RISK
FACTORS
An
investment in our securities involves a high degree of risk. You should carefully read and consider the risks described below,
as well as the other information in this prospectus and other information incorporated by reference herein, before deciding to
invest in our securities. The occurrence of any of the following risks could have a material adverse effect on our business, financial
condition, results of operations or cash flows. In that case, the trading price of our common stock could decline, and you could
lose all or part of your investment.
Risks
Related to Our Business and Strategy
We
have incurred 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 the years ended December 31, 2015 and 2014 we incurred a net loss
of $23.9 million and $32.6 million, respectively, and used cash in operations of $9.1 million and $14.5 million, respectively.
We have an accumulated deficit of $209.3 million at September 30, 2016. Our losses have resulted principally from costs incurred
in connection with our sales and marketing activities, research and development activities, manufacturing activities, general
and administrative expenses associated with our operations, impairments on intangible assets, interest expense, loss on extinguishment
of debt and offering costs. Even if we are successful in launching additional products into the market, we expect to continue
to incur substantial losses for the foreseeable future as we continue to sell and market our current products and research and
develop, and seek regulatory approvals for, our product candidates.
If
sales revenue from any of our current products or 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 product candidates, or if our product development
is delayed, we may never become profitable. Even if we do become profitable, we may be unable to sustain or increase our profitability
on a quarterly or annual basis.
Our
success depends on our ability to successfully commercialize silicon nitride-based medical devices, which to date have experienced
only limited market acceptance.
We
believe we are the first and only company to use silicon nitride in medical applications. To date, however, we have had limited
acceptance of our silicon nitride-based products and our product revenue has been derived substantially from our non-silicon nitride
products. In order to succeed in our goal of becoming a leading biomaterial technology company utilizing silicon nitride, we must
increase market awareness of our silicon nitride interbody spinal fusion products, continue to implement our sales and marketing
strategy, enhance our commercial infrastructure and commercialize our silicon nitride joint replacement components and other products.
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.
Our
current products and our future products may not be accepted by hospitals and surgeons and may not become commercially successful.
Although
we received 510(k) regulatory clearance from the FDA for our first silicon nitride spinal fusion products in 2008, we have not
been able to obtain significant market share of the interbody spinal fusion market to date, and may not obtain such market share
in the future. Even if we receive regulatory clearances or approvals for our product candidates in development, these product
candidates may not gain market acceptance among orthopedic surgeons and the medical community. Orthopedic surgeons may elect not
to use our products for a variety of reasons, including:
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lack
or perceived lack of evidence supporting the beneficial characteristics of our silicon nitride technology;
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limited
long-term data on the use of silicon nitride in medical devices;
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lower
than expected clinical benefits in comparison with other products;
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the
perception by surgeons that there are insufficient advantages of our products relative to currently available products;
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hospitals
may choose not to purchase our products;
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group
purchasing organizations may choose not to contract for our products, thus limiting availability of our products to hospital
purchasers;
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the
price of our products, which may be higher than products made of the other commonly used biomaterials in the interbody spinal
fusion market and total joint market;
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lack
of coverage or adequate payment from managed care plans and other third-party payers for the procedures that use our products;
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Medicare,
Medicaid or other third-party payers may limit or not permit reimbursement for procedures using our products;
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ineffective
marketing and distribution support;
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the
time and resources that may be required for training, or the inadequate training, of surgeons in the proper use of our products;
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the
development of alternative biomaterials and products that render our products less competitive or obsolete; and
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the
development of or improvement of competitive products.
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If
surgeons do not perceive our silicon nitride products and product candidates as superior alternatives to competing products, we
will not be able to generate significant revenues, if any.
Even
if surgeons are convinced of the superior characteristics of our silicon nitride products and our product candidates that we successfully
introduce compared to the limitations of the current commonly used biomaterials, surgeons may find other methods or turn to other
biomaterials besides silicon nitride to overcome such limitations. For instance, with respect to interbody spinal fusion products,
surgeons or device manufacturers may use more effective markers for enhancing the imaging compatibility of PEEK devices, more
effective antibiotics to prevent or treat implant-related infections, and more effective osteoconductive and osteoinductive materials
when implanting an interbody spinal fusion device. Device manufacturers may also coat metal with existing traditional ceramics
to reduce the risk of metal wear particles and corrosion in total joint replacement implants. Additionally, surgeons may increase
their use of metal interbody spinal fusion devices if there is an increasing perception that PEEK devices are limited by their
strength and resistance to fracture.
If
we are unable to increase the productivity of our sales and marketing infrastructure we will not be able to penetrate the spinal
fusion market.
We
market and sell our products to surgeons and hospitals in the United States and select markets in Europe and South America using
a network of independent third-party distributors who have existing surgeon relationships. We manage this distribution network
through our in-house sales and marketing management team. We may also establish distribution collaborations in the United States
and abroad in instances where access to a large or well-established sales and marketing organization may help to expand the market
or accelerate penetration for selected products.
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 various areas, such as spinal
fusion and total hip and knee joint replacement. In addition, the commissions we pay our distributors have increased over time,
which has resulted in higher sales and marketing expenses, and those commissions and expenses may increase in the future. 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 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 have been unable to obtain meaningful market share in the interbody spinal fusion device market with our current
silicon nitride products to date and we may not be successful in increasing the productivity of our sales and marketing team and
distribution network to gain meaningful market share for our silicon nitride products, which could adversely affect our business
and financial condition.
The
orthopedic market is highly competitive and we may not be able to compete effectively against the larger, well-established companies
that dominate this market or emerging and small innovative companies that may seek to obtain or increase their share of the market.
The
markets for spinal fusions and total hip and knee implant products are intensely competitive, and many of our competitors are
much larger and have substantially more financial and human resources than we do. Many have long histories and strong reputations
within the industry, and a relatively small number of companies dominate these markets. Medtronic, Inc.; DePuy Synthes Companies,
a group of Johnson & Johnson companies; Stryker Corporation; Biomet, Inc.; Zimmer Holdings, Inc.; and Smith & Nephew plc,
account for a significant amount of orthopedic sales worldwide.
These
companies enjoy significant competitive advantages over us, including:
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broad
product offerings, which address the needs of orthopedic surgeons and hospitals in a wide range of procedures;
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products
that are supported by long-term clinical data;
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greater
experience in, and resources for, launching, marketing, distributing and selling products, including strong sales forces and
established distribution networks;
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existing
relationships with spine and joint reconstruction surgeons;
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extensive
intellectual property portfolios and greater resources for patent protection;
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greater
financial and other resources for product research and development;
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greater
experience in obtaining and maintaining FDA and other regulatory clearances and approvals for products and product enhancements;
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established
manufacturing operations and contract manufacturing relationships;
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significantly
greater name recognition and widely recognized trademarks; and
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established
relationships with healthcare providers and payers.
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Our
products and any product candidates that we may introduce into the market may not enable us to overcome the competitive advantages
of these large and dominant orthopedic companies. In addition, even if we successfully introduce additional product candidates
incorporating our silicon nitride biomaterial into the market, emerging and small innovative companies may seek to increase their
market share and they may eventually possess competitive advantages, which could adversely impact our business. Our competitors
may also employ pricing strategies that could adversely affect the pricing of our products and pricing in the spinal fusion and
total joint replacement market generally.
Moreover,
many other companies are seeking to develop new biomaterials and products which may compete effectively against our products in
terms of performance and price. For example, Smith & Nephew has developed a ceramic-coated metal, known as Oxinium, which
may overcome certain of the limitations of metal joint replacement products and could directly compete with our silicon nitride
and silicon nitride-coated product candidates.
We
have significant customer concentration, so that economic difficulties or changes in the purchasing policies or patterns of our
key customers could have a significant impact on our business and operating results.
A
small number of customers account for a substantial portion of our product revenues. Our customers are primarily hospitals and
surgical centers. At December 31, 2015 and 2014, our largest customer, Bon Secours St. Mary’s Hospital, or St. Mary’s,
had a receivable balance of approximately 7% and 9%, respectively, of our total trade accounts receivable. In addition, St. Mary’s
accounted for 12% and 18% of our product revenues for each of the years ended December 31, 2015 and 2014. Sales of our products
to our customers, including St. Mary’s, are not based on long-term, committed-volume purchase contracts, and we may not
continue to receive significant revenues from St. Mary’s or any customer. Because of our significant customer concentration,
our revenue could fluctuate significantly due to changes in economic conditions, the use of competitive products, or the loss
of, reduction of business with, or less favorable terms with St. Mary’s or any of our other significant customers. A significant
portion of St. Mary’s’ purchases have been of our non-silicon nitride products, so it may be able to purchase competitive
similar products from others. A reduction or delay in orders from St. Mary’s or any of our other significant customers,
or a delay or default in payment by any significant customer, could materially harm our business and results of operations.
The
manufacturing process for our silicon nitride products is complex and requires sophisticated state-of-the-art equipment, experienced
manufacturing personnel and highly specialized knowledge. If we are unable to manufacture our silicon nitride products on a timely
basis consistent with our quality standards, our results of operation will be adversely impacted.
In
order to control the quality, cost and availability of our silicon nitride products, we developed our own manufacturing capabilities.
We operate a 30,000 square foot manufacturing facility which is certified under the ISO 13485 medical device manufacturing standard
for medical devices and operates under the FDA’s quality systems regulations, or QSRs. All operations with the exceptions
of raw material production, cleaning, packaging and sterilization are performed at this facility.
In
order to mitigate the risk associated with us being the sole manufacturer of our silicon nitride medical device products, in June
2014, we entered into a manufacturing development and supply agreement with Kyocera Industrial Ceramics Corporation, or Kyocera.
We updated our material master file and submitted a 510(k) with the FDA in the third quarter of 2014 to qualify Kyocera as a second
source supplier of our silicon nitride products. Kyocera has been qualified as a second source supplier of our silicon nitride
products. Although we expect this arrangement with Kyocera to continue, if Kyocera ceases to continue as a qualified manufacturer
of these products and product candidates, we will be the sole manufacturer of these products and will need to seek other potential
secondary manufacturers. Our reliance solely on our internal resources to manufacture our silicon nitride products entails risks
to which we would not be subject if we had secondary suppliers for their manufacture, including:
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the
inability to meet our product specifications and quality requirements consistently;
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a
delay or inability to procure or expand sufficient manufacturing capacity to meet additional demand for our products;
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manufacturing
and product quality issues related to the scale-up of manufacturing;
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the
inability to produce a sufficient supply of our products to meet product demands;
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the
disruption of our manufacturing facility due to equipment failure, natural disaster or failure to retain key personnel; and
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our
inability to ensure our compliance with regulations and standards of the FDA, including QSRs, and corresponding state and
international regulatory authorities, including the CFDA.
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Any
of these events could lead to a reduction in our product sales, product launch delays, failure to obtain regulatory clearance
or approval or impact our ability to successfully sell our products and commercialize our products candidates.
We
depend on a limited number of third-party suppliers for key raw materials used in the manufacturing of our silicon nitride products,
and the loss of these third-party suppliers or their inability to supply us with adequate raw materials could harm our business.
We
rely on a limited number of third-party suppliers for the raw materials required for the production of our silicon nitride products
and product candidates. Our dependence on a limited number of third-party suppliers involves several risks, including limited
control over pricing, availability, quality, and delivery schedules for raw materials. We have no supply agreements in place with
any of our suppliers and cannot be certain that our current suppliers will continue to provide us with the quantities of raw materials
that we require or that satisfy our anticipated specifications and quality requirements. Any supply interruption in limited or
single sourced raw materials could materially harm our ability to manufacture our products until a new source of supply, if any,
could be identified and qualified. We may be unable to find a sufficient alternative supply channel within a reasonable time or
on commercially reasonable terms. Any performance failure on the part of our suppliers could delay the production of our silicon
nitride products and product candidates and delay the development and commercialization of our product candidates, including limiting
supplies necessary for commercial sale, clinical trials and regulatory approvals, which could have a material adverse effect on
our business.
Use
of third-party manufacturers increases the risk that we will not have adequate supplies of our non-silicon nitride products or
instrumentation sets.
The
majority of our product revenue is currently generated by sales of non-silicon nitride products. Our reliance on a limited number
of third-party manufacturers to supply us with our non-silicon nitride products and instruments exposes us to risks that could
delay our sales, or result in higher costs or lost product revenues. In particular, our manufacturers could:
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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 non-silicon nitride
products to meet market demand for those products, or they could experience similar problems that result in the manufacture
of insufficient quantities of our non-silicon nitride product candidates; and
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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 non-silicon nitride products or instrumentation sets.
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If
we are unable to obtain adequate supplies of our non-silicon nitride products and related instrumentation sets 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 manufacturers
and they may change the terms of our future orders or choose not to supply us with products or instrumentation sets in the future.
Furthermore, if a third-party manufacturer from whom we purchase fails to perform its obligations, we may be forced to purchase
products or related instrumentation from other third-party manufacturers, which we may not be able to do on reasonable terms,
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 re-verification of an existing manufacturer could negatively
affect our ability to produce and distribute our non-silicon nitride products or instruments in a timely manner.
In
order to be successful, we must expand our available product lines of silicon nitride-based medical devices by commercializing
new product candidates, but we may not be able to do so in a timely fashion and at expected costs, or at all.
Although
we are currently marketing our silicon nitride interbody spinal fusion implants, in order to be successful, we will need to expand
our product lines to include other silicon nitride devices. Therefore, we are developing silicon nitride product candidates for
total hip and knee replacement procedures and are exploring the application of our silicon nitride technology for other potential
applications. However, we have yet to commercialize any silicon nitride products beyond our spinal fusion products. 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. We may also have to write down significant inventory if existing
products are replaced by new products. Because of these uncertainties, there is no assurance that we will succeed in bringing
any of our current or future product candidates to market. If we fail in bringing our product candidates 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.
We
will depend on one or more strategic partners to develop and commercialize our total joint replacement product candidates, and
if our strategic partners are unable to execute effectively on our agreements with them, we may never become profitable.
We
are seeking a strategic partner to develop and commercialize our total joint replacement product candidates. We will be reliant
on our strategic partners to develop and commercialize a total hip or knee joint replacement product candidate that utilizes silicon
nitride-coated components, although we have not yet entered into an agreement with any strategic partner to develop products with
these silicon nitride-coated components and may be unable to do so on agreeable terms. In order to succeed in our joint commercialization
efforts, we and any future partners must execute effectively on all elements of a combined business plan, including continuing
to establish sales and marketing capabilities, manage certified, validated and effective commercial-scale manufacturing operations,
conduct product development and testing, and obtain regulatory clearances and approvals for our product candidate. If we or any
of our strategic partners 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.
Part
of our strategy is to establish and develop OEM partnerships and arrangements, which subjects us to various risks.
Because
we believe silicon nitride is a superior platform and technology for application in the spine, total joint and other markets,
we are establishing OEM partnerships with other companies to replace their materials and products with silicon nitride. Sales
of products to OEM customers will expose our business to a number of risks. Sales through OEM partners could be less profitable
than direct sales. Sales of our products through multiple channels could also confuse customers and cause the sale of our products
to decline. In addition, OEM customers will require that products meet strict standards. Our compliance with these requirements
could result in increased development, manufacturing, warranty and administrative costs. A significant increase in these costs
could adversely affect our operating results. If we fail to meet OEM specifications on a timely basis, our relationships with
our OEM partners may be harmed. Furthermore, we would not control our OEM partners, and they could sell competing products, may
not incorporate our technology into their products in a timely manner and may devote insufficient sales efforts to the OEM products.
If
hospitals and other healthcare providers are unable to obtain coverage or adequate reimbursement for procedures performed with
our products, it is unlikely our products will be widely used.
In
the United States, the commercial success of our existing products 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. Because
we typically receive payment directly from hospitals and surgical centers, we do not anticipate relying directly on payment from
third-party payers for our products. However, hospitals and other healthcare providers that purchase our orthopedic products 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 is critical to market acceptance of our
existing and future products. Neither hospitals nor surgeons are likely to use our 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 Centers
for Medicare and Medicaid Services, or 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 it is expected 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.
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.
Prolonged
negative economic conditions in domestic and international markets may adversely affect us, our suppliers, partners and consumers,
and the global orthopedic market which could harm our financial position.
Global
credit and financial markets have been experiencing extreme disruptions over the past several years, including severely diminished
liquidity and availability of credit, declines in consumer confidence, declines in economic growth, increases in unemployment
rates and uncertainty about economic stability. Credit and financial markets and confidence in economic conditions might deteriorate
further. Our business may be adversely affected by the recent economic downturn and volatile business environment and continued
unpredictable and unstable market conditions. In addition, there is a risk that one or more of our current suppliers may not continue
to operate. Any lender that is obligated to provide funding to us under any future credit agreement with us may not be able to
provide funding in a timely manner, or at all, when we require it. The cost of, or lack of, available credit or equity financing
could impact our ability to develop sufficient liquidity to maintain or grow our company. These negative changes in domestic and
international economic conditions or additional disruptions of either or both of the financial and credit markets may also affect
third-party payers and may have a material adverse effect on our business, results of operations, financial condition and liquidity.
In
addition, we believe that various demographics and industry-specific trends will help drive growth in the orthopedics markets,
but these demographics and trends are uncertain. Actual demand for orthopedic products generally, and our products in particular,
could be significantly less than expected if our assumptions regarding these factors prove to be incorrect or do not materialize,
or if alternative treatments gain widespread acceptance.
We
are dependent on our senior management team, engineering team, sales and marketing team and surgeon advisors, and the loss of
any of them could harm our business.
The
members of our current senior management team have worked together in their new positions with us for a limited time and may not
be able to successfully implement our strategy. In addition, we have not entered into employment agreements, other than change-in-control
severance agreements, with any of the members of our senior management team. There are no assurances that the services of any
of these individuals will be available to us for any specified period of time. The successful integration of our senior management
team, the loss of members of our senior management team, sales and marketing team, engineering team and key surgeon advisors,
or our inability to attract or retain other qualified personnel or advisors could have a material adverse effect on our business,
financial condition and results of operations.
If
we experience significant disruptions in our information technology systems, our business, results of operations and financial
condition could be adversely affected.
The
efficient operation of our business depends on our information technology systems. We rely on our information technology systems
to effectively manage our sales and marketing, accounting and financial functions; manufacturing processes; inventory; engineering
and product development functions; and our research and development functions. As such, our information technology systems are
vulnerable to damage or interruption including from earthquakes, fires, floods and other natural disasters; terrorist attacks
and attacks by computer viruses or hackers; power losses; and computer systems, or Internet, telecommunications or data network
failures. The failure of our information technology systems to perform as we anticipate or our failure to effectively implement
new systems could disrupt our entire operation and could result in decreased sales, increased overhead costs, excess inventory
and product shortages, all of which could have a material adverse effect on our reputation, business, results of operations and
financial condition.
Risks
Related to Our Capital Resources and Impairments
We
will require additional financing and our failure to obtain additional funding would force us to delay, reduce or eliminate our
product development programs or commercialization efforts.
We
currently have limited committed sources of capital and we have limited liquidity. Our cash and cash equivalents as of September
30, 2016 was $10.6 million. We require substantial future capital in order to continue to conduct the research and development
and regulatory clearance and approval activities necessary to bring our products to market, to establish effective marketing and
sales capabilities. Our existing capital resources are not sufficient to enable us to fund the completion of the development and
commercialization of all of our product candidates. We cannot determine with certainty the duration and completion costs of the
current or future development and commercialization of our product candidates for spinal fusion procedures, joint replacement
and coated metals or if, when, or to what extent we will generate revenues from the commercialization and sale of any of these
product candidates for which we obtain regulatory approval. We may never succeed in achieving regulatory approval for certain
or all of these product candidates. The duration, costs and timing of clinical trials and development of our spinal fusion, joint
replacement and coated metal product candidates will depend on a variety of factors, including:
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the
scope, rate of progress, and expense of our ongoing, as well as any additional, clinical trials and other research and development
activities;
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future
clinical trial results we may must or choose to conduct;
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potential
changes in government regulation; and
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the
timing and receipt of any regulatory approvals.
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A
change in the outcome of any of these variables with respect to the development of spinal fusion, joint replacement or coated
metal product candidates could mean a significant change in the costs and timing associated with the development of these product
candidates.
In
addition, the repayment of the Hercules Loan and Security Agreement and the Hercules liquidity covenant limit our ability to use
our cash and cash equivalents to fund our operations and may restrict our ability to continue development of our product candidates.
Additionally, the Loan and Security Agreement with Hercules Technology restricts our ability to incur additional pari passu indebtedness,
which may reduce our ability to seek additional financing. If adequate funds are not available on a timely basis, we may terminate
or delay the development of one or more of our product candidates, or delay activities necessary to commercialize our product
candidates. Additional funding may not be available to us on acceptable terms, or at all. Any additional equity financing, if
available, may not be available on favorable terms and will most likely be dilutive to our current stockholders, and debt financing,
if available, may involve more restrictive covenants. Our ability to access capital when needed is not assured and, if not achieved
on a timely basis, will materially harm our business, financial condition and results of operations or could cause us to cease
operations.
As
a result of our debt obligations, we will need additional funds to meet our operational needs and capital requirements for product
development, clinical trials and commercialization. The timing and amount of our future capital requirements will depend on many
factors, including:
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our
ability to satisfy our obligation to pay principal and interest on the Loan and Security Agreement;
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our
ability to comply with the minimum liquidity covenant related to the Loan and Security Agreement;
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the
level of sales of our current products and the cost of revenue and sales and marketing;
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the
extent of any clinical trials that we will be required to conduct in support of the regulatory clearance of our total hip
and knee replacement product candidates;
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the
scope, progress, results and cost of our product development efforts;
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the
costs, timing and outcomes of regulatory reviews of our product candidates;
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the
number and types of products we develop and commercialize;
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the
costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related
claims; and
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the
extent and scope of our general and administrative expenses.
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If
we do not adhere to the financial covenants set forth in the Loan and Security Agreement with Hercules Technology, we will be
in default of the Loan and Security Agreement.
In
June 2014 we entered into a Loan and Security Agreement with Hercules Technology Growth Capital, Inc., or Hercules Technology,
as administrative and collateral agent for the lenders thereunder and as lender, and Hercules Technology III, LP, as lender. The
Loan and Security Agreement provides us with a $20 million term loan with a maturity date of January 1, 2018 and is secured by
substantially all of our assets and is described in more detail in the “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” section of our Annual Report on Form 10-K.
The
Loan and Security Agreement contains a minimum liquidity covenant that requires us to maintain cash and cash equivalents and availability
under the Loan and Security Agreement of not less than an amount that varies based on the loan amount and reduces as the loan
amount is reduced with a maximum cash requirement of $9.0 million if the loan amount exceeds $19.0 million and a potential minimum
cash requirement of $2.5 million if the loan amount is $7.0 million or less. As of September 30, 2016, the minimum liquidity covenant
was $3.5 million. We anticipate we will need to refinance the Loan and Security Agreement or obtain additional funding in the
second quarter of 2017 to maintain compliance with the minimum liquidity covenant through the next twelve months. Furthermore,
if we are unable to access additional funds prior to becoming non-compliant with the liquidity covenant, the entire remaining
balance of the Loan and Security Agreement could become immediately due and payable at the option of Hercules Technology.
Hercules
Technology could declare a default under the Loan and Security Agreement upon the occurrence of a material adverse effect, as
defined under the credit facility, thereby requiring us to either repay the outstanding indebtedness immediately or attempt to
reverse the declaration of default through negotiation or litigation. Any declaration of an event of default would significantly
harm our business and prospectus and could cause the price of our common stock to decline.
Raising
additional capital by issuing securities or through debt financings or licensing arrangements may cause dilution to existing stockholders,
restrict our operations or require us to relinquish proprietary rights.
To
the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest
may 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 specific
actions such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through
collaboration and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or
products or grant licenses on terms that are not favorable to us. 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.
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.
Our
report from our independent registered public accounting firm for the year ended December 31, 2015 includes an explanatory paragraph
stating that our recurring losses from operations and our need to obtain additional financing in order to satisfy our debt obligations
and to be compliant with covenants under our debt obligations through 2016 raise substantial doubt about our ability to continue
as a going concern. If we are unable to obtain sufficient additional 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. 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 it is likely that investors will 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.
An
impairment charge could have a material adverse effect on our financial condition and results of operations.
We
are required to test acquired goodwill for impairment on an annual basis. Goodwill represents the excess of the amount paid over
the fair value of the net assets at the date of the acquisition. We have chosen to complete our annual impairment reviews of goodwill
at the end of each calendar year. We also are required to test goodwill for impairment between annual tests if events occur or
circumstances change that would more likely than not reduce our enterprise fair value below its book value. In addition, we are
required to test our finite-lived intangible assets for impairment if events occur or circumstances change that would indicate
the remaining net book value of the finite-lived intangible assets might not be recoverable. These events or circumstances could
include a significant change in the business climate, including a significant sustained decline in our market value, legal factors,
operating performance indicators, competition, sale or disposition of a significant portion of our business and other factors.
If
the fair market value of our reporting unit is less than its book value, we could be required to record an impairment charge.
The valuation of a reporting unit requires judgment in estimating future cash flows, discount rates and other factors. In making
these judgments, we evaluate the financial health of our business, including such factors as industry performance, changes in
technology and operating cash flows. Changes in our forecasts or decreases in the value of our common stock could cause book values
of our reporting unit to exceed its fair value, which may result in goodwill impairment charges. The amount of any impairment
could be significant and could have a material adverse effect on our reported financial results for the period in which the charge
is taken.
Risks
Related to Regulatory Approval of Our Products and Other Government Regulations
Our
long-term success depends substantially on our ability to obtain regulatory clearance or approval and thereafter commercialize
our product candidates; we cannot be certain that we will be able to do so in a timely manner or at all.
The
process of obtaining regulatory clearances or approvals to market a medical device from the FDA or similar regulatory authorities
outside of the United States can be costly and time consuming, and there can be no assurance that such clearances or approvals
will be granted on a timely basis, or at all. The FDA’s 510(k) clearance process generally takes one to six months from
the date of submission, depending on whether a special or traditional 510(k) premarket notification has been submitted, but can
take significantly longer. An application for premarket approval, or PMA, must be submitted to the FDA if the device cannot be
cleared through the 510(k) clearance process or is not exempt from premarket review by the FDA. The PMA process almost always
requires one or more clinical trials and can take two to three years from the date of filing, or even longer. In some cases, including
in the case of our interbody spinal fusion devices which incorporate our CSC technology and our solid silicon nitride femoral
head component, the FDA requires clinical data as part of the 510(k) clearance process.
It
is possible that the FDA could raise questions about our spinal fusion products, our spinal fusion product candidates and our
total hip and knee joint replacement product candidates and could require us to perform additional studies on our products and
product candidates. Even if the FDA permits us to use the 510(k) clearance process, we cannot assure you that the FDA will not
require either supporting data from laboratory tests or studies that we have not conducted, or substantial supporting clinical
data. If we are unable to use the 510(k) clearance process for any of our product candidates, are required to provide clinical
data or laboratory data that we do not possess to support our 510(k) premarket notifications for any of these product candidates,
or otherwise experience delays in obtaining or fail to obtain regulatory clearances, the commercialization of our product candidates
in the United States will be delayed or prevented, which will adversely affect our ability to generate additional revenues. It
also may result in the loss of potential competitive advantages that we might otherwise attain by bringing our products to market
earlier than our competitors. Additionally, although the FDA allows modifications to be made to devices that have received 510(k)
clearance with supporting documentation, the FDA may disagree with our decision to modify our cleared devices without submission
of a new 510(k) premarket notification, subjecting us to potential product recall, field alerts and corrective actions. Any of
these contingencies could adversely affect our business.
Similar
to our compliance with U.S. regulatory requirements, we must obtain and comply with international requirements, including those
of the CFDA, in order to market and sell our products outside of the United States and we may only promote and market our products,
if approved, as permitted by applicable regulatory authorities. There is no guarantee that we will receive the necessary regulatory
approvals for our product candidates either inside the United States or internationally, including approvals from the CFDA. If
our product candidates do not receive necessary regulatory approvals, our business could be materially and adversely affected.
The
safety of our products is not yet supported by long-term clinical data, and they may prove to be less safe and effective than
our laboratory data indicate.
We
obtained FDA clearance for each of our products that we currently market, and we have sought and intend to seek FDA clearance
or approval through the FDA’s 510(k) or PMA process and, where applicable, CE marking for our product candidates. The 510(k)
clearance process is based on the FDA’s agreement that a new product candidate is substantially equivalent to an already
marketed product for which a PMA was not required. While most 510(k) premarket notifications do not require clinical data for
clearance, the FDA may request that such data be provided. Long-term clinical data or marketing experience obtained after clearance
may indicate that our products cause unexpected complications or other unforeseen negative effects. If this happens, we could
be subject to the withdrawal of our marketing clearance and other enforcement sanctions by the FDA or other regulatory authority,
product recalls, significant legal liability, significant negative publicity, damage to our reputation and a dramatic reduction
in our ability to sell our products, any one of which would have a material adverse effect on our business, financial condition
and results of operations.
We
expect to be required to conduct clinical trials to support regulatory approval of some of our product candidates. We have little
experience conducting clinical trials, they may proceed more slowly than anticipated, and we cannot be certain that our product
candidates will be shown to be safe and effective for human use.
In
order to commercialize our product candidates in the United States, we must submit a PMA for some of these product candidates,
which will require us to conduct clinical trials. We also plan 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 candidates are 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 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 candidates:
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failure
to obtain financing necessary to bear the cost of designing and conducting clinical trials;
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failure
to obtain approval from the FDA or foreign regulatory authorities to commence investigational studies;
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conditions
imposed on us by the FDA or foreign regulatory authorities regarding the scope or design of our clinical trials;
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failure
to find a qualified CRO to conduct our clinical trials or to negotiate a CRO services agreement on favorable terms;
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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;
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insufficient
supply of our product candidates or other materials necessary to conduct our clinical trials;
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difficulties
in enrolling patients in our clinical trials;
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negative
or inconclusive results from clinical trials, or results that are inconsistent with earlier results, that necessitate additional
clinical studies;
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failure
on the part of the CRO to conduct the clinical trial in accordance with regulatory requirements;
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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;
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serious
or unexpected side effects experienced by patients in whom our product candidates are implanted; or
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failure
by any of our third-party contractors or investigators to comply with regulatory requirements or meet other contractual obligations
in a timely manner.
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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 candidates, 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 candidates could be significantly reduced.
Our
current and future relationships with third-party payers and current and potential customers in the United States and elsewhere
may be subject, directly or indirectly, to applicable anti-kickback, fraud and abuse, false claims, transparency, health information
privacy and security and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties,
contractual damages, reputational harm administrative burdens and diminished profits and future earnings.
Our
current and future arrangements with third-party payers and current and potential customers, including providers and physicians,
as well as PODs, may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations, including, without
limitation, the federal Anti-Kickback Statute and the federal False Claims Act, which may constrain the business or financial
arrangements and relationships through which we sell, market and distribute our products. In addition, we may be subject to transparency
laws and patient privacy regulations by U.S. federal and state governments and by governments in foreign jurisdictions in which
we conduct our business. The applicable federal, state and foreign healthcare laws and regulations that may affect our ability
to operate include:
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the
federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either
the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may
be made under federal healthcare programs, such as Medicare and Medicaid;
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federal
civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act, which impose
criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly
presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs, claims for
payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money
to the federal government;
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the
federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability
for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
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HIPAA,
as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective
implementing regulations, which impose obligations on covered healthcare providers, health plans, and healthcare clearinghouses,
as well as their business associates that create, receive, maintain or transmit individually identifiable health information
for or on behalf of a covered entity, with respect to safeguarding the privacy, security and transmission of individually
identifiable health information;
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the
Physician Payments Sunshine Act, which requires (i) manufacturers of drugs, devices, biologics and medical supplies for which
payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions,
to report annually to CMS information related to certain “payments or other transfers of value” made to physicians,
which is defined to include doctors, dentists, optometrists, podiatrists and chiropractors, and teaching hospitals, with data
collection beginning on August 1, 2013, (ii) applicable manufacturers and applicable group purchasing organizations to report
annually to CMS ownership and investment interests held in such entities by physicians and their immediate family members,
with data collection beginning on August 1, 2013, (iii) manufacturers to submit reports to CMS by March 31, 2014 and the 90th
day of each subsequent calendar year, and (iv) disclosure of such information by CMS on a publicly available website beginning
in September 2014; and
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analogous
state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing
arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payers, including
private insurers; state and foreign laws that require medical device companies to comply with the medical device industry’s
voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict
payments that may be made to healthcare providers; state and foreign laws that require medical device manufacturers to report
information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures;
and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which
differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. Efforts
to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations may
involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not
comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws
and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations
that may apply to us, we may be subject to significant civil, criminal and administrative penalties, including, without limitation,
damages, fines, imprisonment, exclusion from participation in government healthcare programs, such as Medicare and Medicaid,
and the curtailment or restructuring of our operations, which could have a material adverse effect on our business. If any
of the physicians or other healthcare providers or entities with whom we expect to do business, including our collaborators,
are found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions,
including exclusions from participation in government healthcare programs, which could also materially affect our business.
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enacted and future legislation may increase the difficulty and cost for us to obtain and monitor regulatory approval or clearance
of our product candidates and affect the prices we may obtain for our products.
In
the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed
changes regarding the healthcare system that could prevent or delay clearance and/or approval of our product candidates, restrict
or regulate post-clearance and post-approval activities and affect our ability to profitably sell our products and any product
candidates for which we obtain marketing approval or clearance.
In
addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our
business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional
costs or lengthen review times of our products. Delays in receipt of or failure to receive regulatory clearances or approvals
for our new products would have a material adverse effect on our business, results of operations and financial condition. 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) clearances and additional requirements
that may significantly impact the process.
Among
policy makers and payers in the United States and elsewhere, there is significant interest in promoting changes in healthcare
systems with the stated goals of containing healthcare costs, improving quality and expanding access. In the United States, the
medical device industry has been a particular focus of these efforts and has been significantly affected by major legislative
initiatives. In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the
Health Care and Education Affordability Reconciliation Act, or collectively the ACA, a sweeping law intended, among other things,
to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and
abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the
health industry and impose additional health policy reforms.
Among
the provisions of the ACA of importance to our products and product candidates are:
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a
2.3% medical device excise tax on the U.S. sales of most medical devices, for which a moratorium on the payment of the excise
tax for 2016 and 2017 was enacted in December 2015;
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expansion
of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, and new government investigative
powers and enhanced penalties for non-compliance;
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new
requirements under the federal Open Payments program and its implementing regulations;
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a
new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness
research, along with funding for such research; and
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creation
of an independent payment advisory board that will submit recommendations to reduce Medicare spending if projected Medicare
spending exceeds a specified growth rate.
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addition, other legislative changes have been proposed and adopted since the ACA was enacted. For example, on August 2, 2011,
the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on
Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee on Deficit Reduction did
not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s
automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up
to 2% per fiscal year, starting in 2013. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act
of 2012, or ATRA, which, among other things, reduced Medicare payments to several types of providers and increased the statute
of limitations period for the government to recover overpayments to providers from three to five years. On March 1, 2013, the
President signed an executive order implementing the Budget Control Act’s 2% Medicare payment reductions, and on April 1,
2013, these reductions went into effect. These new laws may result in additional reductions in Medicare and other healthcare funding,
which could have a material adverse effect on our financial operations.
We
expect that the ACA, as well as other healthcare reform measures that have been and may be adopted in the future, may result in
more rigorous coverage criteria and in additional downward pressure on the price that we receive for our products. Any reduction
in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers.
The implementation of cost containment measures or other healthcare reforms may affect our ability to generate revenue and profits
or commercialize our product candidates.
In
the European Union and some other international markets, the government provides health care at a low cost to consumers and regulates
prices of healthcare products, patient eligibility or reimbursement levels to control costs for the government-sponsored health
care system. Many countries are reducing their public expenditures and we expect to see strong efforts to reduce healthcare costs
in international markets, including patient access restrictions, suspensions on price increases, prospective and possibly retroactive
price reductions and other recoupments and increased mandatory discounts or rebates and recoveries of past price increases. These
cost control measures could reduce our revenues. In addition, certain countries set prices by reference to the prices in other
countries where our products are marketed. Thus, our inability to secure adequate prices in a particular country may not only
limit the marketing of our products within that country, but may also adversely affect our ability to obtain acceptable prices
in other markets. This may create the opportunity for third-party cross border trade or influence our decision to sell or not
to sell a product, thus adversely affecting our geographic expansion plans and revenues.
Risks
Related to Our Intellectual Property and Litigation
If
the combination of patents, trade secrets and contractual provisions that we rely on to protect our intellectual property is inadequate,
our ability to commercialize our orthopedic products successfully will be harmed, and we may not be able to operate our business
profitably.
Our
success depends significantly on our ability to protect our proprietary rights to the technologies incorporated in our products.
We rely on a combination of patent protection, trade secret laws and nondisclosure, confidentiality and other contractual restrictions
to protect our proprietary technology. However, these may not adequately protect our rights or permit us to gain or keep any competitive
advantage.
The
issuance of a patent is not conclusive as to its scope, validity or enforceability. The scope, validity or enforceability of our
issued patents can be challenged in litigation or proceedings before the U.S. Patent and Trademark Office, or the USPTO, or foreign
patent offices. In addition, our pending patent applications include claims to numerous important aspects of our products under
development that are not currently protected by any of our issued patents. We cannot assure you that any of our pending patent
applications will result in the issuance of patents to us. The USPTO or foreign patent offices may deny or require significant
narrowing of claims in our pending patent applications. Patents issued as a result of the pending patent applications, if any,
may not provide us with significant commercial protection or be issued in a form that is advantageous to us. Proceedings before
the USPTO or foreign patent offices could result in adverse decisions as to the priority of our inventions and the narrowing or
invalidation of claims in issued patents. The laws of some foreign countries may not protect our intellectual property rights
to the same extent as the laws of the United States, if at all.
Our
competitors may successfully challenge and invalidate or render unenforceable our issued patents, including any patents that may
issue in the future, which could prevent or limit our ability to market our products and could limit our ability to stop competitors
from marketing products that are substantially equivalent to ours. In addition, competitors may be able to design around our patents
or develop products that provide outcomes that are comparable to our products but that are not covered by our patents.
We
have also entered into confidentiality and assignment of intellectual property agreements with all of our employees, consultants
and advisors as one of the ways we seek to protect our intellectual property and other proprietary technology. However, these
agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information
in the event of unauthorized use or disclosure or other breaches of the agreements.
In
the event a competitor infringes upon any of our patents or other intellectual property rights, enforcing our rights may be difficult,
time consuming and expensive, and would divert management’s attention from managing our business. There can be no assurance
that we will be successful on the merits in any enforcement effort. In addition, we may not have sufficient resources to litigate,
enforce or defend our intellectual property rights.
We
have no patent protection covering the composition of matter for our solid silicon nitride or the process we use for manufacturing
our solid silicon nitride, and competitors may create silicon nitride formulations substantially similar to ours.
Although
we have a number of U.S. and foreign patents and pending applications relating to our solid silicon nitride products or product
candidates, we have no patent protection either for the composition of matter for our silicon nitride or for the processes of
manufacturing solid silicon nitride. As a result, competitors may create silicon nitride formulations substantially similar to
ours, and use their formulations in products that may compete with our silicon nitride products, provided they do not violate
our issued product patents. Although we have, and will continue to develop, significant know-how related to these processes, there
can be no assurance that we will be able to maintain this know-how as trade secrets, and competitors may develop or acquire equally
valuable or more valuable know-how related to the manufacture of silicon nitride.
We
could become subject to intellectual property litigation that could be costly, result in the diversion of management’s time
and efforts, require us to pay damages, prevent us from marketing our commercially available products or product candidates and/or
reduce the margins we may realize from our products that we may commercialize.
The
medical devices industry is characterized by extensive litigation and administrative proceedings over patent and other intellectual
property rights. Whether a product infringes a patent involves complex legal and factual issues, and the determination is often
uncertain. There may be existing patents of which we are unaware that our products under development may inadvertently infringe.
The likelihood that patent infringement claims may be brought against us increases as the number of participants in the orthopedic
market increases and as we achieve more visibility in the market place and introduce products to market.
Any
infringement claim against us, even if without merit, may cause us to incur substantial costs, and would place a significant strain
on our financial resources, divert the attention of management from our core business, and harm our reputation. In some cases,
litigation may be threatened or brought by a patent holding company or other adverse patent owner who has no relevant product
revenues and against whom our patents may provide little or no deterrence. If we were found to infringe any patents, we could
be required to pay substantial damages, including triple damages if an infringement is found to be willful, and royalties and
could be prevented from selling our products unless we obtain a license or are able to redesign our products to avoid infringement.
We may not be able to obtain a license enabling us to sell our products on reasonable terms, or at all, and there can be no assurance
that we would be able to redesign our products in a way that would not infringe those patents. If we fail to obtain any required
licenses or make any necessary changes to our technologies or the products that incorporate them, we may be unable to commercialize
one or more of our products or may have to withdraw products from the market, all of which would have a material adverse effect
on our business, financial condition and results of operations.
In
addition, in order to further our product development efforts, we have entered into agreements with orthopedic surgeons to help
us design and develop new products, and we expect to enter into similar agreements in the future. In certain instances, we have
agreed to pay such surgeons royalties on sales of products which incorporate their product development contributions. There can
be no assurance that surgeons with whom we have entered into such arrangements will not claim to be entitled to a royalty even
if we do not believe that such products were developed by cooperative involvement between us and such surgeons. In addition, some
of our surgeon advisors are employed by academic or medical institutions or have agreements with other orthopedic companies pursuant
to which they have agreed to assign or are under an obligation to assign to those other companies or institutions their rights
in inventions which they conceive or develop, or help conceive or develop.
There
can be no assurance that one or more of these orthopedic companies or institutions will not claim ownership rights to an invention
we develop in collaboration with our surgeon advisors or consultants on the basis that an agreement with such orthopedic company
or institution gives it ownership rights in the invention or that our surgeon advisors on consultants otherwise have an obligation
to assign such inventions to such company or institution. Any such claim against us, even without merit, may cause us to incur
substantial costs, and would place a significant strain on our financial resources, divert the attention of management from our
core business and harm our reputation.
We
may be subject to damages resulting from claims that we, our employees, or our independent sales agencies have wrongfully used
or disclosed alleged trade secrets of our competitors or are in breach of non-competition agreements with our competitors or non-solicitation
agreements.
Many
of our employees were previously employed at other orthopedic companies, including our competitors and potential competitors.
Many of our distributors and potential distributors sell, or in the past have sold, products of our competitors. We may be subject
to claims that either we, or these employees or distributors, have inadvertently or otherwise used or disclosed the trade secrets
or other proprietary information of our competitors. In addition, we have been and may in the future be subject to claims that
we caused an employee or sales agent to break the terms of his or her non-competition agreement or non-solicitation agreement.
Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation
could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying
money damages, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could
hamper or prevent our ability to commercialize products, which could have an adverse effect on our business, financial condition
and results of operations.
If
our silicon nitride products or our product candidates conflict with the rights of others, we may not be able to manufacture or
market our products or product candidates, which could have a material and adverse effect on us.
Our
commercial success will depend in part on not infringing the patents or violating the other proprietary rights of third parties.
Issued patents held by others may limit our ability to develop commercial products. All issued patents are entitled to a presumption
of validity under the laws of the United States. If we need suitable licenses to such patents to permit us to develop or market
our product candidates, we may be required to pay significant fees or royalties and we cannot be certain that we would even be
able to obtain such licenses. Competitors or third parties may obtain patents that may cover subject matter we use in developing
the technology required to bring our products to market, that we use in producing our products, or that we use in treating patients
with our products. We know that others have filed patent applications in various jurisdictions that relate to several areas in
which we are developing products. Some of these patent applications have already resulted in patents and some are still pending.
If we were found to infringe any of these issued patents or any of the pending patent applications, when and if issued, we may
be required to alter our processes or product candidates, pay licensing fees or cease activities. If use of technology incorporated
into or used to produce our product candidates is challenged, or if our processes or product candidates conflict with patent rights
of others, third parties could bring legal actions against us, in Europe, the United States and elsewhere, claiming damages and
seeking to enjoin manufacturing and marketing of the affected products. Additionally, it is not possible to predict with certainty
what patent claims may issue from pending applications. In the United States, for example, patent prosecution can proceed in secret
prior to issuance of a patent, provided such application is not filed in foreign jurisdiction. For U.S. patent applications that
are also filed in foreign jurisdictions, such patent applications will not publish until 18 months from the filing date of the
application. As a result, third parties may be able to obtain patents with claims relating to our product candidates which they
could attempt to assert against us. Further, as we develop our products, third parties may assert that we infringe the patents
currently held or licensed by them, and we cannot predict the outcome of any such action.
There
has been extensive litigation in the medical devices industry over patents and other proprietary rights. If we become involved
in any litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. If these
legal actions are successful, in addition to any potential liability for damages, we could be required to obtain a license, grant
cross-licenses and pay substantial royalties in order to continue to manufacture or market the affected products.
We
cannot assure you that we would prevail in any legal action or that any license required under a third party patent would be made
available on acceptable terms, or at all. Ultimately, we could be prevented from commercializing a product, or forced to cease
some aspect of our business operations, as a result of claims of patent infringement or violation of other intellectual property
rights, which could have a material and adverse effect on our business, financial condition and results of operations.
Risks
Related to Potential Litigation from Operating Our Business
We
may become subject to potential product liability claims, and we may be required to pay damages that exceed our insurance coverage.
Our
business exposes us to potential product liability claims that are inherent in the design, testing, manufacture, sale and distribution
of our currently marketed products and each of our product candidates that we are seeking to introduce to the market. The use
of orthopedic medical devices can involve significant risks of serious complications, including bleeding, nerve injury, paralysis,
infection, and even death. Any product liability claim brought against us, with or without merit, could result in the increase
of our product liability insurance rates or in our inability to secure coverage in the future on commercially reasonable terms,
if at all. In addition, if our product liability insurance proves to be inadequate to pay a damage award, we may have to pay the
excess of this award out of our cash reserves, which could significantly harm our financial condition. If longer-term patient
results and experience indicate that our products or any component of a product causes tissue damage, motor impairment or other
adverse effects, we could be subject to significant liability. A product liability claim, even one without merit, could harm our
reputation in the industry, lead to significant legal fees, and result in the diversion of management’s attention from managing
our business.
Any
claims relating to our improper handling, storage or disposal of biological or hazardous materials could be time consuming and
costly.
Although
we do not believe that the manufacture of our silicon nitride or non-silicon nitride products will involve the use of hazardous
materials, it is possible that regulatory authorities may disagree or that changes to our manufacturing processes may result in
such use. Our business and facilities and those of our suppliers and future suppliers may therefore be subject to foreign, federal,
state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and
waste products. We may incur significant expenses in the future relating to any failure to comply with environmental laws. Any
such future expenses or liability could have a significant negative impact on our business, financial condition and results of
operations.
Risks
Related to Our Common Stock
The
price of our common stock is volatile and is likely to continue to fluctuate due to reasons beyond our control.
The
volatility of orthopedic company stocks, including shares of our common stock, often do not correlate to the operating performance
of the companies represented by such stocks or our operating performance. Some of the factors that may cause the market price
of our common stock to fluctuate include:
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ability to sell our current products and the cost of revenue;
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our
ability to develop, obtain regulatory clearances or approvals for, and market new and enhanced product candidates on a timely
basis;
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our
ability to enter into OEM and private label partnership agreements and the terms of those agreements;
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changes
in governmental regulations or in the status of our regulatory approvals, clearances or future applications;
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our
announcements or our competitors’ announcements regarding new products, product enhancements, significant contracts,
number and productivity of distributors, number of hospitals and surgeons using products, acquisitions or strategic investments;
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announcements
of technological or medical innovations for the treatment of orthopedic pathology;
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delays
or other problems with the manufacturing of our products, product candidates and related instrumentation;
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volume
and timing of orders for our products and our product candidates, if and when commercialized;
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changes
in the availability of third-party reimbursement in the United States and other countries;
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quarterly
variations in our or our competitors’ results of operations;
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changes
in earnings estimates or recommendations by securities analysts, if any, who cover our common stock;
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failure
to meet estimates or recommendations by securities analysts, if any, who cover our stock;
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changes
in the fair value of our derivative liabilities resulting from changes in the market price of our common stock, which may
result in significant fluctuations in our quarterly and annual operating results;
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changes
in healthcare policy in the United States and internationally;
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product
liability claims or other litigation involving us;
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sales
of a substantial aggregate number of shares of our common stock;
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sales
of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
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disputes
or other developments with respect to intellectual property rights;
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changes
in accounting principles;
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changes
to tax policy; and
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general
market conditions and other factors, including factors unrelated to our operating performance or the operating performance
of our competitors.
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These
and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit
or prevent our stockholders from readily selling their shares of common stock and may otherwise negatively affect the liquidity
of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have
sometimes instituted securities class action litigation against the company that issued the stock. If our stockholders brought
a lawsuit against us, we could incur substantial costs defending the lawsuit regardless of the merits of the case or the eventual
outcome. Such a lawsuit also would divert the time and attention of our management from running our company.
Securities
analysts may not continue to provide coverage of our common stock or may issue negative reports, which may have a negative impact
on the market price of our common stock.
Since
completing our initial public offering of shares of our common stock in February 2014, a limited number of securities analysts
have begun providing research coverage of our common stock. If securities analysts do not continue to cover our common stock,
the lack of research coverage may cause the market price of our common stock to decline. The trading market for our common stock
may be affected in part by the research and reports that industry or financial analysts publish about our business. If one or
more of the analysts who elect to cover us downgrade our stock, our stock price would likely decline rapidly. If one or more of
these analysts cease coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline.
In addition, under the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and a global settlement among the Securities and
Exchange Commission, or the SEC, other regulatory agencies and a number of investment banks, which was reached in 2003, many investment
banking firms are required to contract with independent financial analysts for their stock research. It may be difficult for a
company such as ours, with a smaller market capitalization, to attract independent financial analysts that will cover our common
stock. This could have a negative effect on the market price of our stock.
Anti-takeover
provisions in our organizational documents and Delaware law may discourage or prevent a change in control, even if an acquisition
would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders
to replace or remove our current management.
Our
restated certificate of incorporation and restated bylaws contain provisions that could discourage, delay or prevent a merger,
acquisition or other change in control of our company or changes in our board of directors that our stockholders might consider
favorable, including transactions in which you might receive a premium for your shares. These provisions also could limit the
price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price
of our common stock. Stockholders who wish to participate in these transactions may not have the opportunity to do so. Furthermore,
these provisions could prevent or frustrate attempts by our stockholders to replace or remove management. These provisions:
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allow
the authorized number of directors to be changed only by resolution of our board of directors;
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provide
for a classified board of directors, such that not all members of our board will be elected at one time;
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prohibit
our stockholders from filling board vacancies, limit who may call stockholder meetings, and prohibit the taking of stockholder
action by written consent;
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prohibit
our stockholders from making certain changes to our restated certificate of incorporation or restated bylaws except with the
approval of holders of 75% of the outstanding shares of our capital stock entitled to vote;
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require
advance written notice of stockholder proposals that can be acted upon at stockholders meetings and of director nominations
to our board of directors; and
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authorize
our board of directors to create and issue, without prior stockholder approval, preferred stock that may have rights senior
to those of our common stock and that, if issued, could operate as a “poison pill” to dilute the stock ownership
of a potential hostile acquirer to prevent an acquisition that is not approved by our board of directors.
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addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain
business combinations with stockholders owning 15% or more of our outstanding voting stock. Any delay or prevention of a change
in control transaction or changes in our board of directors could cause the market price of our common stock to decline.
We
do not intend to pay cash dividends.
We
have never declared or paid cash dividends on our capital stock and we do not anticipate paying any cash dividends in the foreseeable
future. We currently intend to retain all available funds and any future earnings for debt service and use in the operation and
expansion of our business. The Hercules Secured Credit Facility contains a negative covenant which prohibits us from paying dividends
to our stockholders without the prior written consent of Hercules Technology. In addition, the terms of any future debt or credit
facility may preclude us from paying any dividends.
Risks
Related to Public Companies
We
are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and a “smaller
reporting company” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting
companies may make our common stock less attractive to investors.
We
are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.
For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies, including (1) not being required to comply
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy statements and (3) exemptions from the requirements of holding a nonbinding
advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Additionally,
under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those
standards apply to private companies. We are electing to delay such adoption of new or revised accounting standards on the relevant
dates on which adoption of such standards is required for non-emerging growth companies. As a result of this election, our financial
statements may not be comparable to the financial statements of other public companies.
We
may take advantage of these exemptions until we are no longer an emerging growth company. Under the JOBS Act, we may be able to
maintain emerging growth company status for up to five years, although circumstances could cause us to lose that status earlier,
including if the market value of our common stock held by non-affiliates exceeds $700 million as of any June 30 before the end
of such five-year period or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time,
in which cases we would no longer be an emerging growth company as of the following December 31. Additionally, if we issue more
than $1.0 billion in non-convertible debt during any three-year period before that time, we would cease to be an emerging growth
company immediately.
We
are also currently a “smaller reporting company” as defined in the Securities Exchange Act of 1934, and in the event
that we are still considered a smaller reporting company at such time as we cease being an emerging growth company, we will be
required to provide additional disclosure in our SEC filings. However, similar to emerging growth companies, smaller reporting
companies are able to provide simplified executive compensation disclosures in their filings, are exempt from the provisions of
Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation
report on the effectiveness of internal control over financial reporting, and have certain other decreased disclosure obligations
in their SEC filings, including, among other things, only being required to provide two years of audited financial statements
in annual reports. We cannot predict whether investors will find our common stock less attractive because of our reliance on any
of 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.
If
the bid price of our common stock price drops below $1.00 for a period of 30 consecutive business days, our common stock may be
subject to delisting from The NASDAQ Stock Market.
On
August 17, 2016, since the bid price of our common stock closed below the required minimum $1.00 per share for 30 consecutive
business days, NASDAQ notified us that our common stock may be subject to delisting. We were provided a grace period of 180-calendar
days, or until February 13, 2017, to regain compliance with the minimum bid price requirement. If at any time during the 180-day
grace period, the minimum closing bid price per share of our common stock closes at or above $1.00 for a minimum of ten consecutive
business days, we will regain compliance and the matter will be closed. In the event the Company does not regain compliance with
Rule 5550(a)(2) within this compliance period, it may be eligible for additional time to regain compliance. To qualify for the
additional time, the Company will be required to meet the continued listing requirement for market value of publicly held shares
and all other initial listing standards, with the exception of the minimum bid price requirement, and will need to provide written
notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary.
If the Nasdaq staff concludes that the Company will not be able to cure the deficiency, or if the Company determines not to submit
the required materials or make the required representations, the Company’s common stock will be subject to delisting by
NASDAQ. If our common stock is delisted, it would adversely impact liquidity of our common stock and potentially result in lower
bid prices for our common stock. There is no guarantee that our stock price will remain above $1.00 per share or that it would
recover after falling below that price.
We
incur substantial costs as a result of being a public company and our management expects to devote substantial time to public
company compliance programs.
As
a public company, we incur significant legal, insurance, accounting and other expenses, including costs associated with public
company reporting. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment
will result in increased general and administrative expenses and may divert management’s time and attention from product
development and commercialization activities. If our efforts to comply with new laws, regulations and standards differ from the
activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate
legal proceedings against us, and our business may be harmed. These laws and regulations could make it more difficult and costly
for us to obtain director and officer liability insurance for our directors and officers, and we may be required to accept reduced
coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract
and retain qualified executive officers and qualified members of our board of directors, particularly to serve on our audit and
compensation committees. In addition, if we are unable to continue to meet the legal, regulatory and other requirements related
to being a public company, we may not be able to maintain the listing of our common stock on The NASDAQ Capital Market, which
would likely have a material adverse effect on the trading price of our common stock.