| SYNERGETICS USA INC Item 1A Risk Factors In addition to the other information contained in this Form 10-K, we have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operation |
| You should carefully consider the risks described below before making an investment decision |
| A significant part of our sales of our neurosurgical products comes from a single customer, which makes us vulnerable to the loss of that customer |
| Codman currently accounts for most of our total revenue from sales of our bipolar electrosurgical generators |
| During the fiscal year ended July 2006, revenue from sales of our bipolar electrosurgical generators represented approximately 17prca of the Company’s total revenue |
| Under our existing agreement with Codman, Codman distributes the third generation generator trademarked as the CMCIII on an exclusive basis |
| Our existing agreement with Codman will expire by its own terms on December 31, 2008, unless extended by mutual agreement of the parties |
| _________________________________________________________________ If any of our single source suppliers were to cease providing components, we may not be able to produce our products |
| We rely on a single source for the supply of the ultrasonic aspirator sold in the United States and internationally under Synergetics’ Omni^^® brand |
| Net sales of Synergetics’ Omni^® ultrasonic aspirators for each of our fiscal years ended July 31, 2006 and 2005 amounted to greater than 10prca of total net sales for each period |
| Also, the manufacture of Synergetics’ Photon^TM xenon light source depends on single sources for several key components |
| In addition, we subcontract for the manufacture of the disposable cord and tubing sets for the Malis^® electrosurgical generator with a single manufacturer |
| If any of these suppliers become unwilling or unable to provide products or components in the required volumes and quality levels or in a timely manner, we would be required to locate and contract with substitute suppliers |
| Although we believe that alternative sources for many of these components and raw materials are available, we could have difficulty identifying a substitute supplier in a timely manner or on commercially reasonable terms and may have to pay higher prices to obtain the necessary materials |
| Any supply interruption could harm our ability to manufacture our products until a new source of supply is identified and qualified |
| We have also become aware that the manufacturers of several parts used in our third generation bipolar electrosurgical generator models will no longer be manufacturing these parts in the near future |
| While we have arranged to purchase and maintain a significant inventory of these parts, our efforts may not be sufficient depending on our unit sales |
| We must develop alternative sources for these parts as well as alternative parts |
| Alternative parts, if available, will require engineering redesign and may require regulatory approval before the manufacture of additional new units |
| The medical device industry is highly competitive, and we may be unable to compete effectively with other companies |
| The medical technology industry is characterized by intense competition |
| We compete with established medical technology companies and early stage companies that have alternative solutions for the markets we serve or intend to serve |
| Many of our competitors have access to greater financial, technical, research and development, marketing, manufacturing, sales, distribution services and other resources than we do |
| Furthermore, our competitors may be more effective at implementing their technologies to develop commercial products |
| Certain of the medical indications that can be treated by our devices can also be treated by other medical devices or by medical practices that do not include a device |
| The medical community widely accepts many alternative treatments and certain of these other treatments have a long history of use |
| Our competitive position depends on our ability to achieve market acceptance for our products, develop new products, implement production and marketing plans, secure regulatory approval for products under development and protect our intellectual property |
| We may need to develop new applications for our products to remain competitive |
| Technological advances by one or more of our current or future competitors could render our present or future products obsolete or uneconomical |
| Our future success depends upon our ability to compete effectively against current technology as well as respond effectively to technological advances and upon our ability to successfully implement our marketing strategies and execute our research and development plan |
| Our future results are dependent, in part, upon the successful introduction of our fourth generation multifunctional bipolar electrosurgical generator, marketed as the Malis^^® Advantage^TM Our future success, in part, is dependent upon the successful launch of our new multifunctional bipolar electrosurgical generator and new proprietary single-use, hand-switching bipolar instruments |
| We announced these products on October 8, 2005 at the 56th Annual Congress of Neurosurgeons Meeting |
| Their success in the marketplace is dependent upon several factors including: _________________________________________________________________ • their acceptance by surgeons; • the recognition of hospitals and surgical centers that the new generator and instruments offer sufficient advantages and benefits to warrant the cost of purchasing the Malis^® Advantage^TM; • our ability to create an effective sales network; • our ability to sustain our average selling price through this network; and • the reaction of our competitors in this market |
| Our products may not be accepted in the market |
| We cannot be certain that our current products or any other products we may develop or market will achieve or maintain market acceptance |
| We cannot be certain that our devices and the procedures they perform will be able to replace those established treatments or that either physicians or the medical community in general will accept and utilize our devices or any other medical products that we may develop |
| For example, we cannot be certain that the medical community will accept our new multifunctional electrosurgical generator and proprietary hand-switching bipolar electrosurgical instruments over traditional monopolar and existing bipolar electrosurgical generators and instruments |
| Market acceptance of our products depends on many factors, including our ability to: • convince third-party distributors and customers that our technology is an attractive alternative to other technologies; • manufacture products in sufficient quantities and at acceptable costs; and • supply and service sufficient quantities of our products directly or through distribution alliances |
| If we do not introduce new commercially successful products in a timely manner, our products may become obsolete over time, thereby decreasing our revenue and profitability |
| Demand for our products may change because of evolving customer needs, the introduction of new products and technologies, the discovery of cures for certain medical problems, evolving surgical practices and evolving industry standards |
| Without the timely introduction of new commercially successful products and enhancements, our products may become obsolete over time, causing our sales and operating results to suffer |
| The success of our new products will depend on several factors, including our ability to: • properly identify and anticipate customer needs; • commercialize new products in a cost-effective and timely manner; • manufacture and deliver products in sufficient volumes on time; • obtain regulatory approval for new products; • differentiate our products from those of our competitors; _________________________________________________________________ • achieve positive clinical outcomes; • satisfy the increased demands by health care payors, providers and patients for lower-cost procedures and shorter hospital stays and recovery times; • innovate and develop new materials, product designs and surgical techniques; and • provide adequate medical and/or customer education relating to new products and attract key surgeons to advocate these new products |
| New products and enhancements usually require a substantial investment in research and development before we can determine the viability of the product, and we may not have the financial resources necessary to fund this research and development |
| Moreover, new products and enhancements may not produce revenues in excess of the research and development costs, and they may become obsolete by changing customer preferences or the introduction by our competitors of new technologies or features |
| Our operating results may fluctuate |
| Some of the factors that may cause these fluctuations include, but are not limited to: • the introduction of new product lines; • product modifications; • the level of market acceptance of new products; • the timing of research and development expenditures; • timing of the receipt of orders from, and product shipments to, distributors and customers; • timing of expenditures; • changes in the distribution arrangements for our products; • manufacturing or supply delays; • the time needed to educate and train additional sales personnel; • costs associated with product introductions; • product returns; and • receipt of necessary regulatory approvals |
| _________________________________________________________________ Changes in the health care industry may require us to decrease the selling price for our products or could result in a reduction in the size of the market for our products, each of which could have a negative impact on our financial performance |
| Trends toward managed care, health care cost containment and other changes in government and private sector initiatives in the United States and other countries in which we do business are placing increased emphasis on the delivery of more cost-effective medical therapies that could adversely affect the sale or the prices of our products |
| For example: • there has been a consolidation among health care facilities and purchasers of medical devices in the United States who prefer to limit the number of suppliers from whom they purchase medical products and these entities may decide to stop purchasing their products or demand discounts on our prices; • major third-party payors of hospital services, including Medicare, Medicaid and private health care insurers could substantially revise their payment methodologies or could impose reimbursement cutbacks that could create downward price pressure on our products; • numerous legislative proposals have been considered that would result in major reforms in the United States health care system that could have an adverse effect on our business; • there is economic pressure to contain health care costs in international markets; and • there have been initiatives by third-party payors to challenge the prices charged for medical products that could affect our ability to sell products on a competitive basis |
| Both the pressures to reduce prices for our products in response to these trends and the decrease in the size of the market as a result of these trends could adversely affect our levels of revenues and profitability of our sales |
| We will first need to obtain regulatory approval to market our products under development |
| Our research and development activities and the manufacturing, labeling, distribution and marketing of our existing and future products are subject to regulation by governmental agencies in the United States and in other countries |
| The FDA and comparable agencies in other countries impose mandatory procedures and standards for the conduct of clinical trials and the production and marketing of products for diagnostic and human therapeutic use |
| Products we have under development are subject to FDA approval or clearance before marketing for commercial use |
| The process of obtaining necessary FDA approvals or clearances can take years and is expensive and full of uncertainties |
| Our inability to obtain required regulatory approval or clearance on a timely or acceptable basis could harm our business |
| Further, approval or clearance may place substantial restrictions on the indications for which the product may be marketed or to whom it may be marketed |
| Further studies may be required to gain approval or clearance for the use of a product for clinical indications other than those for which the product was initially approved or cleared or for significant changes to the product |
| Furthermore, another risk of application to the FDA relates to the regulatory classification of new products or proposed new uses for existing products |
| In the filing of each application, we are required to make a judgment about the appropriate form and content of the application |
| If the FDA disagrees with our judgment in any particular case and, for example, requires us to file a PMA rather than allowing us to market for approved uses while we seek broader approvals or requires extensive additional clinical data, the time and expense required to obtain the approval might be significantly increased or approval might not be granted |
| Approved and cleared products are subject to _________________________________________________________________ continuing FDA requirements relating to quality control and quality assurance, maintenance of records, reporting of adverse events and product recalls, documentation and labeling and promotion of medical devices |
| We may be subject to penalties and may be precluded from marketing our products if we fail to comply with extensive governmental regulations |
| The FDA and foreign regulatory authorities require that our products be manufactured according to rigorous standards |
| These regulatory requirements may significantly increase our production costs and may even prevent us from making our products in amounts sufficient to meet market demand |
| If we change our approved manufacturing process, the FDA may need to review the process before it may be used |
| Failure to develop our manufacturing capability may mean that even if we develop promising new products, we may not be able to produce them profitability, as a result of delays and additional capital investment costs |
| Failure to comply with applicable regulatory requirements discussed throughout this Form 10-K could subject us to enforcement actions, including: • warning letters; • 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 premarket clearance or approval of new products; • withdrawing product approvals already granted; and • criminal prosecution |
| The various regulatory schemes that govern the use of our products in the international market may change, and we may be required to obtain additional marketing clearance for our products |
| The complexity, timeframes and costs associated with obtaining marketing clearances are unknown |
| We will first need to obtain electrical safety approval to market our applicable products under development |
| The majority of our capital equipment products also require electrical safety testing, and in some cases, electromagnetic compatibility testing, as either a product registration or to gain market acceptance |
| The electrical safety testing and electromagnetic compatibility testing requirements may change and require us to redesign and retest our products |
| The complexity, timeframes and costs associated with potential redesign and retesting are unknown |
| Our intellectual property rights may not provide meaningful commercial protection for our products and could adversely affect our ability to compete in the market |
| Our ability to compete effectively depends, in part, on our ability to maintain the proprietary nature of our technologies and manufacturing processes, which includes the ability to obtain, protect and enforce patents on our technology and to protect our trade secrets |
| We own patents that cover significant aspects of our products |
| In addition, challenges may be made to our patents and, as a result, our patents could be narrowed, invalidated or rendered unenforceable |
| Competitors may develop products similar to ours that our patents do not cover |
| In addition, our current and future patent applications may not result in the issuance of patents in the United States or foreign countries |
| Further, there is a substantial backlog of _________________________________________________________________ patent applications in the US Patent and Trademark Office, and the approval or rejection of patent applications may take several years |
| We may become subject to patent infringement claims or litigation or interference proceedings declared by the US Patent and Trademark Office to determine the priority of invention |
| Our competitive position depends, in part, upon unpatented trade secrets, which can be difficult to protect |
| Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets |
| In an effort to protect our trade secrets, we require all of our employees, consultants and advisors to execute proprietary information agreements and certain of them to sign invention assignment agreements upon commencement of employment or consulting relationships with us |
| These agreements typically provide that, except in specified circumstances, all confidential information developed or made known to the individual during the course of his or her relationship with us must be kept confidential |
| They also contain provisions requiring these individuals to assign to us, without additional consideration, any inventions conceived or reduced to practice by them while employed or retained by us, subject to customary exceptions |
| Some jurisdictions limit the enforceability and scope of these agreements and these agreements may not provide meaningful protection for our trade secrets or other proprietary information in the event of the unauthorized use or disclosure of confidential information |
| The medical device industry is characterized by frequent litigation regarding patent and other intellectual property rights |
| Companies in the medical device industry have employed intellectual property litigation to gain a competitive advantage |
| Numerous patents are held by others, including academic institutions and our competitors |
| Until recently patent applications were maintained in secrecy in the United States until after the patent had been issued |
| Patent applications, filed in the United States after November 2000 generally will be published 18 months after the filing date |
| However, since patent applications continue to be maintained in secrecy for at least some period of time, we cannot assure you that our technology does not infringe any patents, patent applications held by third parties or prior patents |
| We have, from time to time, been notified of, or have otherwise been made aware of, claims that we are infringing upon patents or other proprietary intellectual property owned by others |
| If it appears necessary or desirable, we may seek licenses under such patents or proprietary intellectual property |
| Although patent holders may offer such licenses, licenses under such patents or intellectual property may not be offered or the terms of any offered licenses may not be reasonable |
| Any claims, with or without merit, and regardless of whether we are successful on the merits, would be time-consuming, result in costly litigation and diversion of technical and management personnel, cause shipment delays or require us to develop non-infringing technology or enter into royalty or licensing agreements |
| An adverse determination could prevent us from manufacturing or selling our products, which would have a material adverse effect on our business, results of operations and financial condition |
| In October 2005, IRIDEX filed suit against Synergetics USA for infringement of a patent |
| IRIDEX seeks damages, including treble damages and injunctive relief |
| In addition, we countersued IRIDEX alleging that it engaged in false advertising, commercial disparagement, trade libel, injurious falsehood and unfair competition under the Federal Lanham Act and applicable Missouri law |
| While we believe that we have substantial meritorious defenses to their claims, we may incur significant dedication of management resources and legal costs in connection with this lawsuit |
| We may have product liability claims, and our insurance may not cover all claims |
| The development, manufacture, sale and use of medical products entail significant risk of product liability claims |
| We maintain product liability coverage at levels we have determined are reasonable |
| We cannot assure you that such coverage limits are adequate to protect us from any liabilities we might incur in connection with the development, manufacture, sale or use of our products |
| In addition, we may require increased product liability _________________________________________________________________ coverage as our sales increase in their current applications and new applications |
| Product liability insurance is expensive and in the future may not be available on acceptable terms, if at all |
| A successful product liability claim or series of claims brought against us in excess of our insurance coverage could adversely affect our business |
| The loss of key personnel could harm our business |
| We believe our success depends on the contributions of a number of our key personnel, including Messrs |
| Boone, our Chief Executive Officer, Chief Operating Officer, Chief Scientific Officer and Chief Financial Officer, respectively |
| If we lose the services of key personnel, those losses could materially harm our business |
| We maintain key person life insurance of Messrs |
| If we are unable to hire, train and retain additional sales, marketing, manufacturing, engineering and finance personnel, our growth could be impaired |
| To grow our business successfully and maintain a high level of quality, we will need to recruit, retain and motivate highly-skilled sales, marketing, engineering, manufacturing and finance personnel |
| If we are not able to hire, train, and retain a sufficient number of qualified employees, our growth may be impaired |
| In particular, we will need to expand our sales and marketing organizations in order to increase market awareness of our products and to increase revenues |
| In addition, as a company focused on the development of complex products, we will need to hire additional engineering staff of various experience levels in order to meet our product development strategy |
| Competition for skilled employees is intense |
| We plan to expand our international sales and distribution operations, and the success of our international expansion is subject to significant uncertainties |
| We believe that we must expand our international sales and distribution operations to have continued growth |
| We expect to sell an increasing portion of our products to customers overseas |
| In attempting to conduct and expand business internationally, we are exposed to various risks that could adversely affect our international operations and, consequently, our operating results, including: • difficulties and costs of staffing and managing international operations; • fluctuations in currency exchange rates; • unexpected changes in regulatory requirements, including imposition of currency exchange controls; • longer accounts receivable collection cycles; • import or export licensing requirements; • potentially adverse tax consequences; • political and economic instability; • obtaining regulatory approval for our products; • end-market and/or regional competition that may have competitive advantages; • potentially reduced protection for intellectual property rights; and _________________________________________________________________ • subjectivity of foreign laws |
| In addition, because we have suppliers that are located outside the United States, we are subject to risks generally associated with contracting with foreign suppliers and may experience problems in the timeliness and the adequacy or quality of product deliveries |
| The market price of our stock may be highly volatile |
| The market price of our common stock could fluctuate substantially due to a variety of factors, including: • our ability to successfully commercialize our products; • the execution of new agreements and material changes in our relationships with companies with whom we contract; • quarterly fluctuations in results of operations; • announcements regarding technological innovations or new commercial products by us or our competitors or the results of regulatory filings; • market reaction to trends in sales, marketing and research and development and reaction to acquisitions; • sales of common stock by existing shareholders; • economic and political condition, including worldwide geopolitical events; and • fluctuations in the United States financial markets |
| Synergetics USA has anti-takeover defenses that could delay or prevent an acquisition and could adversely affect the price of its common stock |
| Provisions of our certificate of incorporation, bylaws and Delaware law may have the effect of deterring hostile takeovers or delaying or preventing changes in the control of our management, including transactions in which our shareholders might otherwise receive a premium for their shares over then current market prices |
| In addition, these provisions may limit the ability of our shareholders to approve transactions that they may deem to be in their best interest |
| Also, our board of directors is divided into three classes, as nearly equal in size as practicable, with three-year staggered terms |
| This provision may deter a potential acquirer from engaging in a transaction with us because it will be unable to gain control of our board of directors until at least two annual meetings in which directors are elected by our shareholders |