us or to determine the enforceability, scope, and validity of the proprietary rights of others |
| We could incur substantial costs as a result of product liability claims |
| There are various risks of physical injury to the patient when using our lasers for aesthetic and cosmetic treatments |
| Injuries often result in product liability or other claims being brought against the practitioner utilizing the device and us |
| The costs and management time we would have to spend in defending or settling any such claims, or the payment of any award in connection with such claims, could hurt our business, results of operations, and financial condition |
| Although we maintain product liability insurance, we cannot be certain that our policy will provide sufficient coverage for any claim or claims that may arise, or that we will be able to maintain such insurance coverage on favorable economic terms |
| 21 ______________________________________________________________________ We may be unable to attract and retain management and other personnel we need to succeed |
| The loss of any of our senior management or other key research, development, sales, and marketing personnel, particularly if lost to competitors, could hurt our future operating results |
| Our future success will depend in large part upon our ability to attract, retain, and motivate highly skilled employees |
| We cannot be certain that we will attract, retain, and motivate sufficient numbers of such personnel |
| Our failure to manage future acquisitions and joint ventures effectively may divert management attention from our core business and cause us to incur additional debt, liabilities or costs |
| We may acquire businesses, products, and technologies that complement or expand our business |
| We may also consider joint ventures and other collaborative projects |
| We may not be able to: · identify appropriate acquisition or joint venture candidates · successfully negotiate, finance, or integrate any businesses, products, or technologies that we acquire · successfully manage any joint ventures or collaborations Furthermore, the integration of any acquisition or joint venture may divert management time and resources |
| If we fail to manage these acquisitions or joint ventures effectively, we may incur debts or other liabilities or costs that could harm our operating results or financial condition |
| While we from time to time evaluate potential acquisitions of businesses, products, and technologies, consider joint ventures and other collaborative projects, and anticipate continuing to make these evaluations, we have no present understandings, commitments, or agreements with respect to any acquisitions or joint ventures |
| We face risks associated with product warranties |
| We could incur substantial costs as a result of product failures for which we are responsible under warranty obligations |
| The expense and potential unavailability of insurance coverage for our customers could adversely affect our ability to sell our products and negatively impact our financial condition |
| Some of our customers and prospective customers have had difficulty in procuring or maintaining liability insurance to cover their operation and use of our products |
| Medical malpractice carriers are withdrawing coverage in certain states or substantially increasing premiums |
| If this trend continues or worsens, our customers may discontinue using our products and, industry-wide, potential customers may opt against purchasing laser and other light-based products due to the cost of or inability to procure insurance coverage |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include a report by our management on our internal control over financial reporting |
| Such report must contain an assessment by management of the effectiveness of our internal control over financial reporting as of the end of our fiscal year and a statement as to whether or not such internal control is effective |
| Such report must also contain a statement that our independent registered public accounting firm has issued an attestation report on management’s assessment of such internal control |
| Effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud |
| If we cannot provide reasonable assurance with respect to our financial reports and effectively prevent fraud, our brand and operating results could be harmed |
| Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud |
| 22 ______________________________________________________________________ Therefore, even effective internal controls cannot provide absolute assurance with respect to the preparation and fair presentation of financial statements |
| In addition, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate |
| If we fail to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed, and we could fail to meet our reporting obligations, which could have a material adverse effect on our business |
| Our efforts to comply with Section 404 have resulted in, and are likely to continue to result in, significant costs, the commitment of time and operational resources and the diversion of management’s attention |