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1. BUSINESS
Overview
We
are a materials company focused on developing, manufacturing and selling silicon nitride ceramics that are used in medical implants
and in a variety of industrial devices. At present, we commercialize silicon nitride in the spine implant market. We believe that
our versatile silicon nitride manufacturing expertise positions us favorably to introduce new and innovative devices in the medical
and non-medical fields. We also believe that we are the first and only company to commercialize silicon nitride medical implants.
We
have received 510(k) regulatory clearance in the United States, a CE mark in Europe, ANVISA approval in Brazil, and ARTG and Prostheses
approvals in Australia for a number of our devices that are designed for spinal fusion surgery. To date, more than 33,000 of our
silicon nitride devices have been implanted into patients, with a 10-year successful track record. In March 2018, we received
clearance from the United States Food and Drug Administration, or FDA, to market a modified novel composite spinal fusion device
that combines porous and solid silicon nitride, and is comparable to our commercially-available Valeo®C cervical implants.
We
believe that silicon nitride has a superb combination of properties that make it ideally suited for human implantation. Other
biomaterials are based on bone grafts, metal alloys, and polymers- all of which have practical limitations. In contrast, silicon
nitride has a legacy of success in the most demanding and extreme industrial environments. As a human implant material, silicon
nitride offers bone ingrowth, resistance to bacterial infection, resistance to corrosion, superior strength and fracture resistance,
and ease of diagnostic imaging, among other advantages.
We
market and sell our Valeo brand of silicon nitride implants to surgeons and hospitals in the United States and to selected markets
in Europe and South America through more than 50 independent sales distributors who are supported by an in-house sales and marketing
management team. These implants are designed for use in cervical (neck) and thoracolumbar (lower back) spine surgery. In 2016
we entered into a 10-year exclusive distribution agreement with Shandong Weigao Orthopaedic Device Company Limited (“Weigao”)
to sell Amedica-branded silicon nitride spinal fusion devices within the People’s Republic of China (“China”).
Weigao, a large orthopedic company, has expertise in acquiring Chinese Food and Drug Administration (“CFDA”) approval
of medical devices, and will assist us in obtaining regulatory approval. Weigao has committed to minimum purchase requirements
totaling 225,000 implants in the first six years following CFDA clearance. We are also working with other partners in Japan to
obtain regulatory approval for silicon nitride in that country. China and Japan are relevant because historically, ceramic implants
are more familiar to, and more readily accepted by surgeons outside the United States, i.e., in Asia and Europe.
In addition to silicon nitride, we also sell
metal-based products in the United States that provide surgeons and hospitals with a complete package for spinal surgery. These
metal products are designed to address spinal deformity and degenerative conditions. Although these metal products have accounted
for approximately 53% and 48% of our product revenues for each of the years ended December 31, 2017 and 2016, respectively, we
remain focused on developing and promoting silicon nitride, and driving its adoption through a scientifically-intense, data-driven
strategy.
In
addition to direct sales, we have targeted original equipment manufacturer (“OEM”) and private label partnerships
in order to accelerate adoption of silicon nitride, both in the spinal space, and also in future markets such as hip and knee
replacements, dental, extremities, trauma, and sports medicine. Existing biomaterials, based on plastics, metals, and bone grafts
have well-recognized limitations that we believe are addressed by silicon nitride, and we are uniquely positioned to convert existing,
successful implant designs made by other companies into silicon nitride. We believe OEM and private label partnerships will allow
us to work with a variety of partners, accelerate the adoption of silicon nitride, and realize incremental revenue at improved
operating margins, when compared to the cost-intensive direct sales model.
We
believe that silicon nitride addresses many of the biomaterial-related limitations in fields such as hip and knee replacements,
dental implants, sports medicine, extremities, and trauma surgery. We further believe that the inherent material properties of
silicon nitride, and the ability to formulate the material in a variety of compositions, combined with precise control of the
surface properties of the material, opens up a number of commercial opportunities across orthopedic surgery, neurological surgery,
maxillofacial surgery, and other medical disciplines.
We
operate a 30,000 square foot manufacturing facility at our corporate headquarters in Salt Lake City, Utah, and we believe we are
the only vertically integrated silicon nitride medical device manufacturer in the world.
Biomaterials
Biomaterials
are natural or synthetic biocompatible materials that are used in virtually every medical specialty to improve or preserve body
functionality. Various types of biomaterials are used as essential components in medical devices, drug delivery systems, replacement
and tissue repair technologies, prostheses, and diagnostic technologies.
There
are four general categories of biomaterials:
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Ceramics.
Ceramics are hard, non-metallic, non-corrosive, heat-resistant materials made by shaping and then applying high temperatures.
Traditional ceramics commonly used as biomaterials include carbon, oxides of aluminum, zirconium and titanium, calcium phosphate
and zirconia-toughened alumina. Examples of medical uses of ceramics include repair, augmentation or stabilization of fractured
bones, bone and joint replacements, spinal fusion devices, dental implants and restorations, heart valves and surgical instruments.
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Metals.
Metals commonly used as biomaterials include titanium, stainless steel, cobalt, chrome, gold, silver and platinum, and
alloys of these metals. Examples of medical uses of metals include the repair or stabilization of fractured bones, stents,
surgical instruments, bone and joint replacements, spinal fusion devices, dental implants and restorations and heart valves.
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Natural
biomaterials.
Natural biomaterials are derived from human donors, animal or plant sources and include human bone, collagen,
gelatin, cellulose, chitin, alginate and hyaluronic acid. Examples of medical uses of natural biomaterials include the addition
or substitution of hard and soft tissue, cornea protectors, vascular grafts, repair and replacement of tendons and ligaments,
bone and joint replacements, spinal fusion devices, dental restorations and heart valves.
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Polymers.
Polymers are synthetic compounds consisting of similar molecules linked together that can be created to have specific
properties. Polymers commonly used as biomaterials include nylon, silicon rubber, polyester, polyethylene, cross-linked polyethylene
(a stronger version), polymethylmethacrylate, polyvinyl chloride and polyetheretherketone – which is commonly referred
to as PEEK. Examples of medical uses of polymers include soft-tissue replacement, sutures, drug delivery systems, joint replacements,
spinal fusion devices and dental restorations.
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Within
orthopedics, biomaterials are extensively used in spinal fusion procedures, hip and knee replacements and the repair or stabilization
of fractured bones. Currently, Amedica is the only FDA-cleared and ISO 13485 certified silicon nitride medical device manufacturing
facility in the world. We believe we are the only provider of ceramics-based medical devices used for spinal fusion applications.
Market
Opportunity
Overview
We
believe our silicon nitride biomaterial technology platform provides us with numerous competitive advantages in the orthopedic
biomaterials market. We market interbody spinal fusion devices and related products and are developing products for use as components
in total hip and knee joint replacements, as well as dental applications. We believe we can also utilize our silicon nitride technology
platform to develop future products in additional markets, such as the sports medicine, extremities, and trauma markets.
Of
the interbody spinal fusion procedures conducted in the United States today, a significant majority utilized interbody devices
comprised of PEEK and bone, with occasional use of metals and other materials including ceramics. The market for interbody spinal
fusion devices has shifted over time as new biomaterials with superior characteristics have been incorporated into these devices
and have launched into the market. We believe the market has reached another inflection point as surgeons and hospitals recognized
the limitations of devices currently available. Similarly, we believe our silicon nitride interbody spinal fusion products address
the key limitations of other biomaterials currently used in interbody spinal fusion devices and demonstrate superior characteristics
needed to improve clinical outcomes.
We
believe that the main drivers for growth within the orthopedic biomaterials market and, in particular, the spinal fusion and joint
replacement markets, are the following:
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Introduction
of New Technologies.
Better performing and longer-lasting biomaterials, improved diagnostics, and advances in surgical
procedures allow for surgical intervention earlier in the continuum of care and better outcomes for patients. We believe surgical
options using better performing and longer-lasting biomaterials will gain acceptance among surgeons and younger patients and
drive accelerated growth and increase the size of the spinal fusion and joint replacement markets.
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Favorable
and Changing Demographics.
With the growing number of elderly people, age-related ailments are expected to rise sharply,
which we believe will increase the demand and need for biomaterials and devices with improved performance capabilities. Also,
middle-aged and older patients increasingly expect to enjoy active lifestyles, and consequently demand effective treatments
for painful spine and joint conditions, including better performing and longer-lasting interbody spinal fusion devices and
joint replacements.
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Market
Expansion into New Geographic Areas.
We anticipate that demand for biomaterials and the associated medical devices will
increase as the applications in which biomaterials are used are introduced to and become more widely accepted in underserved
countries, such as Brazil and China.
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The
Interbody Spinal Fusion Market
The
human spinal canal is made up of 33 interlocking bones, referred to as vertebrae, separated by 23 intervertebral discs comprised
of a hard outer ring made of collagen with a soft inner core, that act as shock absorbers between vertebrae. Disorders of the
spine can result from degenerative conditions, deformities and trauma or tumor-related damage. Spinal fusion is the standard of
care used to treat most spinal disorders and typically involves the placement of an interbody device between vertebrae to reestablish
spacing between vertebrae and alignment of the spine. Generally, the interbody device is stabilized by screws and, in some procedures,
plates or rods. To enhance bone attachment, surgeons often pack the interbody device with a biomaterial that induces bone growth.
Following successful treatment, new bone tissue grows in and around the interbody device over time, which helps fuse the vertebrae
and create long-term stability of the interbody device, leading to the alleviation of pain and increase in mobility. We selected
this market as the first application for our silicon nitride technology because of the limitations of currently available products,
its size, and the key characteristics silicon nitride possesses, which are critical for superior interbody spinal fusion outcomes.
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Promotion
of Bone Growth.
The biomaterial should be both osteoconductive and create an osteoinductive environment to promote bone
growth in and around the interbody device to further support fusion and stability. Osteoconduction occurs when material serves
as a scaffold to support the growth of new bone in and around the material. Osteoinduction involves the stimulation of osteoprogenitor
cells to develop, or differentiate, into osteoblasts, which are cells that are needed for bone growth. A material which stimulates
bone growth and accelerates fusion rates is ideal in spinal fusion procedures.
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Antibacterial.
Spinal fusion devices can become colonized with bacteria, which may limit fusion to adjacent vertebrae or cause serious
infection. Treating device-related infection is costly and generally requires repeat surgery, including surgery to replace
the device, referred to as revision surgery, which may extend hospital stays, suffering and disability for patients. A biomaterial
that has antibacterial properties can reduce the incidence of bacteria colonization in and around the interbody device that
can lead to infection, revision surgery and associated increased costs.
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Imaging
Compatibility.
The biomaterial should be visible through, and not inhibit the effective use of, common surgical and diagnostic
imaging techniques, such as X-ray, CT and MRI. These imaging techniques are used by surgeons during and after spinal fusion
procedures to assist in the proper placement of interbody devices and to assess the quality of post-operative bone fusion.
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Strength
and Resistance to Fracture.
The biomaterial should be strong and resistant to fracture during implantation of the device
and to successfully restore intervertebral disc space and spinal alignment during the fusion process. The biomaterial should
have high flexural strength, which is the ability to resist breakage during bending, and high compressive strength, which
is the ability to resist compression under pressure, to withstand the static and dynamic forces exerted on the spine during
daily activities over the long term.
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Limitations
of Biomaterials used in Interbody Spinal Fusion Devices
The
three biomaterials most commonly used in interbody spinal fusion devices are PEEK, human cadaver bone, also referred to as allograft
bone, and metals. We believe these materials do not possess the key characteristics required to form the optimal interbody spinal
fusion device and are susceptible to potential fracture, implant-related infection, pain, limited fusion and instability, which
have resulted in revision surgeries.
PEEK
(polyetheretherketone)
We
believe PEEK is the most frequently used biomaterial for interbody spinal devices and accounted for the majority of interbody
spinal devices implanted in the United States in 2017. We believe PEEK has the following limitations:
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Restricts
Bone Growth.
Due to PEEK’s hydrophobic nature, the human body may recognize PEEK as a foreign substance and, therefore,
may encapsulate the device with fibrous tissue. Although it is still possible for bone to grow through the device, bone may
not adhere to the surface of the device if this tissue develops. This fibrous layer could cause a non-fusion, allow bacterial
colonization, and/or potentially lead to costly revision surgery.
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Lacks
Imaging Compatibility.
PEEK is invisible on X-rays. As a result, manufacturers of PEEK devices add metal markers to their
devices so surgeons can see the general location of the devices by X-ray. These markers, however, do not show the full outline
of the device, which makes it difficult to assess the accuracy of the placement of the device. In addition, the metal markers
cause artifacts on CT and MRI that can compromise the quality of the image.
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Lacks
Strength and Resistance to Fracture.
PEEK lacks sufficient flexural strength, compressive strength and resistance to fracture
necessary to reduce the risk of deformity or fracture during the fusion process. In addition, PEEK devices may fracture during
implantation in certain interbody spinal fusion procedures. For example, in December 2012, Zimmer Spine recalled its PEEK
Ardis® Interbody System Inserter, a surgical instrument used to implant a PEEK interbody spinal fusion device, because
it resulted in the PEEK implants being susceptible to breakage when too much lateral force was applied to the inserter during
implantation. Due to radiographic X-rays being the most common way for surgeons to assess fusion, and PEEK being invisible
on X-rays, it is extremely difficult to clearly assess the extent to which fracture rates occur with PEEK interbody fusion
devices.
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Lacks
Antibacterial Properties.
PEEK does not have any inherent antibacterial properties. In fact, a biofilm may form around
a PEEK device after implantation, which could allow for the colonization of bacteria, leading to infection and costly revision
surgeries.
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Allograft
Bone
We
believe allograft bone was the second most frequently used biomaterial in interbody spinal fusion devices in the United States
in 2017. We believe allograft bone has the following limitations:
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Limited
Promotion of Bone Growth.
Allograft bone has limited osteoinductive characteristics and therefore may not effectively
promote bone growth in and around the interbody device.
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Inconsistent
Quality.
Generally, allograft bone is not as strong as live bone within the body or other materials used in interbody
devices. Because the cadaveric bone can be harvested from a wide variety of sources, this often leads to inconsistent patient
outcomes. Allograft bone is subject to inconsistent quality and size, which may require surgeons to make compromises on the
fit of the device during surgery. In addition, techniques used to sterilize allograft bone, like gamma irradiation, can cause
the allograft to become brittle and more susceptible to fracture.
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Lacks
Antibacterial Properties and Risk of Disease Transmission.
In addition to not having inherent antibacterial properties,
allograft bone exposes patients to a greater risk of disease transmission and an adverse auto-immune response.
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Metals
We
believe metal interbody devices accounted for a fraction of the devices implanted in the United States in 2016. We believe metal-based
interbody fusion devices have the following limitations:
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Limited
Promotion of Bone Growth.
Metals have limited osteoinductive characteristics and therefore do not effectively promote
bone growth in and around the interbody device.
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Lack
Antibacterial Properties.
Metals do not have inherent antibacterial properties and do not suppress the colonization of
bacteria in and around the device, which can lead to infection and/or costly revision surgeries.
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Lack
Imaging Compatibility.
Metals are opaque in X-rays and can cause significant imaging artifacts in CTs and MRIs. This can
make it difficult for surgeons to detect the extent and quality of bone growth in and around the device in post-operative
diagnostic imaging procedures.
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The
Hip and Knee Joint Replacement Market
Total
joint replacement involves removing the diseased or damaged joint and replacing it with an artificial implant consisting of components
made from several different types of biomaterials. The key components of a total hip implant include an artificial femoral head,
consisting of a ball mounted on an artificial stem attached to the femur, and a liner, which is placed inside a cup affixed into
the pelvic bone. The femoral head and liner move against each other to replicate natural motion in what is known as an articulating
implant. Total knee replacement implants also use articulating components and are comprised of the following four main components:
a femoral condyle, which is a specially shaped bearing that is affixed to the lower end of the femur; a tibial tray that is affixed
to the upper-end of the tibia; a tibial insert that is rigidly fixed to the tibial tray and serves as the surface against which
the femoral condyle articulates; and a patella, or knee cap, which also articulates against the femoral condyle.
Implants
for total hip and knee replacements are primarily differentiated by the biomaterials used in the components that articulate against
one another. The combinations of biomaterials most commonly used in hip and knee replacement implants in the United States are
metal-on-cross-linked polyethylene and traditional oxide ceramic-on-cross-linked polyethylene. The use of hip replacement implants
incorporating metal-on-metal and traditional oxide ceramic-on-traditional ceramic biomaterials experienced a steep decline in
the United States over the last several years due to their significant limitations. We believe that the most commonly used biomaterials
in joint replacement implants also have limitations, and do not possess all of the following key characteristics required for
optimal total joint replacement implants:
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Resistance
to Wear.
The biomaterials should have sufficient hardness and toughness, as well as extremely smooth surfaces, to effectively
resist wear. Because the articulating implants move against each other, they are subject to friction, which frequently leads
to abrasive wear and the release of small wear particles. This may cause an inflammatory response which results in osteolysis,
or bone loss. Surgeons have identified osteolysis as a leading cause of joint implant failure, resulting in the need for costly
revision surgery to replace the failed implant. One of the most commonly used combinations of biomaterials, metal-on-cross-linked
polyethylene, as well as metal-on-metal implants, tends to generate a large number of metal wear particles, which can cause
osteolysis and a moderate to severe allergic reaction to the metal, referred to as metal sensitivity. While less common, metal
implants may also cause a serious medical condition called metallosis, which involves the deposition and build-up of metal
debris in the soft tissues of the body. Both metal sensitivity and metallosis can result in revision surgery. In addition,
we believe traditional oxide ceramics currently used in total joint replacements accelerate wear of the cross-linked polyethylene
liner as compared to our non-oxide ceramic composition found in our silicon nitride biomaterial platform.
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Non-Corrosive.
The biomaterials should be non-corrosive and should not cause adverse patient reactions. Metal placed in the human body
corrodes over time and also results in the formation of metal ions, which leads to metal sensitivity in approximately 10%
to 15% of the population and, less commonly, metallosis. As a result, there are significant increased risks from using metal-on-cross-linked
polyethylene and metal-on-metal implants.
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Hardness,
Strength and Resistance to Fracture.
The biomaterials should be hard, strong and resistant to fracture to adequately bear
the significant loads placed on the hip and knee joints during daily activities. We believe there are strength limitations
associated with traditional oxide ceramic-on-cross-linked polyethylene and traditional oxide ceramic-on-traditional oxide
ceramic implants.
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Antibacterial.
The biomaterials should have antibacterial properties to reduce the risk of bacteria colonization, infection, revision
surgeries and associated increased costs. None of the most commonly used biomaterials in joint replacement implants have antibacterial
properties.
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Our
Silicon Nitride Technology Platform
We
believe we are the only FDA-cleared and ISO 13485 certified silicon nitride medical device manufacturing facility in the world,
and the only provider of ceramics-based medical devices used for spinal fusion applications. Silicon nitride is a chemical compound
comprised of the elements silicon and nitrogen, with the chemical formula Si
3
N
4
. Silicon nitride, an advanced
ceramic, is lightweight, resistant to fracture and strong, and is used in many demanding mechanical, thermal and wear applications,
such as in space shuttle bearings, jet engine components and body armor.
We
believe our silicon nitride is ideally suited for use in many medical applications and has the following characteristics that
make it superior to other biomaterials, including PEEK, bone, metal and traditional oxide ceramics, which do not possess all of
these characteristics:
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Promotes
Bone Growth.
Our silicon nitride is osteoconductive through its inherent surface topography that provides scaffolding
for new bone growth. We believe our silicon nitride promotes an ideal environment for osteoinduction. As a hydrophilic material,
silicon nitride attracts protein cells and nutrients that stimulate osteoprogenitor cells to differentiate into osteoblasts,
which are needed for optimal bone growth environments. Our silicon nitride has an inherent surface chemistry that is more
similar to bone than PEEK and metals. These properties are highlighted in an
in vivo
study, where we measured the force
required to separate devices from the spine after being implanted for three months, which indicates the level of osteointegration.
In the absence of bacteria, the force required to separate our silicon nitride from its surrounding bone was approximately
three times that of PEEK, and nearly two times that of titanium. In the presence of bacteria, the force required to separate
our silicon nitride from its surrounding bone was over five times that of titanium, while there was effectively no separation
force required for PEEK, indicating essentially no osteointegration.
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Hard,
Strong and Resistant to Fracture.
Our silicon nitride is hard, strong and possesses superior resistance to fracture over
traditional ceramics and greater strength than polymers currently on the market. For example, our silicon nitride’s
flexural strength is more than five times that of PEEK and our silicon nitride’s compressive strength is over twenty
times that of PEEK. Unlike PEEK interbody spinal fusion devices, we believe our silicon nitride interbody spinal fusion devices
can withstand the forces exerted during implantation and daily activities over the long term.
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Antibacterial.
We have demonstrated in
in vitro
and
in vivo
studies that silicon nitride has inherent antibacterial properties,
which reduce the risk of infection in and around a silicon nitride device. PEEK, traditional ceramics, metals and bone do
not have inherent antibacterial characteristics. These properties were highlighted in an
in vitro
study (Acta Biomater.
2012 Dec;8(12):4447-54. doi: 10.1016/j.actbio.2012.07.038. Epub 2012 Jul 31.), where live bacteria counts were between 8 and
30 times lower on our silicon nitride than PEEK and up to 8 times lower on our silicon nitride than titanium. In addition
to improving patient outcomes, we believe the antibacterial properties of our silicon nitride should make it an attractive
biomaterial to hospitals and surgeons who are not reimbursed by third-party payors for the treatment of hospital-acquired
infections. Additionally, silicon nitride is synthetic and, therefore, there is a lower risk of disease transmission through
cross-contamination or of an adverse auto-immune response, sometimes associated with the use of allograft bone.
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Imaging
Compatible.
Our silicon nitride interbody spinal fusion devices are semi-radiolucent, clearly visible in X-rays, and produce
no distortion under MRI and no scattering under CT. These characteristics enable an exact view of the device for precise intra-operative
placement and post-operative bone fusion assessment in spinal fusion procedures. These qualities provide surgeons with greater
certainty of outcomes with our silicon nitride devices than with other biomaterials, such as PEEK and metals.
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Resistant
to Wear.
We believe our silicon nitride joint implant product candidates could have higher resistance to wear than metal-on-cross-linked
polyethylene and traditional oxide ceramic-on-cross-linked polyethylene joint implants, the two most commonly used total hip
replacement implants. Wear debris associated with metal implants increases the risk of metal sensitivity and metallosis. It
is a primary reason for early failures of metal and polymer articulating joint components.
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Non-Corrosive.
Our silicon nitride does not have the drawbacks associated with the corrosive nature of metal within the body, including
metal sensitivity and metallosis, nor does it result in the release of metal ions into the body. As a result, we believe our
silicon nitride products will have lower revision rates and fewer complications than comparable metal and traditional oxide
ceramic products.
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Our
Forms of Silicon Nitride
The
chemical composition of our in-house formulation of silicon nitride and our processing and manufacturing experience allow us to
produce silicon nitride in four distinct forms. This capability provides us with the ability to utilize our silicon nitride biomaterial
in a variety of ways depending on the intended application, which, together with our silicon nitride’s key characteristics,
distinguishes us from manufacturers of products using other biomaterials.
We
currently produce silicon nitride for use in our commercial products and product candidates in the following forms:
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Solid
Silicon Nitride.
This form of silicon nitride is a fully dense, load-bearing solid used for devices that require high
strength, toughness, fracture resistance and low wear, including interbody spinal fusion devices, hip and knee replacement
implants, and dental implants.
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Porous
Silicon Nitride.
While this form of silicon nitride has a chemical composition that is identical to that of our monolithic
solid silicon nitride, this formulation has a porous structure, which is engineered to mimic cancellous bone, the spongy bone
tissue that typically makes up the interior of human bones. Our porous silicon nitride has interconnected pores ranging in
size between about 90 and 600 microns, which is similar to that of cancellous bone. This form of silicon nitride can be used
for the promotion of bone in-growth and attachment. We believe our porous silicon nitride can act as a substitute for the
orthobiologics currently used to fill interbody devices in an effort to stimulate fusion, as a bone void filler, and as a
porous scaffold for medical devices.
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Composite
Silicon Nitride.
This form of silicon nitride is a combination, or composite, of our solid monolithic and porous formulations
of silicon nitride. This composite may be used to manufacture devices and implants that mimic the structure of natural bone
by incorporating both a fully dense, load-bearing solid component on the outside and a porous component intended to promote
bone in-growth on the inside. This composite form of silicon nitride is used in interbody spinal fusion devices and can be
used in components for total hip and knee replacement implants.
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Silicon
Nitride Coating.
With a similar chemical composition as our other forms of silicon nitride, this form of silicon nitride
can be applied as an adherent coating to metallic substrates, including cobalt-chromium, titanium and steel alloys. We believe
applying an extremely thin layer of silicon nitride as a coating may provide a highly wear-resistant articulation surface,
such as on femoral heads, which may reduce problems associated with metal or polymer wear debris. We also believe that the
silicon nitride coating can be applied to devices that require firm fixation and functional connections between the device
or implant and the surrounding tissue, such as hip stems and screws. The use of silicon nitride coating may also create an
antibacterial barrier between the device and the adjacent bone or tissue.
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Our
Competitive Strengths
We
believe we can use our silicon nitride technology platform to become a leading biomaterial company and have the following principal
competitive strengths:
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Sole
Provider of Silicon Nitride Medical Devices.
We believe we are the only company that designs, develops, manufactures and
sells medical grade silicon nitride-based products. Due to its key characteristics, we believe our silicon nitride enables
us to offer new and transformative products across multiple medical specialties. In addition, with the FDA clearance of our
silicon nitride Valeo products, we are the only company to develop and manufacture a ceramic for use in FDA cleared spinal
fusion medical devices in the United States.
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In-House
Manufacturing Capabilities.
We operate a 30,000 square foot manufacturing facility located at our corporate headquarters
in Salt Lake City, Utah. This operation complies with the FDA’s quality system regulation, or QSR, and is certified
under the International Organization for Standardization’s, or ISO, standard 13485 for medical devices. This facility
allows us to rapidly design and produce silicon nitride products, while controlling the entire manufacturing process from
raw material to finished goods.
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Established
Commercial Infrastructure.
We market and sell our products to surgeons and hospitals in the United States and select markets
in Europe and South America through our established network of more than 50 independent sales distributors who are managed
by our experienced in-house sales and marketing management team. Our control over the sales and marketing processes also allows
us greater flexibility to selectively collaborate with distributors when we believe their experience or geographic reach can
be beneficial to us.
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Portfolio
of Non-Silicon Nitride Products.
In addition to designing, developing, manufacturing and commercializing silicon nitride
interbody spinal fusion devices, we sell a complementary line of non-silicon nitride spinal fixation products. We offer a
full suite of spinal fusion solutions, which increases our access to surgeons and hospitals, and allows us to more effectively
market our silicon nitride spinal fusion products to our customers. Product revenue from the sale of these non-silicon nitride
products also supports further development of our silicon nitride products and product candidates.
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Highly
Experienced Management and Surgeon Advisory Team.
Members of our management team have experience in product development,
launching of new products into the orthopedics market and selling to hospitals through direct sales organizations, distributors,
manufacturers and other orthopedic companies. We also collaborate with a network of leading surgeon advisors in the design,
development and use of our silicon nitride products and product candidates.
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Our
Strategy
Our
goal is to become a leading biomaterial company focused on using our silicon nitride technology platform to develop, manufacture
and commercialize a broad range of medical devices. Key elements of our strategy to achieve this goal are the following:
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●
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Drive
Further Adoption of our Silicon Nitride Interbody Spinal Fusion Devices.
We believe that increasing the awareness of our
silicon nitride technology by educating surgeons about its key benefits, and the design improvements to our silicon nitride
products and related instruments will accelerate the adoption of our products and ultimately help improve patient outcomes.
To drive further awareness of our products and the associated benefits offered by our silicon nitride technology, we will
continue to educate surgeons through multiple channels, including industry conferences and meetings, media outlets and through
our sales and marketing efforts.
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|
|
|
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●
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Continue
Establishing and Cultivating OEM and Private Label Partnerships.
Because we believe silicon nitride is a superior platform
and technology for application in the spine, total joint, dental, and extremities markets, we have established, and will seek
to establish, additional partnerships with other medical device companies to replace their inferior materials and products
with products manufactured from silicon nitride. For example, under an OEM arrangement, we would manufacture the company’s
spinal fusion implant designs with silicon nitride and leverage their existing instrumentation, allowing the company to convert
their existing line of spinal fusion devices with limited capital expenditures. Additionally, a private label arrangement
would allow our partners to sell Amedica’s Valeo line of silicon nitride interbody spinal fusion devises under their
own brand name. The private label agreements typically provide a quicker pathway to revenue as compared to the OEM arrangements.
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|
●
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Enhance
our Commercial Infrastructure.
We expect to increase the productivity of our sales and marketing team by continuing to
engage experienced independent sales distributors with strong orthopedic surgeon relationships. For example, we have a sales
agent agreement with a Brazilian medical device distributor to distribute our Valeo line of silicon nitride interbody implants.
We may also establish distribution collaborations in the United States and abroad when access to large or well-established
sales and marketing organizations may help us gain access to new markets, increase sales in our existing markets, or accelerate
market penetration for selected products.
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Develop
Silicon Nitride for Total Joint Components.
We are incorporating our silicon nitride technology into silicon nitride-coated
metal components and solid silicon nitride components for use in total hip and knee replacement product candidates that we
plan to develop in collaboration with a strategic partner. We are also working with the FDA to define the regulatory pathway
required for development and commercialization of these components.
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Apply
our Silicon Nitride Technology Platform to Other OEM Opportunities.
Our silicon nitride technology platform is adaptable
and we believe it may be used to develop products to address other significant opportunities, such as in the dental, extremities,
sports medicine, cardiovascular and trauma markets. We have manufactured prototypes of dental implants, extremities, sports
medicine and trauma products, and have developed a process to coat metals with our silicon nitride to enhance current medical
devices and instruments. We plan to collaborate with other companies to develop and commercialize future products in these
areas.
|
Spinal
Fusion Products and Product Candidates
Our
Valeo Silicon Nitride Products and Product Candidates
Our
first generation Valeo silicon nitride spinal fusion device received 510(k) regulatory clearance and a CE mark in 2008. Based
on surgeon feedback for our first generation spinal fusion devices, we developed a second generation of Valeo products. In 2012,
we received 510(k) clearance to market this second generation family of Valeo interbody spinal fusion devices which we launched
with a select number of surgeons in 2013. Our second generation Valeo interbody spinal fusion devices offer distinct improvements
over the first generation. The instrumentation of the second generation devices allow for better control of the device during
implantation. The device allows for improved stability and potentially improved fusion after implantation and is offered in a
broad selection of sizes. We completed the full launch of our second generation AL, PL, OL and TL Valeo interbody spinal fusion
devices in the United States in 2014, our second generation LL Valeo interbody spinal fusion devices in August 2015 and our second
generation C Valeo interbody spinal fusion devices in February 2016.
Our
current products are:
Valeo
Interbody Fusion Devices
|
|
Generation
|
AL:
Anterior Lumbar
|
|
1
st
and 2
nd
|
PL:
Posterior Lumbar
|
|
1
st
and 2
nd
|
OL:
Oblique Lumbar
|
|
1
st
and 2
nd
|
TL:
Transforaminal Lumbar
|
|
1
st
and 2
nd
|
LL:
Lateral Lumbar
|
|
2
nd
|
C:
Cervical
|
|
1
st
and 2
nd
|
CORP:
Corpectomy
|
|
1
st
|
C+CSC
(cleared in Australia and the EU but not the USA)
|
|
1st
|
C+CSC
with Lumen
|
|
1st
|
In
2009, we received a CE Mark to commercialize the Valeo interbody spinal fusion devices made from our composite silicon nitride.
The porous silicon nitride center of these devices is designed to facilitate bone growth into the device, which we believe will
allow surgeons to reduce or eliminate the use of allograft bone and other osteoconductive biomaterials. We are currently marketing
these devices in the Europe and Australia. Additionally, we conducted a prospective clinical trial in Europe, named CASCADE, comparing
our Valeo composite silicon nitride interbody devices to PEEK interbody devices filled with autograft bone to obtain additional
safety and efficacy data to support a 510(k) clearance in the United States. The CASCADE study enrolled 104 patients in a prospective
clinical trial that independently scored fusion rates and clinical outcomes at 12 and 24 months follow-up. Neck Disability Index
scores decreased similarly in both patient groups, consistent with clinical improvements reported in the literature. Importantly,
the incidence of cervical spine fusion was statistically identical between study groups, and consistent with figures reported
in other studies. In March 2018, the FDA cleared our 510(k) premarket application to commercialize a composite silicon nitride
implant which we refer to as our Valeo C+CsC with Lumen Interbody Fusion Device. The Valeo C+CsC with Lumen Interbody Fusion Device
is a composite spinal fusion implant that combines different densities of our proprietary medical grade silicon nitride ceramic.
An outer shell of solid silicon nitride is manufactured around a porous core, called CsC (Cancellous structured Ceramic). The
Valeo C+CsC device is already used in Europe, and the Valeo C+CsC with Lumen is the introduction of this porous technology in
the US.
Valeo
Composite (Monolithic + Porous Silicon Nitride)
Our
Non-Silicon Nitride Spinal Fixation Products
We
sell a line of complementary non-silicon nitride spinal fixation products to provide surgeons and hospitals with a broader range
of products. Product revenue from the sale of our non-silicon nitride spinal fixation products further supports development of
our silicon nitride products and product candidates. In November 2016 the FDA notified the company that the new pedicle screw
system, which we refer to as our Taurus™ Pedicle Screw System, was cleared for commercialization. The Taurus Pedicle Screw
System is intended to immobilize and stabilize the spinal segments to supplement fusion of the lumbar and/or sacral spine. Taurus™
is a modular degenerative system, connecting strength with intra-operative flexibility. The Taurus™ modular screw can be
attached in-situ facilitating screw-to-screw distraction, improving disc space visualization. The dual-lead screw design maintains
a rapid insertion speed, while improving screw pullout strength. Additionally, the tension head-body holds its position at any
angle, and the patented helical flange technology eliminates head splay and cross-threading.
Our
Total Hip and Knee Joint Replacement Product Candidates
Our
Total Hip Implant Product Candidates
We
have developed a femoral head that is made from our solid silicon nitride, which could be used for total hip replacement product
candidates. This femoral head is expected to articulate against a cross-linked polyethylene liner fixed into a metal acetabular
cup. Together with a strategic partner, we have initiated biomechanical testing of our solid silicon nitride femoral heads. The
final results of this test will be released in 2018. If the tests indicate that silicon nitride femoral heads are superior in
terms of wear performance, taper corrosion, strength and
in vitro
hydrothermal stability, we eventually intend to commercialize
this product in cooperation with a strategic partner. However, clearance of these types of devices by the FDA will be required.
Currently, the FDA has indicated that a limited one to two year clinical trial may be necessary to obtain clearance. If clearance
is eventually obtained, we intend to commercially launch products for use in total hip replacement in 2020 or 2021.
Our
Total Knee Implant Product Candidates
We
have developed a femoral condyle design made from our solid silicon nitride. The femoral condyle component will attach to the
lower end of the femur. The femoral condyle is expected to articulate against a cross-linked polyethylene tibial insert that will
attach to the tibial tray at the upper end of the tibia, which we expect will be made from metal. We have successfully made prototypes
of this design. Following the potential clearance of the femoral head components (discussed above), we intend to initiate biomechanical
testing with a strategic partner for silicon nitride components for use in knee replacement procedures to support a 510(k) submission
to the FDA. If this clearance is eventually obtained, we intend to commercialize our products for use in total knee replacement
surgeries post-FDA clearance.
Other
Product Opportunities
Our
silicon nitride technology platform is adaptable and we believe it may be used to develop products to address other significant
opportunities, such as in the dental, extremities, sports medicine and trauma markets.
We
have entered into a joint development agreement with a dental implant design company and distributor of dental technologies for
the development of a silicon nitride based dental implant system and devices.
We
also believe our coating technology may be used to enhance our marketed metal products as well as other commercially available
metal spinal fusion and joint replacement products. We have produced feasibility prototypes of dental implants, other components
for use in total hip implants in addition to our total hip and knee implant product candidates discussed above, a suture anchor
for sports medicine applications, an osteotomy wedge for extremities applications, and prototypes of silicon nitride-coated plates
for potential trauma applications. We have also developed a process to apply our silicon nitride as a coating on other biomaterials.
The
FDA has not evaluated any of these potential products and we are not currently advancing the development of any of these product
candidates. We plan to collaborate with medical device companies to complete the development of and commercialize any product
candidates we advance in these areas or develop any one of them ourselves if sufficient resources should become available.
Supporting
Data
We
and a number of independent third parties have conducted extensive biocompatibility, biomechanical,
in vivo
and
in vitro
testing on our silicon nitride composition to establish its safety and efficacy in support of regulatory clearance of our
biomaterial, products and product candidates. We have also completed additional testing of our silicon nitride products and product
candidates. The results of this testing have been published in peer reviewed publications. We believe our product development
strategy is consistent with the manner in which other biomaterials have been successfully introduced into the market and adopted
as the standard of care. Listed below is an overview of some of the key testing completed on our silicon nitride biomaterial,
products and product candidates to date, as well as other information about our silicon nitride and other biomaterials.
Biocompatibility
Before
our silicon nitride was cleared by the FDA in 2008, we conducted a series of biocompatibility tests following the guidelines of
the FDA and ISO and submitted the results to the FDA as part of the regulatory clearance process. These tests confirmed that our
silicon nitride products meet required biocompatibility standards for human use.
Promotion
of Bone Growth
In
2012, we conducted two separate studies at Brown University, the results of which suggest that the chemistry and inherent surface
topography of our solid silicon nitride provides an optimal environment for bone growth onto and around the device.
The
first study was a series of
in vitro
analyses of protein adsorption, or presence on the surface of the biomaterial, onto
silicon nitride, PEEK and titanium. The results of this study indicated that adsorption of two key proteins necessary for bone
growth (fibronectin and vitronectin) were up to eight times greater on our silicon nitride than on PEEK, and up to four times
greater than on titanium. A third important protein (laminin) had up to two times greater adsorption on our silicon nitride than
on PEEK, and up to two-and-one-half times greater adsorption than on titanium.
The
second study was an
in vivo
investigation of the osteointegration characteristics of these same three biomaterials after
they had been surgically implanted into the skulls of laboratory rats. This study included an examination of the effect of Staphylococcus
epidermidis bacteria on osteointegration. At time intervals of up to three months after implantation of the biomaterial, the amount
of new bone growth within the surgical site and in direct contact with the implanted biomaterial was evaluated. In the absence
of bacteria, new bone formation within the surgical site surrounding our silicon nitride was approximately 69%, compared with
36% and 24% for titanium and PEEK, respectively. Similarly, bone in direct contact, or apposition, with our silicon nitride, titanium
and PEEK was 59%, 19% and 8%, respectively. As is common, in the presence of bacteria, new bone formation within the surgical
site was suppressed, but still significantly greater for our silicon nitride than for the other two biomaterials. Observed new
bone growth within the surgical site surrounding our silicon nitride was 41%, compared with 26% and 21% for titanium and PEEK,
respectively. At the implant interface, the bone apposition for our silicon nitride, titanium and PEEK was 23%, 9% and 5%, respectively.
To further characterize the extent of osteointegration, the force needed to separate each implant from its surrounding bone was
measured. A larger force needed to separate the implant is an indication of improved osteointegration. At three months after implantation,
in the absence of bacteria, the force required to separate our silicon nitride from its surrounding bone was approximately three
times that of PEEK, and nearly two times that of titanium. In the presence of bacteria, there was effectively no separation force
required for PEEK, indicating essentially no osteointegration. Our silicon nitride required over five times the force to separate
it from its surrounding bone in the presence of bacteria in comparison to titanium.
In
2008, we conducted an animal study in which we evaluated the level of osteointegration of our porous silicon nitride with a knee-defect
model in adult sheep. At three months after implantation, three out of five of the silicon nitride implants had extensive new
bone formation at and into the implant surface, showing that the bone had grown into our porous silicon nitride to a depth of
3 millimeters, or mm. This animal study demonstrated the rapid osteointegration potential of our porous silicon nitride composition.
Hardness,
Strength and Resistance to Fracture
Comparative
Information
As
shown in the table of comparative information publicly available about various biomaterials below:
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●
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the
hardness, or a material’s resistance to deformity, of silicon nitride is comparable to traditional ceramics, but is
substantially higher than either polymers or metals;
|
|
|
|
|
●
|
the
strength of silicon nitride is comparable or higher than metals and traditional ceramics, and is about sixteen to fifty-five
times stronger than highly-cross-linked polyethylene, and four to eight times stronger than PEEK; and
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|
|
|
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●
|
silicon
nitride has the highest fracture resistance of any medical ceramic material and is three to eleven times more resistant to
fracture than PEEK or highly-cross-linked polyethylene. This is due to the interwoven microstructure of silicon nitride. Metals
have the highest fracture resistance.
|
Comparison
of Mechanical Properties Among Orthopedic Biomaterials
Material
|
|
Hardness
(GPa)(1)
|
|
Strength
(MPa)(1)
|
|
Fracture
Resistance (MPam
1/2
)(1)
|
Silicon
Nitride
|
|
|
13
– 16
|
|
|
|
800
– 1200
|
|
|
|
8
– 11
|
|
Aluminum
Oxide Ceramic
|
|
|
14
– 19
|
|
|
|
300
– 500
|
|
|
|
3
– 5
|
|
Zirconia-Toughened
Alumina Ceramic
|
|
|
12
– 19
|
|
|
|
700
– 1150
|
|
|
|
5
– 10
|
|
PEEK
|
|
|
0.09
– 0.28
|
|
|
|
160
– 180
|
|
|
|
2
– 3
|
|
Highly-Cross-Linked
Polyethylene Polymer
|
|
|
0.03
– 0.07
|
|
|
|
22
– 48
|
|
|
|
1
– 2
|
|
Cobalt-Chromium
Metal
|
|
|
3
– 4
|
|
|
|
700
– 1000
|
|
|
|
50
– 100
|
|
Titanium
Alloy Metal
|
|
|
3
– 4
|
|
|
|
920
– 980
|
|
|
|
75
|
|
(1)
|
GPa
is a giga-pascal. Pascals are a measure of pressure. MPam
1/2
is mega-pascal times a square root meter and is a
measure related to the energy required to initiate fracture of a material.
|
We
believe that the combination of high hardness, strength and fracture resistance positions our silicon nitride as an ideal biomaterial
for many medical applications.
Burst
Strength
In
2006, we conducted in-house comparative “burst strength” tests on femoral heads made from our silicon nitride produced
by a contract manufacturer to our specifications and femoral heads made from one of the strongest commercially available ceramics,
BIOLOX
®
delta (zirconia-toughened alumina). These tests were performed on three designs of 28 mm femoral heads
using accepted testing protocols. The tests involved applying a load to each femoral head while mounted on a cobalt-chromium simulated
hip implant stem, until the head burst. This enabled us to directly compare the strength of the femoral heads made of the two
biomaterials. The results also provided an indication of each biomaterial’s resistance to fracture. The results of these
tests are shown in the chart below.
The
average burst test strength for the silicon nitride femoral heads in these tests was 75 kilonewtons, or kNs, compared with 65
kN for BIOLOX
®
delta, or about a 15% improvement. The burst strengths observed in our tests for BIOLOX
®
delta femoral heads are comparable to those observed by an independent party testing the same design BIOLOX
®
delta femoral heads as we did. We also conducted burst strength tests of 36 mm femoral heads made from our silicon nitride which
showed those femoral heads had burst strengths that averaged 164 kN.
Resistance
to Wear
In
2011, we commissioned an independent laboratory to conduct a wear study using our silicon nitride femoral heads. We tested our
28 mm silicon nitride femoral heads articulated against cross-linked polyethylene acetabular liners and our 40 mm silicon nitride
femoral heads articulated against cross-linked polyethylene acetabular liners using well-established protocols in a hip simulator
for their wear performance over 5 million cycles. We then compared the results for our silicon nitride product candidates to the
results for the cobalt chrome femoral head and publicly available data from other commonly paired products. The results and comparison
showed that:
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●
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our
silicon nitride-on-cross-linked polyethylene had approximately half the wear rate of that publicly reported for cobalt chrome-on-cross-linked
polyethylene articulating hip components; and
|
|
|
|
|
●
|
our
silicon nitride-on-cross-linked polyethylene had comparable wear to that publicly reported for traditional oxide ceramic-on-cross-linked
polyethylene articulating hip components.
|
Antibacterial
Properties
The
results of the two studies at Brown University in 2012, demonstrate that our solid silicon nitride has antibacterial properties.
The objective of the
in vitro
study was to determine how our silicon nitride, PEEK and titanium interact with bacteria,
protein and bone cells without the use of antibiotics and compared the growth of five different types of bacteria on silicon nitride,
PEEK and titanium over time. Live bacteria counts were between 8 to 30 times lower on silicon nitride than PEEK and up to 8 times
lower on silicon nitride than titanium.
In
the
in vivo
study, bacteria were applied to the biomaterials before implantation. Three months after implantation, no infection
was observed with silicon nitride, whereas both PEEK and titanium showed infection. The data demonstrate that our silicon nitride
inhibits biofilm formation and bacterial colonization around the biomaterial.
Imaging
Compatibility
In
2007, we conducted a study to compare the imaging characteristics of test blanks made of PEEK, the metals titanium and tantalum,
and silicon nitride using a cadaver human vertebral body. Images of the vertebral body and the blanks were obtained using X-ray,
CT and MRI under identical conditions. We assessed the radiolucent characteristics of the blanks in X-ray images quantitatively,
assessed the presence of scatter in CT qualitatively and assessed distortion in MRI quantitatively. In X-ray, the metal blanks
did not permit visualization of the underlying bone of the vertebral body, while PEEK was transparent, rendering its location
difficult to determine. The silicon nitride blank had an intermediate radiolucency that rendered it visible and allowed a visual
assessment of the underlying bone of the vertebral body. CT and MRI of the metal blanks indicated the presence of distortion while
silicon nitride and PEEK exhibited no scattering.
Sales
and Marketing
We
market and sell our products to surgeons and hospitals through our established network of more than 50 independent sales distributors
who are managed by our experienced in-house sales and marketing management team. Our sales efforts to-date have been in the United
States and select markets in Europe and South America. To supplement our independent sales distributors, in select international
markets, such as Europe, China, Japan, Australia, Latin America and Canada, we may also seek to establish collaborations with
leading orthopedic companies where we believe that a large, well-established partner may provide better access to those markets.
For example, we have entered into a distribution agreement with a Brazilian medical device distributor for distribution of our
Valeo line of products in Brazil, are looking for an appropriate distribution partner in Australia, and we are working with strategic
partners in China and Japan to gain approval of our products for commercialization in those countries. In addition, we may establish
collaborations in the United States under circumstances where access to a larger sales and marketing organization may help to
expand the market or accelerate penetration for selected products.
In
addition to leveraging the strong existing surgeon relationships of our distribution network, we market our products through a
combination of initiatives that are designed to establish and increase awareness of our silicon nitride products and their benefits
over alternative products. We attend and make presentations at major industry events, including society meetings, to educate surgeons
and distributors about our products and product candidates. We advertise in trade journals and publications, and offer unique
pricing strategies, including product bundling and incentivizing our distribution network to create and maintain long-term relationships
with surgeons and hospitals. We also use surgeon advisors to assist in product development and to help implement awareness campaigns
aimed at educating surgeons about our products. As part of these campaigns, we provide educational materials for hospitals and
surgeons. We also conduct regional training seminars where our product managers, trainers, engineers, sales and marketing staff
members work together with our surgeon advisors to educate surgeons and our distribution network in the use of our products.
Original
Equipment Manufacturing and Private Label
In
addition to the markets into which we directly sell our products, we are utilizing our silicon nitride technology platform to
expand our current penetration in the spinal fusion market through original equipment manufacturer (“OEM”) and private
label partnerships. We also expect to do the same in other markets such as total hip and knee joint replacements, dental, extremities,
and sports medicine. We believe our biomaterial expertise, strong intellectual property and formulaic manufacturing process will
allow us to transition currently available medical device products made of inferior biomaterials and manufacture them using silicon
nitride and our technology platform to improve their characteristics.
Manufacturing
Silicon
Nitride Manufacturing
To
control the quality, cost and availability of our silicon nitride products and product candidates, we operate our own manufacturing
facility. Our 54,000 square foot corporate building includes a 30,000 square foot ISO 13485 certified medical device manufacturing
space. It is equipped with state-of-the-art powder processing, spray drying, pressing and computerized machining equipment, sintering
furnaces, and other testing equipment that enables us to control the entire manufacturing process for our silicon nitride products
and product candidates. To our knowledge, we are the only vertically integrated silicon nitride orthopedic medical device manufacturer
in the world. All operations with the exceptions of raw material production, cleaning, packaging and sterilization are performed
in-house. We purchase raw materials, consisting of silicon nitride ceramic powder and dopant chemical compounds, from several
vendors which are ISO registered and approved by us. These raw materials are characterized and tested in our facility in accordance
with our specifications and then blended to formulate our silicon nitride. We believe that there are multiple vendors that can
supply us these raw materials and we continually monitor the quality and pricing offered by our vendors to ensure high quality
and cost-effective supply of these materials.
Non-Silicon
Nitride and Instruments Manufacturing
We
obtain our non-silicon nitride spinal fixation products and instruments from third-party manufacturers. We also plan to rely on
third-party manufacturers for the supply of the metal components of our silicon nitride hip and knee joint replacement product
candidates. We only use manufacturers that operate under QSR and are ISO 13485 certified. Our in-house quality control group examines
subcontracted components to ensure that they meet our required specifications. We believe that the use of third-party sources
for non-silicon nitride spinal fixation products and instruments will reduce our capital investment requirements and allow us
to strategically focus our resources on the manufacture of our silicon nitride products and product candidates.
Intellectual
Property
We
rely on a combination of patents, trademarks, trade secrets, nondisclosure agreements, proprietary information ownership agreements
and other intellectual property measures to protect our intellectual property rights. We believe that in order to have a competitive
advantage, we must continue to develop and maintain the proprietary aspects of our technologies.
As
of March 27, 2018, we had 58 issued U.S. patents, 5 pending U.S. patent applications, 1 pending PCT application, 6 granted foreign
patents and 1 pending foreign patent applications. Our first issued patent expired in 2016, with the last of these patents expiring
in 2034. The first core patents do not expire until 2022; these include US 6,881,229 and US 6,790,233.
We
have fourteen U.S. patents and one pending U.S. patent application directed to articulating implants using our high-strength,
high toughness doped silicon nitride solid ceramic. The issued patents, which include US 6,881,229; US 7,666,229; US 7,758,646;
US 7,695,521; US 7,771,481; US 7,776,085; US 7,780,738; US 8,016,890; US 8,123,812; US 8,133,284, US 8,377,134; US 8,747,540;
US 9,051,639; US 9,517,136; begin to expire in 2022. The pending U.S. patent application has been assigned serial no. 15/162,363
and a non-final Office action was issued January 25, 2018.
We
also have six U.S. patents and five foreign patent (Switzerland, Germany, France, Greece and the Netherlands) related to our CSC
technology that are directed to implants that have both a dense load-bearing, or cortical, component and a porous, or cancellous,
component, together with a surface coating. These issued patents, which include US 6,790,233; US 6,846,327; US 7,695,521; US 8,133,284;
US 8,747,408; US 9,649,197; and EP 1389978, begin to expire in 2022. EP 1389978 was registered in Switzerland, Germany, France,
Greece and the Netherlands.
We
also have three U.S. patents that we acquired in July 2012 from Dytech Corporation Ltd., or Dytech, directed to manufacturing
processes for the production of porous ceramics for use in our orthopedic implants. These patents include US 5,563,106 and US
5,705,448, which have now expired; these patents also include US 6,617,270, which expires in 2019. Under our acquisition agreement
with Dytech, Dytech granted to us a perpetual, irrevocable and exclusive license, including the right to grant sublicenses, to
certain improvements and know-how related to the acquired patents. In return, we are required to pay Dytech a low single-digit
royalty on net sales of products sold by us, our affiliates, or our licensees that are covered by one or more valid claims of
these patents, and a percentage of any non-royalty licensing income we may receive in the event we grant a license to others.
Our
remaining issued patents and pending applications are directed to additional aspects of our products and technologies including,
among other things:
|
●
|
designs
for pedicle screws;
|
|
|
|
|
●
|
designs
for intervertebral fusion devices;
|
|
|
|
|
●
|
designs
for hip implants; and
|
|
|
|
|
●
|
designs
for knee implants.
|
We
also expect to rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop
and maintain our intellectual property position. However, trade secrets are difficult to protect. We seek to protect the trade
secrets in our proprietary technology and processes, in part, by entering into confidentiality agreements with commercial partners,
collaborators, employees, consultants, scientific advisors and other contractors and into invention assignment agreements with
our employees and some of our commercial partners and consultants. These agreements are designed to protect our proprietary information
and, in the case of the invention assignment agreements, to grant us ownership of the technologies that are developed.
Competition
The
main alternatives to our silicon nitride biomaterial include: PEEK, which is predominantly manufactured by Invibio; BIOLOX
®
delta
, which is a traditional oxide ceramic manufactured by CeramTec; allograft bone; metals; and coated metals.
We
believe our main competitors in the orthopedic implant market, which utilize a variety of competitive biomaterials, include: Medtronic,
Inc.; DePuy Synthes Companies, a group of Johnson & Johnson companies; Stryker Corporation; Biomet, Inc.; Zimmer Holdings,
Inc.; Smith & Nephew plc; and Aesculap Inc. Presently, these companies buy ceramic components on an OEM basis from manufacturers
such as CeramTec, Kyocera and CoorTek, Inc., among others. We anticipate that these and other orthopedic companies and OEMs will
seek to introduce new biomaterials and products that compete with ours.
Competition
within the industry is primarily based on technology, innovation, product quality, and product awareness and acceptance by surgeons.
Our principal competitors have substantially greater financial, technical and marketing resources, as well as significantly greater
manufacturing capabilities than we do, and they may succeed in developing products that render our implants and product candidates
non-competitive. Our ability to compete successfully will depend upon our ability to develop innovative products with advanced
performance features based on our silicon nitride technologies.
Government
Regulation of Medical Devices
Governmental
authorities in the United States, at the federal, state and local levels, and other countries extensively regulate, among other
things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution, marketing and export
and import of products such as those we are commercializing and developing. Failure to obtain approval or clearance to market
our products and products under development and to meet the ongoing requirements of these regulatory authorities could prevent
us from continuing to market or develop our products and product candidates.
United
States
Pre-Marketing
Regulation
In
the United States, medical devices are regulated by the FDA. Unless an exemption applies, a new medical device will require either
prior 510(k) clearance or approval of a premarket approval application, or PMA, before it can be marketed in the United States.
The information that must be submitted to the FDA in order to obtain clearance or approval to market a new medical device varies
depending on how the medical device is classified by the FDA. Medical devices are classified into one of three classes on the
basis of the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices,
which are those that have the lowest level or risk associated with them, are subject to general controls, including labeling,
premarket notification and adherence to the QSR. Class II devices are subject to general controls and special controls, including
performance standards. Class III devices, which have the highest level of risk associated with them, are subject to most of the
previously identified requirements as well as to premarket approval. Most Class I devices and some Class II devices are exempt
from the 510(k) requirement, although manufacturers of these devices are still subject to registration, listing, labeling and
QSR requirements.
A
510(k) premarket notification must demonstrate that the device in question is substantially equivalent to another legally marketed
device, or predicate device, that did not require premarket approval. In evaluating the 510(k), the FDA will determine whether
the device has the same intended use as the predicate device, and (a) has the same technological characteristics as the predicate
device, or (b) has different technological characteristics, and (i) the data supporting the substantial equivalence contains information,
including appropriate clinical or scientific data, if deemed necessary by the FDA, that demonstrates that the device is as safe
and as effective as a legally marketed device, and (ii) does not raise different questions of safety and effectiveness than the
predicate device. Most 510(k)s do not require clinical data for clearance, but the FDA may request such data. The FDA’s
goal is to review and act on each 510(k) within 90 days of submission, but it may take longer based on requests for additional
information. In addition, requests for additional data, including clinical data, will increase the time necessary to review the
notice. If the FDA does not agree that the new device is substantially equivalent to the predicate device, the new device will
be classified in Class III, and the manufacturer must submit a PMA. Since July 2012, however, with the enactment of the Food and
Drug Administration Safety and Innovation Act, or FDASIA, a de novo pathway is directly available for certain low to moderate
risk devices that do not qualify for the 510(k) pathway due to lack of a predicate device. Modifications to a 510(k)-cleared medical
device may require the submission of another 510(k) or a PMA if the changes could significantly affect the safety or effectiveness
or constitute a major change in the intended use of the device.
Modifications
to a 510(k)-cleared device frequently require the submission of a traditional 510(k), but modifications meeting certain conditions
may be candidates for FDA review under a Special 510(k). If a device modification requires the submission of a 510(k), but the
modification does not affect the intended use of the device or alter the fundamental scientific technology of the device, then
summary information that results from the design control process associated with the cleared device can serve as the basis for
clearing the application. A Special 510(k) allows a manufacturer to declare conformance to design controls without providing new
data. When the modification involves a change in material, the nature of the “new” material will determine whether
a traditional or Special 510(k) is necessary. For example, in its Device Advice on How to Prepare a Special 510(k), the FDA uses
the example of a change in a material in a finger joint prosthesis from a known metal alloy to a ceramic that has not been used
in a legally marketed predicate device as a type of change that should not be submitted as a Special 510(k). However, if the “new”
material is a type that has been used in other legally marketed devices within the same classification for the same intended use,
a Special 510(k) is appropriate. The FDA gives as an example a manufacturer of a hip implant who changes from one alloy to another
that has been used in another legally marketed predicate. Special 510(k)s are typically processed within 30 days of receipt.
The
PMA process is more complex, costly and time consuming than the 510(k) clearance procedure. A PMA must be supported by extensive
data including, but not limited to, technical, preclinical, clinical, manufacturing, control and labeling information to demonstrate
to the FDA’s satisfaction the safety and effectiveness of the device for its intended use. After a PMA is submitted, the
FDA has 45 days to determine whether it is sufficiently complete to permit a substantive review. If the PMA is complete, the FDA
will file the PMA. The FDA is subject to performance goal review times for PMAs and may issue a decision letter as a first action
on a PMA within 180 days of filing, but if it has questions, it will likely issue a first major deficiency letter within 150 days
of filing. It may also refer the PMA to an FDA advisory panel for additional review, and will conduct a preapproval inspection
of the manufacturing facility to ensure compliance with the QSR, either of which could extend the 180-day response target. While
the FDA’s ability to meet its performance goals has generally improved during the past few years, it may not meet these
goals in the future. A PMA can take several years to complete and there is no assurance that any submitted PMA will ever be approved.
Even when approved, the FDA may limit the indication for which the medical device may be marketed or to whom it may be sold. In
addition, the FDA may request additional information or request the performance of additional clinical trials before it will reconsider
the approval of the PMA or as a condition of approval, in which case the trials must be completed after the PMA is approved. Changes
to the device, including changes to its manufacturing process, may require the approval of a supplemental PMA.
If
a medical device is determined to present a “significant risk,” the manufacturer may not begin a clinical trial until
it submits an investigational device exemption, or IDE, to the FDA and obtains approval of the IDE from the FDA. The IDE must
be supported by appropriate data, such as animal and laboratory testing results and include a proposed clinical protocol. These
clinical trials are also subject to the review, approval and oversight of an institutional review board, or IRB, which is an independent
and multi-disciplinary committee of volunteers who review and approve research proposals, and the reporting of adverse events
and experiences, at each institution at which the clinical trial will be performed. The clinical trials must be conducted in accordance
with applicable regulations, including but not limited to the FDA’s IDE regulations and current good clinical practices.
A clinical trial may be suspended by the FDA, the IRB or the sponsor at any time for various reasons, including a belief that
the risks to the study participants outweigh the benefits of participation in the trial. Even if a clinical trial is completed,
the results may not demonstrate the safety and efficacy of a device, or may be equivocal or otherwise not be sufficient to obtain
approval.
Post-Marketing
Regulation
After
a device is placed on the market, numerous regulatory requirements apply. These include:
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compliance
with the QSR, which require manufacturers to follow stringent design, testing, control, documentation, record maintenance,
including maintenance of complaint and related investigation files, and other quality assurance controls during the manufacturing
process;
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labeling
regulations, which prohibit the promotion of products for uncleared or unapproved or “off-label” uses and impose
other restrictions on labeling; and
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medical
device reporting obligations, which require that manufacturers investigate and report to the FDA adverse events, including
deaths, or serious injuries that may have been or were caused by a medical device and malfunctions in the device that would
likely cause or contribute to a death or serious injury if it were to recur.
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Failure
to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following
sanctions:
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warning
letters;
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fines,
injunctions, and civil penalties;
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recall
or seizure of our products;
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operating
restrictions, partial suspension or total shutdown of production;
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refusal
to grant 510(k) clearance or PMA approvals of new products;
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withdrawal
of 510(k) clearance or PMA approvals; and
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criminal
prosecution.
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To
ensure compliance with regulatory requirements, medical device manufacturers are subject to market surveillance and periodic,
pre-scheduled and unannounced inspections by the FDA, and these inspections may include the manufacturing facilities of our subcontractors.
International
Regulation
International
sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. The
time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements
may differ. For example, the primary regulatory authority with respect to medical devices in Europe is that of the European Union.
The European Union consists of 28 countries and has a total population of over 500 million people. The unification of these countries
into a common market has resulted in the unification of laws, standards and procedures across these countries, which may expedite
the introduction of medical devices like those we are offering and developing. Norway, Iceland, Lichtenstein and Switzerland are
not members of the European Union, but have transposed applicable European medical device laws into their national legislation.
Thus, a device that is marketed in the European Union may also be recognized and accepted in those four non-member European countries
as well.
The
European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling and
adverse event reporting for medical devices. Devices that comply with the requirements of relevant directives will be entitled
to bear CE Conformity Marking, indicating that the device conforms to the essential requirements of the applicable directives
and, accordingly, can be commercially distributed throughout the European Union. Actual implementation of these directives, however,
may vary on a country-by-country basis. The CE Mark is a mandatory conformity mark on medical devices distributed and sold in
the European Union and certifies that a medical device has met applicable requirements.
The
method of assessing conformity varies, but normally involves a combination of self-assessment by the manufacturer and a third-party
assessment by a “Notified Body.” Notified Bodies are independent testing houses, laboratories, or product certifiers
authorized by the European Union member states to perform the required conformity assessment tasks, such as quality system audits
and device compliance testing. An assessment by a Notified Body based within the European Union is required in order for a manufacturer
to distribute the product commercially throughout the European Union. Medium and higher risk devices require the intervention
of a Notified Body which will be responsible for auditing the manufacturer’s quality system. The Notified Body will also
determine whether or not the product conforms to the requirements of the applicable directives. Devices that meet the applicable
requirements of E.U. law and have undergone the appropriate conformity assessment routes will be granted CE “certification.”
The CE Mark is mandatory for medical devices sold not only within the countries of the European Union but more generally within
most of Europe. As many of the European standards are converging with international standards, the CE Mark is often used on medical
devices manufactured and sold outside of Europe (notably in Asia that exports many manufactured products to Europe). CE Marking
gives companies easier access into not only the European market but also to Asian and Latin American markets, most of whom recognize
the CE Mark on medical device as a mark of quality and adhering to international standards of consumer safety, health or environmental
requirements.
Compliance
with Healthcare Laws
We
must comply with various U.S. federal and state laws, rules and regulations pertaining to healthcare fraud and abuse, including
anti-kickback and false claims laws, rules, and regulations, as well as other healthcare laws in connection with the commercialization
of our products. Fraud and abuse laws are interpreted broadly and enforced aggressively by various state and federal agencies,
including the U.S. Department of Justice, the U.S. Office of Inspector General for the Department of Health and Human Services
and various state agencies.
We
have entered into agreements with certain surgeons for assistance with the design of our products, some of whom we anticipate
may make referrals to us or order our products. A majority of these agreements contain provisions for the payments of royalties.
In addition, some surgeons currently own shares of our stock. We have structured these transactions with the intention of complying
with all applicable laws, including fraud and abuse, data privacy and security, and transparency laws. Despite this intention,
there can be no assurance that a particular government agency or court would determine our practices to be in full compliance
with such laws. We could be materially impacted if regulatory or enforcement agencies or courts interpret our financial arrangements
with surgeons to be in violation of healthcare laws, including, without limitation, fraud and abuse, data privacy and security,
or transparency laws.
The
U.S. federal Anti-Kickback Statute prohibits persons, including a medical device manufacturer (or a party acting on its behalf),
from knowingly or willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or
to induce either the referral of an individual for a service or product or the purchasing, ordering, arranging for, or recommending
the ordering of, any service or product for which payment may be made by Medicare, Medicaid or any other federal healthcare program.
This statute has been interpreted to apply to arrangements between medical device manufacturers on one hand and healthcare providers
on the other. The term “remuneration” is not defined in the federal Anti-Kickback Statute and has been broadly interpreted
to include anything of value, such as cash payments, gifts or gift certificates, discounts, waiver of payments, credit arrangements,
ownership interests, the furnishing of services, supplies or equipment, and the provision of anything at less than its fair market
value. Courts have broadly interpreted the scope of the law, holding that it may be violated if merely “one purpose”
of an arrangement is to induce referrals, irrespective of the existence of other legitimate purposes. The Anti-Kickback Statute
prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Although there are
a number of statutory exemptions and regulatory safe harbors protecting certain business arrangements from prosecution, the exemptions
and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending
may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all
of the criteria for safe harbor protection from federal Anti-Kickback Statute liability. The reach of the Anti-Kickback Statute
was broadened by the recently enacted Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Affordability
Reconciliation Act of 2010, collectively, the Affordable Care Act or ACA, which, among other things, amends the intent requirement
of the federal Anti-Kickback Statute such that a person or entity no longer needs to have actual knowledge of the statute or specific
intent to violate it in order to have committed a violation. In addition, the ACA provides that the government may assert that
a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent
claim for purposes of the federal False Claims Act (discussed below) or the civil monetary penalties statute, which imposes fines
against any person who is determined to have presented or caused to be presented claims to a federal healthcare program that the
person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent. In addition
to the federal Anti-Kickback Statute, many states have their own anti-kickback laws. Often, these laws closely follow the language
of the federal law, although they do not always have the same scope, exceptions, safe harbors or sanctions. In some states, these
anti-kickback laws apply not only to payments made by government healthcare programs but also to payments made by other third-party
payors, including commercial insurance companies.
Sales,
marketing, consulting, and advisory arrangements between medical device manufacturers and sales agents and physicians are subject
to the Anti-Kickback Statute and other fraud and abuse laws. Government officials have focused recent enforcement efforts on,
among other things, the sales and marketing activities of healthcare companies, including medical device manufacturers, and have
brought cases against individuals or entities whose personnel allegedly offered unlawful inducements to potential or existing
customers in an attempt to procure their business. We expect these activities to continue to be a focus of government enforcement
efforts. Settlements of these cases by healthcare companies have involved significant fines and penalties and in some instances
criminal plea agreements. We are also aware of governmental investigations of some of the largest orthopedic device companies
reportedly focusing on consulting and service agreements between these companies and orthopedic surgeons. These developments are
ongoing and we cannot predict the effects they will have on our business.
The
federal False Claims Act imposes liability on any person that, among other things, knowingly presents, or causes to be presented,
a false or fraudulent claim for payment by a federal healthcare program. The qui tam provisions of the False Claims Act allow
a private individual to bring civil actions on behalf of the federal government alleging that the defendant has submitted a false
claim, or has caused such a claim to be submitted, to the federal government, and to share in any monetary recovery. There are
many potential bases for liability under the False Claims Act. Liability arises, primarily, when a person knowingly submits, or
causes another to submit, a false claim for reimbursement to the federal government. The False Claims Act has been used to assert
liability on the basis of inadequate care, kickbacks, and other improper referrals, and allegations as to misrepresentations with
respect to the services rendered. Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare
companies, including medical device manufacturers, to defend false claim actions, pay damages and penalties, or be excluded from
participation in Medicare, Medicaid or other federal or state healthcare programs as a result of investigations arising out of
such actions. In addition, various states have enacted similar laws analogous to the False Claims Act. Many of these state laws
apply where a claim is submitted to any third-party payor and not merely a federal healthcare program. We are unable to predict
whether we would be subject to actions under the False Claims Act or a similar state law, or the impact of such actions. However,
the cost of defending such claims, as well as any sanctions imposed, could adversely affect our financial performance. The Health
Insurance Portability and Accountability Act of 1996, or HIPAA, also created several new federal crimes, including healthcare
fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing
a scheme to defraud any healthcare benefit program, including private third party payors. The false statements statute prohibits
knowingly and willfully falsifying, concealing, or covering up a material fact or making any materially false, fictitious, or
fraudulent statement in connection with the delivery of or payment for healthcare benefits, items, or services.
In
addition, we may be subject to, or our marketing or research activities may be limited by, data privacy and security regulation
by both the federal government and the states in which we conduct our business. For example, HIPAA and its implementing regulations
established uniform federal standards for certain “covered entities” (healthcare providers, health plans and healthcare
clearinghouses) governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of
protected health information. The American Recovery and Reinvestment Act of 2009, commonly referred to as the economic stimulus
package, included expansion of HIPAA’s privacy and security standards called the Health Information Technology for Economic
and Clinical Health Act, or HITECH, which became effective on February 17, 2010. Among other things, HITECH makes HIPAA’s
privacy and security standards directly applicable to “business associates”—independent contractors or agents
of covered entities that create, receive, maintain, or transmit protected health information in connection with providing a service
for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered
entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions
for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated
with pursuing federal civil actions. These laws also require the reporting of breaches of protected health information to affected
individuals, regulators and in some cases, local or national media. HIPAA and HITECH impose strict limits on our physician collaborators’
ability to use and disclose patient information on our behalf.
There
are also an increasing number of state “sunshine” laws that require manufacturers to provide reports to state governments
on pricing and marketing information. Several states have enacted legislation requiring medical device companies to, among other
things, establish marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales
and marketing activities, and to prohibit or limit certain other sales and marketing practices. In addition, a federal law known
as the Physician Payments Sunshine Act, now requires medical device manufacturers to track and report to the federal government
certain payments and other transfers of value made to physicians and teaching hospitals and ownership or investment interests
held by physicians and their immediate family members. The first reporting period covered only payments or transfers of value
made and ownership or investment interests held by physicians and their immediate family members from August 1, 2013 to December
31, 2013. The federal government disclosed the reported information on a publicly available website beginning in September 2014.
For calendar year 2014, the Physician Payments Sunshine Act will require medical device manufacturers to report payments and transfers
of values made and ownership or investment interests held by physicians and their immediate family members for the full calendar
year. These laws may adversely affect our sales, marketing, and other activities by imposing administrative and compliance burdens
on us. If we fail to track and report as required by these laws or to otherwise comply with these laws, we could be subject to
the penalty provisions of the pertinent state and federal authorities.
Clinical
research is heavily regulated by FDA regulations for the protection of human subjects (21 C.F.R. 50 and 56) and also the regulations
of the U.S Department of Health and Human Services, or the Common Rule (45 C.F.R 46). Both FDA human subject regulations and the
Common Rule impose restrictions on the involvement of human subjects in clinical research and require, among other things, the
balancing of the risks and benefits of research, the documented informed consent of research participants, initial and ongoing
review of research by an IRB. Similar regulations govern research conducted in foreign countries. Compliance with human subject
protection regulations is costly and time consuming. Failure to comply could substantially and adversely impact our research program
and the development of our products.
Because
of the breadth of these laws and the narrowness of available statutory and regulatory exemptions, it is possible that some of
our business activities could be subject to challenge under one or more of such laws. If our operations are found to be in violation
of any of the federal and state laws described above or any other governmental regulations that apply to us, we may be subject
to penalties, including criminal and significant civil monetary penalties, damages, fines, imprisonment, exclusion from participation
in government healthcare programs, injunctions, recall or seizure of products, total or partial suspension of production, denial
or withdrawal of pre-marketing product clearances and approvals, private “qui tam” actions brought by individual whistleblowers
in the name of the government or refusal to allow us to enter into supply contracts, including government contracts, and the curtailment
or restructuring of our operations. Public disclosure of privacy and data security violations could cause significant reputational
harm. Any of these events could adversely affect our ability to operate our business and our results of operations. To the extent
that any of our products are sold in a foreign country, we may be subject to similar foreign laws and regulations, which may include,
for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws, implementation
of corporate compliance programs, as well as laws and regulations requiring transparency of pricing and marketing information
and governing the privacy and security of health information, such as the E.U.’s Directive 95/46 on the Protection of Individuals
with regard to the Processing of Personal Data, or the Data Directive, and the wide variety of national laws implementing the
Data Directive.
Healthcare
Reform
The
regulations we are subject to may change as result of legislative and regulatory healthcare reform.
Significant
healthcare reform was enacted in 2010 when the Patient Protection and Affordable Care Act or the PPACA, was signed into law. State
laws also were enacted to implement the PPACA. While a primary goal of these healthcare reform efforts was to expand coverage
to more individuals, it also involved increased government price controls, additional regulatory mandates and other measures designed
to constrain medical costs. The PPACA significantly impacts the medical device industry. Among other things, the PPACA:
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imposes
an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States,
which began on January 1, 2013, but was suspended during 2016 and 2017 and has been suspended for 2018 and 2019;
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establishes
a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness
research in an effort to coordinate and develop such research; and
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implements
payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other
providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models.
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addition, other legislative changes have been proposed and adopted since the PPACA was enacted. For example, on January 2, 2013,
former President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which, among other things, further
reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers and increased
the statute of limitations period for the government to recover overpayments to providers from three to five years. Moreover,
certain legislative changes to and regulatory changes under the PPACA have occurred in the 115th United States Congress and under
the Trump Administration. For example, on December 22, 2017, President Trump signed a budget reconciliation act into law, which
among other things, repealed the penalty for individuals who do not maintain minimum essential coverage, which was a central component
of PPACA’s approach to expanding coverage. On January 9, 2018, President Trump signed the Bipartisan Budget Act of 2018,
which, among other things, repealed the PPACA provision establishing an independent payment advisory board that would have submitted
recommendations to reduce Medicare spending if projected Medicare spending exceeded a specified growth rate.
Additional
legislative changes to and regulatory changes under the PPACA remain possible. We expect that other state and federal healthcare
reform measures will be adopted in the future, any of which could reduce the number of patients with coverage or limit the amounts
that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our
products or additional pricing pressure.
Third-Party
Reimbursement
Because
we typically receive payment directly from hospitals and surgical centers, we do not anticipate relying directly on payment for
any of our products from third-party payors, such as Medicare, Medicaid, private insurers, and managed care companies. However,
our business will be affected by policies administered by federal and state healthcare programs, such as Medicare and Medicaid,
as well as private third-party payors, which often follow the policies of the state and federal healthcare programs. For example,
our business will be indirectly impacted by the ability of a hospital or medical facility to obtain coverage and third-party reimbursement
for procedures performed using our products. Many hospitals and clinics in the United States belong to group purchasing organizations
(that 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 or persuade hospitals
and clinics to purchase our product “off contract.” These third-party payors may deny reimbursement if they determine
that a device used in a procedure was not medically necessary; was not used in accordance with cost-effective treatment methods,
as determined by the third-party payor; or was used for an unapproved use. A national or local coverage decision denying Medicare
coverage for one or more of our products could result in private insurers and other third party payors also denying coverage.
Even if favorable coverage and reimbursement status is attained for our products, less favorable coverage policies and reimbursement
rates may be implemented in the future. The cost containment measures that third-party payors and providers are instituting, both
within the United States and abroad, could significantly reduce our potential revenues from the sale of our products and any product
candidates. We cannot provide any assurances that we will be able to obtain and maintain third party coverage or adequate reimbursement
for our products and product candidates in whole or in part.
For
inpatient and outpatient procedures, including those that will involve use of our products, Medicare and many other third-party
payors in the United States reimburse hospitals at a prospectively determined amount. This amount is generally based on one or
more diagnosis related groups, or DRGs, associated with the patient’s condition for inpatient treatment and generally based
on ambulatory payment classifications, or APCs, associated with the procedures performed as an outpatient at an ambulation surgicenter.
Each DRG or APC is associated with a level of payment and may be adjusted from time to time, usually annually. Prospective payments
are intended to cover most of the non-physician hospital costs incurred in connection with the applicable diagnosis and related
procedures. Implant products, such as those we plan to sell, represent part of the total procedure costs while labor, hospital
room and board, and other supplies and services represent the balance of those costs. However, the prospective payment amounts
are typically set independently of a particular hospital’s actual costs associated with treating a particular patient and
implanting a device. Therefore, the payment that a hospital would receive for a particular hospital visit would not typically
take into account the cost of our products.
Medicare
has established a number of DRGs for inpatient procedures that involve the use of products similar to ours. Although Medicare
has authority to create special DRGs for hospital services that more properly reflect the actual costs of expensive or new-technology
devices implanted as part of a procedure, it has declined to do so in the past, and we do not expect that it will do so with respect
to our current products and product candidates. Medicare’s DRG and APC classifications may have implications outside of
Medicare, as many other U.S. third-party payors often use Medicare DRGs and APCs for purposes of determining reimbursement.
We
believe that orthopedic implants generally have been well received by third-party payors because of the ability of these implants
to greatly reduce long-term healthcare costs for patients with degenerative joint disease. However, coverage and reimbursement
policies vary from payor to payor and are subject to change. As discussed above, hospitals that purchase medical devices for treatment
of their patients generally rely on third-party payors to reimburse all or part of the costs and fees associated with the procedures
performed with these devices. Both government and private third-party coverage and reimbursement levels are critical to new product
acceptance. Neither hospitals nor surgeons are likely to use our products if they do not receive reimbursement for the procedures
adequate to cover the cost of our products.
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. Commercial insurers and managed
care plans frequently follow government payment policies, and are likewise interested in controlling increases in the cost of
medical care. These third-party payors may deny payment if they determine that a procedure was not medically necessary, a device
used in a procedure was not used in accordance with cost-effective treatment methods, as determined by the third-party payor,
or was used for an unapproved use.
In
addition, some payors 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 find ways to deliver the same or better results while consuming fewer resources. As a result of these
programs, and related payor efforts to reduce payment levels, hospitals and other providers are seeking ways to reduce their costs,
including the amounts they pay to medical device suppliers. Adverse changes in payment rates by payors to hospitals could adversely
impact our ability to market and sell our products and negatively affect our financial performance.
In
international markets, healthcare payment systems vary significantly by country and many countries have instituted price ceilings
on specific product lines. There can be no assurance that our products will be considered cost-effective by third-party payors,
that reimbursement will be available or, if available, that the third-party payors’ reimbursement policies will not adversely
affect our ability to sell our products profitably.
Member
countries of the European Union offer various combinations of centrally financed healthcare systems and private health insurance
systems. The relative importance of government and private systems varies from country to country. Governments may influence the
price of medical devices through their pricing and reimbursement rules and control of national healthcare systems that fund a
large part of the cost of those products to consumers. Some jurisdictions operate positive and negative list systems under which
products may be marketed only once a reimbursement price has been agreed upon. Some of these countries may require, as condition
of obtaining reimbursement or pricing approval, the completion of clinical trials that compare the cost-effectiveness of a particular
product candidate to currently available therapies. Some E.U. member states allow companies to fix their own prices for devices,
but monitor and control company profits. The choice of devices is subject to constraints imposed by the availability of funds
within the purchasing institution. Medical devices are most commonly sold to hospitals or healthcare facilities at a price set
by negotiation between the buyer and the seller. A contract to purchase products may result from an individual initiative or as
a result of a competitive bidding process. In either case, the purchaser pays the supplier, and payment terms vary widely throughout
the European Union. Failure to obtain favorable negotiated prices with hospitals or healthcare facilities could adversely affect
sales of our products.
Employees
As
of March 1, 2018, we had 33 employees. We believe that our success will depend, in part, on our ability to attract and retain
qualified personnel. We have never experienced a work stoppage due to labor difficulties and believe that our relations with our
employees are good. None of our employees are represented by labor unions.
ITEM
1A. RISK FACTORS
In
addition to the other information contained in this Annual Report, the following risk factors should be considered carefully in
evaluating our company. Our business, financial condition, liquidity or results of operations could be materially adversely affected
by any of these risks.
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, 2017 and 2016 we incurred a net loss
of $9.3 million and $14.8 million, respectively, and used cash in operations of $4.8 million and $7.2 million, respectively. We
have an accumulated deficit of $220.6 million at December 31, 2017. 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 and property and equipment, 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, 2017 and 2016, our largest customer, Bon Secours St. Mary’s Hospital, or St. Mary’s,
had a receivable balance of approximately 12% and 16%, respectively, of our total trade accounts receivable. In addition, St.
Mary’s accounted for 21 % and 18% of our product revenues for the years ended December 31, 2017 and 2016, respectively.
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.
Moreover,
certain legislative changes to and regulatory changes under the PPACA have occurred in the 115th United States Congress and under
the Trump Administration. For example, on December 22, 2017, President Trump signed a budget reconciliation act into law, which
among other things, repealed the penalty for individuals who do not maintain minimum essential coverage, which was a central component
of PPACA’s approach to expanding coverage. On January 9, 2018, President Trump signed the Bipartisan Budget Act of 2018,
which, among other things, repealed the PPACA provision establishing an independent payment advisory board that would have submitted
recommendations to reduce Medicare spending if projected Medicare spending exceeded a specified growth rate we cannot predict
the ultimate content, timing or effect of any changes to the Health Care Reform Act or other federal and state reform efforts.
There is no assurance that federal or state healthcare reform will not adversely affect our business and financial results, and
we cannot predict how future federal or state legislative, judicial or administrative changes relating to healthcare reform will
affect our business.
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.
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. We may not have sufficient personnel to effectuate our business strategy due to our recent
reduction in force.
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.
In
October 2016, we implemented a substantial reduction in our workforce by approximately 38% to lower operating expenses. This most
recent restructuring plan and other such efforts could result in disruptions to our operations. We may not have sufficient number
of qualified personnel to effectuate our business strategy which 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 December
31, 2017 was $0.5 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 loan under the Loan and Security Agreement and the associated liquidity covenant limit (as described
below) 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 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 covenants set forth in the Exchange Notes, we will be in default of the Exchange Notes.
On
January 3, 2018, we entered into an Assignment Agreement (the “Assignment Agreement”) with MEF I, LP and Anson Investments
Master Fund, LP (the “Assignees” and each an “Assignee”), Hercules Technology III, L.P. (“HT III”)
and Hercules Capital, Inc. (“HC” and, together with HT III, “Hercules”), pursuant to which Hercules assigned
to the Assignees all amounts remaining due under the Loan and Security Agreement, dated June 30, 2014, as amended, between the
Company and Hercules (the “Loan and Security Agreement”) and (2) the note (the “Hercules Note”) between
the Company and Hercules evidencing the amounts due under the Loan and Security Agreement. The total amount assigned by Hercules
to the Assignees equals in the aggregate $2.2 million, which is secured by the same collateral underlying the Loan and Security
Agreement.
On
January 3, 2018, we entered into an exchange agreement (the “Exchange Agreement”) with the Assignees, pursuant to
which the Company agreed to exchange (the “Exchange”) the Hercules Note held by the Assignees for senior secured convertible
promissory notes each in the principal amount of $1.1 million for an aggregate principal amount of $2.3 million (the “Exchange
Notes”).
The
Exchange Notes contain certain covenants and other obligations to which we are required to adhere to while the Exchange Notes
are outstanding. If we were to breach any of these covenants or obligations the Assignees could declare that an event of default
has occurred under the Exchange Notes, and declare that the outstanding principal amount of the Exchange Notes, plus accrued but
unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, immediately due
and payable, in cash or in shares of common stock. Additionally, after the occurrence of any event of default, the interest rate
on the Exchange Notes shall accrue at an additional interest rate equal to the lesser of two percent (2%) per month (twenty-four
percent (24%) per annum) or the maximum rate permitted under applicable law. Any declaration of an event of default would significantly
harm our business and prospects and could cause the price of our common stock to decline.
If
we do not adhere to the covenants set forth in the Note, we will be in default of the Note.
On
January 31, 2018, we entered into a securities purchase agreement (the “Purchase Agreement”) with L2 Capital LLC (“L2”
or the “Holder”). Pursuant to the Purchase Agreement, the Company agreed to sell an original issue discount promissory
note in the aggregate principal amount of up to $0.8 million (the “Note”) for an aggregate purchase price of up to
$0.8 million (the “Consideration”) and warrants to purchase up to an aggregate of 68,257 shares of common stock of
the Company (the “Warrants”).
The
Note contains certain covenants and other obligations to which we are required to adhere to while the Note is outstanding. If
we were to breach any of these covenants or obligations the Holder could declare that an event of default has occurred under the
Note, and declare that the outstanding principal amount of the Note, plus accrued but unpaid interest, liquidated damages and
other amounts owing in respect thereof through the date of acceleration, immediately due and payable, in cash or in shares of
common stock. Additionally, after the occurrence of any event of default, the interest rate on the Note shall accrue at an additional
interest rate equal to eighteen percent (18%) per annum or the maximum rate permitted under applicable law. Any declaration of
an event of default would significantly harm our business and prospects 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. Further, our current debt obligations
to our current debt holders could also impair our ability to raise future capital through equity or debt transactions. 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, 2017 includes an explanatory paragraph
stating that our recurring losses from operations raises 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.
We
have identified material weaknesses in our internal control over financial reporting and such weaknesses have led to a conclusion
that our disclosure controls and procedures were not effective as of December 31, 2017. Our ability to remediate these material
weaknesses, our discovery of additional weaknesses, and our inability to achieve and maintain effective disclosure controls and
procedures and internal control over financial reporting, have and could continue to adversely affect our results of operations,
our stock price and investor confidence in our company.
Section
404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and report on their systems of internal control over financial
reporting. As disclosed in more detail under “Controls and Procedures” in Part II, Item 9A of this Report, management
has concluded that, as of December 31, 2017, our internal control over financial reporting was not effective due to the material
weaknesses described below.
The
design and operating effectiveness of our controls were inadequate to ensure that complex accounting matters are properly accounted
for and reviewed in a timely manner. As a result, we failed to accurately record a complex equity transaction which caused the
restatements of our first, second and third quarter 2017 filings and annual 2016 filing. In addition, we failed to properly evaluate
and test certain long-lived assets for impairment, which ultimately resulted in recognition of an impairment charge. These errors
are a result of the following control deficiencies:
Control
Environment and Risk Assessment
– The Company did not have an effective control environment with the structure necessary
for effective internal controls over financial reporting. Further, the Company did not have an effective risk assessment to identify
and assess risks associated with changes to the Company’s structure and the impact on internal controls. The Company did
not have appropriately qualified personnel to meet the Company’s control objectives. The Company does not have personnel
with an appropriate level of US GAAP knowledge and experience to properly review and evaluate the work performed by other Company
personnel and experts related to complex accounting matters.
Control
Activities
– The Company did not have control activities that were designed and operating effectively including management
review controls, controls related to monitoring and assessing the work of consultants, and controls to verify the completeness
and adequacy of information. Specifically, the Company did not have procedures for competent personnel to review work performed
by experts in relation to complex debt and equity transactions and impairment valuations.
Monitoring
Activities –
The Company did not maintain effective monitoring controls related to the financial reporting process.
The Company did not effectively monitor the changes in internal control related to changes in the roles and responsibilities associated
with the changes in personnel and organizational structure. The failure to properly monitor impacted the timing, accuracy, and
completion of the work related to significant accounting matters.
Our
Chief Executive Officer and Principal Financial Officer continue with a review of our controls relating to complex accounting
matters. Although our analysis is not complete, we have added additional resources with expertise in accounting for complex accounting
matters including timely review and evaluation of assets for potential impairment. We are also considering redesigning
controls to add additional layers of review and approval whenever entering into or subsequently converting, exercising, amending,
repricing, exiting or otherwise experiencing changes in or to complex financial instruments.
If
we fail to remediate these material weaknesses and maintain an effective system of disclosure controls or internal control over
financial reporting, our business and results of operations could be harmed, investors could lose confidence in our reported financial
information and our ability to obtain additional financing, or additional financing on favorable terms, could be adversely affected.
Any of these could result in delisting actions by the NASDAQ Stock Market, investigation and sanctions by regulatory authorities,
and adversely affect our business and the trading price of our common stock. In addition, failure to maintain effective internal
control over financial reporting could result in investigations or sanctions by regulatory authorities.
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 definite-lived intangible assets for impairment if events occur or circumstances change that would indicate
the remaining net book value of the definite-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 physician owned distributorships or 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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U.S.
federal income tax reform could adversely affect us.
On
December 22, 2017, President Donald Trump signed into law sweeping tax reform, which overhauls individual, business and international
taxes including, but not limited to:
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Cutting
the corporate federal statutory tax rate to 21%;
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Limiting
net interest expense deductions to 30% of adjusted taxable income; and
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Limiting
the net operating loss deduction to 80% of taxable income.
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The
reduction in tax rate will result in a reduction in the deferred tax assets. We have previously used the 35% federal statutory
tax rate to calculate the value of those assets. Also, if we fail to generate significant taxable income, we may not be able to
fully deduct the interest expense on our debt, which could result in us having to pay increased federal income taxes. We have
also generated substantial taxable losses in the past and may continue to do so in the future. Although the treatment of tax losses
generated before December 31, 2017 has not changed, tax losses generated in fiscal 2018 and beyond will only be able to offset
80% of taxable income, although the losses may be carried forward indefinitely. This could cause us to have to pay federal income
taxes despite generating a loss for federal income tax purposes in the future. We continue to work with our tax advisors to determine
the full impact that the new tax bill will have on our Company.
Recently
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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imposes
an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States,
which began on January 1, 2013, but was suspended during 2016 and 2017 and has been suspended for 2018 and 2019;
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establishes
a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness
research in an effort to coordinate and develop such research; and
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implements
payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other
providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models.
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In
addition, other legislative changes have been proposed and adopted since the PPACA was enacted. For example, on January 2, 2013,
former President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which, among other things, further
reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers and increased
the statute of limitations period for the government to recover overpayments to providers from three to five years. Moreover,
certain legislative changes to and regulatory changes under the PPACA have occurred in the 115th United States Congress and under
the Trump Administration. For example, on December 22, 2017, President Trump signed a budget reconciliation act into law, which
among other things, repealed the penalty for individuals who do not maintain minimum essential coverage, which was a central component
of PPACA’s approach to expanding coverage. On January 9, 2018, President Trump signed the Bipartisan Budget Act of 2018,
which, among other things, repealed the PPACA provision establishing an independent payment advisory board that would have submitted
recommendations to reduce Medicare spending if projected Medicare spending exceeded a specified growth rate.
Additional
legislative changes to and regulatory changes under the PPACA remain possible. We expect that other state and federal healthcare
reform measures will be adopted in the future, any of which could reduce the number of patients with coverage or limit the amounts
that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our
products or additional pricing pressure.
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 Loan and Security Agreement 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 $700.0 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.
We
could be delisted from Nasdaq, which could seriously harm the liquidity of our stock and our ability to raise capital.
On
January 2, 2018, the Company received a notification from the Listing Qualifications Department of Nasdaq indicating that the
Company is not in compliance with Nasdaq Listing Rule 5620(a) due to its failure to hold an annual meeting of shareholders within
twelve months of the end of the Company’s fiscal year ended December 31, 2016. On February 16, 2018, we submitted a plan
to regain compliance. Our plan was accepted by Nasdaq and we now have until June 29, 2018, to regain compliance. There can be
no assurance that the Company will be able to regain compliance with Nasdaq requirements or will otherwise be in compliance with
other Nasdaq listing criteria.
If
we cease to be eligible to trade on the Nasdaq Capital Market:
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We
may have to pursue trading on a less recognized or accepted market, such as the OTC Bulletin Board or the “pink sheets.”
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The
trading price of our common stock could suffer, including an increased spread between the “bid” and “asked”
prices quoted by market makers.
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Shares
of our common stock could be less liquid and marketable, thereby reducing the ability of stockholders to purchase or sell
our shares as quickly and as inexpensively as they have done historically. If our stock is traded as a “penny stock,”
transactions in our stock would be more difficult and cumbersome.
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We
may be unable to access capital on favorable terms or at all, as companies trading on alternative markets may be viewed as
less attractive investments with higher associated risks, such that existing or prospective institutional investors may be
less interested in, or prohibited from, investing in our common stock. This may also cause the market price of our common
stock to decline.
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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.