Our Business
We are a medical technology company focused on neurological
wellness and our mission statement is to:
Develop, license and acquire unique, non-invasive
treatments designed to help patients affected by neurological symptoms caused by
disease or trauma.
Our first product in development, the portable neuromodulation
stimulator (PoNS) device, exemplifies this mission as the device, when used in
combination with physiotherapy, is designed to enhance the brains ability to
compensate for damage due to trauma or disease.
Improving the process by which the brain can reorganize itself
and compensate for damage, or even augment how we learn, has far-reaching
implications for the treatment of disease as well as for the healthy population.
We intend to pursue these opportunities using our platform PoNS technology.
Neuroplasticity, the ability of the brain to reorganize a neural network or
re-task neurons and form new synaptic connections, is core to all cerebral
learning, training, and rehabilitation. Neuromodulation is the alteration of
nerve activity in response to the delivery of electrical stimulation or chemical
agents. Our proprietary PoNS device is designed to induce Cranial Nerve Non
Invasive Neuromodulation through a dramatic increase in stimulation of the
facial and trigeminal nerves which innervate the tongue. This appears to enhance
neuroplasticity and benefit persons with neurological, cognitive, sensory, and
motor disorders when combined with the rehabilitation process.
Traditional rehabilitation interventions have typically
involved medication and various forms of therapies, including physical therapy.
Our patented PoNS device has been developed to deliver to the tongue a
non-invasive neurostimulation, in a form that induces neuromodulation. Published
studies, suggest neurologic diseases and disorders such as Traumatic Brain
Injury (TBI), Multiple Sclerosis (MS), Stroke, Parkinsons disease, Alzheimers
diseases, Depression, Attention Deficit Hyperactivity Disorder, and Autism, all
have symptoms that may benefit from enhanced neuromodulation as a component of
their rehabilitation therapy.
When the PoNS device is placed into and held in the patients
mouth, it stimulates the trigeminal and facial nerves that innervate the
anterior two-thirds of the human tongue using a sequenced pattern of superficial
electrical stimulation. This stimulation excites a natural flow of neural
impulses to the brainstem and cerebellum that is designed to effect changes in
the function of these targeted brain structures. A series of studies, which are
further described below, suggest that prolonged activation of 20 minutes or more
of neuronal circuits, when combined with physical therapy, initiate a durable
neuronal reorganization with a variety of positive results, including the
correction of gait/balance impairments resulting from TBI. These results
represent what we refer to as anecdotal evidence, and must be confirmed by a
larger well-controlled, independently reviewed scientific study. Successful
results from FDA approved and reviewed clinical trials are required prior to
regulatory clearance for sale in the U.S.
The inventors of the PoNS device conducted a series of
Institutional Review Board sanctioned feasibility studies, case studies, and one
placebo-controlled study. In total, these studies involved approximately 260
patients using the first generation PoNS device in conjunction with physical or
cognitive therapy at the University of Wisconsin-Madison. An Institutional
Review Board is a scientific and patient advocacy board that reviews the
validity and safety of clinical trials on behalf of patients. A feasibility
study is a study with a small sample size that allows for early clinical
evaluation for proof of principle and initial clinical safety data. A
feasibility study may be appropriate early in device development when clinical
experience is necessary because nonclinical testing methods are not available or
adequate to provide the information needed to advance the developmental process.
We use the term case study to mean a study of one patient that may support at
most anecdotal evidence of efficacy. By placebo-controlled study, we mean a
way of testing a medical therapy in which, in addition to a group of subjects
that receives the treatment to be evaluated, a separate control group receives
an artificial placebo treatment which is specifically designed to have no real
effect. These studies were conducted primarily at the Tactile Communication and
Neurorehabilitation Laboratory, or TCNL, at the University of Wisconsin-Madison
with the approval and oversight by the universitys Institutional Review Board,
which is required for scientific studies involving human subjects.
3
Based on the prior results in subjects with MS, a further
controlled feasibility study in 14 MS subjects was independently performed at
the Montreal Neurological Institute in 2015 using the next generation PoNS
device to treat gait and balance disorder associated with MS. The results of
this study were consistent with the previously completed studies on MS and
further supported the devices safety and efficacy in this cohort.
As described below, we have developed the PoNS device to
secure FDA clearance for commercial use in treating balance disorder in TBI
subjects. We are conducting a clinical trial of our PoNS device for the
treatment of balance disorder in patients with TBI. Should the PoNS device be
cleared by the FDA, we believe the addressable market for our product device to
treat balance disorder associated with TBI is potentially over $5.0 billion.
According to the U.S. Center for Disease Control and Prevention, approximately
5.3 million individuals in the U.S. were living with permanent TBI symptoms in
1999, and the incidence of new TBI diagnoses, as measured by hospitalizations
and emergency department visits, has increased between 2001 and 2010.
Additionally, the Brain Injury Association of America estimates that
approximately 40% of patients diagnosed with TBI experience balance disturbance.
Our addressable market estimate for TBI in the U.S. is based on the number of
persons living with TBI (5.3 million) multiplied by the rate of balance
disturbance in TBI patients (40%), and multiplied by the expected price per unit
of our product.
In addition to the ongoing TBI study, we plan on conducting a
registrational clinical trial of our PoNS device for the treatment of gait and
balance disorder in patients with MS. Should the PoNS device be cleared by the
FDA, we believe the addressable markets for our PoNS device to treat gait and
balance disorder associated with MS is potentially over $500 million. According
to the National Multiple Sclerosis Society, there are approximately 400,000
individuals in the U.S. with MS. Our addressable market estimate for MS is
calculated by multiplying the estimated number of persons with MS by the rate of
balance disturbance in MS patients (50%) and the expected price per unit of our
product.
Supporting our three issued U.S. medical method patents, are a
further twenty-one issued design and utility patents. Additional domestic and
international patent filings for the PoNS device connected to both further
medical methods and other designs and utility are a key component of the value
of the Company and will continue to be expanded.
Our Principal Product
The predecessor to the current PoNS device was developed in
2008 at the TCNL. Since then, we have conducted a significant amount of
experimentation, research, and development to arrive at the present-day PoNS
device. We have completed the technical and product design phases of the PoNS
device as well as the manufacturing development phase which will enable us to
manufacture the device commercially. We are performing the registration clinical
trials for FDA clearance with the device for use in treating balance disorder in
TBI subjects and plan to launch a registrational clinical trial for MS subjects
in late 2016.
We anticipate that the full commercial device will be ready for
release in the fourth quarter of calendar year 2016, and we expect to produce
the PoNS device in accordance with FDAs Quality System Regulation, or QSR,
current good manufacturing practices, or cGMPs, and in compliance with European
and Canadian regulatory requirements. Previously, we disclosed that we
anticipated that the full commercial device would be ready for release in the
first quarter of calendar 2016. We delayed the commercial device build based on
our revised forecast for the clinical trial completion.
The PoNS device is ergonomically designed for patient comfort,
is relatively light, contains a replaceable hygienic mouthpiece, a rechargeable
battery and allows for technical data logging and communications. See Figure
1.
4
The PoNS device is an electrical pulse generator that delivers
controlled electrical stimulation to the tongue. Pulses are generated and
organized by a counter, timer, and wave-shaping electronic components. The
device is held lightly in place by the lips and teeth around the neck of the tab
that goes into the mouth and rests on the anterior and superior part of the
tongue. See Figure 2.
The paddle-shaped tab of the device has a hexagonally patterned
array of 143 gold-plated circular electrodes (1.50 mm diameter, on 2.34 mm
centers) that is created by a photolithographic process used to make printed
circuit boards. It is designed to use low-level electrical current to stimulate
the lingual branch projections of at least two cranial nerves in the anterior
tongue through the gold-plated electrodes. Device function is controlled by four
buttons: On, Off, Intensity Up, and Intensity Down.
A rechargeable lithium- polymer battery with built-in charge
safety circuitry provides power. While the voltage and pulse timing to each
electrode are programmed into the device and cannot be altered, the stimulus
intensity can be adjusted by the user. The sensation produced by the array is
similar to the feeling of drinking a carbonated beverage. The waveform is
specifically designed to minimize the potential for tissue irritation.
When the PoNS device is turned off, the intensity setting
automatically resets to zero. Upon first introduction to the device stimulation,
subjects are instructed to press the Up intensity button and hold it for
approximately 4-5 seconds to reach sensation threshold. Subjects will frequently
notice that the sensation intensity decreases 2-4 minutes after stimulation
onset. Subjects are instructed to simply increase the sensation level to return
to the predetermined perceptual midpoint of their individual perceptual dynamic
range.
5
Ximedica
We have completed the design phase of the PoNS device and we
will subcontract the building of commercial quantities of the device to
Ximedica, LLC (Ximedica), a contract manufacturer based in Providence, Rhode Island, that
we selected after an exhaustive procurement process. We place an emphasis on
protecting our patented technology, trade secrets and know-how and only share
confidential information on a need to know basis, even with our manufacturers.
We expect that the PoNS device will require some very light assembly and
labeling that will be performed by Ximedica. Ximedica is registered as a medical
device manufacturer in good standing with the FDA, and is certified with
International Organization for Standardization (ISO) 13485, a comprehensive
quality management system for the design and manufacture of medical devices.
We are currently evaluating commercial-scale manufacturers for
the PoNS device with the goal of building sufficient stock to warehouse and
ship the product to our distributor, who will in turn manage customer
distribution.
U.S. Army
We are designing the PoNS device with the cooperation of the
U.S. Army pursuant to an agreement known as a cooperative research and
development agreement, (the CRADA). The U.S. Army was interested in signing
the CRADA because of the very high incidence of TBI in
soldiers and the fact that there are very few proven, effective treatments
available for those soldiers who suffer from chronic TBI symptoms. Department of
Defense statistics show that incidence of TBI in the U.S. Army has numbered
approximately 30,000 per year from 2012 to 2014 in active duty personnel, and
over 300,000 U.S. military personnel have been diagnosed with TBI since 2000. Of
the 30,000 active duty personnel who suffer from TBI annually, we estimate that
approximately 20-30% will develop chronic symptoms related to their TBI. While
the number of cases of TBI among active duty personnel may vary based on troop
levels maintained by the federal government, our primary target market will be
the large number of retired soldiers who suffer from chronic TBI symptoms as
this population is less subject to material, year-to-year fluctuation. The Army
has expressed its desire to distribute our PoNS device to service members who
would benefit, should the device be cleared by the FDA. However, the U.S. Army
is not under any obligation to purchase our product under the CRADA or any other
agreement with us, and there is no assurance that the U.S. Army will ultimately
purchase our product.
Pursuant to the CRADA, as amended, the laboratories of the U.S.
Army Medical Material Agency (USAMMA) and the U.S. Army Medical Material
Development Activity (USAMMDA) (collectively, the Army Laboratories), agreed
to cooperate with NHC on research for the ongoing design and development to
determine if the PoNS device can be developed for commercial use in assisting
physical therapy in the treatment of soldiers and others with military relevant
neurological manifestations of TBI, including but not limited to Tinnitus,
post-traumatic stress disorder, or PTSD, pain and any subsequent indications
identified by the parties. The CRADA may be terminated by NHC or the Army
Laboratories unilaterally at any time by providing the other party written
notice at least 30 days prior to the desired termination date. In addition, the
CRADA automatically expires on December 31, 2017 unless modified in writing by
the parties, provided that the CRADA is subject to a four-year automatic
extension as required for both FDA clearance in the event that a pre-market
approval application with the FDA is required for a PoNS indication in respect
of aid to therapy for chronic balance deficits resulting from TBI as well as for
commercialization of the PoNS device.
We will initially seek FDA clearance only for treatment of
patients with chronic balance deficit due to TBI. The U.S. Army has expressed an
interest in supplying PoNS devices to the military personnel who need it,
subject to our ability to demonstrate its safety and effectiveness and our
ability to obtain such FDA clearance. Based on this interest, we estimate that
there is a sufficient potential market of active duty and retired soldiers who
could potentially benefit from the PoNS device due to their chronic TBI
symptoms. However, the U.S. Army has not made any guarantees and is not
otherwise under any contractual obligations to purchase PoNS devices, even if
we do demonstrate effectiveness and obtain FDA clearance.
If we are able to complete development of the PoNS device and
obtain FDA clearance of the device to treat chronic balance deficit due to mild
to moderate TBI, we plan to develop the PoNS device to treat other indications,
or symptoms caused by neurological disorders. As set forth in the January 12,
2015 amendment of our CRADA, the U.S. Army has also expressed interest in our
development of the PoNS device to treat other symptoms of TBI or any other
indications caused by neurological disorders. We would be required to commit our
own resources to sponsor the regulatory process for these additional
indications. However, the Army Laboratories has agreed in the January 12, 2015
amendment to our CRADA to be responsible for supporting the execution of studies
using the PoNS device as a treatment for mutually agreed-upon military relevant
neurological disorders, which could include but not be limited to Tinnitus,
PTSD, sleep regulation and pain (headache) and any subsequent indications
identified by the parties. The amount of such support, if any, and the terms of
such responsibility to support such studies are not yet negotiated and we have
no assurance that we can ultimately reach agreement with the Army Laboratories
on such amount or terms of support. There can be no assurance that the Army
Laboratories will not otherwise attempt to renegotiate its responsibilities
under the CRADA.
6
Food and Drug Administration
To date, no prior premarket notifications for clearance of the
PoNS device have been submitted by NHC to the FDA, but the Army Laboratories,
which previously was responsible as the regulatory sponsor until such role was
assumed by NHC, submitted a request for information with the FDA with respect to
the potential classification of the PoNS device through what is known as a
513(g) request for information. In response to a 513(g) request, the FDA
provides information regarding the classification of the device or the
requirements applicable to a device under the Federal Food, Drug, and Cosmetic
Act, or the FD&C Act. Under the 513(g) request, the Army Laboratories sought
guidance from the FDA regarding the classification of the PoNS device and the
applicable requirements under the FD&C Act. As a result of this process, the
FDA responded with guidance on pursuing
de novo
classification of the PoNS
device as a Class II medical device.
We plan to utilize the
de novo
classification process to obtain
Class II classification and 510(k) clearance from the FDA for the PoNS device.
We have been deemed by the FDA through the pre-submission process a
non-significant risk device in the context of the TBI clinical trial and thus do
not need an Investigation Device Exemption to complete our clinical trials. We
are seeking to complete a safety and effectiveness clinical trial by the first
quarter of calendar year 2017 and will thereafter submit a request for
de novo
classification and the premarketing notification (i.e., 510(k)) to the FDA.
Previously, we had sought to complete the safety and effectiveness clinical
trial by the first quarter of calendar year 2016.
On a parallel path to our request for
de novo
classification
and premarket notification to the FDA, we expect to submit an application for
the clearances of the PoNS device for both TBI and MS indications to Europe for
a CE Mark and to Health Canada (the department of the government of Canada with
responsibility for national public health). Our goal is that the CE Mark and
Canadian clearance for the PoNS device will be obtained in early 2017.
On April 29, 2014, NHC, as cooperator, entered into Notice of
Modification No. 1 of the CRADA, with Advanced NeuroRehabilitation LLC (ANR), one of our
significant shareholders, the inventors, and the Army Laboratories, whereby NHC
will no longer provide expertise and training in the design of clinical study
protocols or for U.S. Army and/or VA personnel in the physical therapy
interventions required for clinical studies. In addition, pursuant to the
amended CRADA, ANR will share all data with USAMMA and NHC will provide all data
supporting clinical claims for regulatory approval.
On January 12, 2015, NHC, as cooperator, entered into Notice of
Modification No. 2 of the CRADA, with ANR, the inventors, and the Army
Laboratories. Under this amendment to the CRADA, the Army Laboratories agreed to
transfer some of the CRADA responsibilities to NHC. We believe the Army
Laboratories agreed to transfer certain responsibilities to us under the CRADA
to enable us to accelerate development of the PoNS device for the eventual
potential treatment of soldiers. One of the material changes reflected in the
amendment to the CRADA is the shifting from the Army Laboratories to NHC of sole
responsibility as the regulatory sponsor for all interactions with the FDA in
order to gain approval and clearance from the FDA, including the initial 513(g)
submission. As part of the amendments to the CRADA, NHC has agreed to be
responsible to fund the FDA process as well as to provide the supply of all
devices to support all studies governed by the CRADA. While under the amendments
NHC gains control of the FDA regulatory process, the amendments materially
increase the financial burden on NHC to meet these funding and supply
obligations. The amendments also extend from two to four years both the time for
regulatory approval in the event a pre-market approval application, or PMA, is
required by the FDA as well as for commercialization of the PoNS device.
While NHC has sole responsibility as the regulatory sponsor
under the CRADA, the U.S. Army Medical Research and Materiel Command (USAMRMC)
has entered into a sole-source contractual agreement to support the execution of
the registration trial for treatment of balance disorder associated with mild to
moderate TBI. The objective of this contract is to defray the costs of the
registration trial. The Army Laboratories also agreed in the January 12, 2015
amendment to our CRADA to be responsible for supporting the execution of studies
using the PoNS device as a treatment for mutually agreed-upon military relevant neurological disorders, which
could include but not be limited to Tinnitus, PTSD, and pain and any subsequent
indications identified by the parties. The amount of such support, if any, and
the terms of such responsibility to support such clinical studies are not yet
negotiated and we have no assurance that we can ultimately reach agreement with
the Army Laboratories on such amount or terms of support, and there can be no
assurance that the Army Laboratories will not otherwise attempt to renegotiate
its responsibilities under the CRADA. The Army Laboratories may terminate their
obligations under the CRADA at any time upon 30 days prior written notice to us.
If there are insufficient funds available to cover the necessary research and
development costs for our product, the Army Laboratories could terminate the
CRADA and cease research and development efforts which could jeopardize our
ability to commercialize our PoNS device.
7
On July 7, 2015, the Company announced that NHC entered into a
sole source cost sharing contract with the USAMRMC. The contract will support
the Companys registrational trial investigating the safety and effectiveness of
the PoNS device. Under the contract, the USAMRMC will reimburse the Company for
approximately 62% of the initially budgeted costs related to the registrational
trial of up to a maximum amount of
$2,996,244. The sole source cost sharing agreement expires December 31, 2016. As
of March 31, 2016, the Company has received a total of $1,458,374 in respect of
expenses reimbursed.
On December 28, 2015, NHC, as cooperator, entered into Notice
of Modification No. 3 of the CRADA, with ANR, the inventors, and the Army
Laboratories to extend the expiration date of the CRADA to December
31, 2017.
Our Market
NHC is in the neurostimulation market. According to a study by
Grand View Research, the neurostimulation market was valued at $3.4 billion in
2013 and is expected to grow at a compounded annual growth rate of 14.4% from
2014 to 2020. The leading sectors in the industry are Spinal Cord Stimulation,
Deep Brain Stimulation, Sacral Nerve Stimulation and Vagal Nerve Stimulation. We
believe that due to the significant lack of non-invasive devices, non-invasive
stimulation addresses only approximately 3% of the overall neurostimulation
market today. This allows for a significant market opportunity for the Company.
Market Competition
The neurostimulation market is competitive and growing. Our
competitors in the industry are predominantly large, publically-traded companies
that have a history in the market, have significantly easier access to resources
and have an established product pipeline. The combined clinical research and
product development done by the industry, including by us and all of our
competitors, is foundational, and neurostimulation has slowly become integrated
into neurological therapy. This foundation has allowed for new and innovative
neurostimulation companies to enter the market.
We believe that our technology, the PoNS device, introduces an
innovative target and method of stimulation because targeting the tongue for
neurostimulation provides several clear advantages, which are discussed below.
While we believe that the factors described below competitively distinguish our
technologies and provide the PoNS device a competitive advantage for
non-invasive neuromodulation therapy, we note that these factors are only
supported by anecdotal evidence of efficacy from the initial work done at the
TCNL Laboratories. We believe that our pilot study on MS done at the Montreal
Neurological Institute and Hospital and Concordia Universitys PERFORM Center
using functional MRI provides scientific evidence of efficacy, and from our
Press Release dated November 2, 2015, we announced that our device met all of
its study objectives and that the results suggested the device may be
facilitating neural plasticity. We therefore are making the assumption that the
results of our current TBI clinical trial program will be positive and further
support these claims at that time.
Advantages of the PoNS Device
|
|
Other technologies stimulate other branches of the
trigeminal nerve. We target the lowest branch of the trigeminal nerve,
which is found in the tongue. It is also the largest branch, having the
highest amount of nerve fibers of the three branches.
|
|
|
|
|
|
Stimulating the tongue also allows for the simultaneous
stimulation of a second cranial nerve found in the tongue, the facial
nerve. The ability to stimulate more than one nerve alone differentiates
us from our competition. However, it has not been scientifically proven
that stimulating additional nerves adds to the efficacy of the treatment.
|
8
|
|
The tongue has an anatomically unique surface
with a high density of receptors, a consistently moist and conductive
environment, constant pH, constant temperature and a direct connection to
the brain through at least two cranial nerves.
|
|
|
|
|
|
We believe that the trigeminal and facial
cranial nerves offer a high-bandwidth pathway for impulses to directly
affect the central nervous system. The trigeminal and facial nerves
project directly onto several areas of the brain, primarily the brainstem
(trigeminal and solitary nuclei), cerebellum, cochlear nuclei and spinal
cord. Secondary targets include the limbic system, basal ganglia and
thalamus. We believe that this range of projections allows impulses be
sent through sites regulating dozens of functions.
|
|
|
|
|
|
Unlike Deep Brain Stimulation devices,
implantable vagal nerve devices and other invasive forms of electrical
stimulation, the tongue allows for neurostimulation to be delivered
non-invasively and portably. This opens the door for integration of
neurostimulation with a wide range of therapies previously unexplored for
neurological rehabilitation.
|
Reimbursement
If we complete our clinical trials and obtain FDA clearance,
and ultimately receive customer orders for the PoNS device, we plan to submit
applications for appropriate reimbursement codes so that insurers, including
Medicare and Medicaid, are able to pay for the device. We plan to seek coverage
and reimbursement of the PoNS device from public payers, such as Medicare and
Medicaid, as well as private payers. There are complex laws, regulations and
guidance that set forth Medicare coverage and reimbursement policies. To help us
navigate the regulatory complexities, we have engaged consultants to assist us
with our reimbursement strategy.
From time to time, Congress enacts laws that impact Medicare
coverage and reimbursement policy. In addition, the Centers for Medicare &
Medicaid Services, or CMS, regularly engage in rulemaking activities and issues
instructions and guidance that may affect Medicare coverage and reimbursement
policy. Similarly, the federal and state governments may enact future laws or
issue regulations or guidance that may impact Medicaid coverage and
reimbursement policies, or the coverage and reimbursement policies of private
insurers. We must ensure that we are in full compliance with all applicable
requirements, and that we remain abreast of potential legislative or regulatory
developments that could impact its business. For all payers, the PoNS device
must fit within an identifiable coverage category and fully meet the
requirements of such category.
Once we complete our clinical trials and obtain FDA clearance,
and ultimately receive customer orders for the PoNS device, we intend to seek
coverage for the PoNS device under the Medicare part B durable medical
equipment benefit. This will involve ensuring that the PoNS device meets all of
the criteria for coverage under that benefit. In addition, as part of the
coverage process, we may have to submit an application request to CMS to revise
the Healthcare Common Procedure Coding System, or HCPCS, level II national code
set so that the PoNS device becomes eligible to be covered and reimbursed, not
only by Medicare, but by other public and private payers. The HCPCS Level II
Code Set is a standardized coding set used for claims submitted to public and
private payers that identifies particular products, supplies and services. At
present, we do not believe that the PoNS device would fit easily within an
existing HCPCS code. Thus, we are considering submitting a request to CMS for a
new HCPCS code and are evaluating our options with our consultants. An applicant
can request that (1) a new permanent code be added to the HCPCS level II
national code set; (2) the language used to describe an existing code be
modified; or (3) an existing code be deleted. However, prior to submitting its
coding request application, we must satisfy several criteria, including but not
limited to receiving documentation of the FDAs approval of the device and
having sufficient claims activity or volume in the United States (evidenced by 3
months of marketing activity). The national codes are updated annually. Coding
requests must be received by January 3 of the current year to be considered for
the January update of the following year.
If we do submit such a request for a new HCPCS code, it will be
reviewed by the CMS HCPCS Workgroup, which is comprised of representatives of
CMS, Medicaid state agencies, and the Pricing, Data Analysis and Coding
contractor. The HCPCS Workgroup meets monthly and determines whether each coding
request warrants a change to the HCPCS national coding set.
In addition, Medicare and other insurers must find that the
PoNS device is medically reasonable and necessary for the treatment of
patients illness or injuries. If Medicare and other insurers find that the
PoNS device does not meet their medical necessity criteria, it will not be reimbursed. Medicare
and commercial insurers must also develop a payment amount for the PoNS device.
If that amount is inadequate to cover the costs of the PoNS device, healthcare
providers will be unlikely to use this device.
9
Deployment
Our PoNS device has a design feature that stops delivering
therapy every fourteen weeks. This is expected to require patients to return to
their physician or physical therapy center, or PTC, for assessment of their
progress and reestablishment of challenging physical therapy to achieve higher
goals. We currently expect the device to be inspected visually by the physical
therapist, reset for another fourteen weeks of treatment, and the tongue array
would be replaced by a new one to ensure no degradation of the electrodes
occurs. We expect this business model feature to ensure proper support for
patients in the early phase of their therapy.
We expect physicians will be informed to prescribe both the
PoNS device and the local trained PTCs for their patients to receive the
PoNS device and certified their training. We anticipate supporting the launch
of the PoNS device with the development and implementation of a hub services center to
help facilitate the healthcare transaction.
Upon discharge from the PTC, patients are expected to be
monitored in their home therapy through the PTCs. At the end of their prescribed
treatment, we expect patients to be directed back to their physician for
assessment and then return to the PTC for additional treatment as well as
replacement of the tongue array if the fourteen weeks have expired.
PoNS in the U.S. Army
If it ultimately decides to purchase PoNS devices from us, we
expect that the U.S. Army would deploy the device to Active Duty Personnel
through their rehabilitation centers under orders from the central medical
command. All personnel are expected to be certified PoNS trainers supported by
live, paper and video-based training materials developed through this project by
the U.S. Army.
We have also approached the Canadian and United Kingdom Armed
Forces to discuss their support of a similar program in Canada and discussions
are ongoing. We also intend to pursue other military organizations in relevant
countries based on need and size of potential deployment.
PoNS in Civilian Population
We believe that a key to deployment success will be to create a
national framework of PoNS-trained Physical Therapists (PTs). We have developed
a training certification program where PTs can become certified PoNS therapists
after on-line and in-person training. We expect there to be a strong financial
incentive for the PT community to partner with us because PoNS training offers
substantial opportunity for growth for the PTs. We anticipate that PTs will be
able to use existing reimbursement codes for the physical therapy portion of the
therapy. As discussed above, we plan to apply for reimbursement codes for the
PoNS device.
We will concentrate our efforts in the United States, Canadian
and UK marketplaces as first launch markets. We are currently uncertain which of
these three markets will launch first, primarily due to the relative speed of
the regulatory process, and there is no assurance that any will launch at all.
Following the initial launch of marketplaces, we intend to commercialize the
PoNS device in the rest of Europe, Australia and Japan as second phase
countries (2018-2019) and Brazil, India and other markets as phase III countries
(2019-2020). Previously, we disclosed that we intended to commercialize the
PoNS device in the phase II countries in 2017 and the phase III countries in
2018. This change is based on the timing of our current clinical trial.
In November 2014 we signed a development and distribution
agreement with Altair (a Russian company based in Moscow) to apply for
registration and distribute the PoNS device in the territories of the former
Soviet Union. Thus far the device has received a letter of conformity as an
adjunct to physical therapy in Russia and Uzbekistan following regulatory
applications to the health authorities of these two countries.
10
Licensed Intellectual Property
Pursuant to the Second Amended and Restated Patent Sub-License
agreement dated as of June 6, 2014 entered into between ANR and NHC (the
Sublicense
Agreement), ANR has granted NHC a worldwide, exclusive
license to make, have made, use, lease and sell devices utilizing certain patent
applications, which are collectively referred to as the Patent Pending Rights.
The Patent Pending Rights relate to the PoNS
TM
device and include the
following patents and patent applications, which cover a device that
noninvasively delivers neurostimulation through the skin or intra- orally to the
brain stem via the trigeminal nerve, the facial nerve or both:
U.S. Patent
Application No.
|
Application
Filing Date
|
Status
|
U.S.
Patent No.
|
Issue
Date
|
Subject Matter
|
12/348,301
|
1/4/2009
|
Issued
|
8,849,407
|
9/30/2014
|
non-invasive neurostimulation of the skin
combined with simultaneous physical therapy to provide neurorehabilitation
of a patient to treat various maladies including, e.g., TBI, stroke and
Alzheimers disease
|
14/340,144
|
7/24/2014
|
Issued
|
8,909,345
|
12/9/2014
|
non- invasive neurostimulation within a
patients mouth combined with physical therapy to provide
neurorehabilitation of a patient to treat various maladies including,
e.g., TBI, stroke, and Alzheimers disease
|
14/341,141
|
7/25/2014
|
Issued
|
9,020,612
|
4/28/2015
|
non- invasive neurostimulation within a
patients mouth combined with cognitive therapy to provide
neurorehabilitation of a patient resulting in improved reading
comprehension and increased attention span as well as the treatment
various maladies including, but not limited to, TBI, stroke, and
Alzheimers disease
|
14/615,766
|
2/6/2015
|
Pending
|
N/A
|
N/A
|
non- invasive neurostimulation within a
patients mouth combined with stimulation of the patients vision,
hearing, vestibular systems, or somatosensory systems for the treatment of
tinnitus
|
14/689,462
|
4/17/2015
|
Pending
|
N/A
|
N/A
|
non- invasive neurostimulation of a patients
skin combined with cognitive therapy to provide neurorehabilitation of a
patient resulting in improved reading comprehension and increased
attention span as well as the treatment various maladies including, e.g.,
TBI, stroke, and Alzheimers disease
|
14/815,171
|
7/31/2015
|
Pending
|
N/A
|
N/A
|
non- invasive neurostimulation of a patients
mouth combined with therapy to provide neurorehabilitation of a patient,
with a focus on features of a neurostimulation device
|
61/019,061
(Provisional)
|
1/4/2008
|
Expired
|
N/A
|
N/A
|
N/A
|
61/020,265
(Provisional)
|
1/10/2008
|
Expired
|
N/A
|
N/A
|
N/A
|
11
U.S. Patent Nos. 8,909,345 and 9,020,612 and U.S. Patent
Application Nos. 14/615,766, 14/689,462 and 14/815,171 claim priority to U.S.
Patent No. 8,849,407.
A U.S. provisional patent application provides the means to
establish an early effective filing date for a later filed nonprovisional patent
application. Therefore, though the two provisional applications have expired,
they establish a priority date for U.S. Patent Nos. 8,849,407, 8,909,345,
9,020,612, and U.S. Patent Application Nos. 14/615,766, 14/689,462, 14/815,171
and any future filings that claim priority. We intend to file additional
continuation applications in the USPTO claiming priority to U.S. Patent
Application Nos. 14/615,766, 14/689,462, and 14/815,171 to protect other aspects
of the PoNS
TM
device and related non- invasive neurostimulation
techniques.
ANR, which is one of Helius significant shareholders, holds an
interest in the Patent Pending Rights pursuant to an exclusive license from the
inventors. U.S. Patent Application Nos. 14/615,766, 14/689,462, 14/815,171 are
included in the exclusive license as the exclusive license agreement covers (i)
U.S. Patent Application No. 12/348,301 and Provisional Application No.
61/019,061, (ii) any patents issuing therefrom and (iii) any patents claiming
priority to U.S. Patent Application No. 12/348,301 or Provisional Application
No. 61/019,061, which U.S. Patent Application Nos. 14/615,766, 14/689,462,
14/815,171 claim priority through such provisional application as well as
through Provisional Application 61/020,265.
In addition, ANR has agreed that ownership of any improvements,
enhancements or derivative works of the Patent Pending Rights that are developed
by NHC or ANR shall be owned by NHC, provided that if NHC decides not to patent
such improvements, ANR may choose to pursue patent rights independently.
Pursuant to the Sublicense Agreement, NHC has agreed to pay ANR royalties equal
to 4% of NHCs revenues collected from the sale of devices covered by the Patent
Pending Rights and services related to the therapy or use of devices covered by
the Patent Pending Rights in therapy services. The Sublicense Agreement provides
that the sublicense granted by ANR to NHC, if in good standing, shall not be
cancelled, limited or impaired in any way should there be a termination of the
master license granted by the inventors to ANR, which was acknowledged by the
inventors in the Sublicense Agreement. On June 6, 2014, NHC and ANR entered into
a second amended and restated sublicense agreement, or the Second Sublicense
Agreement, which acknowledges the Reverse Merger (see Our Corporate History -
Acquisition of NeuroHabilitation Corporation and Concurrent Financing below),
and adds us as a party to the agreement.
The license of the Patent Pending Rights are subject to the
right of the government of the United States, which funded certain research
relating to the development of the PoNS
TM
device, to a nonexclusive,
non- transferable, irrevocable, paid- up license to use the Patent Pending
Rights for governmental purposes. In addition, NHC has granted a perpetual,
royalty-free license to the Patent Pending Rights back to ANR for non- profit
research and development activities which do not compete with NHCs business and
to produce and derive revenues from devices and services in connection with
investigational uses of the PoNS
TM
device and related technology.
The license of the Patent Pending Rights is also subject to the
terms of the CRADA. In the event that Helius is not willing or is unable to
commercialize the PoNS
TM
technology within four years from the
expiration of the CRADA, the Company is required to transfer possession,
ownership and sponsorship/holdership of the regulation application, regulatory
correspondence and supporting regulatory information related technology to
USAMRMC and grant the U.S. Government a non-exclusive, irrevocable license to
any patent, copyright, data rights, proprietary information or regulatory
information for the U.S. Government to commercialize the technology.
12
Company Owned Intellectual Property
On July 17, 2015, the Company announced that the USPTO issued
the Company its first patent related to the design of the current
PoNS
TM
device. U.S. Patent No. 9,072,889, Systems for Providing
Non-Invasive Neurorehabilitation of a Patient, issued on July 7, 2015, is the
first patent Helius has received related specifically to the new device design.
The Company filed 27 U. S. patent applications related to
various technical and ornamental aspects of the PoNS
TM
device. The
Company filed eleven non-provisional patent applications that describe various
technical features in the current version device and 16 design patent
applications describing various ornamental designs. Helius is the sole assignee
for these 27 U.S. patent filings. Prior to issuance, once the USPTO determines
that a patent application meets all of the statutory requirements for
patentability it provides a notice of allowance. In addition to the first issued
patent (U.S. Patent No. 9,072,889), the USPTO has issued three utility patents,
16 design patents and provided notices of allowance for utility applications as
summarized in the table below:
U.S. Patent
Application No.
|
Application
Filing
Date
|
Status
|
U.S. Patent
No.
|
Issue Date
|
Subject Matter
|
14/558,768
|
12/3/2014
|
Issued
|
9,072,889
|
7/7/2015
|
Utility application covering overall system
design, including controller and mouthpiece
|
14/559,123
|
12/3/2014
|
Issued
|
9,272,133
|
3/1/2016
|
Utility application covering strain relief
mechanisms for the connection between the mouthpiece and the controller
|
14/558,787
|
12/3/2014
|
Issued
|
9,227,051
|
1/5/2016
|
Utility application covering shape of the
mouthpiece
|
14/558,789
|
12/3/2014
|
Issued
|
9,283,377
|
3/15/2016
|
Utility application covering center of gravity
of the mouthpiece
|
14/559,080
|
12/3/2014
|
Allowed
|
TBD
|
TBD
|
Utility application covering structural support
of the mouthpiece
|
14/559,105
|
12/3/2014
|
Allowed
|
TBD
|
TBD
|
Utility application covering glue wells of the
mouthpiece
|
29/510,741
|
12/3/2014
|
Issued
|
D750264
|
2/23/2016
|
Design application covering an alternative
version of the current PoNS device (over-ear double boom design)
|
29/510,742
|
12/3/2014
|
Issued
|
D749746
|
2/16/2016
|
Design application covering an alternative
version of the current PoNS device (overhead minimal interference
design)
|
29/510,743
|
12/3/2014
|
Issued
|
D752236
|
3/22/2016
|
Design application covering system design used
in the current PoNS device
|
29/510,745
|
12/3/2014
|
Issued
|
D750265
|
2/23/2016
|
Design
application covering an alternative mouthpiece not used in the current
PoNS device
|
13
U.S. Patent
Application No.
|
Application
Filing
Date
|
Status
|
U.S. Patent
No.
|
Issue Date
|
Subject Matter
|
29/510,754
|
12/3/2014
|
Issued
|
D750794
|
3/1/2016
|
Design application covering the controller used
in the PoNS device
|
29/510,755
|
12/3/2014
|
Issued
|
D751215
|
3/8/2016
|
Design application covering an alternative
controller not used in the current PoNS device
|
29/510,746
|
12/3/2014
|
Issued
|
D750266
|
2/23/2016
|
Design application covering an alternative
mouthpiece not used in the current PoNS device
|
29/510,749
|
12/3/2014
|
Issued
|
D750268
|
2/23/2016
|
Design application covering an alternative
mouthpiece not used in the current PoNS device
|
29/510,747
|
12/3/2014
|
Issued
|
D751213
|
3/8/2016
|
Design application covering an alternative
mouthpiece not used in the current PoNS device
|
29/510,748
|
12/3/2014
|
Issued
|
D750267
|
2/23/2016
|
Design application covering an alternative
mouthpiece not used in the current PoNS device
|
29/510,750
|
12/3/2014
|
Issued
|
D753315
|
4/5/2016
|
Design application covering mouthpiece used in
the current PoNS device
|
29/510,751
|
12/3/2014
|
Issued
|
D751722
|
3/15/2016
|
Design application covering an alternative
controller not used in the current PoNS device
|
29/510,752
|
12/3/2014
|
Issued
|
D752766
|
3/29/2016
|
Design application covering an alternative
controller not used in the current PoNS device
|
29/510,753
|
12/3/2014
|
Issued
|
D753316
|
4/5/2016
|
Design application covering an alternative
controller not used in the current PoNS device
|
29/510,744
|
12/3/2014
|
Issued
|
D760397
|
6/28/2016
|
Design application covering system design used
in the current PoNS device
|
29/510,756
|
12/3/2014
|
Issued
|
D759830
|
6/21/2016
|
Design application covering system design used
in the current PoNS device
|
Additionally, Helius has filed three international
applications, and 14 foreign design applications: seven in Canada, three in
China, three in Russia, and one community design in Europe. The following three
applications filed in China, which have been assigned to China Medical Systems Holdings LTD. pursuant
to an asset purchase agreement (the Strategic
Agreement) dated
effective October 9, 2015 with A&B have issued:
14
Chinese Patent
Application
No.
|
Application
Filing
Date
|
Status
|
Chinese
Patent
No.
|
Issue Date
|
Subject Matter
|
201530177804.4
|
6/3/2015
|
Issued
|
CN303597712S
|
2/24/2016
|
Design application covering the system design
currently used in the PoNS
TM
4.0 device
|
201530178171.9
|
6/3/2015
|
Issued
|
CN303597713S
|
2/24/2016
|
Design application covering the mouthpiece
design currently used in the PoNS
TM
4.0 device
|
201530177398.1
|
6/3/2015
|
Issued
|
CN303597711S
|
2/24/2016
|
Design application covering the controller
design currently used in the PoNS
TM
4.0 device
|
Further, the three design applications filed in Russia have
been allowed, and the Canadian Design applications and European community design have issued:
Russian Design
Application No.
|
Application
Filing Date
|
Status
|
Russian
Patent No.
|
Issue Date
|
Subject Matter
|
2015501883
|
6/3/2015
|
Allowed
|
TBD
|
TBD
|
Design application covering
the
system design currently
used in the PoNS
TM
4.0
device
|
2015501882
|
6/3/2015
|
Allowed
|
TBD
|
TBD
|
Design application covering
the
mouthpiece design
currently used in the
PoNS
TM
4.0
device
|
2015501881
|
6/3/2015
|
Allowed
|
TBD
|
TBD
|
Design application covering
the
controller design
currently used in the
PoNS
TM
4.0
device
|
Canadian Design
Application No.
|
Application
Filing Date
|
Status
|
Canadian
Patent No.
|
Issue Date
|
Subject Matter
|
162676
|
6/2/2015
|
Issued
|
162676
|
2/29/2016
|
Design application covering system design used in the current PoNS
TM
device
|
162672
|
6/2/2015
|
Issued
|
162672
|
2/29/2016
|
Design application covering an alternative mouthpiece not used in the current PoNS
TM
device
|
162671
|
6/2/2015
|
Issued
|
162671
|
2/29/2016
|
Design application covering an alternative mouthpiece not used in the current PoNS
TM
device
|
162674
|
6/2/2015
|
Issued
|
162674
|
2/29/2016
|
Design application covering mouthpiece used in the current PoNS
TM
device
|
162675
|
6/2/2015
|
Issued
|
162675
|
2/29/2016
|
Design application covering an alternative controller not used in the current PoNS
TM
device
|
162670
|
6/2/2015
|
Issued
|
162670
|
2/29/2016
|
Design application covering the controller used in the PoNS
TM
device
|
162673
|
6/2/2015
|
Issued
|
162673
|
2/29/2016
|
Design application covering system design used in the current PoNS
TM
device
|
EU Community
Design
Application No.
|
Application
Filing
Date
|
Status
|
EU Community
Design
Reg. No.
|
Issue Date
|
Subject Matter
|
002712026
|
6/3/2015
|
Issued
|
002712026
|
9/4/2015
|
Design application covering
several aspects of the
system design currently
used in the
PoNS
TM
4.0
device
|
Currently, Helius uses four trademarks in connection with the
operation of the business: PoNS
TM
, NeuroHabilitation, NHC and Helius
Medical Technologies. Helius owns the rights to the PoNS
TM
mark by
virtue of an assignment agreement having an effective date of October 27, 2014
and entered into with ANR and the inventors of the PoNS
TM
technology.
Helius is the sole owner of the rights in the NeuroHabilitation and NHC
trademarks, and Helius is the owner of the rights in the Helius Medical
Technologies mark. On October 31, 2014, Helius filed trademark applications in
the USPTO for these four trademarks.
On January 7, 2015, Helius filed trademark applications with
the Canada Intellectual Property Office, claiming priority to the corresponding
U.S. applications filed on October 31, 2014. The Company is the owner of the
rights in the NeuroHabilitation, NHC, and PoNS marks in Canada, and Helius is
the owner of the rights in the Helius Medical Technologies mark in Canada. The
Company has also applied for the PoNS trademark in Canada, Europe, Russia and
China.
We take precautions to safeguard our intellectual property, and
it has been and may be the subject of lawsuits. See Part I Item 3, Legal
Proceedings.
15
Government Regulation
Our products under development and our operations are subject
to significant government regulation. In the United States, our products are
regulated as medical devices by the FDA and other federal, state, and local
regulatory authorities. The following is a general description of the review and
clearance process of the FDA for medical devices.
FDA Regulation of Medical Devices
The FDA and other U.S. and foreign governmental agencies
regulate, among other things, the following activities with respect to medical
devices:
|
|
design, development and manufacturing;
|
|
|
|
|
|
testing, labeling, content and language of
instructions for use and storage;
|
|
|
|
|
|
clinical trials;
|
|
|
|
|
|
product storage and safety;
|
|
|
|
|
|
marketing, sales and distribution;
|
|
|
|
|
|
pre-market clearance and approval;
|
|
|
|
|
|
record keeping procedures;
|
|
|
|
|
|
advertising and promotion;
|
|
|
|
|
|
recalls and field safety corrective actions;
|
|
|
|
|
|
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;
|
|
|
|
|
|
post-market approval studies; and
|
|
|
|
|
|
product import and export.
|
In the United States, numerous laws and regulations govern all
the processes by which medical devices are brought to market and marketed. These
include the FD&C Act and the FDAs implementing regulations, among others.
The FDA Review, Clearance and Approval Process
Each medical device we seek to commercially distribute in the
United States must first receive either clearance under Section 510(k) of the
FD&C Act, receive
de novo
down-classification, or pre-market
approval, or PMA, from the FDA, unless specifically exempted by the FDA. FDA
review and approval is required for each application of a device, regardless of
whether the device has been approved for other applications. The FDA classifies
all medical devices into one of three classes. Devices deemed to pose the lowest
risk are categorized as either Class I or II, which requires the manufacturer to
submit to the FDA a 510(k) pre-market notification submission requesting
clearance of the device for commercial distribution in the United States, unless
the device is exempted from this requirement. Devices deemed by the FDA to pose
the greatest risk, such as life sustaining, life-supporting or implantable
devices, or devices deemed not substantially equivalent to a previously 510(k)
cleared device are categorized as Class III and require submission and approval
of a PMA application.
In the 510(k) clearance process, the FDA must determine that a
proposed device is substantially equivalent to a device legally on the market,
known as a predicate device, with respect to intended use, technology and
safety and effectiveness, in order to clear the proposed device for marketing.
Clinical data is sometimes required to support a determination of substantial
equivalence. The PMA pathway requires an applicant to demonstrate the safety and
effectiveness of the device based, in part, on extensive data, including, but
not limited to, technical, preclinical, clinical trial, manufacturing and
labeling data. The PMA process is typically required for devices that are deemed
to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. However, some devices are
automatically subject to the PMA pathway regardless of the level of risk they
pose, because they have not previously been classified into a lower risk class
by the FDA. Manufacturers of these devices may request that the FDA review such
devices in accordance with the
de novo
classification procedure, which
allows a manufacturer whose novel device would otherwise require the submission
and approval of a PMA prior to marketing to request down-classification of the
device on the basis that the device presents low or moderate risk. If the FDA
agrees with the down-classification, the applicant will then receive approval to
market the device. This device type can then be used as a predicate device for
future 510(k) submissions.
16
We intend to utilize the
de novo
classification
procedures to seek marketing authorization for the PoNS device, because there
is currently no predicate cleared or approved by the FDA for commercial
distribution and no existing classification decision by the FDA for such a
device. The process of obtaining regulatory clearances or approvals, or
completing the
de novo
classification process, to market a medical device
can be costly and time consuming, and we may not be able to successfully obtain
pre-market reviews on a timely basis, if at all.
If the FDA requires us to go through a lengthier, more rigorous
examination for the PoNS device, introducing the product could be delayed or
canceled, which could cause our launch to be delayed. In addition, the FDA may
determine that the PoNS device requires the more costly, lengthy and uncertain
PMA process. For example, if the FDA disagrees with our determination that the
de novo
classification procedures are the appropriate path to obtain
marketing authorizations for the PoNS device, the FDA may require us to submit
a PMA application, which is generally more costly and uncertain and can take
from one to three years, or longer, from the time the application is submitted
to the FDA until an approval is obtained. Further, even with respect to those
future products where a PMA is not required, we cannot be certain that we will
be able to obtain 510(k) clearances with respect to those products.
510(k) Clearance Process
To obtain 510(k) clearance, we must submit a pre-market
notification to the FDA demonstrating that the proposed device is substantially
equivalent to a previously-cleared 510(k) device or is a device that was in
commercial distribution before May 28, 1976 for which the FDA has not yet called
for the submission of PMA applications. The FDAs 510(k) clearance process
usually takes from three to 12 months from the date the application is submitted
and filed with the FDA, but may take significantly longer and clearance is never
assured. Although many 510(k) pre-market notifications are cleared without
clinical data, in some cases, the FDA requires significant clinical data to
support substantial equivalence. In reviewing a pre-market notification
submission, the FDA may request additional information, including clinical data,
which may significantly prolong the review process.
After a device receives 510(k) clearance, any subsequent
modification of the device that could significantly affect its safety or
effectiveness, or that would constitute a major change in its intended use, will
require a new 510(k) clearance or could require PMA. The FDA requires each
manufacturer to make this determination initially, but the FDA may review any
such decision and may disagree with a manufacturers determination. If the FDA
disagrees with a manufacturers determination, the FDA may require the
manufacturer to cease marketing and/or recall the modified device until 510(k)
clearance or PMA is obtained. Under these circumstances, the FDA may also
subject a manufacturer to significant regulatory fines or other penalties. In
addition, the FDA is currently evaluating the 510(k) process and may make
substantial changes to industry requirements, including which devices are
eligible for 510(k) clearance, the ability to rescind previously granted 510(k)s
and additional requirements that may significantly impact the process.
De novo Classification Process
If a previously unclassified new medical device does not
qualify for the 510(k) pre-market notification process because no predicate
device to which it is substantially equivalent can be found, the device is
automatically classified Class III regardless of the level of risk it poses. The
Food and Drug Administration Modernization Act of 1997 established a new route
to market for low to moderate risk medical devices that are automatically placed
into Class III due to the absence of a predicate device, called the Request for
Evaluation of Automatic Class III Designation, or the
de novo
classification procedure. This procedure allows a manufacturer whose novel
device is automatically classified into Class III to request down-classification
of its medical device into Class I or Class II on the basis that the device
presents low or moderate risk, rather than requiring the submission and approval
of a PMA application. Prior to the enactment of the Food and Drug Administration
Safety and Innovation Act, or FDASIA, in July 2012, a medical device could only
be eligible for
de novo
classification if the manufacturer first
submitted a 510(k) premarket notification and received a determination from the
FDA that the device was not substantially equivalent. The FDASIA streamlined the
de novo
classification pathway by permitting manufacturers to request
de novo
classification directly without first
submitting a 510(k) premarket notification to the FDA and receiving a not
substantially equivalent determination. Under the FDASIA, the FDA is required to
classify the device within 120 days following receipt of the
de novo
application. If the manufacturer seeks reclassification into Class II, the
manufacturer must include a draft proposal for special controls that are
necessary to provide a reasonable assurance of the safety and effectiveness of
the medical device. In addition, the FDA may reject the reclassification
petition if it identifies a legally marketed predicate device that would be
appropriate for a 510(k) or determines that the device is not low to moderate
risk or that general controls would be inadequate to control the risks and
special controls cannot be developed.
17
We plan to utilize the
de novo
classification process to
obtain marketing authorization for the PoNS device under development, and we
plan to seek Class II classification. In order to be placed in Class II, the FDA
would need reasonable assurance of safety and effectiveness of the PoNS device.
Under Class II, general controls (e.g., premarket notification) and special
controls (e.g., specific performance testing) would be applicable. Our goal
would be to complete in six months a safety and effectiveness clinical trial
using the PoNS device, initially only for the treatment of balance disorder in
patients with mild to moderate TBI and balance disorder associated with MS. Our
overall goal for submission of the
de novo
application and FDA clearance
of a 510(k) would be 24 months from December 2014. The application to the FDA
will be made after the completion of the registration trial, which we anticipate
will be completed in the first quarter of calendar year 2017. Originally, we
anticipated that the registration trial would be completed at the end of 2015,
but that timing was revised due to slower than expected enrollment. We have
invested resources to expand recruiting to recoup for time lost. It will take us
approximately four weeks to prepare the premarket notification to the FDA. We
thus anticipate that we will be applying for clearance in the first half of
calendar year 2017. To the extent the FDA completes its review in 90 days, we
anticipate clearance by the third quarter of calendar year 2017.
Obtaining FDA clearance,
de novo
down-classification, or
approval for medical devices can be expensive and uncertain, generally takes
from several months to several years, and generally requires detailed and
comprehensive scientific and clinical data. Notwithstanding the expense, these
efforts may never result in FDA clearance. Even if we were to obtain regulatory
clearance, it may not be for the uses we believe are important or commercially
attractive, in which case we would not be permitted to market our product for
those uses.
Pre-market Approval Process
A PMA application must be submitted if the medical device is in
Class III (although the FDA has the discretion to continue to allow certain
pre-amendment Class III devices to use the 510(k) process) or cannot be cleared
through the 510(k) process. A PMA application must be supported by, among other
things, extensive technical, preclinical, clinical trial, manufacturing and
labeling data to demonstrate to the FDAs satisfaction the safety and
effectiveness of the device for its intended use.
After a PMA application is submitted and filed, the FDA begins
an in-depth review of the submitted information, which typically takes between
one and three years, but may take significantly longer. During this review
period, the FDA may request additional information or clarification of
information already provided. Also during the review period, an advisory panel
of experts from outside the FDA may be convened to review and evaluate the
application and provide recommendations to the FDA as to the approvability of
the device. In addition, the FDA will conduct a pre-approval inspection of the
manufacturing facility to ensure compliance with Quality System Regulations, or
QSR, which impose elaborate design development, testing, control, documentation
and other quality assurance procedures in the design and manufacturing process.
The FDA may approve a PMA application with post-approval conditions intended to
ensure the safety and effectiveness of the device including, among other things,
restrictions on labeling, promotion, sale and distribution and collection of
long-term follow-up data from patients in the clinical study that supported
approval. Failure to comply with the conditions of approval can result in
materially adverse enforcement action, including the loss or withdrawal of the
approval. New PMA applications or supplements are required for significant
modifications to the manufacturing process, labeling of the product and design
of a device that is approved through the PMA process. PMA supplements often
require submission of the same type of information as an original pre-market
approval application, except that the supplement is limited to information
needed to support any changes from the device covered by the original PMA
application, and may not require as extensive clinical data or the convening of
an advisory panel.
Clinical Trials
A clinical trial is typically required to support a PMA
application and is sometimes required for a 510(k) pre-market notification.
After a trial begins, the FDA may place it on hold or terminate it if, among
other reasons, it concludes that the clinical subjects are exposed to an
unacceptable health risk. Any trials we conduct must be conducted in accordance
with FDA regulations as well as other federal regulations and state
laws concerning human subject protection and privacy. Moreover, the results of a
clinical trial may not be sufficient to obtain clearance or approval of the
product, and separate clinical trials will be necessary to obtain clearance for
multiple uses of one device.
18
Risks of Delay from the FDA Clearance Process and
Regulatory Compliance Risks
The FDA can delay, limit or deny clearance or approval of a
device for many reasons, including:
|
|
we may not be able to demonstrate to the FDAs
satisfaction that our product candidate is safe and effective, sensitive
and specific diagnostic tests, for its intended users;
|
|
|
|
|
|
the data from our pre-clinical studies and
clinical trials may be insufficient to support clearance or approval,
where required; and
|
|
|
|
|
|
the manufacturing process or facilities we use
may not meet applicable requirements.
|
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 initiated an evaluation of the
program, and in January 2011, announced several proposed actions intended to
reform the review process governing the clearance of medical devices. The FDA
intends these reform actions to improve the efficiency and transparency of the
clearance process, as well as bolster patient safety. In addition, as part of
the FDASIA the U.S. Congress reauthorized the Medical Device User Fee Amendments
with various FDA performance goal commitments and enacted several Medical
Device Regulatory Improvements and miscellaneous reforms that are further
intended to clarify and improve medical device regulation both pre- and
post-approval. Any delay in, or failure to receive or maintain, clearance or
approval for our product candidate could prevent us from generating revenue from
our product candidate and adversely affect our business operations and financial
results.
Even if we obtain FDA clearance for our PoNS device, we will
still be required to pursue a 510(k) clearance,
de novo
down-classification, or PMA for any future product which will delay future
product launches and would likely place substantial restrictions on how our
device is manufactured, marketed and sold. For example, the manufacture of
medical devices must comply with FDAs QSR. In addition, manufacturers must
register their manufacturing facilities, list the products with FDA, and comply
with requirements relating to labeling, marketing, complaint handling, adverse
event and medical device reporting, reporting of corrections and removals, and
import and export. FDA monitors compliance with the QSR and these other
requirements through periodic inspections. If our facilities or those of our
manufacturers or suppliers are found to be in violation of applicable laws and
regulations, or if we or our manufacturers or suppliers fail to take
satisfactory corrective action in response to an adverse inspection, the
regulatory authority could take enforcement action, including any of the
following sanctions:
|
|
untitled letters, warning letters, fines, injunctions,
consent decrees and civil penalties;
|
|
|
|
|
|
customer notifications or repair, replacement, refunds,
detention or seizure of our products;
|
|
|
|
|
|
operating restrictions or partial suspension or total
shutdown of production;
|
|
|
|
|
|
refusing or delaying requests for 510(k) marketing
clearance or pre-market approvals of new products or modified products;
|
|
|
|
|
|
withdrawing 510(k) marketing clearances or pre-market
approvals that have already been granted;
|
|
|
|
|
|
refusing to provide Certificates for Foreign Government;
|
|
|
|
|
|
refusing to grant export approval for our products; or
|
|
|
|
|
|
pursuing criminal prosecution.
|
19
Additionally, 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 product
candidate and dissuade our customers from using our product candidate, if and
when they are authorized for marketing.
Pervasive and Continuing U.S. Food and Drug
Administration Regulation
After a medical device is placed on the market, numerous FDA
regulatory requirements apply, including, but not limited to the following:
|
|
the QSR, which requires manufacturers to follow design,
testing, control, documentation and other quality assurance procedures
during the manufacturing process;
|
|
|
|
|
|
establishment registration, which requires establishments
involved in the production and distribution of medical devices, intended
for commercial distribution in the United States, to register with the
FDA;
|
|
|
|
|
|
medical device listing, which requires manufacturers to
list the devices they have in commercial distribution with the FDA;
|
|
|
|
|
|
correction and removal reporting regulations which
require that manufacturers report to the FDA field corrections and product
recalls or removals undertaken to reduce a risk to health posed by the
device or remedy a violation of the FD&C Act that may present a risk
to health;
|
|
|
|
|
|
labeling regulations, which prohibit misbranded devices
from entering the market, as well as prohibit the promotion of products
for unapproved or off-label uses and impose other restrictions on
labeling;
|
|
|
|
|
|
clearance or approval of product modifications that could
significantly affect safety or efficacy or that would constitute a major
change in intended use;
|
|
|
|
|
|
post-market surveillance including Medical Device
Reporting, which requires manufacturers report to the FDA if their device
may have caused or contributed to a death or serious injury, or
malfunctioned in a way that would likely cause or contribute to a death or
serious injury if it were to recur; and
|
|
|
|
|
|
other post-approval restrictions or conditions.
|
Our Corporate History Highlights
Formation and Arrangement with Boomerang Oil,
Inc.
We were incorporated on March 13, 2014 under the British
Columbia Business Corporations Act, or the BCBCA, as 0996445 B.C. Ltd. On
March 25, 2014, and amended on April 8, 2014, we entered into an arrangement
agreement with Boomerang Oil, Inc. (formerly known as 0922327 B.C. Ltd.) and
0995162 B.C. Ltd. to reorganize the business structure of such three entities in
such a manner which would allow Boomerang Oil, Inc. to spin us out to become an
independent entity that is a reporting issuer in Canada and for us to complete a
reverse take-over of 0995162 B.C. Ltd. As a result of the arrangement agreement,
we became a reporting issuer in the provinces of British Columbia and Alberta.
In addition, the arrangement resulted in 0995162 B.C. Ltd. becoming our
wholly-owned subsidiary. The assets of 0995162 B.C. Ltd. consisted of cash and
0995162 B.C. Ltd.s interest in a letter agreement pursuant to which it had
agreed to acquire all of the outstanding shares of NHC, a Delaware corporation,
and to seek a listing on a recognized stock exchange.
Reincorporation in Wyoming
On May 23, 2014, we changed our name to Helius Medical
Technologies, Inc. and filed articles of continuation with the Wyoming
Secretary of State office to reincorporate from being a corporation governed by
the BCBCA to a corporation governed by the Wyoming Business Corporation Act, or
WBCA.
Acquisition of NeuroHabilitation Corporation and
Concurrent Financing
On June 13, 2014, we completed the acquisition of NHC by way of
an agreement and plan of merger. We refer to this transaction as the Reverse
Merger. Pursuant to the agreement and plan of merger, HMT Mergersub, Inc., our
wholly-owned subsidiary, merged with and into NHC with NHC as the surviving
corporation. In connection with the Reverse Merger, we issued an aggregate of
35,300,083 shares of our Class A common stock, or our common stock, to the
former shareholders of NHC. The Reverse Merger was deemed to be a capital
transaction in substance and recorded as a reverse recapitalization of
NeuroHabilitation Corporation whereby NeuroHabilitation Corporation is deemed to
be the continuing, surviving entity for accounting purposes, but through
reorganization, has deemed to have adopted the capital structure of Helius.
20
In connection with the Reverse Merger, we completed a
non-brokered private placement financing of $7.016 million (CAD$7.62 million) by
issuing 15.24 million subscription receipts. Pursuant to its terms, each
subscription receipt automatically converted into one unit upon satisfaction of
certain escrow release conditions, which had been satisfied. Each unit consisted
of one share of our common stock and one-half of one share purchase warrant with
each whole warrant being exercisable at CAD$1.00 per share for a period of two
years. In connection with the concurrent private placement financing, we paid
aggregate finders fees of $379,806 (CAD $412,200) and issued 824,000 finders
warrants. Each finder warrant is exercisable at CAD$1.00 per share for a period
of two years.
General Development of the Business of NeuroHabilitation
Corporation
Our primary operations are conducted through our wholly-owned
subsidiary NHC. On January 22 2013, NHC entered into a patent sub-license
agreement whereby ANR granted NHC exclusive worldwide rights to ANRs trade
secrets, knowhow, and patent pending technology for a non-invasive means for
delivering neurostimulation through the oral cavity, or the PoNS device. NHC
obtained these rights in exchange for 50% of the outstanding equity in NHC and
an obligation to pay ANR a royalty equal to 4% of any revenue collected by NHC
from (1) the sale of products covered by any claim of the patent rights to end
users and (2) services related to the therapy or use of such products in therapy
services. This agreement was subsequently amended by the Amended and Restated
Patent Sub-License and again by the Sublicense Agreement described above.
Listing of our Common Stock on the CSE, TSX and
OTCQB
Following our Reverse Merger, we obtained approval of the
listing of our common stock on the Canadian Securities Exchange (the CSE).
On April 18, 2016, our common stock was listed on the Toronto
Stock Exchange (TSX) under the symbol HSM. At the same time, we delisted our
common stock from the CSE. Our Warrants were also approved for listing on the
TSX on April 18, 2016.
Our common stock is currently quoted on the OTCQB under the
symbol HSDT.
Our shares of Class A common stock were approved for listing on
the TSX on April 18, 2016. However, some of our shares of common stock were
issued in an offshore offering in April and May of 2016 (the Offshore
Offering) in transactions exempt from the registration requirements of the
Securities Act of 1933, as amended (the Securities Act) and are listed under a
separate ticker symbol for trading on the TSX. These shares of common stock are
subject to restrictions on their resale to a U.S. person (as that term is
defined in Regulation S), or to a person in the United States, unless in a
registered transaction or pursuant to an applicable safe harbor or exemption
from registration. Certain of our warrants were also approved for listing on the
TSX on April 18, 2016. However, because only warrants issued in the Offshore
Offering in transactions exempt from the registration requirements of the
Securities Act were approved for listing on the TSX, the Warrants listed on the
TSX may not be purchased by or on behalf of a U.S. person, or by a person in the
United States, unless in a registered transaction or pursuant to an applicable
safe harbor or exemption from registration.
Employees
As of June 21, 2016, we have six full time employees and 20
full-time equivalent independent contractors.
Business Uncertainties and Going Concern Risk
To date we have not generated any revenue from the sales of
products or services. There are a number of conditions that we must satisfy
before we will be able to generate revenue, including but not limited to
successful completion of the TBI, FDA, CE Mark or Health Canada clearance of the
PoNS device for balance disorder associated with TBI, manufacturing of a commercially-viable version of the PoNS device and
demonstration of safety and effectiveness sufficient to generate commercial
orders by customers for our product. In addition, given the importance of the
U.S. Army to our early commercial plans, if the U.S. Army were to eventually
decide not to purchase our product, we would need to replace those sales in the
civilian market which will lower our early commercialization forecast. To date,
we have not achieved many of these conditions, and the successful achievement of
such conditions will require significant expenditures. Because we have not
generated any revenues, we are dependent entirely on funding from outside
investors. There is no guarantee that such funding will be available at all or
in sufficient amounts to satisfy our required expenditures. Furthermore, even if
we were able to raise sufficient capital to successfully design and manufacture
a commercially-viable version of the PoNS device and to receive FDA, CE Mark or
Health Canada clearance, we do not currently have any contract or other
arrangement to sell the PoNS device. Accordingly, we cannot know for certain
that we will ever be able to generate any revenue from the sales of products or
services.
21
Additionally, based on managements assessment that there is
substantial doubt about the Companys ability to continue as a going concern.
This means that there is substantial doubt that we can continue as an on-going
business for the next twelve months. While we had $2,643,937 of cash as of March
31, 2016 and we have raised an additional $7,199,781 (CAD$9,215,000) in the
Offshore Offering and private placement, and $1,409,947 (CAD$1,825,600) from the
exercise of certain warrants issued in 2014, we do not currently have sufficient
resources to accomplish all of the above conditions necessary for us to generate
revenue.
In reviewing this filing, you should carefully consider the
risks described in the section entitled Risk Factors and other risks described
throughout this Annual Report.
RISK FACTORS
An investment in our common stock involves a number of
very significant risks. You should carefully consider the following risks and
uncertainties in addition to other information in this Annual Report in
evaluating our company and its business before purchasing shares of our common
stock. Our business, operating results and financial condition could be
seriously harmed due to any of the following risks. The risks described below
may not be all of the risks facing our company. Additional risks not presently
known to us or that we currently consider immaterial may also impair our
business operations. You could lose all or part of your investment due to any of
these risks.
Risks Related to Our Company
We have a very limited operating history and have a
history of operating losses.
Helius Medical Technologies, Inc. is our holding company and it
has no material assets other than cash and cash equivalents and its ownership of
all of the outstanding shares of NHC, which is our wholly owned subsidiary. NHC
was incorporated in Delaware on January 22, 2013 and has had limited operations
to date. Since our inception, we have incurred significant net losses. As of
March 31, 2016, our accumulated deficit was approximately $26,305,263.
We are heavily dependent upon the ability and expertise
of our CEO and a very limited number of employees and the loss of such
individuals could have a material adverse effect on our business, operating
results or financial condition.
We currently have a very small management team and almost no
other employees. Our success is dependent upon the ability, expertise, judgment,
discretion and good faith of our senior management, and in particular Mr.
Philippe Deschamps, our President and Chief Executive Officer. Currently, Mr.
Deschamps is joined by Jonathan Sackier, our Chief Medical Officer, Joyce
LaViscount, our Chief Financial Officer and Chief Operating Officer, Brian
Bapty, our Vice President of Strategy and Business Development, and two others
as our only full-time employees. We also have engaged 20 full-time equivalent
persons as independent contractors. While employment agreements are customarily
used as a primary method of retaining the services of key employees, these
agreements cannot assure the continued services of such employees. Any loss of
the services of such individuals could have a material adverse effect on our
business, operating results or financial condition.
22
Our independent registered public accounting firm has
included an explanatory paragraph relating to our ability to continue as a going
concern in its report on our audited financial statements. We may be unable to
continue to operate without the threat of liquidation for the foreseeable
future.
In connection with our managements assessment, our report from
our independent registered public accounting firm for the fiscal year ended
March 31, 2016 includes an explanatory paragraph stating that our recurring
losses from operations and net capital deficiency raise substantial doubt about
our ability to continue as a going concern. If we are unable to obtain
sufficient funding, our business, prospects, financial condition and results of
operations will be materially and adversely affected and we may be unable to
continue as a going concern. For example, our existing capital resources will be
insufficient to fund our operations beyond the end of the fourth quarter of
calendar 2016. If we are unable to continue as a going concern, we may have to
liquidate our assets and may receive less than the value at which those assets
are carried on our consolidated financial statements, and investors will likely
lose all or a part of their investment. Future reports from our independent
registered public accounting firm may also contain statements expressing doubt
about our ability to continue as a going concern. If we seek additional
financing to fund our business activities in the future and there remains doubt
about our ability to continue as a going concern, investors or other financing
sources may be unwilling to provide additional funding on commercially
reasonable terms or at all.
We have identified a material weakness in our internal
controls over financial reporting. If we do not maintain effective internal
controls over financial reporting, we could fail to report our financial results
accurately.
We have identified material weaknesses in our internal control
over financial reporting. Under the direction of our Chief Executive Officer and
our Chief Financial Officer, our management evaluated our disclosure controls
and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the Exchange Act), and concluded that our
disclosure controls and procedures were ineffective as of March 31, 2015, June
30, 2015, September 30, 2015, December 31, 2015, and March 31, 2016.
In April of 2016, the Board, after consulting with the
Companys management, determined that it was necessary to reevaluate the
Companys accounting relating to warrants issued as part of its private
placements conducted in April, June and July of 2015 (the 2015 Warrants), and
to restate the Companys previously reviewed, unaudited, condensed consolidated
financial statements for the three months ended June 30, 2015, the three months
and six months ended September 30, 2015, and the three and nine months ended
December 31, 2015, as a result of an error in the classification of the 2015
Warrants. The Company previously recorded the issuance of the 2015 Warrants as
equity instruments instead of liabilities. The warrant exercise prices are
denominated in U.S. dollars whereas the functional currency of the Company is
the Canadian dollar; as such, the settlement of the warrants fails the fixed for
fixed criteria of ASC 815 and they are required to be recorded as a liability at
their fair value on inception. The warrant liability is required to be
re-measured at its fair value on each reporting date with the changes in fair
value recorded in the Companys Statement of Comprehensive Loss.
The Company had previously restated its consolidated financial
statements for the periods as of and for the twelve months ended March 31, 2015
and the quarters therein and its interim condensed consolidated financial
statements for the three months ended June 30, 2015 and the three months and six
months ended September 30, 2015, as a result of the Company not previously
re-measuring the fair value of stock options awarded to non-employees that had
not yet vested. The Companys management has determined that the improper design
of controls with respect to the calculation of the fair value of the Companys
share based compensation was a deficiency in its internal control over financial
reporting. It is possible that other control deficiencies could be identified in
the future or may exist or occur without being identified. In the event
additional material weaknesses in our internal controls are discovered in the
future, they may adversely affect our ability to record, process, summarize and
report financial information timely and accurately and, as a result, our
financial statements may contain material misstatements or omissions.
We have incurred substantial net losses since our
inception and anticipate that we will continue to incur substantial net losses
for the foreseeable future. We may never achieve or sustain
profitability.
We have incurred substantial net losses since our inception.
For our fiscal years ending March 31, 2016 and March 31, 2015, we incurred a net
loss of $6,881,812 and $9,838,317, respectively, and used cash in operations of
$7,816,536 and $6,321,285 respectively. We have an accumulated deficit of
$26,305,263 and $19,423,451 as of March 31, 2016 and March 31, 2015,
respectively. Our losses have resulted primarily from costs incurred in
connection with our design, manufacturing and development, research and
development activities, stock based compensation, legal, advertising, marketing
and investor relations, and general and administrative expenses associated with
our operations. Even if we are successful in obtaining clearance from the FDA and launching our PoNS device into the
market, we expect to continue to incur substantial losses for the foreseeable
future as we continue to sell and market our current product and research and
develop, and seek regulatory approvals for, other potential product candidates.
23
We are subject to all of the business risks and uncertainties
associated with any new business enterprise, including under-capitalization,
cash shortages, limitations with respect to personnel, financial and other
resources, lack of revenue and the risk that we will not achieve our growth
objective. If sales revenue from our current product or any potential product
candidates that receive marketing clearance from the FDA or other regulatory
body is insufficient, if we are unable to develop and commercialize any of our
potential product candidates, or if our product development is delayed, we may
never achieve or sustain profitability.
We will require additional financing to carry out our
plan of operations and if we are unable to obtain such financing, our business
may fail.
We currently have limited working capital and liquid assets. We
held cash totaling $2,643,937 as at March 31, 2016. To date we have not
generated any revenue from the sales of products or of services. There are a
number of conditions that we must satisfy before we will be able to generate
revenue, including but not limited to completion of our clinical trial for the
treatment of balance disorder in subjects with mild to moderate TBI, FDA
clearance of the PoNS device for treating balance disorder in patients with
mild to moderate TBI, manufacturing of a commercially-viable version of the
PoNS device and demonstration of effectiveness sufficient to generate
commercial orders by customers for our product. While we are currently seeking
additional funding, we do not currently have sufficient resources to accomplish
any of these conditions necessary for us to generate revenue, and we do not
expect to generate revenue in an amount sufficient to fund our operations for
the foreseeable future. We will therefore require substantial additional funds
in order to continue to conduct the research and development and regulatory
clearance and approval activities necessary to bring our product to market, to
establish effective marketing and sales capabilities and to develop other
product candidates. Our existing capital resources will not be sufficient to
enable us to fund the completion of the development and commercialization of our
current product and our product candidates. We cannot determine with certainty
the duration and completion costs of the current or future development and
commercialization of our product candidate or if, when, or to what extent we
will generate revenues from the commercialization and sale of our current
product candidate or potential future product candidates for which we obtain
regulatory approval. We may never succeed in achieving regulatory approval for
our current product candidate and any potential future product candidates. We
may be unable to raise the additional funding to finance our business on
commercially reasonable terms, or at all. If we are unable to obtain additional
financing as needed, we may be required to reduce the scope of our operations
and pursue only those projects that can be funded through cash flows generated
from its existing operations, if any.
Raising additional capital by issuing securities or through
debt financings or licensing arrangements may cause dilution to our existing
stockholders, restrict our operations or require us to relinquish rights to our
technologies or product candidate on terms unfavorable to us.
To the extent that we raise additional capital through the sale
of equity or convertible debt securities, your ownership interest will be
diluted, and the terms may include liquidation or other preferences that
adversely affect your rights as a stockholder. Debt financing, if available, may
involve agreements that include covenants limiting or restricting our ability to
take certain actions, such as incurring additional debt, making capital
expenditures or declaring dividends. If we raise additional funds through
strategic partnerships with third parties, we may have to relinquish valuable
rights to our technologies or product candidate, future revenue streams,
research programs or product candidate, or otherwise grant licenses on terms
that are not favorable to us. If we are unable to raise additional capital when
needed, we may be required to delay, limit, reduce or terminate our product
development or commercialization efforts for our product candidate or our
preclinical product candidates, or grant rights to develop and market potential
future product candidates that we would otherwise prefer to develop and market
ourselves. Any of these events could adversely affect our ability to achieve our
product development and commercialization goals and have a material adverse
effect on our business, financial condition and results of operations.
We currently only have one product candidate, which is
still in development, and we have not obtained clearance from the FDA to
commercially distribute the device in the United States or clearance from Health
Canada to commercially distribute the device in Canada, and we may never obtain
such clearances.
Until such time, if ever, as we can generate substantial
product revenues, we expect to finance our cash needs through a combination of
public and private equity offerings, debt financings, and license and
development agreements through strategic partnerships with third parties. For example, we
recently completed a license agreement and debt and equity financing arrangement
with A&B. Under the agreements with A&B, we licensed the use of our
intellectual property in Asia, and arranged for financing through the issuance
of significant amounts of our common stock. We currently have no products
approved for commercial distribution. We currently are dependent on the
potential development of a single product which is our PoNS device for use in
the neuromodulation market. We are still developing this product, and we cannot
begin marketing and selling the device in the United States or Canada until we
obtain clearances from the FDA or Health Canada, respectively. We have not yet
submitted applications for regulatory clearance in the United States, Europe, or
Canada. The process of obtaining regulatory clearance is expensive and
time-consuming and can vary substantially based upon, among other things, the
type, complexity and novelty of a product. Changes in regulatory policy, changes
in or the enactment of additional statutes or regulations, or changes in
regulatory review for each submitted product application may cause delays in the
clearance of a product candidate or rejection of a regulatory application
altogether. The FDA has substantial discretion in the
de novo
review and
clearance processes and may refuse to accept any application or may decide that
our data are insufficient for clearance and require additional pre-clinical,
clinical, or other studies. In addition, varying interpretations of the data
obtained from pre-clinical and clinical testing could delay, limit, or prevent
marketing authorization from the FDA or regulatory clearance of a product
candidate. Any marketing authorization from the FDA or regulatory clearance we
ultimately obtain may be limited or subject to restrictions or post-market
commitments that render the product candidate not commercially viable. If our
attempts to obtain marketing authorization are unsuccessful, we may be unable to
generate sufficient revenue to sustain and grow our business, and our business,
financial condition, and results of operations will be materially adversely
affected.
24
If we are able to complete development of the PoNS device and
obtain clearance of the PoNS device for treatment of chronic balance deficit in
patients with mild to moderate TBI or chronic gait and balance deficit
associated with MS in the United States, Europe, or Canada, we plan to develop
the PoNS device to treat other indications, or symptoms caused by neurological
disorders. We would be required to commit our own resources to fund development
of any other indications and each would require separate FDA clearance. The
costs of such development efforts and FDA clearances would be substantial and
would likely require additional funding, and each such indication would be
subject to the same foregoing risks and uncertainties for FDA clearance.
We are and will continue to be dependent in significant
part on outside scientists and third-party research institutions for our
research and development in order to be able to commercialize our product
candidate.
We currently have a limited number of employees and resources
available to perform the research and development necessary to commercialize our
PoNS device and potential future product candidates. We therefore rely at
present, and will continue to rely on third-party research institution
collaborators for this capability.
Our subsidiary, NHC, is currently party to the CRADA (as
defined below) with the inventors, background patent owners and the Army
Laboratories. Pursuant to the CRADA, the Army Laboratories agree to cooperate
with NHC on research for the ongoing design and development to determine if the
PoNS device can be developed for commercial use in assisting physical therapy
in the treatment of soldiers and others with military relevant neurological
disorders, including but not limited to Tinnitus, post-traumatic stress
disorder, or PTSD, pain and any subsequent indications identified by the
parties. Under the terms of the initial CRADA, we are solely responsible to fund
and oversee clinical studies for the PoNS device and seek FDA clearance and
approval of the PoNS device. We are also solely responsible to complete the
research and development efforts necessary to commercialize our PoNS device.
However, on July 7, 2015, we announced that NHC entered into a sole-source
contractual agreement with USAMRMC to support the execution of the registration
trial for treatment of balance disorder associated with mild to moderate TBI.
The objective of this contract is to defray the costs of the registration trial.
The Army Laboratories also agreed in the January 12, 2015 amendment to our CRADA
to be responsible to support the execution of clinical studies for the PoNS
device as a treatment for mutually agreed upon military relevant neurological
disorders, which could include but not be limited to Tinnitus, PTSD, and pain
and any subsequent indications identified by the parties. The amount of such
support, if any, and the terms of such responsibility to support such clinical
studies are not yet negotiated and we have no assurance that we can ultimately
reach agreement with the Army Laboratories on such amount or terms of support,
and there can be no assurance that the Army Laboratories will not otherwise
attempt to renegotiate its responsibilities under the CRADA. The Army
Laboratories may terminate their obligations under the CRADA at any time upon 30
days prior written notice to us. If there are insufficient funds available to
cover the necessary research and development costs for our product, the Army
Laboratories could terminate the CRADA and cease research and development
efforts which could jeopardize our ability to commercialize our PoNS device.
25
If we fail to obtain FDA clearance for commercialization
of or otherwise fail to ensure that the PoNS device is available for purchase
by the U.S. Government by December 31, 2017, we are subject to significant risk
of loss of data, proprietary rights and to certain contractual
penalties.
Under the CRADA if we fail to obtain FDA clearance of the PoNS
device or otherwise fail to ensure that the PoNS device is available for
purchase by the U.S. Government, in each case by the expiration date under the
CRADA of December 31, 2017, we may forfeit the right to pursue commercialization
on our own. Specifically, in either such case, we will be required to (i)
transfer possession, ownership and sponsorship of any regulatory application,
and correspondence supporting the PoNS technology to the USAMRMC and (ii)
provide the U.S. Government with a non-exclusive, irrevocable license to any
patent, copyright, data rights, proprietary information and regulatory
information, in order to permit the U.S. Government to pursue commercialization
on its own. Any such loss of our ability to exclusively market and sell the
PoNS device would have a material adverse effect on our business.
Additionally, under our Strategic Agreement with A&B if we
fail to obtain FDA clearance for commercialization of or otherwise fail to
ensure that the PoNS device is available for purchase by the U.S. Government by
December 31, 2017, we are subject to a US$2,000,000 contract penalty payable to
A&B.
We may encounter substantial delays in our clinical
trials, or our clinical trials may fail to demonstrate the safety and efficacy
of our product candidate to the satisfaction of applicable regulatory
authorities.
Before obtaining marketing approval from regulatory authorities
for the sale of our product candidate, we must conduct extensive clinical trials
to demonstrate the safety and efficacy of the product candidate. Clinical
testing is expensive, time consuming and uncertain as to outcome. We cannot
guarantee that clinical trials will be conducted as planned or completed on
schedule, if at all. A failure of one or more clinical trials can occur at any
stage of testing. Delays can be costly and could negatively affect our ability
to complete a clinical trial.
There is limited market awareness of our product and the
neuromodulation market is new and uncertain.
There is currently limited market awareness of our product. In
order to succeed, we must among other things increase market awareness of our
PoNS product and implement a sales and marketing strategy. If we fail in any of
these endeavors or experience delays in pursuing them, we will not generate
revenues as planned and will need to curtail operations or seek additional
financing earlier than otherwise anticipated. In addition, should the
neuromodulation market fail to expand, it could have a materially adverse effect
on our business and financial position.
Our PoNS technology is a new untested form of
neurostimulation therapy and the medical community tends not to adopt new
therapies very rapidly, which may have a material adverse effect on our business
and financial position.
The effectiveness of our PoNS technology to treat TBI or any
other neurological disorder has not been established in studies conducted in a
controlled environment designed to produce scientifically significant results.
Accordingly, our PoNS technology is a new untested, and therefore unproven,
therapy. Unproven and untested technologies are usually more slowly adopted by
the medical community as the medical community tends to be very conservative and
does not adopt new untested therapies very rapidly. Physicians may elect not
to use our products for a variety of reasons, including:
|
|
lack or perceived lack of evidence supporting
the beneficial characteristics of our technology;
|
|
|
limited long-term data on the use of PoNS
technology for therapy;
|
|
|
physicians perception that there are
insufficient advantages of our product relative to currently available
products;
|
|
|
hospitals may choose not to purchase our
product;
|
|
|
group purchasing organizations may choose not
to contract for our product, thus limiting availability of our products to
hospital purchasers;
|
|
|
lack of coverage or adequate payment from
managed care plans and other third-party payers for our product;
|
|
|
Medicare, Medicaid or other third-party payers
may limit or not permit reimbursement for our product; and
|
|
|
the development of or improvement of
competitive products.
|
If the medical community reacts in a similar fashion to
adopting our PoNS device for neurostimulation therapy, we will not be able to
generate significant revenues, if any.
26
In order to be successful, we must expand our products
beyond our single product by commercializing new potential product candidates,
but we may not be able to do so in a timely fashion and at expected costs, or at
all.
In order to be successful, we will need to expand our product
lines beyond our PoNS device which is currently our only product. To succeed in
our commercialization efforts, we must effectively continue product development
and testing, obtain regulatory clearances and approvals, and enhance our sales
and marketing capabilities. There is no assurance that we will succeed in
bringing any of our current or potential future product candidates to market. If
we fail in bringing our product candidate to market, or experience delays in
doing so, we will not generate revenues as planned and will need to curtail
operations or seek additional financing earlier than otherwise anticipated.
The development of additional products is subject to the risks
of failure inherent in the development of new, state of the art products,
laboratory devices and products based on new technologies. These risks include:
(a) delays in product development or manufacturing; (b) unplanned expenditures
for product development or manufacturing; (c) failure of new products to have
the desired effect or an acceptable accuracy profile; (d) emergence of superior
or equivalent products; (e) failure by any potential collaborative partners to
successfully develop products; and (f) the dependence on third parties for the
manufacture, development and sale of our products. Because of these risks, our
research and development efforts or those of potential collaborative partners
may not result in any commercially viable products. If a significant portion of
these development efforts is not successfully completed, or any products are not
commercially successful, we are less likely to generate significant revenues, or
become profitable. The failure to perform such activities could have a material
adverse effect on our business, financial condition and results of its
operations.
We can provide no assurance that the development by
others of new or improved devices or products will not result in our present and
future products from becoming obsolete.
The areas in which we plan to commercialize, distribute, and/or
sell products involves rapidly developing technology. There can be no assurance
that we will be able to establish ourselves in such fields, or, if established,
that we will be able to maintain our market position, if any. There can be no
assurance that the development by others of new or improved products will not
make our present and future products, if any, superfluous or obsolete.
Our future success depends on our ability to obtain
approval on the patent for the PoNS technology, failing which we may be unable
to protect our proprietary information and any competitive advantage which may
have a material adverse effect on our business and financial condition.
Our future success will depend, in part, on our ability to
obtain patent approval for the PoNS technology. There can be no assurance that
the patent applications made will result in the issuance of patents or that the
term of the patents will be extendable after they expire in due course, which
would prevent us from being able to protect our proprietary information and may
have a material adverse effect on our business and financial condition.
Much of our know-how and technology may not be patentable,
though they may constitute trade secrets. There can be no assurance, however,
that we will be able to meaningfully protect our trade secrets. To help protect
our intellectual property rights and proprietary technology, we require
employees, consultants, advisors and collaborators to enter into confidentiality
agreements. There can be no assurance that these agreements will provide
meaningful protection for our trade secrets, knowhow or other proprietary
information in the event of any unauthorized use or disclosure.
Our intellectual property has been and may be the subject of
lawsuits. See Part I Item 3,Legal Proceedings.
If our intellectual property protection is inadequate,
competitors may gain access to our technology and undermine our competitive
position.
We regard our intended and future intellectual property as
important to our success, and we intend to rely on patent law to protect our
proprietary rights. Despite our precautions, unauthorized third parties may copy
certain portions of our devices or products or reverse engineer or obtain and
use information that we regard as proprietary. We may seek additional patents in
the future. We do not know if any future patent application will be issued with
the scope of the claims we seek, if at all, or whether any patents we receive
will be challenged or invalidated. Thus, we cannot assure you that any
intellectual property rights that we may receive can be successfully asserted in
the future or that they will not be invalidated, circumvented or challenged. In
addition, the laws of some foreign countries do not protect proprietary rights
to the same extent as do the laws of the United States. Our means of protecting
any proprietary rights we may receive in the United States or abroad may not
be adequate and competitors may independently develop a similar
technology. Any failure to protect our proprietary information and any
successful intellectual property challenges or infringement proceedings against
us could have a material adverse effect on our business, financial condition, or
results of operations.
27
We may be subject to various litigation claims and legal
proceedings, including intellectual property litigation, such as patent
infringement claims, which could adversely affect our business.
We, as well as certain of our directors and officers, may be
subject to claims or lawsuits. These lawsuits may result in significant legal
fees and expenses and could divert managements time and other resources. If the
claims contained in these lawsuits are successfully asserted against us, we
could be liable for damages and be required to alter or cease certain of our
business practices or product lines. Any of these outcomes could cause our
business, financial performance and cash position to be negatively impacted.
Additionally, our commercial success will also depend, in part,
on not infringing on the patents or proprietary rights of others. There can be
no assurance that the technologies and products used or developed by us will not
infringe such rights. If such infringement occurs and we are not able to obtain
a license from the relevant third party, we will not be able to continue the
development, manufacture, use, or sale of any such infringing technology or
product. There can be no assurance that necessary licenses to third-party
technology will be available at all or on commercially reasonable term. In some
cases, litigation or other proceedings may be necessary to defend against or
assert claims of infringement or to determine the scope and validity of the
proprietary rights of third parties. Any potential litigation could result in
substantial costs to, and diversion of, our resources and could have a material
and adverse impact on us.
An adverse outcome in any such litigation or proceeding could
subject us to significant liabilities, require us to cease using the subject
technology or require us to license the subject technology from the third party,
all of which could have a material adverse effect on our business.
On January 5, 2015, Wicab sued the Company, NHC, Mitch Tyler, a
director of the Company and NHC and Yuri Danilov, a former director of the
Company and a director of NHC,
and ANR, in the U.S. District Court for
the Western District of Wisconsin. ANR is the licensor to the Company of three
issued patents (U.S. Patent Nos. 8,849,407 and 8,909,345 and 9,020,612) and
other patents pending related to neurostimulation methods and devices. The
complaint contained various state and common law claims arising from Messrs.
Danilovs and Tylers prior employment with Wicab and relating to ownership of
two of the issued patents (U.S. Patent Nos. 8,849,407 and 8,909,345). U.S.
Patent No. 9,020,612 was not included in the Wicab complaint. The complaint
alleged, among other things, that following their departure from Wicab, Danilov
and Tyler knowingly filed patent applications for and used ideas and inventions
developed at Wicab in violation of various non-competition and confidentiality
agreements, and that the two issued patents are therefore rightfully the
property of Wicab. The complaint sought an unspecified amount of monetary
damages, an injunction preventing NHC from using the ideas and inventions in the
two patents, an order transferring ownership of the patents from ANR to Wicab,
and recovery of costs and attorneys fees. The Company conducted an internal
investigation and determined that Wicab expressly waived all rights in the two
issued patents and, additionally, that Wicabs claims were barred by the six
year statute of limitations in Wisconsin. On January 14, 2015, the Company
informed Wicab of its belief that the claims were barred due to the express
waiver and the statute of limitations. On the same day, Wicab dismissed the
complaint without prejudice.
On October 12, 2015, the Company received a letter from Wicab
alleging that the two issued patents were invalid in view of prior art cited in
the letter, including scientific publications and patent applications, and that
Paul Bach-y-Rita, Wicabs founder, should have been named as an inventor on
these two issued patents. Wicab indicated in the letter that it may file
reexamination or
inter partes
review proceedings with the U.S. Patent
Office to attempt to invalidate the claims in the two issued patents. Wicab also
stated that it would consider an unspecified business solution to resolve this
matter. On December 10, 2015, representatives of each of the Company and Wicab
met to discuss the parameters of a potential settlement. As at the date of this
filing, these discussions are ongoing and there can be no guarantee that a
settlement will be reached. In the event that a settlement with Wicab is not
reached, Wicab may file reexamination or
inter partes
review proceedings
with the U.S. Patent Office to challenge the validity of the two issued patents.
If the Company receives an adverse decision from the U.S. Patent Office in
connection with these proceedings, some or all of the claims in the two patents
may be invalidated or otherwise impaired, which could prevent the Company from
bringing an infringement suit against a future competitor for making use of the
PoNS technology for neurorehabilitation, and could have a material adverse
effect on the Companys business, operating results and financial condition.
Wicab may also take other actions against the Company, its assets, intellectual
property rights, officers, directors, employees, agents or other persons or
entities which may also have a material on business, operating results and
financial condition.
28
See Part I Item 3, Legal Proceedings.
If our expenses are greater than anticipated, then we
will have fewer funds with which to pursue our plan of operations and our
financing requirements will be greater than anticipated.
We may find that the costs of carrying out our plan of
operations are greater than we anticipate. Increased operating costs may cause
the amount of financing that we require to increase. Investors may be more
reluctant to provide additional financing if we cannot demonstrate that we can
control our operating costs. There is no assurance that additional financing
required as a result of our operating costs being greater than anticipated will
be available to us. If we do not control our operating expenses, then we will
have fewer funds with which to carry out our plan of operations with the result
that our business may fail.
Our ability to use net operating losses to offset future
taxable income may be subject to certain limitations.
Under Section 382 of the Internal Revenue Code of 1986, as
amended, substantial changes in a corporations ownership may limit the amount
of net operating losses (NOLs) that can be utilized annually in the future to
offset the corporations (and the corporations affiliates) U.S. federal and
state taxable income. Specifically, this limitation may arise in the event of a
cumulative change in ownership of more than 50% within any three-year period.
The amount of the annual limitation is determined based on the value of the
corporation that underwent the ownership change, immediately before the
ownership change. Subsequent ownership changes may further affect any limitation
in future years (including by the way of exercising of warrants). We plan to
undertake a study to analyze and determine if any historical ownership changes
of us or our subsidiary NHC have occurred to determine if there are any
permanent limitations on our ability to utilize NOLs in the future. If we
determine that an ownership change has occurred, the limitations on the use of
our NOLs could increase our U.S. federal and state tax liability and reduce the
amount of cash available for distribution to shareholders or otherwise adversely
affect the value of an investment in our common stock or Warrants.
We may not be able to build an effective distribution
network for our products.
We currently have very few employees and will likely need to
rely on third party distributors to sell our product. We cannot assure you that
we will succeed in entering into and maintaining productive arrangements with an
adequate number of distributors that are sufficiently committed to selling our
products. The establishment of a distribution network is expensive and time
consuming. As we launch new products and increase our marketing effort with
respect to existing products, we will need to continue to hire, train, retain
and motivate skilled independent distributors with significant technical
knowledge. In addition, the commissions we pay our distributors could increase
over time which would result in higher sales and marketing expenses.
Furthermore, current and potential distributors may market and sell the products
of our competitors. Even if the distributors market and sell our products, our
competitors may be able, by offering higher commission payments or other
incentives, to persuade these distributors to reduce or terminate their sales
and marketing efforts related to our products. The distributors may also help
competitors solicit business from our existing customers. Some of our
independent distributors will likely account for a significant portion of our
sales volume, and, if we were to lose them, our sales could be adversely
affected. Even if we engage and maintain suitable relationships with an adequate
number of distributors, they may not generate revenue as quickly as we expect
them to, commit the necessary resources to effectively market and sell our
products, or ultimately succeed in selling our products.
We depend on a single source for the manufacture of our
product and the loss of this third-party manufacture could harm our
business.
We will be dependent on a single third-party to manufacture and
supply our PoNS device. This manufacturer will also hold some inventory and
ship our products to our distribution center who will hold the bulk of our
inventory, warehouse and ship our products to customers as well as handle
customer service related tasks. Our reliance on a single third-party
manufacturer to supply us with our PoNS device and a separate vendor to provide
such other distribution and warranty services exposes us to risks that could
delay our sales, or result in higher costs or lost product revenues. In
particular, our manufacturer could:
|
|
encounter difficulties in achieving volume
production, quality control and quality assurance or suffer shortages of
qualified personnel, which could result in their inability to manufacture
sufficient quantities of our commercially available product to meet market
demand, or it could experience similar problems that result in the
manufacture of insufficient quantities of our product candidate; and
|
29
|
|
fail to follow and remain in compliance with
the FDA-mandated QSRs, compliance which is required for all medical
devices, or fail to document their compliance to QSRs, either of which
could lead to significant delays in the availability of materials for our
product.
|
If we are unable to obtain adequate supplies of our product
that meet our specifications and quality standards, it will be difficult for us
to compete effectively. We have no supply agreements in place with our
manufacturer and it may change the terms of our future orders or choose not to
supply us with products in the future. Furthermore, if such manufacturer fails
to perform its obligations, we may be forced to purchase our product from other
third-party manufacturers, which we may not be able to do on reasonable terms or
in sufficient time, if at all. In addition, if we are required to change
manufacturers for any reason, we will be required to verify that the new
manufacturer maintains facilities and procedures that comply with quality
standards and with all applicable regulations and guidelines. The delays
associated with the verification of a new manufacturer or the reverification of
an existing manufacturer could negatively affect our ability to produce and
distribute our product in a timely manner.
If the U.S. Army were to decide not to purchase our
product or chose to no longer provide financial support for our clinical testing
through the sole-source cost sharing contract we would face risks related to
finding new partners or customers.
The U.S. Army is under no obligation to purchase the PoNS
device from us and there is no assurance that the U.S. Army will ultimately
purchase the Companys product. Given the importance of the U.S. Army to our
commercial plans, if the U.S. Army were to eventually decide not to purchase our
product, we would need to find other buyers for our product. If the U.S. Army
were to decline to purchase our product, we may have more difficulty persuading
other third parties to purchase our product. Additionally, through our
subsidiary NHC, we are party to a sole source cost sharing contract with the
USAMRMC. Under the contract, the USAMRMC will reimburse the Company for costs
related to a registrational trial investigating the safety and effectiveness of
the PoNS device up to a maximum amount of $2,996,244. The contract expires on
December 31, 2016, however, the Company is working with the USAMRMC to extend
the contract into 2017 based on the current trial forecast timelines . If we fail to complete the registrational trial or renew the
contract by that time we face the risk of needing to find additional financial
support for the trial.
If and when we sell our products, we may be liable for
product liability claims and we may not carry sufficient product liability
insurance.
The devices and products that we intend to develop may expose
us to potential liability from personal injury claims by end-users of the
product. We intend to carry product liability insurance to protect us against
the risk that in the future a product liability claim or product recall could
materially and adversely affect our business. Inability to obtain sufficient
insurance coverage at an acceptable cost or otherwise to protect against
potential product liability claims could prevent or inhibit the
commercialization of our intended products. We cannot assure you that if and
when we commence distribution of our product that we will be able to obtain or
maintain adequate coverage on acceptable terms, or that such insurance will
provide adequate coverage against all potential claims. Moreover, even if we
maintain adequate insurance, any successful claim could materially and adversely
affect our reputation and prospects, and divert managements time and attention.
If we are sued for any injury allegedly caused by our future products our
liability could exceed our total assets and our ability to pay the liability.
We are an emerging growth company under the Jumpstart
Our Business Startups Act of 2012, or JOBS Act, and we cannot be certain if the
reduced disclosure requirements applicable to emerging growth companies will
make our common stock less attractive to investors.
We are an emerging growth company as defined in the JOBS Act.
As an emerging growth company, we may take advantage of certain exemptions
from various reporting requirements that are applicable to other public
companies that are not emerging growth companies including, but not limited
to, not being required to comply with the auditor attestation requirements of
section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements,
and exemptions from the requirements of holding a nonbinding advisory vote on
executive compensation, shareholder approval of any golden parachute payments
not previously approved and presenting the relationship between executive
compensation actually paid and our financial performance. We cannot predict if
investors will find our common stock less attractive because we may 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 more volatile. Additionally, we have irrevocably elected to
comply with new or revised accounting standards even though we are an emerging
growth company.
30
We will remain an emerging growth company for up to
five years after our first sale of common stock pursuant to a Securities Act of
1933, as amended, or the Securities Act, registration statement, although we
will lose that status sooner if our revenues exceed $1 billion, if we issue more
than $1 billion in non-convertible debt in a three year period, or if the market
value of our common stock that is held by non-affiliates exceeds $700 million as
of the end of our third quarter in any calendar year.
Our status as an emerging growth company under the JOBS Act
may make it more difficult to raise capital as and when we need it. Because of
the exemptions from various reporting requirements provided to us as an
emerging growth company, we may be less attractive to investors and it may be
difficult for us to raise additional capital as and when we need it. If we are
unable to raise additional capital as and when we need it, our financial
condition and results of operations may be materially and adversely affected.
We are a small company with limited resources compared to
some of our current and potential competitors and we may not be able to compete
effectively and increase market share.
There is potential that we will face intense competition from
other companies, some of which can be expected to have longer operating
histories and more financial resources and manufacturing and marketing
experience than us. Increased competition by larger and better financed
competitors could materially and adversely affect our business, financial
condition and our results of operations.
Because of the early stage of the industry in which we intend
to operate, we expect to face additional competition from new entrants. To be
competitive, we will require a continued high level of investment in research
and development, marketing, sales and client support. We may not have sufficient
resources to maintain research and development, marketing, sales and client
support efforts on a competitive basis which could materially and adversely
affect our business, financial condition and our results of operations.
We have incurred increased costs and have become subject
to additional regulations and requirements as a result of becoming a public
company, which could lower our profits, if any, or make it more difficult to run
our business.
As a public company, we have incurred significant legal,
accounting and other expenses that we did not incur as a private company,
including costs associated with public company reporting requirements. We will
continue to incur costs associated with the rules implemented by the SEC, the
TSX, the OTCQB, and any other exchange on which our common stock may become
listed. The expenses incurred by public companies for reporting and corporate
governance purposes have generally been increasing. These rules and regulations
have increased our legal and financial compliance costs and have made some
activities more time-consuming and costly. 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 and other
regulatory action and potentially civil litigation.
Several people who work for us on a part-time consulting
basis may be subject to conflicts of interest.
Several people who provide services to us do so on a part-time
consulting basis. Each may devote part of his working time to other business
endeavors, including consulting relationships with other corporate entities, and
may have responsibilities to these other entities. Because of these
relationships, some of the persons who provide services to us may be subject to
conflicts of interest. Such conflicts may include deciding how much time to
devote to our affairs, as well as what business opportunities should be
presented to us.
31
Risks Related to Government Regulation
Before we can market and sell our products, we will be
required to obtain approval and clearance by the FDA and foreign regulatory
authorities. These approvals and clearances will take significant time and
require significant research, development, and clinical study expenditures, and
ultimately may not succeed.
Before we begin to label and market the PoNS device for use in
the United States, we are required to obtain clearance from the FDA under
Section 510(k) of the FD&C Act, approval of a de novo reclassification
petition for our product, or approval of pre-market approval application from
the FDA, unless an exemption from pre-market review applies. We intend to
utilize the de novo classification procedures to seek marketing authorization
for the PoNS device, because there is currently no predicate cleared or
approved by the FDA for commercial distribution and no existing classification
decision by the FDA for such a device. We will also be required to comply with
costly and time-consuming compliance by foreign regulatory authorities if we
want to sell our products outside of the United States. The process of obtaining
regulatory clearances or approvals, or completing the de novo classification
process, to market a medical device can be costly and time consuming, and we may
not be able to successfully obtain pre-market reviews on a timely basis, if at
all.
If the FDA requires us to go through a lengthier, more rigorous
examination for the PoNS device, introducing the product could be delayed or
canceled, which could cause our launch to be delayed. In addition, the FDA may
determine that the PoNS device requires the more costly, lengthy and uncertain
pre-market approval process. For example, if the FDA disagrees with our
determination that the de novo classification procedures are the appropriate
path to obtain marketing authorizations for the PoNS device, the FDA may
require us to submit a PMA application, which is generally more costly and
uncertain and can take from one to three years, or longer, from the time the
application is submitted to the FDA until an approval is obtained.
Further, even with respect to those future products where a PMA
is not required, we cannot be certain that we will be able to obtain 510(k)
clearances with respect to those products.
Obtaining FDA clearance will be costly, may result in
time-consuming delays and will subject us to ongoing compliance costs and
regulatory risk for non-compliance.
Obtaining FDA clearance,
de novo
down-classification, or
approval for medical devices can be expensive and uncertain, and generally takes
from several months to several years, and generally requires detailed and
comprehensive scientific and clinical data. Notwithstanding the expense, these
efforts may never result in FDA clearance. Even if we were to obtain regulatory
clearance, it may not be for the uses we believe are important or commercially
attractive, in which case we would not be permitted to market our product for
those uses.
The FDA can delay, limit or deny clearance or approval of a
device for many reasons, including:
|
|
we may not be able to demonstrate to the FDAs
satisfaction that our product candidate is safe and effective, sensitive
and specific diagnostic tests, for its intended users;
|
|
|
the data from our pre-clinical studies and
clinical trials may be insufficient to support clearance or approval,
where required; and
|
|
|
the manufacturing process or facilities we use
may not meet applicable requirements.
|
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 initiated an evaluation of the
program, and in January 2011, announced several proposed actions intended to
reform the review process governing the clearance of medical devices. The FDA
intends these reform actions to improve the efficiency and transparency of the
clearance process, as well as bolster patient safety. In addition, as part of
the FDASIA the U.S. 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-approval. Any delay in, or failure to receive or maintain, clearance or
approval for our product candidate could prevent us from generating revenue from
our product candidate and adversely affect our business operations and financial
results.
Even if granted, a 510(k) clearance,
de novo
down-classification, or pre-market approval for any future product would likely
place substantial restrictions on how our device is marketed or sold, and FDA
will continue to place considerable restrictions on our products and operations.
For example, the manufacture of medical devices must comply with FDAs QSR. In
addition, manufacturers must register their manufacturing facilities, list the
products with FDA, and comply with requirements relating to labeling, marketing,
complaint handling, adverse event and medical device reporting, reporting of
corrections and removals, and import and export. FDA monitors compliance with
the QSR and these other requirements through periodic inspections. If our facilities or those of our manufacturers or
suppliers are found to be in violation of applicable laws and regulations, or if
we or our manufacturers or suppliers fail to take satisfactory corrective action
in response to an adverse inspection, the regulatory authority could take
enforcement action, including any of the following sanctions:
32
|
|
untitled letters, warning letters, fines, injunctions,
consent decrees and civil penalties;
|
|
|
customer notifications of repair, replacement, refunds,
detention or seizure of our products
|
|
|
operating restrictions or partial suspension or total
shutdown of production;
|
|
|
refusing or delaying requests for 510(k) marketing
clearance or pre-market approvals of new products or modified products;
|
|
|
withdrawing 510(k) marketing clearances or pre-market
approvals that have already been granted;
|
|
|
refusing to provide Certificates for Foreign Government;
|
|
|
refusing to grant export approval for our products; or
|
|
|
pursuing criminal prosecution
|
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
product candidate and dissuade our customers from using our product candidate,
if and when it is authorized for marketing.
We expect to be required to conduct clinical trials to
support regulatory approval of some of our potential future product candidates.
We have limited experience in the clinical trials process, they may proceed more
slowly than anticipated, and we cannot be certain that our product candidate
will be shown to be safe and effective for human use.
In order to commercialize our product candidate in the United
States, we may be required by the FDA to submit an application for PMA for
review and approval by the FDA. A PMA application must be submitted to the FDA
if our device cannot be cleared through the 510(k) clearance process or is not
exempt from premarket review by the FDA. We could also be required to submit a
PMA application for other potential future product candidates. If we are
required by the FDA to submit a PMA application, the FDA will also require us to
conduct clinical trials. The FDA could also require us to provide the FDA with
clinical trial data to support some of our 510(k) premarket notifications. We
will receive approval or clearance from the FDA to commercialize products
requiring a clinical trial only if we can demonstrate to the satisfaction of the
FDA, through well-designed and properly conducted clinical trials, that our
product candidate is safe and effective and otherwise meet the appropriate
standards required for approval or clearance for specified indications.
Clinical trials are complex, expensive, time consuming,
uncertain and are subject to substantial and unanticipated delays. Before we may
begin clinical trials, we must submit and obtain approval for an investigational
device exemption, or IDE, that describes, among other things, the manufacture
of, and controls for, the device and a complete investigational plan. Clinical
trials generally involve a substantial number of patients in a multi-year study.
Because we do not have the experience or the infrastructure necessary to conduct
clinical trials, we will have to hire one or more contract research
organizations, or CROs, to conduct trials on our behalf. CRO contract
negotiations may be costly and time consuming and we will rely heavily on the
CRO to ensure that our trials are conducted in accordance with regulatory and
industry standards. We may encounter problems with our clinical trials and any
of those problems could cause us or the FDA to suspend those trials, or delay
the analysis of the data derived from them.
A number of events or factors, including any of the following,
could delay the completion of our clinical trials in the future and negatively
impact our ability to obtain FDA approval for, and to introduce our product
candidate:
|
|
failure to obtain financing necessary to bear the cost of
designing and conducting clinical trials;
|
|
|
failure to obtain approval from the FDA or foreign
regulatory authorities to commence investigational studies;
|
|
|
conditions imposed on us by the FDA or foreign regulatory
authorities regarding the scope or design of our clinical trials;
|
|
|
failure to find a qualified CRO to conduct our clinical
trials or to negotiate a CRO services agreement on favorable terms;
|
|
|
delays in obtaining or in our maintaining required
approvals from institutional review boards or other reviewing entities at
clinical sites selected for participation in our clinical trials;
|
|
|
insufficient supply of our product candidate or other
materials necessary to conduct our clinical trials;
|
|
|
difficulties in enrolling patients in our clinical
trials;
|
33
|
|
negative or inconclusive results from clinical trials, or
results that are inconsistent with earlier results, that necessitate
additional clinical studies;
|
|
|
failure on the part of the CRO to conduct the clinical
trial in accordance with regulatory requirements;
|
|
|
our failure to maintain a successful relationship with
the CRO or termination of our contractual relationship with the CRO before
completion of the clinical trials;
|
|
|
serious or unexpected side effects experienced by
patients in whom our product candidate are implanted; or
|
|
|
failure by any of our third-party contractors or
investigators to comply with regulatory requirements or meet other
contractual obligations in a timely manner.
|
Our clinical trials may need to be redesigned or may not be
completed on schedule, if at all. Delays in our clinical trials may result in
increased development costs for our product candidate, which could cause our
stock price to decline and limit our ability to obtain additional financing. In
addition, if one or more of our clinical trials are delayed, competitors may be
able to bring products to market before we do, and the commercial viability of
our product candidate could be significantly reduced.
We will be substantially dependent on third parties to
conduct clinical trials.
As we are required to conduct clinical trials to obtain FDA
clearance, we need to rely heavily on third parties over the course of our
clinical trials, and as a result will have limited control over the clinical
investigators and limited visibility into their day-to-day activities.
Nevertheless, we are responsible for ensuring that each of our studies is
conducted in accordance with the applicable protocol and legal, regulatory, and
scientific standards, and our reliance on third parties does not relieve us of
our regulatory responsibilities. We and these third parties are required to
comply with current good clinical practices, or cGCPs, which are regulations and
guidelines enforced by the FDA and comparable foreign regulatory authorities for
product candidates in clinical development. Regulatory authorities enforce these
cGCPs through periodic inspections of trial sponsors, principal investigators,
and trial sites. If we or any of these third parties fail to comply with
applicable cGCP regulations, the clinical data generated in our clinical trials
may be deemed unreliable and the FDA or comparable foreign regulatory
authorities may require us to perform additional nonclinical or clinical trials
before approving our marketing applications. We cannot be certain that, upon
inspection, such regulatory authorities will determine that any of our clinical
trials comply with the cGCP regulations. In addition, our clinical trials may be
required to be conducted with a large number of test patients. Our failure or
any failure by these third parties to comply with these regulations or to
recruit a sufficient number of patients may require us to repeat clinical
trials, which would delay the regulatory approval process. Moreover, our
business may be implicated if any of these third parties violates federal or
state fraud and abuse or false claims laws and regulations or healthcare privacy
and security laws.
Any third parties conducting our clinical trials are not and
will not be our employees and, except for remedies available to us under our
agreements with such third parties, we cannot control whether or not they devote
sufficient time and resources to our ongoing preclinical, clinical, and
nonclinical programs. These third parties may also have relationships with other
commercial entities, including our competitors, for whom they may also be
conducting clinical studies or other drug development activities, which could
affect their performance on our behalf. If these third parties do not
successfully carry out their contractual duties or obligations or meet expected
deadlines, if they need to be replaced, or if the quality or accuracy of the
clinical data they obtain is compromised due to the failure to adhere to our
clinical protocols or regulatory requirements or for other reasons, our clinical
trials may be extended, delayed, or terminated and we may not be able to
complete development of, obtain regulatory approval of or successfully
commercialize our product candidate. As a result, our financial results and the
commercial prospects for our product candidate would be harmed, our costs could
increase, and our ability to generate revenue could be delayed.
If any of our relationships terminate with these third-party
CROs, we may not be able to enter into arrangements with alternative CROs or do
so on commercially reasonable terms. Switching or adding additional CROs
involves additional cost and requires management time and focus. In addition,
there is a natural transition period when a new CRO begins work. As a result,
delays occur, which can materially impact our ability to meet our desired
clinical development timelines. Though we carefully manage our relationships
with our CROs, there can be no assurance that we will not encounter similar
challenges or delays in the future or that these delays or challenges will not
have a material adverse impact on our business, financial condition, and
prospects.
34
If we are unable to obtain a reimbursement code from the
U.S. Department of Health and Human Services so that the PoNS device is covered
under Medicare and Medicaid, this would have a negative impact on our intended
sales and would have a material adverse effect on our business, financial
condition and operating results.
We plan to submit an application to the U.S. Department of
Health and Human Services for reimbursement code so that the PoNS device is
covered under Medicare and Medicaid. There can be no assurance that our
application will be successful, or that we will be able to obtain a
reimbursement code in a timely manner. In the event that we do not obtain a
reimbursement code for the PoNS device, our customers may be unable to obtain
reimbursement for their purchases under private or government-sponsored
insurance plans which would have a negative impact on sales and have a material
adverse effect on our business, financial condition and operating results. In
addition, Medicare and its administrative contractors as well as other insurers
must find that the PoNS device meets their medical necessity requirements for
the treatment of patients or they will not pay for the device. In addition,
there is a risk that the payment amount for the PoNS device is too low to
incentivize customer adoption.
If hospitals and other healthcare providers are unable to
obtain coverage or adequate reimbursement for procedures performed with our
products, our product will not likely be widely used.
In the United States, the commercial success of our existing
product and any future products will depend, in part, on the extent to which
governmental payers at the federal and state levels, including Medicare and
Medicaid, private health insurers and other third-party payers provide coverage
for and establish adequate reimbursement levels for procedures utilizing our
products. Hospitals and other healthcare providers that purchase our product for
treatment of their patients generally rely on third-party payers to pay for all
or part of the costs and fees associated with our products as part of a
bundled rate for the associated procedures. The existence of coverage and
adequate reimbursement for our products and the procedures performed with them
by government and private payers critical to market acceptance of our existing
and future products. Neither hospitals nor physicians are likely to use our
product and any future products if they do not receive adequate reimbursement
for the procedures utilizing our products.
Many private payers currently base their reimbursement policies
on the coverage decisions and payment amounts determined by the CMS, which
administers the Medicare program. Others may adopt different coverage or
reimbursement policies for procedures performed with our products, while some
governmental programs, such as Medicaid, have reimbursement policies that vary
from state to state, some of which may not pay for the procedures performed with
our products in an adequate amount, if at all. A Medicare national or local
coverage decision denying coverage for one or more of our products could result
in private and other third-party payers also denying coverage for our products.
Third-party payers also may deny reimbursement for our products if they
determine that a product used in a procedure was not medically necessary, was
not used in accordance with cost-effective treatment methods, as determined by
the third-party payer, or was used for an unapproved use. Unfavorable coverage
or reimbursement decisions by government programs or private payers underscore
the uncertainty that our products face in the market and could have a material
adverse effect on our business.
Many hospitals and clinics in the United States belong to group
purchasing organizations, which typically incentivize their hospital members to
make a relatively large proportion of purchases from a limited number of vendors
of similar products that have contracted to offer discounted prices. Such
contracts often include exceptions for purchasing certain innovative new
technologies, however. Accordingly, the commercial success of our products may
also depend to some extent on our ability to either negotiate favorable purchase
contracts with key group purchasing organizations and/or persuade hospitals and
clinics to purchase our product off contract.
The healthcare industry in the United States has experienced a
trend toward cost containment as government and private payers seek to control
healthcare costs by paying service providers lower rates. While we believe that
hospitals will be able to obtain coverage for procedures using our products, the
level of payment available to them for such procedures may change over time.
State and federal healthcare programs, such as Medicare and Medicaid, closely
regulate provider payment levels and have sought to contain, and sometimes
reduce, payment levels. Private payers frequently follow government payment
policies and are likewise interested in controlling increases in the cost of
medical care. In addition, some payers are adopting pay-for-performance programs
that differentiate payments to healthcare providers based on the achievement of
documented quality-of-care metrics, cost efficiencies, or patient outcomes.
These programs are intended to provide incentives to providers to deliver the
same or better results while consuming fewer resources. As a result of these
programs, and related payer efforts to reduce payment levels, hospitals and
other providers are seeking ways to reduce their costs, including the amounts
they pay to medical device manufacturers. We may not be able to sell our
implants profitably if third-party payers deny or discontinue coverage or reduce
their levels of payment below that which we project, or if our production costs
increase at a greater rate than payment levels. Adverse changes in payment rates
by payers to hospitals could adversely impact our ability to market and sell our
products and negatively affect our financial performance.
35
In international markets, medical device regulatory
requirements and healthcare payment systems vary significantly from country to
country, and many countries have instituted price ceilings on specific product
lines. We cannot assure you that our products will be considered cost-effective
by international third-party payers, that reimbursement will be available or, if
available, that the third-party payers reimbursement policies will not
adversely affect our ability to sell our products profitably. Any failure to
receive regulatory or reimbursement approvals would negatively impact market
acceptance of our products in any international markets in which those approvals
are sought.
Risks Related to Our Common Stock
A decline in the price of our common stock could affect
our ability to raise any required working capital and adversely impact our
operations.
A decline in the price of our common stock could result in a
reduction in the liquidity of our common stock and a reduction in our ability to
raise any required capital for our operations. Because our operations to date
have been principally financed through the sale of equity securities, a decline
in the price of our common stock could have an adverse effect upon our liquidity
and our continued operations. A reduction in our ability to raise equity capital
in the future may have a material adverse effect upon our business plan and
operations. If our stock price declines, we may not be able to raise additional
capital or generate funds from operations sufficient to meet our obligations.
Our common stock does not have a well-established trading
market in the United States. Trading of our common stock is sporadic, and the
price of our common stock may be volatile; we caution you as to the highly
illiquid nature of an investment in our shares.
Our common stock is currently periodically quoted on the OTCQB
electronic quotation service operated by OTC Markets Group Inc. A
well-established market for our common stock may never develop in the United
States. Trading in stock quoted on the OTCQB is often thin and characterized by
wide fluctuations in trading prices, due to many factors that may have little to
do with our operations or business prospects. This volatility could depress the
market price of our common stock for reasons unrelated to operating performance
or future prospects of our business. Moreover, the OTCQB is not a stock
exchange, and trading of securities on the OTCQB is often more sporadic than the
trading of securities listed on a quotation system like NASDAQ or a stock
exchange like Amex. Accordingly, shareholders may have difficulty reselling any
of the shares.
Our common stock has been listed on the TSX since April 18,
2016. Certain shares of our common stock are also restricted for immediate
resale to U.S. persons or to anyone for the account or on behalf of any U.S.
person, pursuant to the requirements of Regulation S. These shares are traded
separately on the TSX under a separate ticker symbol. To date, trading on the
TSX in our common stock has been extremely limited and sporadic. Trading in our
common stock on the CSE was also extremely limited.
Our Warrants were also approved for listing on the TSX on April
18, 2016. However, because only the Warrants issued in the Offshore Offering in
transactions exempt from the registration requirements of the Securities Act
were approved for listing on the TSX, the Warrants listed on the TSX may not be
purchased by or on behalf of a U.S. person, or by a person in the United States,
unless in a registered transaction or pursuant to an applicable safe harbor or
exemption from registration.
Securities of microcap and small-cap companies have experienced
substantial volatility in the past, often based on factors unrelated to the
companies financial performance or prospects. We believe that trading in our
stock, if it occurs at all, will likely be subject to significant volatility
since, among other reasons, we do not have nor will we have in the foreseeable
future an active trading market in our stock. These factors include
macroeconomic developments in North America and globally and market perceptions
of the attractiveness of particular industries. Factors unrelated to our
performance that may affect the price of our common stock include the following:
the extent of analytical coverage available to investors concerning our business
may be limited if investment banks with research capabilities do not follow us,
a reduction in trading volume and general market interest in our common stock
may affect an investors ability to trade significant numbers of shares of our
common stock; the size of our public float may limit the ability of some
institutions to invest in our common stock; and a substantial decline in the
price of shares of our common stock that persists for a significant period of
time could cause our common stock, if listed on an exchange, to be delisted from
such exchange, further reducing market liquidity. As a result of any of these
factors, the market price of our common stock at any given point in time may not
accurately reflect our long-term value. The price of our common shares may
increase or decrease in response to a number of events and factors, including:
changes in financial estimates; our acquisitions and financings; quarterly
variations in our operating results; the operating and share price performance of other companies that
investors may deem comparable; and purchase or sale of blocks of our common
stock. These factors, or any of them, may materially adversely affect the prices
of our common shares regardless of our operating performance. We caution you as
to the highly illiquid nature of an investment in our shares.
36
The market price of our common stock is affected by many other
variables which are not directly related to our success and are, therefore, not
within our control. These include other developments that affect the breadth of
the public market for shares of our common stock and the attractiveness of
alternative investments. The effect of these and other factors on the market
price of our common stock is expected to make our common stock price volatile in
the future, which may result in losses to investors.
We have not voluntarily implemented various corporate
governance measures, in the absence of which, shareholders may have more limited
protections against interested director transactions, conflicts of interest and
similar matters.
Federal legislation, including the Sarbanes-Oxley Act of 2002,
has resulted in the adoption of various corporate governance measures designed
to promote the integrity of the corporate management and the securities markets.
Some of these measures have been adopted in response to legal requirements.
Others have been adopted by companies in response to the requirements of
national securities exchanges, such as the NYSE or the Nasdaq Stock Market, on
which their securities are listed. Among the corporate governance measures that
are required under the rules of national securities exchanges are those that
address board of directors independence, and audit committee oversight. We have
not yet adopted many of these corporate governance measures, including
|
|
the requirement that our board of directors be composed
of a majority of independent directors; and
|
|
|
the requirement that we have a nominating and corporate
governance committee, a compensation committee and an audit committee
composed entirely of independent directors, with written charters
addressing the committees purpose and responsibilities.
|
It is possible that if we were to adopt some or all of these
corporate governance measures, stockholders would benefit from somewhat greater
assurances that internal corporate decisions were being made by disinterested
directors and that policies had been implemented to define responsible conduct.
Investors should bear in mind our current lack of corporate governance measures
in formulating their investment decisions.
Our shares are subject to potential delisting if we do
not meet or continue to maintain the listing requirements of the TSX.
The TSX rules for continued listing include minimum market
capitalization and other requirements. Failure to maintain our listing on the
TSX or being de-listed from the TSX would make it more difficult for
shareholders to dispose of our common stock and more difficult to obtain
accurate quotations on our common stock. This could have an adverse effect on
the price of our common stock. Our ability to issue additional securities for
financing or other purposes, or to otherwise arrange for any financing we may
need in the future, may also be materially and adversely affected if our common
stock is not traded on a national securities exchange.
The market price of our common stock is likely to be
highly volatile and subject to wide fluctuations, and you may be unable to
resell your shares at or above the price at which you acquired them, or at
all.
The market price of our common stock is likely to be highly
volatile and could be subject to wide fluctuations in response to a number of
factors that are beyond our control, including, but not limited to:
|
|
quarterly variations in our revenues and
operating expenses;
|
|
|
developments in the financial markets and
worldwide or regional economies;
|
|
|
announcements of innovations or new products or
services by us or our competitors;
|
|
|
announcements by the government relating to
regulations that govern our industry;
|
|
|
significant sales of our common stock or other
securities in the open market;
|
|
|
variations in interest rates;
|
|
|
changes in the market valuations of other
comparable companies; and
|
|
|
changes in accounting principles.
|
37
In the past, stockholders have often instituted securities
class action litigation after periods of volatility in the market price of a
companys securities. If a stockholder were to file any such class action suit
against us, we would incur substantial legal fees and our managements attention
and resources would be diverted from operating our business to respond to the
litigation, which could harm our business.
Our two major shareholders have the ability to take
shareholder action without the involvement of our other shareholders.
In accordance with our governing documents, any action required
to be taken at a shareholders' meeting may be taken without a meeting if
consents in writing setting forth the action so taken are signed by the holders
of our outstanding shares having not less than the minimum number of votes that
would be required to authorize or take the action at a meeting at which all
shares entitled to vote on the action were present and voted. Currently, our two
major shareholders, MPJ Healthcare, LLC (MPJ) and ANR, hold approximately 39%
of our outstanding shares of common stock. Philippe Deschamps, our Chief
Executive Officer, and Jonathan Sackier, our Chief Medical Officer, each serve
on the board of members of MPJ.
Our two major shareholders may have the ability to take
shareholder action at a shareholders' meeting even if they do not hold a
majority of our outstanding common stock.
As long as our two major shareholders, MPJ and ANR,
collectively hold at least 33 1/3% of our outstanding common stock, they may be
able to effect a vote requiring shareholder approval. In accordance with our
governing documents, shareholders holding at least five percent of all the votes
entitled to be cast on a proposal may call a special meeting to vote on the
proposal. Also in accordance with our governing documents, quorum for a
shareholders' meeting is at least 33 1/3% of our outstanding common stock
entitled to vote and, where quorum is present, shareholder action may be taken
by the affirmative vote of a majority of the shares represented at the meeting
and entitled to vote. Accordingly, if our two major shareholders call a meeting
and establish quorum, they can effect shareholder approval on a proposal unless
other shareholders holding a greater number of shares than our two major
shareholders were present at the meeting, either in person or by proxy, and vote
against the proposal. There is no guarantee that such other shareholders will be
present at any such meeting or, even if they were present at such meeting, will
vote against the proposal.
We are authorized to issue an unlimited number of Class A
common stock, and we intend to issue significantly more shares to raise capital,
which would result in substantial dilution to your investment in our
shares.
Our Articles of Incorporation authorize the issuance of an
unlimited number of Class A common shares, that can be issued for such
consideration and on such terms and conditions as are established by our board
of directors without the approval of any of our shareholders. Any additional
financings effected by us may result in the issuance of additional securities
without stockholder approval and the substantial dilution in the percentage of
common stock held by our then existing stockholders. Moreover, the common stock
issued in any such transaction may be valued on an arbitrary or non-arms-length
basis by our management, resulting in an additional reduction in the percentage
of common stock held by our current stockholders. Our board of directors has the
power to issue any or all of such authorized but unissued shares without
stockholder approval. To the extent that additional shares of common stock or
preferred stock are issued in connection with a financing, dilution to the
interests of our stockholders will occur and the rights of the holders of common
stock might be materially and adversely affected. We may issue additional common
shares in connection with a future financing or acquisition. The issuance of
additional common shares may dilute an investors investment in us and reduce
cash available for distribution per common share, if any dividends are declared
by the board of directors in the future.
We have not paid any dividends and do not foresee paying
dividends in the future.
We intend to retain earnings, if any, to finance the growth and
development of our business and do not intend to pay cash dividends on shares of
our common stock in the foreseeable future. The payment of future cash
dividends, if any, will be reviewed periodically by the board of directors and
will depend upon, among other things, conditions then existing including
earnings, financial condition and capital requirements, restrictions in
financing agreements, business opportunities and other factors.
38
A significant portion of our outstanding common stock may
be sold into the public market in the future, which could cause the market price
of our common stock to drop significantly, even if our business is doing
well.
Sales of a substantial number of shares of our common stock in
the public market could occur in the future. These sales, or the market
perception that the holders of a large number of shares of our common stock
intend to sell shares, could reduce the market price of our common stock.
Our stock is a penny stock. Trading of our stock may be
restricted by the SECs penny stock regulations which may limit a stockholders
ability to buy and sell our stock.
Our stock is a penny stock. The SEC has adopted Rule 15g-9
which generally defines penny stock to be any equity security that has a
market price (as defined) less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions. Our securities are covered
by the penny stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
accredited investors. The term accredited investor refers generally to
institutions with assets in excess of $5,000,000 or individuals with a net worth
in excess of $1,000,000, not including any equity in that persons or persons
spouses primary residence, or annual income exceeding $200,000 or $300,000
jointly with their spouse. The penny stock rules require a broker-dealer, prior
to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document in a form prepared by the SEC
which provides information about penny stocks and the nature and level of risks
in the penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customers
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customers confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchasers written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our common stock.
FINRA sales practice requirements may also limit a
stockholders ability to buy and sell our stock.
In addition to the penny stock rules promulgated by the SEC,
the Financial Industry Regulatory Authority (FINRA) has adopted rules that
require that in recommending an investment to a customer, a broker-dealer must
have reasonable grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customers financial status, tax status, investment
objectives and other information. Under interpretations of these rules, FINRA
believes that there is a high probability that speculative low priced securities
will not be suitable for at least some customers. The FINRA requirements make it
more difficult for broker-dealers to recommend that their customers buy our
common stock, which may limit your ability to buy and sell our stock.
Any future sales of our equity securities will dilute the
ownership percentage of our existing stockholders and may decrease the market
price for our common stock.
Future sales or issuances of equity securities could decrease
the value of our common stock, dilute stockholders voting power and reduce
future potential earnings per share. We intend to sell additional equity
securities in future offerings (including through the sale of securities
convertible into shares of our common stock) and may issue additional equity
securities to finance our operations, development, acquisitions or other
projects. We cannot predict the size of future sales and issuances of equity
securities or the effect, if any, that future sales and issuances of equity
securities will have on the market price of our common stock. Sales or issuances
of a substantial number of equity securities, or the perception that such sales
could occur, may adversely affect prevailing market prices for our common stock.
With any additional sale or issuance of equity securities, investors will suffer
dilution of their voting power and may experience dilution in our earnings per
share.
Anti-takeover provisions may limit the ability of another
party to acquire us, which could cause our stock price to decline.
Though not now, we may be or in the future we may become
subject to Wyomings control share law. The law focuses on the acquisition of a
controlling interest which means the ownership of outstanding voting shares
sufficient, but for the control share law, to enable the acquiring person to
exercise the following proportions of the voting power of the corporation in the
election of directors: (i) one-fifth or more but less than one-third, (ii)
one-third or more but less than a majority, or (iii) a majority or more. The ability to exercise such voting power may
be direct or indirect, as well as individual or in association with others. The
effect of the control share law is that the acquiring person, and those acting
in association with it, obtains only such voting rights in the control shares as
are conferred by a resolution of the stockholders of the corporation, approved
at a special or annual meeting of stockholders. The control share law
contemplates that voting rights will be considered only once by the other
stockholders. Thus, there is no authority to strip voting rights from the
control shares of an acquiring person once those rights have been approved. If
the stockholders do not grant voting rights to the control shares acquired by an
acquiring person, those shares do not become permanent non-voting shares. The
acquiring person is free to sell its shares to others. If the buyers of those
shares themselves do not acquire a controlling interest, their shares do not
become governed by the control share law. If control shares are accorded full
voting rights and the acquiring person has acquired control shares with a
majority or more of the voting power, any stockholder of record, other than an
acquiring person, who has not voted in favor of approval of voting rights is
entitled to demand fair value for such stockholders shares.
39
Wyomings control share law may have the effect of discouraging
takeovers of the corporation. In addition to the control share law, Wyoming has
a business combination law which prohibits certain business combinations between
Wyoming corporations and interested stockholders for three years after the
interested stockholder first becomes an interested stockholder, unless the
corporations board of directors approves the combination in advance. For
purposes of Wyoming law, an interested stockholder is any person who is (i)
the beneficial owner, directly or indirectly, of ten percent or more of the
voting power of the outstanding voting shares of the corporation, or (ii) an
affiliate or associate of the corporation and at any time within the three
previous years was the beneficial owner, directly or indirectly, of ten percent
or more of the voting power of the then outstanding shares of the corporation.
The definition of the term business combination is sufficiently broad to cover
virtually any kind of transaction that would allow a potential acquirer to use
the corporations assets to finance the acquisition or otherwise to benefit its
own interests rather than the interests of the corporation and its other
stockholders. The effect of Wyomings business combination law is to potentially
discourage parties interested in taking control of the Company from doing so if
it cannot obtain the approval of our board of directors.
In addition, our Articles of Incorporation provide for
unlimited authorized shares of our Class A common stock. Our authorized but
unissued shares of common stock will be available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
unlimited authorized but unissued shares of common stock could render more
difficult or discourage an attempt to obtain control of a majority of our Class
A common stock by means of a proxy contest, tender offer, merger or otherwise.
Holders of our Warrants will have no rights as
shareholders until such holders exercise their Warrants and acquire our common
shares.
Until holders of Warrants acquire common shares upon exercise
of the Warrants, holders of Warrants will have no rights with respect to the
common shares underlying such Warrants. Upon exercise of the Warrants, the
holders thereof will be entitled to exercise the rights of common shareholders
only as to matters for which the record date occurs after the exercise date.
If securities or industry analysts do not publish or
cease publishing research or reports about us, our business or our market, or if
they change their recommendations regarding our stock adversely, our stock price
and trading volume could decline.
The trading market for our common stock will be influenced by
the research and reports that industry or securities analysts may publish about
us, our business, our market or our competitors. If any of the analysts who may
cover us change their recommendation regarding our stock adversely, or provide
more favorable relative recommendations about our competitors, our stock price
would likely decline. If any analyst who may cover us were to cease coverage of
our company or fail to regularly publish reports on us, we could lose visibility
in the financial markets, which in turn could cause our stock price or trading
volume to decline.