United States District Court, N.D. California, San Jose Division
IN RE RESTORATION ROBOTICS, INC. SECURITIES LITIGATION
ORDER GRANTING IN PART AND DENYING IN PART
DEFENDANTS' MOTION TO DISMISS; GRANTING DEFENDANTS'
JOINDER MOTIONS RE: DKT. NOS. 45, 47, 49, 50
J. DAVILA UNITED STATES DISTRICT JUDGE
class action arises out of Defendants' alleged violations
of Section 11 and 15 of the Securities Act of 1933
(“the Act”) during its initial public offering
(“IPO”) of Restoration Robotics, a company
dedicated to robotic hair restoration.
Plaintiff Edgardo Guerrini purchased Restoration Robotics
common stock pursuant to the “Offering Materials,
” see infra I.A., issued in connection with
Restoration's IPO. Plaintiff alleges violations of Section 11
and 15 of the Act and argues that the Offering Materials
contained materially false or misleading statements regarding
Restoration's marketing function, the functionality of
the ARTAS System (Restoration's hair transplant
technology), and the ARTAS System's sales and continuing
revenue. See Consolidated Amended Complaint
(“Compl.”) ¶¶ 3, 15, 19, 129, Dkt. 36.
Plaintiff also claims Defendants violated Item 303 of SEC
Regulation S-K by failing to disclose known trends or
uncertainties that existed at the time of the IPO.
Complaint names multiple defendants: (1) Restoration Robotics;
(2) Individual Defendants Ryan Rhodes (the Chief Executive
Officer “CEO”), Charlotte Holland (Chief
Financial Officer “CFO”), Frederic Moll (Chairman
of the Board), Jeffrey Bird (Board member), Gil Kliman (Board
member), Emmett Cunningham, Jr. (Board member), Craig Taylor
(Board member), and Shelly Thunen (Board member); (3) Venture
Capital Sutter Hill Ventures, L.P., Clarus Lifesciences II,
L.P., Clarus Ventures II, LLC, Alloy Ventures 2002, L.P.,
Alloy Ventures 2005, L.P., Alloy Ventures 2002, LLC, Alloy
Ventures 2005, LLC, Interwest Partners IV, L.P., and
Interwest Management Partners IX, LLC; and (4) Underwriter
Defendants National Securities Corporation, Roth Capital
Partners, LLC, and Craig-Hallum Capital Group LLC.
Id. ¶¶ 21-43.
Overview. Restoration Robotics is a medical technology
company that “develop[s] and commercializ[es] a robotic
device, the ARTAS System that assists physicians in
performing many of the repetitive tasks that are part of a
follicular unit extraction surgery, a type of hair
restoration procedure.” Compl. ¶ 51, Dkt. 36. The
ARTAS System is an all-in-one device comprised of a patient
chair, a robotic arm, an integrated vision system, artificial
intelligence algorithms, and a series of proprietary end
effectors, which have a needle and punch to secure hair
follicles from a patient's scalp. Id. ¶ 52.
It is designed to “robotically assist a physician
through many of the most challenging steps of the hair
restoration process.” Id. ¶ 54.
April 2011, Restoration received clearance to market and sell
the ARTAS system in 61 countries. Id. ¶ 56. To
sell the system domestically, Restoration relies on a direct
sales and marketing team. This team is composed of Regional
Sales Managers (“RSMs”), Clinical Trial Managers
(“CTMs”), and Practice Success Managers
(“PSMs”). Id. ¶ 66. RSMs are
“responsible for coordinating with executing the direct
sales of the ARTAS Systems.” Id. ¶ 67.
CTMs provide “high quality, comprehensive training and
education to physicians on the use of the ARTAS System and on
how to build their hair restoration practices.”
Id. ¶ 68. PSMs work alongside physician clients
to help “build awareness and market the ARTAS procedure
and increase ARTAS brand-awareness.” Id.
¶ 69. This system is meant to prioritize profits by
working collaboratively with physician customers to increase
the number of ARTAS procedures performed. Id. ¶
73. Internationally, the Company sells the ARTAS System to
independent, third-party distributors who then sell the
systems to end-users. Id. ¶¶ 118-19. As an
inducement to buy the system, Restoration promised doctors
high quality patient leads. Id. 78-80.
Structure. Restoration generates revenue from the ARTAS
system in three ways: (1) systems, (2) procedure based, and
(3) service-related fees. Id. ¶ 59.
“systems” is the sale of the actual ARTAS system,
which is a one-time revenue at an average price of $225, 000
to $240, 000. Id. ¶ 61. Domestic sale revenue
is recorded upon delivery to customers. Declaration of Gavin
M. Masuda in Support of Restoration Robotics Defendants'
Motion to Dismiss (“Masuda Decl.”), Ex. A at 61,
Dkt. 48. International sale revenue is recorded upon shipment
to an international distributor. Id. Second,
“procedure based” revenue is earned anytime there
is a procedure; physician-customers must “pay in
advance on a per-follicle basis for the follicles to be
harvested, and on a per procedure basis for Site
Making.” Compl. ¶ 62. Outside of the United
States, physician-customers pay in advance on a per procedure
basis for both follicle extraction and site making.
Id. Third, Restoration generates
“service-related fees” from post-warranty
maintenance on the ARTAS Systems pursuant to “service
and support contracts offered by the Company.”
Id. ¶ 64. Because the purchase of an ARTAS
System is a one-time occurrence, Restoration depended mainly
on “procedure-based” revenue. Id. ¶
the revenue system functioned a bit differently. Plaintiff
alleges that, at the end of the quarter, Restoration
increased sales to foreign distributors to boost quarterly
sales numbers. Id. ¶¶ 118-23. In these
foreign sales, the products did not go directly to the
physician-consumer; instead, a distributor purchased the
system and then allowed it to lay dormant in their
warehouses. Id. This resulted in “warehousing,
” which resulted in limited “procedure
based” profits and oversaturated foreign markets,
ultimately causing “system” revenue to decrease.
Id. ¶¶ 145-58. In response, Restoration
announced a pivot to a U.S.-centric model in May 2018.
Id. ¶ 161.
Plaintiff uses three confidential witnesses
(“CWs”) to support its allegations. Id.
¶ 44. CW 1 was a PSM, employed by Restoration before the
IPO. Id. ¶ 45. CW 2 was a PSM employed after
the IPO. Id. ¶ 48. And, CW 3 was an RSM
employed before and after the IPO. Id. ¶ 49.
According to CW 1 and 2, Restoration was unable to provide
doctors with the promised patient leads and marketing
support. Id. ¶¶ 80-82. Those that
Restoration did identify as potential leads often had
“no idea” how they ended up on Restoration's
list. Id. ¶ 82. This problem was so widespread,
it resulted in a number of internal complaints among the PSMs
and physicians. Id. Ultimately, because patient
leads were not provided, physicians allowed their ARTAS
System to lay dormant, resulting in a significant drop in
procedure-based revenue. Id. ¶¶ 85, 93.
the lack of patient leads, doctors also reported discontent
with the amount of time and expense required to use the ARTAS
System. Id. ¶¶ 97-99. Allegedly, the
system had widespread product issues that resulted in lower
follicle yields, which further caused doctors to abandon the
system. Id. Specifically, the needles used for the
procedure suffered from a material defect that caused the
machine to damage a patient's already limited number of
donor grafts, lowering harvest yields and increasing costs to
physicians, leading to more abandonment of the system.
Id. ¶ 140. According to CW 1, thirteen percent
of doctors in her region had abandoned the system.
Id. ¶ 100.
before the IPO, device sales stalled because interested
doctors were waiting for the new product (the ARTAS iX).
Id. ¶¶ 112, 152. Representatives were told
to avoid mentioning this during sales for fear of stagnation
of sales. Id. ¶ 167, 169. Sales of the original
ARTAS System were slowing because of this potential new
product-doctors did not want to buy an out-of-date system.
IPO. On September 1, 2017, Restoration filed its
Registration Statement with the Securities and Exchange
Commission (“SEC”). Id. ¶ 5. After
several amendments, the statement became effective on October
11, 2017. Id. ¶ 6. On October 13, 2017,
Restoration filed a Prospectus pursuant to Rule 424(b)(4)
with the SEC, commencing the public offering of 3, 575, 000
Restoration shares of common stock priced at $7.00 per share,
raising over $23 million in net proceeds. Id. ¶
128. The Registration Statement and the Prospectus, together
the “Offering Materials, ” form the basis of this
action. Id. ¶ 7. The Offering Materials
contained disclosures regarding Restoration's sales and
marketing strategy, the quality and design of the ARTAS
System, and ARTAS system sales and continuing revenue.
Id. ¶¶ 130-46.
Following the IPO, the Company's stock traded
consistently below its offering price of $7.00 per share.
Id. ¶ 13. Plaintiff identifies three
significant events: first, on January 5, 2018, Restoration
announced Chris Aronson was replacing long-time Vice
President of Global Sales Brent Nixon, causing the stock
price to drop 14%. Id. ¶¶ 163-64. Second,
on May 14, 2018, Restoration announced its first quarter
earnings for 2018, which showed a loss and caused the share
price to drop 14.42% (falling to $3.68 per share).
Id. ¶¶ 150-51. Third, on November 5, 2018,
Restoration announced quarterly earnings for the third
quarter of 2018 of $4.8 million, based on the sale of 11
ARTAS iX Systems. Despite an increase in total system sales,
procedure-based revenue dropped to $1.28 million.
Id. ¶ 152. Analyst Roth Capital Partners, and
other analysts, lowered their price target to $4 per share.
Id. ¶ 153. The share price decreased to $1.13
per share as of November 29, 2018. Id.
Alleged Material Misstatements/Omissions
alleges the Offering Materials contained 10 materially false,
misleading, and incomplete statements concerning the
Company's marketing function, the quality and design of
the ARTAS System, and the number of ARTAS Systems installed
and their prospects for revenue generation. Id.
¶¶ 130-47. For clarity, the Court has numbered
Plaintiffs alleged actionable statements. Bold and italics
are copied from Plaintiffs Complaint and indicate the part of
the statement alleged to be materially false and misleading.
Concerning Restoration's Marketing Function
strategically market the ARTAS System to hair restoration
surgeons, dermatologists, plastic surgeons and aesthetic
physicians. We believe we are able to reach our target
physician customers effectively through focused marketing
efforts. These efforts include participation in trade shows,
scientific meetings, educational symposiums, webinars and
other activities. For physicians who purchase the ARTAS
System, we provide comprehensive clinical training,
practice-based marketing support, as well as patient leads.
For example, we believe we help our physician customers
increase the number of procedures performed by assigning a
practice success manager, or PSM, to provide assistance in
building the physician-customer's hair restoration
practice. Support from a PSM includes the deployment of
patient marketing materials, assisting with social media and
digital marketing strategies, and other marketing and sales
increased utilization of the ARTAS System by working
collaboratively with our physician customers to increase the
number of ARTAS procedures that are performed.
Increased Utilization. In addition to revenues from
system sales and servicing, we also generate revenue from
procedure based fees. We will continue to work
collaboratively with our physician customers to increase
utilization by introducing new functionalities, technology
and innovations. In addition, we believe we can increase
procedure revenues by helping physicians build their practice
through our marketing and training support. To achieve all of
these goals, we intend to utilize our teams of clinical
training managers, or CTMs, PSMs and field service engineers
to work with and to support our physician customers in
developing profitable ARTAS practices.
PSMs are responsible for helping our physician customers
build awareness and market the ARTAS procedure and increase
ARTAS brand-awareness. Our PSMs average over ten years of
experience in developing hair restoration practices and
aesthetics practices. They form strong relationships with
our customers and consult on how to integrate the ARTAS
System into their practices, while raising awareness of the
procedure among potential patients. This process often
begins before the ARTAS System is installed at the customer
site. Our PSMs work closely with the team that will
manage the ARTAS business at the practice level to establish
goals and develop detailed strategies to achieve these goals.
This includes extensive training and coaching with respect to
the patient consultation process. We provide easily
implemented marketing tools allowing practices to create
individually tailored website content, direct mail
advertisements, print ads for magazines and newspapers and
brochures. In addition, PSMs consult on methods to raise
awareness of the ARTAS procedure through practice events,
public relations, television, and radio advertising and other
sell the ARTAS System, provide service and generate procedure
based revenue by helping our physician customers build their
hair restoration practice, through a direct sales force in
the U.S. which, as of May 31, 2017, included seven
regional sales managers, or RSMs, seven CTMs, and seven PSMs.
Concerning the Quality and Design of the ARTAS System
ARTAS System's image-guided robotic capabilities allow
physicians to perform hair restoration procedures with
fewer staff required than a traditional strip surgery or a
manual FUE procedure. Procedures can also be performed
with less physician and technician fatigue.
needle travels at approximately 2, 500 mm to 3, 000 mm per
second when it contacts the skin. This provides targeted
precision and a cleanly scored incision.
punch then spins at 3, 000 rpm and loosens the grafts from
the surrounding tissue. In a clinical setting, we have
observed that the dissection cycle takes between one to two
seconds per graft, depending on the length of the graft. In a
clinical setting, the ARTAS System has been shown to move
from graft to graft at a rate of approximately one to three
seconds, thereby enabling the ARTAS System to dissect a graft
every two to five seconds, or approximately 720 to over 1,
800 grafts per hour. The ARTAS System enables the physicians
to adjust dissection parameters to accommodate for different
types of skin, and manipulate graft selection algorithms
based on patient needs. The ARTAS System can be
programmed to dissect as many grafts as appropriate thus
maximizing the use of the donor area. It can also be
programmed to dissect grafts with more than two hairs each,
thereby increasing the hair yield or the number of hairs per
Concerning the Number of ARTAS Systems Installed &