ITEM 1. Business.
Overview
Osiris Therapeutics, Inc., together with our wholly-owned subsidiary, Osiris Therapeutics International GmbH (collectively, "we,"
"us," "our," or the "Company"), researches, develops, manufactures and commercializes regenerative medicine products intended to improve the health and lives of patients and lower overall healthcare
costs. We have achieved commercial success with products in orthopedics, sports medicine and wound care, including the Grafix product line, Stravix, BIO
4
and Cartiform. We continue to
advance our research and development ("R&D") by focusing on innovation in regenerative medicine, including the development of bioengineered stem cell and tissue-based products.
We
began operations in 1992 and were a Delaware corporation until, with the approval of our stockholders, we reincorporated as a Maryland corporation in May 2010. Our principal executive
offices are located at 7015 Albert Einstein Drive, Columbia, MD 21046, and our telephone number is (443) 545-1800.
Osiris®,
Grafix®, Grafix CORE®, Grafix PRIME®, Grafix XC®, Stravix®, Cartiform®,
Prestige, OvationOS®, Ovation, TruSkin® and Menvivo are trademarks of the Company. BIO
4
® is a trademark of
Howmedica Osteonics Corp., a subsidiary of Stryker Corporation ("Stryker"). Prochymal® is a trademark of Mesoblast Limited. Any other trademarks referred to in this Annual Report on
Form 10-K are the property of their owners.
Our History
From May 2010 to October 2013, we operated in two business segments, therapeutics and biosurgery. Our therapeutics business focused on
developing biologic stem cell drug candidates from a readily available sourceadult human bone marrow. Our biosurgery
business, now our only segment, focuses on using unique tissue preservation technologies to develop viable human tissue products designed to improve wound closure and surgical outcomes for patients
and physicians over standard of care alone.
In
October 2013, we sold our therapeutics business, including Prochymal, a stem cell drug for treatment of graft versus host disease, and related assets, to Mesoblast International SARL
("Mesoblast"), a wholly-owned subsidiary of Mesoblast Limited.
Since
2013, we have focused our resources on our biosurgery business. We have built a substantial direct sales force dedicated exclusively to sell our Grafix and Stravix products and
entered into exclusive agreements to market and distribute BIO
4
and Cartiform. We are a fully integrated company, having developed capabilities in R&D, manufacturing, marketing and sales
of our products. We are focused on our long-term commercial growth of through the delivery of differentiated products for use across multiple fields of medicine with clear value propositions to
patients, providers and third-party payors.
Market Overview
Regenerative medicine focuses on the process of creating living, functional tissues to repair or replace tissue or organ function lost due to
age, disease, damage, or congenital defects. This field of medicine includes wound care, orthopedic and sports medicine. Examples of products designed to address needs of wound care, orthopedics and
sports medicine are skin substitutes, bone grafts and articular cartilage grafts, respectively.
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Skin
substitutes are utilized in a variety of medical fields, including wound care, in which repair and regeneration of damaged tissues are required. They represent the largest wound
care market segment of products, often referred to as wound biologics, a large and diverse group of advanced wound care products with the potential to support natural wound healing processes. These
products are used in conjunction with standard of care when the standard of care alone are not effective for a patient. Examples of skin substitutes include human placental tissue-based products, like
our Grafix and Stravix products. Grafix and Stravix are used primarily for treating chronic wounds of different causes (i.e., diabetic foot ulcers ("DFUs"), venous leg ulcers
("VLUs"), pressure ulcers, arterial ulcers, and severe burns), as well as a limited number of challenging-to-heal surgical and trauma wounds.
Bone
grafts are used in a variety of orthopedic surgical procedures to fill bone voids to help facilitate repair and regeneration of the bone. Bone grafting is one of most frequent types
of surgical procedures performed on bones. Bone grafts have a wide array of product types, including viable bone matrix allografts, like our BIO
4
product. BIO
4
is primarily
used to fill bone voids and for bone fusion procedures, assisting in the natural healing process of the bone.
Osteochondral
allografts are used in articular cartilage repair procedures to repair cartilage lesions and, when necessary, underlying bone issues. Osteochondral grafting procedures are
primarily performed in the knee, but can also be used in other joints. Examples of osteochondral allografts include fresh stored osteochondral allografts or, like our product, Cartiform, cryopreserved
viable osteochondral allograft. Cartiform is primarily used to treat articular cartilage lesions in the knee and, with the variety of sizes, other joints as well.
Scientific Background and Our Technology
After being founded on a discovery of mesenchymal stem cells ("MSCs") in adult human bone marrow, and through more than 25 years of R&D,
we have gained a deep understanding of cell biology and the importance of MSCs and other biological factors in tissue repair and regeneration. With our knowledge, we have developed our current
portfolio of products and Prochymal, the first approved MSC drug for treatment of graft versus host disease in Canada and New Zealand. As described above, Mesoblast acquired Prochymal in connection
with the sale of our therapeutics business.
Our
current regenerative medicine products consist of unique placental, bone and cartilage tissue allografts. To manufacture our products, we rely on a unique proprietary tissue
cryopreservation technique, which retains the native tissue components, including mesenchymal stem cells, growth factors and extracellular matrix, and the tissue's inherent functionalities. Our
cryopreservation technology serves as the manufacturing backbone for all of our current products including Grafix and Stravix as wound covers, BIO
4
for bone repair and regeneration, and
Cartiform for repair and regeneration of articular cartilage.
Cryopreservation
is the conventional method for long-term storage of living cells and tissues. However, this method requires ultra-low temperature (below 80 Celsius
degrees) equipment for storage and shipment, which creates a barrier to widespread use. In 2017, we announced the development of our Prestige Lyotechnology, a new tissue preservation technology which
we believe will allow for storage and shipment of living tissue, including our products, at room temperature. We believe that this novel technology will have tremendous practical significance for both
scientific and clinical applications, because it is designed to eliminate the need to preserve and transport our products at constant ultra-low temperatures.
Products and Pipeline
All of our current commercialized products are marketed as human cells, tissues and cellular and tissue-based products ("HCT/Ps"), as defined by
the United States Food and Drug Administration ("FDA"), that are regulated solely under Section 361 of the Public Health Service Act ("361 HCT/Ps"),
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and
consequently, do not require pre-market approval from the FDA. Nevertheless, to support our reimbursement efforts for certain products, we have performed clinical studies to demonstrate the
products' benefits to healthcare providers and third-party payors as described in greater detail below. Commercialization of future biological drug product candidates in the United States by us, if
any, may require the submission of Investigational New Drug Applications ("INDs") and Biologics License Applications ("BLAs") and can occur only after successful completion of clinical trials and
governmental agency approval.
The
table below summarize the status of our products.
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Product
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Field of Use
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Status (Market or Discontinued)
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Grafix
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Wounds and Surgical Procedures
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Market
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Stravix
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Wounds and Surgical Procedures
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Market
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BIO
4
(formerly, OvationOS)
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Bone repair
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Market
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Cartiform
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Cartilage repair
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Market
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Menvivo
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Meniscus repair
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Market, but not actively distributed
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TruSkin
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Wounds
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Market, but not actively distributed
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Ovation
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Surgical applications
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Discontinued (2014)
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While we are focused on the development and commercialization of 361 HCT/Ps, we have early discovery and development programs for biological
product candidates, including our cellular drug program. In recent years, we have reduced our spending on R&D in an effort to conserve resources. We do not expect to file an IND for, or pursue
clinical trials of, any of our biological product candidates in 2018.
Our current products are:
Grafix
is a product line of several products, Grafix PRIME, Grafix XC and Grafix CORE, and was initially launched in 2010. They are
cryopreserved placental membranes that retain the extracellular matrix, growth factors, endogenous cells, including neonatal mesenchymal stem cells, and fibroblasts of the native tissue, all of which
are beneficial in supporting natural wound repair. Grafix PRIME and Grafix XC (a larger size for surgical applications) are derived from the amnion and Grafix CORE is derived from the chorion. The
amnion is the innermost membrane and the chorion is the outermost membrane of the placenta. Our Grafix products are flexible and conforming wound covers designed for direct application to
hard-to-treat acute and chronic wounds, including but not limited to DFUs, VLUs and burns.
A
significant market for Grafix is chronic wounds, which are primarily treated in a hospital outpatient setting. Reimbursement by public and private providers for outpatient treatments
typically requires approvals from third-party payors, which may be granted after in depth and sometimes independent reviews. To support these reimbursement efforts for use of Grafix, we conducted
several clinical studies. One of these studies, Protocol 302, was a clinical study comparing Grafix to conventional wound care. The study evaluated the efficacy and safety of Grafix for the treatment
of chronic DFUs. Patients were randomized and received either Grafix with standard of care or standard of care alone for a chronic DFU. On August 13, 2013, we reported that Protocol 302 had met
its
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primary
endpoint, which was complete wound closure by week 12. The study also met all top-line secondary endpoints, demonstrating faster wound closure and a statistically significant reduction in the
number of treatments needed to achieve wound closure. We published the results of this study in the International Wound Journal in July 2014.
We
used Protocol 302 data to gather evidence to further support our belief that using Grafix for chronic DFUs reduces the overall cost of treatment when compared to the standard of care.
We published the evidence in the Journal of Clinical Diabetes and Practice in 2016, which showed that the patients treated with Grafix experienced fewer wound-related infections and hospitalizations,
due to wounds closing faster than the patients treated with standard of care alone. The fewer adverse events and hospitalizations resulted in estimated savings for Grafix patients versus control
patients of approximately $14,000 per patient.
In
2015, we conducted another study, Protocol 310, to evaluate the safety and efficacy of Grafix for the treatment of complex DFUs with exposed tendon and/or bone. Patients with
type 1 or type 2 diabetes and a complex DFU with exposed tendon and/or bone were eligible for inclusion. Twenty-seven of the 31 enrolled patients completed the study. The primary
endpoint, 100% wound granulation (formation of new soft tissue to cover exposed bone or tendon) by week 16, was met by 96% of the patients completing the study, and complete wound closure occurred in
59% of those patients. We published the results of this study in the International Wound Journal in 2017.
We
received an 'untitled letter' dated September 26, 2013 (the "Untitled Letter") from the FDA stating that Grafix and Ovation did not meet the definition of a 361 HCT/P. Among
the grounds for the FDA's position were our marketing claims, including wound healing claims for Grafix. We revised all of our marketing claims for Grafix and resolved all issues with the Untitled
Letter, which included the discontinuance of Ovation in 2014. Grafix remains on the market as a 361 HCT/P. In April 2016, the FDA performed a routine inspection of the Company, which included a
follow-up on our corrective actions to close out the Untitled Letter. In May 2016, we received an FDA Establishment Inspection Report, which stated that there were no observations, findings, warnings
or untitled letters for either the routine inspection or the Untitled Letter follow-up.
With
respect to the above mentioned wound healing claims, we commenced a clinical trial in 2015 to support a BLA covering such expanded claims for Grafix, which we referred to in the IND
as OTI-15-01. In October 2016, we announced plans to terminate further enrollment in the trial and complete treatment of the 53 patients then enrolled. Treatment of the
53 patients was completed in April 2017. The decision to terminate further enrollment in the trial reflects our desire to allocate our limited R&D resources to other clinical programs.
Stravix
is a viable cryopreserved human placental tissue, comprised of amniotic and connective layers of umbilical tissue that has been
developed as a wound cover or surgical wrap to support soft tissue repair. It retains native components of the umbilical tissue including the extracellular matrix, growth factors and endogenous viable
cells including epithelial cells, fibroblasts and MSCs. Stravix conforms to the site of injury and requires minimal preparation prior to use. It is thicker and has a stronger tensile strength than our
Grafix products. Stravix was launched in late 2015.
BIO
4
is a viable bone matrix containing endogenous bone forming cells including MSCs, osteoprogenitor cells, osteoblasts,
osteoinductive and angiogenic growth factors. It possesses all four characteristics involved in bone repair and regeneration: osteoconductive, osteoinductive, osteogenic, and angiogenic.
BIO
4
is an alternative to autograft (or a graft of tissue from one's own body) which requires a procedure of harvesting a patient's own bone ("donor" site) and is associated with donor
site morbidity. Originally branded as OvationOS and launched in 2014, BIO
4
is marketed and distributed exclusively by Stryker under the brand name BIO
4
since 2015.
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Cartiform
is a viable osteochondral allograft that contains extracellular matrix, chondrogenic factors and endogenous viable chondrocytes
native to the cartilage tissue. The intact architecture of native cartilage is preserved in Cartiform. Cartiform is intended to treat osteochondral defects. Cartiform can fit to any surface contour.
Cartiform was launched in 2012 and is exclusively available through Arthrex, Inc. ("Arthrex").
Menvivo
was developed for repair of the meniscus following partial meniscectomy. Menvivo is processed from donated human meniscus tissue
and maintains the structural and mechanical properties of the tissue. Extracellular matrix, biological factors and endogenous viable cells of fresh meniscal tissue are retained in Menvivo. Although
Menvivo is available to the market as a 361 HCT/P, we have no current plans to actively distribute this product because the proper use of this product requires the development of new implantation
techniques and instruments.
TruSkin
is a cryopreserved viable skin allograft designed to address unmet medical needs of chronic wounds, such as DFUs, VLUs,
pressure ulcers, surgical wounds, and wounds with exposed bone, tendon, joint capsule and muscle. TruSkin retains the extracellular matrix, growth factors and endogenous living skin cells of
native tissue, making it an alternative to fresh skin allograft. We introduced TruSkin in November 2015. Although TruSkin is available to the market as a 361 HCT/P, we are not actively distributing it
because reimbursement for this product is limited.
Ovation
was a chorion suspension retaining tissue native matrix, the growth factors and the
endogenous cells, including fibroblasts and mesenchymal stem cells. We marketed Ovation from early 2011 until October of 2014. The Untitled Letter discussed above stated that Ovation did not meet the
regulatory requirements to be classified as a 361 HCT/Ps. We committed to the FDA to discontinue the Ovation product line by the second half of 2014, and such discontinuation was completed in October
2014.
Reimbursement
Physicians, hospitals and other healthcare providers use our current products. Our non-government customers depend on third-party payors to
reimburse them for the cost of our products. Third-party payors include, but are not limited to, Medicare, managed care networks and private insurance plans. Reimbursement by third-party payors may be
subject to periodic adjustments as a result of legislative, regulatory and policy changes, as well as budgetary pressures. Even though our customers' obligations to pay us for our products are not
contingent on whether adequate third-party reimbursement is available, possible reductions in, or eliminations of, coverage or reimbursement by third-party payors affects our customers' ability to
purchase our products.
Medicare is the largest third-party payor in the United States. Medicare is a health insurance program primarily for individuals 65 years
of age and older and younger individuals with certain disabilities. The Centers for Medicare and Medicaid Services ("CMS") administers the Medicare program through twelve Medicare Administrative
Contractors ("MACs"). A MAC is a multi-state and private healthcare insurer that has been awarded by CMS a geographic jurisdiction to process Medicare Part A and Part B medical claims
for Medicare fee-for-service beneficiaries. Although the overall Medicare reimbursement framework was developed in accordance with the Social Security Act and the applicable CMS regulations, each MAC
has the discretion to decide whether to cover our products.
Grafix.
Effective January 2013, CMS issued permanent Healthcare Common Procedure Coding System ("HCPCS") Q-codes for Grafix, which
assist healthcare
providers in facilitating reimbursement in the commercial and Medicare patient populations. Since March 2016, all MACs provide coverage for
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our
Grafix products for the treatment of certain chronic wounds, including DFUs. For Medicare reimbursement purposes, CMS has classified our Grafix products as skin substitutes. The majority of Grafix
is used in hospital outpatient departments ("HOPDs"). In these settings, Medicare reimburses skin substitutes only in bundled arrangements, meaning Medicare pays the facility for our product and the
related application procedure in the form of a single payment. CMS also assigns skin substitutes to
either the low cost bundle group or high cost bundle group depending on the product's average weighted mean unit cost. Grafix has been assigned to the high cost group. The national average high cost
bundle reimbursement for each application was $1,406.87 in 2015, $1,411.21 in 2016 and $1,427.16 in 2017. For 2018, reimbursement is set at $1,568.32 per application. For private office procedures,
reimbursement is based on the average sales price ("ASP") as published by CMS. As of January 1, 2018, the ASP for Grafix CORE is $139.45 and for Grafix PRIME is $134.38. No ASP is published for
Grafix XC.
Stravix.
CMS has also classified Stravix as a skin substitute, which is also mainly used in HOPDs, but it has not been assigned a
specific HCPCS
Q-code. Since Stravix does not have a specific Q-code, it is classified in the low cost bundle group. The national average low cost bundle reimbursement for each application was $428.67 in 2016 and
$452.91 in 2017. For 2018, reimbursement is set at $488.17 per application. No ASP is published by CMS for private office procedures.
BIO
4
and
Cartiform.
BIO
4
and Cartiform are used in the operating
room
setting. They are bundled as part of a hospital's claim for operating room services under a diagnosis-related group ("DRG") for inpatient admissions and under an ambulatory payment classification
("APC") for outpatient procedures. Medicare pays a single amount for a patient's inpatient hospitalization based on the applicable DRG, which depends on the patient's diagnosis, the surgical
procedures involved, and the patient's age and gender. When the surgery is performed on an outpatient basis, Medicare pays for it based on the APC applicable to the surgical procedure.
Private third-party payors include, but are not limited to, private health insurance plans and managed care networks. Each private health
insurance plan and managed care network has its own coverage and reimbursement policies applicable to our products. Even if a plan covers our products, the reimbursement amount may not cover the
entire costs of our product, which could adversely impact the demand for our products.
Intellectual Property
We have intellectual property (patents, licenses, know-how and trademarks) related to our products, manufacturing processes and other
technologies. Our strategy to protect our intellectual property position includes generally seeking patent protection for our technology and products primarily in the United States, Canada and the
European Union. The intellectual property position of biotechnology firms generally is highly uncertain and involves complex legal and factual questions. Our success will depend, in part, on whether
we can:
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obtain patents to protect our own technologies and products;
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protect our trade secrets and know-how;
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obtain licenses or the right to use the technologies of third-parties, which may be protected by patents;
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obtain trademarks to protect our brand names; and
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conduct our business without infringing the intellectual property and proprietary rights of others.
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Our success depends, in part, on our ability to obtain patents, maintain trade secret protection, and operate without infringing on the
proprietary rights of third parties. Our policy is to file patent applications to protect technology, inventions and improvements that we consider important to our business and operations. We have 7
patents and 28 pending patent applications in the United States Patent and Trademark Office. We also have patents and pending patent applications in the European Patent Office and the patent offices
of other foreign jurisdictions. We may need to defend patents from challenges by others from time to time in the future. Certain of our U.S. patents may also be challenged by parties who file a
request for post-grant review or inter partes reexamination under the America Invents Act of 2011 or ex parte reexamination. Post-grant proceedings are increasingly common in the United States and are
costly to defend. Our patent rights may not provide us with a proprietary position or competitive advantages against competitors. Furthermore, even if the outcome is favorable to us, the enforcement
of our intellectual property rights can be expensive and time consuming.
We sold our culturally expanded mesenchymal stem cell ("ceMSC") technology (including our stem cell drug Prochymal and other related assets) to
Mesoblast, a wholly owned subsidiary of Mesoblast Limited, in October 2013. Pursuant to the purchase agreement with Mesoblast, we retained a royalty free license to all transferred intellectual
property, insofar as necessary to continue in our current business. We have agreed not to compete with Mesoblast in the ceMSC business through October 2021, but we retain the rights to develop any
other MSC technologies that do not involve culture expansion of cells.
We also rely upon trade secrets to protect our proprietary information and technology. A significant amount of our technology, including aspects
of the manufacturing processes for our products, is maintained by us as trade secrets. Through our experience with MSC-based and tissue-based product development, we have developed expertise and
know-how in this field. To protect our know-how in manufacturing processes, we enter into confidentiality agreements with our employees, consultants and contractors, manufacturers, outside
collaborators, sponsored researchers, advisors and other third parties. These agreements generally provide for protection of confidential information and technology, restrictions on the use of
materials and assignment of inventions conceived during the term of the agreement. These agreements may not effectively prevent disclosure of or otherwise protect our confidential information and
technology.
Osiris®, Grafix®, Grafix CORE®, Grafix PRIME®, Grafix XC®, Stravix®,
Cartiform®, Prestige, OvationOS®, Ovation, TruSkin® and Menvivo are trademarks of the Company. We believe that trademark
protection is an important part of establishing product and brand recognition. We own a number of registered trademarks and trademark applications in the U.S., Canada and in various other countries
throughout the world. U.S. federal registrations for trademarks remain in force for 10 years and may be renewed every 10 years after issuance, provided the mark is still being used in commerce.
Trademark registrations in Canada remain in force for 15 years and may be renewed every 15 years after issuance, and are vulnerable to cancellation thereafter if the mark is
not being used in commerce. Other countries generally have similar but varying terms and renewal policies with respect to trademarks registered in those countries.
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Manufacturing
Our current products are derived from human tissue donated for transplantation. Grafix and Stravix are derived from living human donors'
placental tissues, and BIO
4
and Cartiform are derived from donated human cadaveric bone and cartilage tissues. We contract with tissue recovery agencies for both placental and cadaveric
tissue for our products. These agencies operate on a fee-for-service basis. As needed, we intend to enter into contracts with additional tissue recovery agencies to fulfill expected product demand. We
have not experienced significant supply issues with tissue recovery agencies, and placental tissue and cadaveric donor bone and cartilage have been generally available to us in sufficient quantities
and on acceptable terms. However, there are a limited number of tissue supply agencies and it requires a long-lead time to order large quantities of placental and cadaveric tissue. This means that a
sudden increase in demand or a supply shortage may prevent us from producing sufficient quantities of our products.
We
currently manufacture all of our supply of Grafix and Stravix products at our facility in Columbia, Maryland. Currently, we outsource manufacturing of all of our supply of
BIO
4
and Cartiform to Aziyo Biologics, Inc. ("Aziyo"). Having a single manufacturing source for each of our products could limit our distribution capabilities, increase our
distribution costs or cause production delays, any of which can damage our reputation and adversely affect our results of operations. We have entered into an agreement with another third party to
manufacture BIO
4
and Cartiform and are in advanced discussions with the same third party to establish it as a manufacturer of all of our products in order to increase our manufacturing
capacity. A lengthy disruption or shutdown of, or a shortage of supply at, our current manufacturing facilities or the manufacturing facilities of Aziyo or another outsourced contract manufacturer,
whether due to the occurrence of natural disasters, the need to comply with the requirements of directives from government agencies, such as the FDA, the lack of supply of human tissue, or otherwise,
could have a material adverse effect on our business, financial condition and results of operations.
Sales, Marketing and Distribution
Grafix
and
Stravix:
We currently sell Grafix and Stravix through the
efforts of our internal direct
sales and marketing departments, as well as through a small number of specialty distributors for certain target markets. We focus our marketing efforts for these products in four specific channels:
HOPDs, inpatient surgical procedures, private physician offices, and Department of Veteran Affairs ("VA") and Department of Defense ("DOD") hospitals. For our VA and DOD customers, our products are
distributed exclusively through resellers designated as Service-Disabled, Veteran-Owned Small Businesses ("SDVOSBs"). SDVOSBs are eligible for set-asides and other preferences in the federal
contracting process. For the VA, SDVOSBs enter into Federal Supply Schedule or Strategic Acquisition Center contracts and for the DOD, SDVOSBs enter into Distribution and Pricing contracts.
BIO
4
:
In December 2014, we entered into an exclusive agreement with Howmedica Osteonics Corp., also referred to as
Stryker
Orthopaedics, a subsidiary of Stryker Corporation, for the marketing and distribution of BIO
4
. We are responsible for supply, manufacturing, inventory management, shipments to customers,
continued research and product improvement activities. Stryker is responsible for the sales and marketing of BIO
4
for use in all surgical applications, including spine, trauma,
extremity, cranial, and foot and ankle surgery. We collaborate with Stryker on the design and conduct of clinical development programs.
The
agreement with Stryker provides for an initial four-year exclusive term, which commenced on the date of Stryker's initial commercial sale of BIO
4
in February 2015. The
term may be extended by Stryker for an additional exclusive period of four years or an additional non-exclusive period of two years. If Stryker extends the term on an exclusive basis, it has the
option to further extend the term on an exclusive basis for two more years. We received an initial exclusivity fee of $5.0 million in 2015 and
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are
entitled to receive additional fees upon any exercise by Stryker of its right to extend the initial term, whether on an exclusive or non-exclusive basis. These additional fees are reduced on a
sliding scale if Stryker meets certain revenue thresholds during the initial term or if revenue goals are not met
as a result of us not fulfilling our supply obligations. Stryker is entitled to a certain percentage of sales of allograft services for BIO
4
and has limited early termination rights.
Cartiform:
In October 2014, we entered into an exclusive agreement for our cartilage product, Cartiform, with Arthrex. The
agreement with Arthrex
provides Arthrex with exclusive commercial distribution rights to Cartiform. We are responsible for manufacturing, continued research and product improvement activities. We collaborate with Arthrex on
the design and conduct of clinical development programs. The agreement provides for an initial eight-year exclusive term with automatic renewals of additional two-year periods. Pursuant to the
agreement, Arthrex is entitled to a certain commission on Cartiform sales.
Information
regarding our revenue from sales of the above products is set forth under the heading Results of Operations in Part II, Item 7 of this Form 10-K and is
incorporated by reference in this Item 1.
Competition
In the marketplace, we compete with other companies and organizations that are marketing or developing products competitive with Grafix, Stravix
and our other products and products under development. Companies competing with our products include, but are not limited to: Organogenesis Inc., the manufacturer of Apligraf® and
Dermagraft®, MiMedx Group, Inc., the manufacturer of EpiFix®, and Integra LifeSciences Corporation, the manufacturer of Integra, all of which compete with Grafix and
Stravix. BIO
4
competes with bone tissue products such as Osteocel® marketed by NuVasive, Inc. and Trinity® marketed by Orthofix International NV,
while Cartiform competes with cartilage allografts such as ProChondrix® marketed by AlloSource and DeNovo® marketed by Zimmer Biomet Holdings, Inc. In addition to those
listed above, we have other existing and potential competitors developing a variety of products for the same conditions for which we market our products.
Government Regulation
Regulation by governmental authorities in the United States and other countries is a significant factor in the development, manufacture,
commercialization and reimbursement of our products. Our current products, Grafix, Stravix, BIO
4
and Cartiform, are HCT/Ps that we believe qualify under 21 CFR Part 1271 to
be regulated solely under Section 361 of the Public Health Services Act. Such 361 HCT/Ps are regulated differently from biologics and drugs, and do not require pre-marketing
approval. Some of our product candidates in early development may require pre-marketing approval of a BLA, referred to as licensure, by the FDA, prior to commercialization.
361 HCT/Ps are human cells, tissues, or cellular and tissue-based products that are intended for implantation, transplantation, infusion,
or transfer into a human recipient and that meet all of the following criteria set forth under 21 CFR Part 1271:
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The product is minimally manipulated;
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The product is intended for homologous use only, as reflected in its labeling, advertising and all other indications of the manufacturer's
objective intent;
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The manufacture of the product does not involve the combination with another article except for water, crystalloids, or a sterilizing,
preserving, or storage agent, provided that the addition of such articles does not raise new clinical safety concerns with respect to the product; and
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The product does not have a systemic effect and is not dependent on the metabolic activity of living cells for its primary function (or if it
does, it meets other criteria not applicable to our products, such as being limited to use in first or second degree blood relatives).
These
criteria form the framework governing our advertising and promotional activities for 361 HCT/Ps. For additional information on FDA's regulation of 361 HCT/P
advertising and promotion, refer to the risk factor entitled, "
Our business is subject to an inherently uncertain and evolving area of regulation."
under "Risk Factors" in Part I, Item 1A of this Form 10-K
We
believe all of our current products (Grafix, Stravix, BIO
4
, and Cartiform), as well as our tissue products being developed using our Prestige Lyotechnology, meet, or
will meet, the FDA's current interpretations of the criteria for 361 HCT/Ps. For additional information about the FDA regulatory history of our products, which informs our belief that our
products qualify as 361 HCT/Ps, refer to the risk factor entitled, "
Should the FDA determine that any of our current products do not meet regulatory requirements that
permit qualifying human cells, tissues and cellular and tissue-based products to be manufactured, stored, labeled and distributed without pre-marketing approval, we may be required to stop
manufacturing and distributing such products."
under "Risk Factors" in Part I, Item 1A of this Form 10-K.
The FDA has specific regulations governing HCT/Ps, including some regulations specific to 361 HCT/Ps, which are set forth in 21
CFR Part 1271. All establishments that manufacture 361 HCT/Ps must register and list their HCT/Ps with the FDA's Center for Biologics Evaluation and Research ("CBER") within five days
after commencing operations. In addition, establishments are required to update their registration annually in December or within 30 days of certain changes, and submit changes in HCT/P listing
at the time of or within six months of such change.
The
regulations in 21 CFR Part 1271 requires us to comply with donor screening, eligibility and testing requirements and federally mandated current Good Tissue Practices ("cGTPs")
regulations to prevent the introduction, transmission and spread of communicable diseases. The cGTPs govern, as may be applicable, the facilities, controls, and methods used in the manufacture of all
HCT/Ps, including processing, storage, recovery, labeling, packaging, and distribution of 361 HCT/Ps. cGTPs require us, and our contract manufacturers, among other things, to maintain a quality
program, train personnel, control and monitor environmental conditions as appropriate, control and validate processes, properly store, handle and test our products and raw materials, maintain our
facilities and equipment, keep records, and comply with standards regarding recovery, pre-distribution, distribution, tracking and labeling of our products, and complaint handling. 21 CFR
Part 1271 also mandates compliance with adverse event and cGTP deviation reporting and labeling requirements.
Although
we do not currently import any human tissue for our products, we have executed contracts with potential suppliers of placental tissue sourced from Canada, and we are currently
in the process of qualifying those suppliers. In the event that we import placental tissue, we will be required to satisfy
the regulations on importing 361 HCT/Ps. Those regulations require that the importer of record of HCT/Ps notify the FDA prior to, or at the time of, importation and provide sufficient
information for the FDA to make an admissibility decision. In addition, the importer must hold the HCT/P intact and under conditions necessary to prevent transmission of communicable disease until an
admissibility decision is made by the FDA.
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The
FDA conducts periodic inspections of HCT/P manufacturing facilities, and contract manufacturers' facilities, to assess compliance with cGTP. Such inspections can occur at any time
with or without written notice at such frequency as determined by the FDA in its sole discretion. To determine compliance with the applicable provisions, the inspection may include, but is not limited
to, an assessment of the establishment's facilities, equipment, finished and unfinished materials, containers, processes, HCT/Ps, procedures, labeling, records, files, papers, and controls required to
be maintained under 21 CFR Part 1271. If the FDA were to find serious non-compliant manufacturing or processing practices during such an inspection, it could take regulatory actions that could
adversely affect our business, results of operations, financial condition and cash flows. For additional information on these potential enforcement actions, refer to the risk factor entitled,
"
Our business is subject to continuing regulatory compliance by the FDA and other authorities, which is costly and our failure to comply could result in negative effects on our
business."
under "Risk Factors" in Part I, Item 1A of this Form 10-K
If the FDA determines that any of our current products do not qualify as 361 HCT/Ps, such products would then be regulated as biological
products and would require pre-marketing approval of a BLA, also known as licensure, from the FDA before they could be marketed again in the United States. In addition, certain of our product
candidates in early stage development may constitute biological product candidates requiring licensure. For such biological product candidates, the FDA generally requires the following steps prior to
their introduction into interstate commerce:
-
-
performance of preclinical (animal and laboratory) tests, in accordance with the FDA's current Good Laboratory Practice ("cGLP") regulations
and other applicable requirements;
-
-
submissions to the FDA of an IND, which must become effective before clinical trials may commence;
-
-
approval by an independent institutional review board ("IRB") of each clinical site before a clinical trial is initiated;
-
-
performance of adequate and well-controlled clinical trials according to FDA's current Good Clinical Practice ("cGCP") regulations, and any
additional requirements for the protection of human research subjects and their health information, to establish the safety, purity and potency of the investigational biological product in the
intended target population for its intended use;
-
-
establishment and validation of a consistent and reproducible manufacturing process intended for commercial use, including the collection of
appropriate manufacturing data;
-
-
preparation and submission to FDA of a BLA for marketing approval that includes substantial evidence of safety, purity and potency from results
of nonclinical testing and clinical trials;
-
-
satisfactory completion of an FDA Advisory Committee review, unless waived by the FDA;
-
-
satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the biological product candidate is produced to
assess compliance with current Good Manufacturing Practices ("cGMPs") and to assure that the facilities, methods and controls are adequate to preserve the biological product candidate's identity,
safety, strength, quality, potency and purity;
-
-
potential FDA inspection of the nonclinical and clinical trial sites that generated the data in support of the BLA; and
-
-
FDA review and approval of the BLA before any commercial sale or shipment of the product can begin again.
For
additional information on the requirements for licensure, refer to the risk factor entitled, "
If the FDA determines that any of our current products are not
361 HCT/Ps, or that any of our future
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products are not 361 HCT/Ps, we will be required to seek and obtain pre-marketing regulatory approval.
" under "Risk Factors" in Part I, Item 1A of this
Form 10-K.
Our communicable disease testing is performed by laboratories registered with the FDA to perform donor testing and certified to perform such
testing on human specimens in accordance with the Clinical Laboratory Improvement Amendments of 1988 ("CLIA") and 42 CFR Part 493, or that has met equivalent requirements as determined by CMS.
CLIA extends federal oversight to clinical laboratories that examine or conduct testing on materials derived from the human body for the purpose of providing information for the diagnosis, prevention,
or treatment of disease or for the assessment of the health of human beings. CLIA requires that these laboratories be certified by the government, satisfy governmental quality and personnel standards,
undergo proficiency testing, be subject to biennial
inspections and remit fees. The sanctions for failure to comply with CLIA include suspension, revocation, or limitation of a laboratory's CLIA certificate necessary to conduct business, fines, or
criminal penalties.
Procurement of certain human organs and tissues for transplantation is subject to the restrictions of the National Organ Transplant Act
("NOTA"), which prohibits the transfer of certain human organs, including skin and related tissue, for valuable consideration, but permits reasonable payment associated with the removal,
transportation, implantation, processing, preservation, quality control and storage of human tissue and skin. We reimburse tissue banks, hospitals and physicians for their services associated with the
recovery, storage and transportation of donated human tissue.
Certain state and local governments regulate our business. As required, we maintain state licensure as a human tissue bank in Maryland,
California, Florida, and New York. We believe these are the only states in which this specific licensure is required for us. We also received and actively maintain American Association of Tissue Banks
("AATB") accreditation. In January 2016 the 14th Edition of the AATB standards went into effect, which included specific standards for recovery, screening, testing, labeling and processing of
placental tissue. We believe we are compliant in all material respects with AATB standards and our state licensure requirements.
Federal and state laws govern our ability to obtain and, in some cases, to use and disclose data we need to conduct research activities. Through
the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), Congress required the Department of Health and Human Services ("HHS") to issue a series of regulations establishing standards
for the electronic transmission of certain health information by healthcare providers, hospitals, health plans and healthcare clearinghouses, which are known as "Covered Entities". Among these
regulations were standards for the privacy of individually identifiable health information ("PHI"). HIPAA applies to us because we are a "Business Associate", meaning that we are a third-party who
performs functions or services involving
PHI for or on behalf of Covered Entities. Congress also enacted the Health Information Technology for Economic and Clinical Health Act ("HITECH"). Among other changes to the laws governing PHI, HITECH
strengthened and expanded HIPAA requirements, increased penalties for violations, gave patients new rights to restrict uses and disclosures of their health information and imposed a number of privacy
and security requirements directly on Business Associates. Under HITECH, we must report unauthorized use or disclosure of PHI that meets the definition of a breach to our Covered Entities. We have
adopted
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privacy
policies and procedures designed to comply with the applicable requirements set forth in HIPAA and HITECH.
HIPAA
and HITECH do not preempt, or override, state privacy laws that provide even more protection for individuals' health information. These laws' requirements could further complicate
our ability to obtain necessary research data from our research collaborators. In addition, certain state privacy and genetic testing laws may directly regulate our research activities, affecting the
manner in which we use and disclose individuals' health information, potentially increasing our cost of doing business, and exposing us to liability claims. Patients and research collaborators may
also have contractual rights that further limit our ability to use and disclose individually identifiable health information. Any claims that we have violated individuals' privacy rights or breached
our contractual obligations, even if we are not found liable, could be expensive and time-consuming to defend and could result in adverse publicity that could harm our business.
In the United States, we are subject to laws and regulations pertaining to healthcare fraud and abuse, including anti-kickback laws and
physician self-referral laws that regulate the means by which companies in the healthcare industry may market their products to hospitals and healthcare professionals and may compete by discounting
the prices of their products. Our products also are subject to regulation regarding reimbursement, and United States healthcare laws apply when a customer submits a claim for a product that is
reimbursed under a federally funded healthcare program. These laws require that we exercise care in designing our sales and marketing practices, including involving interactions with healthcare
professionals. For additional description of these laws and their applicability to us, refer to the risk factor entitled, "
We and our distributor sales representatives must
comply with U.S. federal and state fraud and abuse laws, including anti-kickback and false claims laws and equivalent foreign rules."
under "Risk Factors" in Part I,
Item 1A of this Form 10-K.
We also are subject to various local, state and federal laws and regulations relating to safe working conditions, laboratory and manufacturing
practices, the distribution of human tissue and tissue products, experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including chemicals,
micro-organisms and various radioactive compounds used in connection with our R&D activities. These laws include, but are not limited to, the Occupational Safety and Health Act, the Toxic Test
Substances Control Act and the Resource Conservation and Recovery Act. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed
by state and federal regulations, we cannot assure you that accidental contamination or injury to employees and third parties from these materials will not occur. We may not have adequate insurance to
cover claims arising from our use and disposal of these hazardous substances.
In the event we decide to distribute our products outside of the United States, we will be required to seek approval for the manufacturing and
marketing of each of our products from regulatory authorities in foreign countries prior to the commencement of marketing of the product in those countries. The approval procedure varies among
countries, may involve preclinical testing and clinical trials, and the time required may differ from that required by the FDA. For example, although there is now a centralized European Union approval
mechanism in place, the mechanism applies only to certain specific medicinal product categories. Each European country also may impose certain of its own procedures and requirements in addition to
those requirements set out in the appropriate legislation, many of which could be time-consuming and expensive.
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Employees
As of March 23, 2018, we had 337 full-time employees and 13 part-time employees. Of this total, 16 were engaged in R&D and clinical
studies, 80 were engaged in manufacturing activities, 164 were engaged in sales and marketing activities, 23 were engaged in reimbursement and market access activities and 67 were engaged in
administration, finance, and facilities. None of our employees are represented by a labor union or covered under a collective bargaining agreement, and we have not experienced any work stoppages.
Available Information
Our reports filed with the SEC can be found on our website at www.osiris.com under the "Investors" heading free of charge. These include our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934. We make these reports available as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.
You
can also obtain these reports from the SEC's Public Reference Room, which is located at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public
Reference Room is available by phone (1-800-SEC-0330) or on the Internet (www.sec.gov). This site contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC.
The
content on any website referred to in this Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.
ITEM 1A. Risk Factors.
We are subject to numerous risks and uncertainties. In addition to the other information contained in this report, you should carefully consider
the risks and uncertainties described below. These risks are not the only ones that we may face. Additional risks not presently known to us
or that we currently consider immaterial may also impact our business operations. Our actual results could differ materially from those anticipated in our forward-looking statements as a result of
known and unknown risks including the risks described below or elsewhere in this report.
Risks Related to Our Business
Our operating results may fluctuate significantly as a result of a variety of factors, many of which are
outside of our control.
The following factors, among others, may negatively affect our operating results:
-
-
Failure to obtain reimbursement approvals by, and adequate and timely reimbursements from, third-party payors, such as Medicare and private
health plans, for our products;
-
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Removal of our products from the Federal Supply Schedule or change in the prices that government customers will pay for our products;
-
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Our ability to attract and retain key personnel;
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The announcement or introduction of new or improved products by our competitors;
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Our ability to obtain the necessary quantities of human tissue to manufacture our products;
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Our ability to upgrade and develop our systems and infrastructure to accommodate our growth, including adding more manufacturing capacity to
enable us to continue to meet market demand;
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-
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Our ability to manage our relationships with third parties that help us research, develop, manufacture, market and distribute our products;
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The amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure;
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Our ability to comply with regulatory requirements related to the marketing, manufacturing and distribution of our products and product
candidates, including FDA regulations; and
-
-
General economic conditions as well as economic conditions specific to the healthcare industry.
We
have based our current and future expense levels largely on our investment plans and estimates of future events, although certain of our expense levels are, to a large extent, fixed.
We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenue relative to our planned expenditures would
have an immediate adverse effect on our business, financial condition and results of operations. Further, as a strategic response to changes in the competitive environment, we may from time to time
make certain pricing, service or marketing decisions that could have a material adverse effect on our business, financial condition and results of operations. Due to the foregoing factors, among
others, our revenue and operating results are and will remain difficult to forecast.
We have a history of operating losses and may not achieve or sustain profitability.
We have incurred losses in each year since our inception (except fiscal years 2009, 2010, 2011, 2013 and 2017), and may incur additional losses
in the future. As of December 31, 2017, we had an accumulated deficit of approximately $242 million. In earlier years, these losses resulted principally from costs incurred in our R&D
programs. In recent years, these losses resulted principally from our growing sales and marketing expenses, primarily due to the expansion of our sales force which was internalized in 2014, and from
our growing general and administrative expenses. Our general and administrative expenses included approximately $8.1 million and $9.5 million in 2016 and 2017, respectively, related to
the Restatement.
We
expect to continue to incur significant operating expenses in the foreseeable future as we seek to:
-
-
continue to add sales, operational and financial personnel either through additional employees or outsourcing, consistent with expanding our
operations and improving our internal control over financial reporting;
-
-
expand our manufacturing capacity;
-
-
continue to pursue clinical studies for our products to support our reimbursement efforts;
-
-
manage regulatory issues and requirements related to the marketing, manufacturing and distribution of our products and product candidates,
including issues related to FDA regulation and third-party payor reimbursement; and
-
-
maintain, expand and protect our intellectual property.
The
extent of our future operating losses or profits is highly uncertain, and we may not achieve or sustain profitability. If we are unable to achieve and then maintain profitability,
the market value of our common stock will decline.
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We continue to expand our sales and marketing capabilities, and there can be no assurance that these efforts
will result in significant increases in sales.
Since 2014, we have been engaged in a major initiative to build and expand our internal sales and marketing capabilities. As a result, we have
and are continuing to hire direct sales personnel for certain of our products to allow us to reach new customers. Due to the unique nature of our products, we spend significant time and resources on
recruiting, training, retaining, motivating and managing our sales personnel. The increased expenses associated with these selling efforts impact our operating results, and there can be no assurance
that we will be successful in significantly increasing sales of our products.
We may have difficulty managing growth in our business, which could have a material adverse effect on our
business, financial condition and results of operations.
As we expand our activities there will be additional demands on our financial, operational and management resources. To manage the growth of our
operations and personnel, we must both modify our existing operational and financial systems, procedures and controls and implement new systems, procedures and controls. We must also expand our
finance, administrative and operations staff. Management may be unable to hire, train, retain, motivate and manage necessary personnel or to identify, manage and exploit existing and potential
strategic relationships and market opportunities. The failure to manage growth effectively could have a material adverse effect on our business, financial condition and results of operations.
Our revenues depend on obtaining coverage and adequate reimbursement from public and private insurers and
health systems.
Our success depends on the extent to which reimbursement for the costs of our products will be available from third-party payors, such as
government health administration authorities, private health insurers, health maintenance organizations and pharmacy benefit management companies. A significant number of government and private
third-party payors currently do not provide coverage and reimbursement for our products. If we are not successful in obtaining coverage and adequate reimbursement for our products from more
third-party payors, our ability to sell our products will be adversely affected. Therefore, our ability to grow our revenues is dependent on our ability to meet the requirements for coverage of
additional third-party payors, and to negotiate acceptable reimbursement with such payors once our products have been approved for coverage. Even if we do succeed in obtaining widespread coverage and
adequate reimbursement for our products, future changes in coverage and reimbursement policies could have a negative impact on our business, financial condition and results of operations.
Our products may have higher costs than more traditional products, due to the higher cost and complexity
associated with their research, development and production, and the complexity associated with their distribution. This higher cost and complexity can make it more difficult to obtain adequate
coverage and reimbursement.
Our products may have higher costs or fees associated with them compared with more traditional products, due to the higher cost and complexity
associated with their research, development and production, and the complexity associated with their distributionwhich requires special handling, storage and shipment procedures and
protocols. This, in turn, makes it more
difficult for us to obtain approval for coverage and reimbursement from third-party payors for our products and the procedures in which they are used, particularly if we cannot demonstrate a favorable
cost-benefit relationship. Third-party payors may also deny coverage because the product has not received approval from the FDA or other government regulators that they believe is necessary, or they
believe that the product is experimental, unnecessary or inappropriate.
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Even
though we are not required to conduct clinical trials in order to market our products in the United States, we may nevertheless be required to conduct one or more clinical studies,
and to publish one or more peer reviewed journal articles supporting the product, before we are able to obtain third-party reimbursement. We may also be required to conduct additional clinical studies
that compare the cost effectiveness of our products to other available therapies before third-party payors will provide reimbursement. Conducting clinical studies is expensive and results in delays in
wide scale commercialization and reimbursement. In addition, even if our products otherwise meet the requirements for reimbursement, pricing negotiations with third-party payors may take months or
longer and result in significant delay in obtaining approval for reimbursement.
Coverage
and reimbursement policies also sometimes differ depending upon the setting in which the product is to be used. The use of our products in a hospital setting as part of a
surgical or other more extensive procedure may have a coverage and reimbursement pathway that differs from a use in an outpatient setting for a more narrowly defined procedure. Thus, for example, the
coverage and reimbursement pathway for Grafixwhich we expect to be used more often in an outpatient settingmay differ from that for BIO
4
which we
expect to be used more often in an in-patient hospital setting as part of a surgical procedure. These differences may limit or make coverage and reimbursement more difficult for some products as
compared to others, and influence our product development and marketing efforts in ways that may ultimately prove to be detrimental to our business. Payors' coverage and reimbursement policies also
are subject to change, and the policies in effect at the time a product is marketed may be different from the policies in place when a coverage and reimbursement strategy was developed.
In
addition, third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services, and many limit coverage and reimbursement for newly
approved healthcare products. In particular, third-party payors may limit the indications for which they will reimburse patients who use our products, or they may not provide reimbursement for our
products separately from the procedures in which they are used, to encourage providers to select products based on cost-effectiveness or for other reasons. Cost-control initiatives could decrease the
price for our products, which would result in lower product revenue to us.
To continue our commercial expansion, we must convince more physicians that our products are appropriate
alternatives to traditional methods and products and that our products should be used in their procedures.
While many physicians are using our products, we must continue our efforts to convince other physicians that our products are appropriate
alternatives to traditional methods and products. We believe physicians will only adopt our products if they determine, based on experience, clinical data and published peer reviewed journal articles,
that the use of our products in a particular procedure is a favorable alternative to conventional methods. Physicians may be slow to change their practices for the following reasons, among
others:
-
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their lack of experience in the field using our products;
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lack of evidence supporting additional patient benefits and our products over conventional methods;
-
-
perceived liability risks generally associated with the use of new products and procedures;
-
-
limited availability of reimbursement from third-party payors;
-
-
the exclusion of our products on the formulary of their affiliated hospital or group purchasing organization ("GPO"), which would preclude
their use of our product; and
-
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the time that must be dedicated to training physicians on how to use our products.
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In
addition, hospital acquisition decisions often are affected by physicians' assessments of products. If physicians do not support adoption of our products or if we are unable to
demonstrate favorable long-term clinical data, hospitals may not use our products, which would significantly reduce our ability to achieve expected revenue.
The potential of our products and products under development may not be realized, including products based on
our Prestige Lyotechnology.
We are continually evaluating the potential of our current products and products under development. Our products are susceptible to various
risks, including undesirable and unintended side effects, inadequate efficacy or other characteristics that may prevent or limit their commercial use, or if required, pre-marketing approval. We have
invested substantial time and resources in developing additional products, including products using our novel Prestige Lyotechnology, a proprietary method to preserve living cells and tissues at room
temperatures. Further commercialization of any new products, especially products based on new technologies, will require additional development, clinical evaluation, significant marketing efforts and
substantial additional investment before they can provide us with any revenue. Despite our efforts, any such products may not become commercially successful products for a number of reasons,
including:
-
-
we may experience delays in our development programs;
-
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any products that are approved may not be accepted in the marketplace by patients, physicians or payors;
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we may not be able to manufacture any such products in sufficient commercial quantities; and
-
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rapid technological change may make such products obsolete.
If
the potential of our products is not realized, the value of our products, technology and development programs could be significantly reduced.
Some product development programs are based on novel technologies, such as our Prestige Lyotechnology, which
are inherently risky.
We are subject to the risks of failure inherent in the development of products based on new technologies, such as our Prestige Lyotechnology.
The novel nature of our technology platforms and product candidates creates significant challenges in regards to product development and optimization, processing and manufacturing, government
regulation and/or approval, third-party reimbursement and market acceptance. Therefore, the pathway to development and commercialization of our products may be more complex and lengthy than other
products. Additionally, tissue- and cell-based products are subject to donor-to-donor variability, which can make standardization more difficult. As a result, the development and commercialization
pathway for our products is subject to increased uncertainty.
We depend on key personnel.
Our current and future success depends to a significant extent on the skills, experience and efforts of our scientific, management, technical
and sales personnel. None of our employees is employed for a specified term, and we have experienced significant turnover. Competition for personnel is intense. We may be unable to retain our current
personnel or attract or integrate other qualified scientific, management, technical or sales personnel in the future which could harm our business and might significantly delay or prevent the
achievement of research, development, sales or other business objectives.
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We are in a highly competitive and evolving field and face competition from well-established tissue product
manufacturers as well as new market entrants.
Our business is in a very competitive and evolving field. Competition from other companies and from research and academic institutions is
intense and widespread, expected to increase, subject to rapid change and could be significantly affected by new product introductions. The presence of this competition in our market may lead to
pricing pressure, which would limit our ability to sell our products at a price that would make us profitable or prevent us from selling our products at all. Our ability to successfully compete will
depend on whether we can perfect and protect our intellectual property rights related to our technologies as well as to develop new technologies and new applications for our technologies. Our failure
to compete effectively would have a material adverse effect on our business, financial condition and results of operations.
Our products could become obsolete due to rapid technological change.
The technologies underlying our products are subject to rapid and profound technological change. Competition intensifies as technical advances
in each field are made and become more widely known. We can give no assurance that others will not develop services, products or processes with significant advantages over the products that we offer
or are developing. Any such occurrence could have a material adverse effect on our business, financial condition and results of operations.
Many of our competitors have greater resources or capabilities than we have, or may succeed in developing new
or better products more quickly than we do.
In the marketplace, we compete with other companies and organizations that are marketing or developing products competitive with Grafix, Stravix
and our other products and products under development. In many cases, the competing product or candidate is based on bioengineering or other technologies. Companies competing with our products
include, but are not limited to: Organogenesis Inc., the manufacturer of Apligraf® and Dermagraft®,
MiMedx Group, Inc., the manufacturer of EpiFix®, and Integra LifeSciences Corporation, the manufacturer of Integra, all of which compete with Grafix and Stravix. BIO
4
competes with bone tissue products such as Osteocel® marketed by NuVasive, Inc. and Trinity® marketed by Orthofix International NV, while Cartiform competes with
cartilage allografts such as ProChondrix® marketed by AlloSource and DeNovo® marketed by Zimmer Biomet Holdings, Inc. In addition to those listed above, we have other
existing and potential competitors developing a variety of products for the same conditions for which we market our products. Many of our current and potential competitors have greater financial and
human resources than we have, including more experience in R&D and more established marketing and distribution capabilities.
The
biotechnology industry is characterized by rapid technological change, resulting in new product introductions and other technological advancements. Because FDA approval is generally
not required for tissue-based products which are not more than minimally manipulated, competitors might choose to enter this market and produce a substantially similar product, and we may not be able
to prevent the marketing and distribution of any such similar products by others. Should others produce a substantially similar product or a new product that renders our current or future products
obsolete, we could be subject to increased competition and our potential revenue from distribution of these products may be limited.
Our products are derived from human tissue and therefore have the potential for disease transmission.
Our products consist of human tissue: Grafix is manufactured from human placental tissue; Stravix is manufactured from human placental tissue
comprised of amniotic and connective layers of umbilical
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tissue;
BIO
4
is manufactured from cadaveric donor bone; and Cartiform is manufactured from cadaveric donor cartilage.
The
utilization of human tissue creates the potential for transmission of communicable disease, including, but not limited to, human immunodeficiency virus, Zika virus, viral hepatitis,
syphilis, Creutzfeldt-Jakob disease (the human form of "mad cow" disease) and other viral, fungal or bacterial pathogens. We, and our suppliers of human adult cadaveric bone, cartilage and placenta
tissue are required to comply with federal and state regulations and applicable standards intended to prevent communicable disease transmission. Although we and our suppliers have strict quality
controls over the procurement and processing of our tissue:
-
-
we can provide no assurance that these quality controls will be adequate;
-
-
we or our suppliers may fail to comply with such regulations and standards;
-
-
even with compliance, our products might nevertheless be viewed by the public as being associated with transmission of disease; and
-
-
a patient that contracts an infectious disease might assert that the use of our products resulted in disease transmission, even if the patient
became infected through another source.
Any
actual or alleged transmission of communicable disease could result in patient claims, litigation, distraction of management's attention and potentially increased expenses. Further,
any failure in screening, whether by us or other manufacturers of similar products, could adversely affect our reputation, the support we receive from the medical community and overall demand for our
products. As a result, such actions or claims, whether or not directed at us, could have a material adverse effect on our reputation with our customers and our ability to distribute our products,
which could have a material adverse effect on our business, financial condition and results of operations.
Ethical, legal and other concerns surrounding the use of human tissue may negatively affect public perception
of us or our products, or may result in increased scrutiny of our products and product candidates from a regulatory approval perspective, thereby reducing demand for our products, restricting our
ability to market our products or adversely affecting the market price for our common stock.
The commercial success of our products depends in part on general public acceptance of the use of human tissue as a part of the treatment of
human diseases and other conditions. The use of human tissue including placental tissue from full-term normal pregnancies, which is discarded otherwise, has been the subject of debate regarding
related ethical, legal and social issues.
We do not use embryonic stem cells or fetal tissue, but the public may fail to differentiate our use of adult tissue, including placental tissue from the use by others of embryonic stem cells or fetal
tissue. Ethical concerns have been raised by some about the use of donated human tissue in a for-profit setting. This could result in a negative perception of our company or our products.
Future
adverse events in the field of cellular-based therapy or changes in public policy could also result in greater governmental regulation of our products and potential regulatory
uncertainty or delay relating to any required testing or approval.
Our dependence upon human tissue necessary to produce our products may impact our ability to produce these
products on a large scale.
As an accredited and licensed tissue bank, we acquire some of our tissue supply through our own collection efforts. The remaining portion of our
tissue supply is obtained through third-party donor agencies. We and our supplier agencies may not be able to collect sufficient amounts of tissue to meet the demand. Shortages or disruptions in the
supply of human tissue can adversely impact our ability to fulfill orders, resulting in decreased sales. For example, in 2016, the FDA issued guidance regarding the
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Zika
virus, which limited our supply of placental tissue for a period of time. Since 2016, we have added additional donor agencies and initiated our own collection efforts. Nevertheless, there can be
no assurance that any change in guidance from the FDA or future outbreaks of Zika would not hamper our ability to acquire human placental issue to meet our manufacturing needs.
The
availability of donated tissue could also be adversely impacted by public opinion of the donor process as well as our own reputation in the industry. Moreover, the use of human
tissue as a part of the treatment for human disease and medical conditions has increased over recent years and continues to increase, creating greater and continually increasing competition and demand
for donated human tissue. Even if we are successful in our efforts to expand our compliment of products, we may not be able to secure quantities of human tissue sufficient to meet the demand.
We may not be able to process our products in sufficient quantities to meet market demand or expand our
market for the products.
We currently manufacture all of our supply of Grafix and Stravix products at our facility in Columbia, Maryland. Currently, we outsource
manufacturing of all of our supply of BIO
4
and Cartiform to Aziyo Biologics. Having a single manufacturing source for each of our products could limit our distribution capabilities,
increase our distribution costs or cause production delays, any of which can damage our reputation and adversely affect our results of operations. We have entered into an agreement with another third
party to manufacture BIO
4
and Cartiform and are in advanced discussions with the same third party to establish it as a manufacturer of all of our products in order to increase our
manufacturing capacity. A lengthy disruption or shutdown of, or a shortage of supply at, our current manufacturing facilities or the manufacturing facilities of Aziyo or another outsourced contract
manufacturer, whether due to the occurrence of natural disasters, the need to comply with the requirements of directives from government agencies, such as the FDA, the lack of supply of human tissue,
or otherwise, could have a material adverse effect on our business, financial condition and results of operations.
In
addition, our product supply chain and manufacturing infrastructure depends on the performance of a number of complex contracts between us on the one hand and our suppliers on the
other. If any of our suppliers, contract manufacturers or other service providers cannot or do not perform their contractual obligations, then our production efforts may suffer. If we cannot or do not
perform our contractual obligations, then we may be subject to arbitration, mediation or litigation that could have a material adverse effect on us.
Reliance
on third parties entails risks to which we would not be subject if we manufactured all of our products and product components ourselves,
including:
-
-
reliance on third parties for regulatory compliance and quality assurance;
-
-
the possible breach of the manufacturing agreement by the third party; and
-
-
the possible termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or
inconvenient for us.
We use or may use third parties to help us develop, manufacture, market and/or distribute our products, and
our business may be impaired if our third-party relationships are unsuccessful.
We have arrangements in place with third parties that help us with certain aspects of our business. Each third party supports us in differing
capacities, including our R&D, human tissue supply, regulatory compliance, tissue procurement, manufacturing, testing, or marketing and distribution
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efforts.
We are subject to a number of risks associated with our dependence upon our third-party relationships, including:
-
-
the third parties may not cooperate with us or perform their obligations under our agreements with them;
-
-
we cannot control the quality, amount and timing of the third parties' resources that will be devoted to performing their responsibilities
under our agreements with them, and they may choose to pursue alternative technologies in preference to those being developed or commercialized with us;
-
-
the third parties may refuse or fail to perform their responsibilities in a timely manner, including breach;
-
-
a third party may terminate its agreement with us for reasons outside our control, and in some cases on limited notice;
-
-
business combinations and changes in a third party's business strategy may adversely affect the third party's willingness or ability to
complete its obligations;
-
-
loss of significant rights to the other party if we fail to meet our obligations under our agreements;
-
-
the ability of a third party to successfully market and promote our products;
-
-
withdrawal of support by the third party following development or acquisition by the third party of competing products; and
-
-
disagreements with a third party regarding our agreement with such third party or ownership of intellectual property or other proprietary
rights.
Due
to these factors and other possible events, we could suffer delays or experience additional costs in the research, development, supply, manufacture, distribution or sale of our
products or we may become involved in litigation or arbitration, which would be time consuming and expensive.
We also rely upon third parties for services and raw materials needed for the manufacture and testing of our
products.
In order to produce our products, we require biological media, reagents and other highly specialized materials. This is in addition to the human
tissue donations used to manufacture our products. These items must be manufactured and supplied to us in sufficient quantities and in compliance with FDA cGTP regulations. To meet these requirements,
we either order from or have entered into supply agreements with firms that manufacture these components to cGTP standards and testing service agreements to perform the necessary quality testing.
We
rely on third-party suppliers, contract manufacturers and service providers and commodity markets to secure raw materials, parts, components and sub-assembly systems used in our
products or to manufacture our products, which expose us to volatility in the prices and availability of these materials. Some of these suppliers or their sub-suppliers are limited or sole-source
suppliers. Some of these suppliers or their sub-suppliers are located outside of the United States. A disruption in deliveries from our third-party suppliers, capacity constraints, production
disruptions, price increases, or decreased availability of raw materials or commodities, including as a result of catastrophic events, could have an adverse effect on our ability to meet our
commitments to customers or increase our operating costs. Quality and sourcing issues experienced by third-party suppliers can also adversely affect the quality of our products and result in liability
and reputational harm.
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The
purchase of components and products from international sources subjects us to extensive U.S. and foreign governmental trade, import, export and customs regulations and laws. If we,
our product candidates, or the manufacturing facilities for our product candidates or components, fail to comply with applicable regulatory requirements, a regulatory agency may seize or detain
products or refuse to permit the import of products.
Our most significant third-party arrangement is an exclusive agreement with a subsidiary of Stryker for the
distribution of BIO
4
, and our success with this product depends upon the success of this relationship.
We are party to an exclusive service agreement with Stryker for the commercialization of our viable bone matrix allograft under the name
BIO
4
. Pursuant to the agreement, Stryker is the exclusive worldwide marketer and distributor of allograft services for BIO
4
for use in
surgical applications, including spine, trauma, extremity, cranial and foot and ankle surgery. This agreement is subject to all of the risks and uncertainties applicable to third-party arrangements
generally, including those described above.
The
agreement with Stryker provides for an initial four-year exclusive term, which commenced in 2015. The term may be extended by Stryker for an additional exclusive period of four years
or an additional non-exclusive period of two years. If Stryker extends the term on an exclusive basis, it has the option to further extend the term on an exclusive basis for two more years. We
received an initial exclusivity fee of $5.0 million and are entitled to receive additional fees upon any exercise by Stryker of its right to extend the initial term, whether on an exclusive or
non-exclusive basis. These additional fees are reduced on a sliding scale if Stryker meets certain revenue thresholds during the initial term or if revenue goals are not met as a result of us not
fulfilling our supply obligations. Stryker is entitled to a certain percentage of sales of allograft services for BIO
4
and has limited early termination rights. The success of this
agreement for us will in part depend upon Stryker's success in marketing and promoting BIO
4
.
Stryker
has significantly greater resources than we do, and this agreement is not as core to its business as it is to ours. We rely upon Stryker's continued performance under this
agreement, and any determination by Stryker not to proceed or perform, or any material adverse event that affects Stryker's ability or desire to perform may have a material adverse effect on our
business.
We
may also enter into additional third-party agreements in the future. If we fail to maintain our existing or any future relationships for any reason, we would need to undertake on our
own and at our own expense, or find other third parties, to perform the activities we currently anticipate will be performed by third parties. This may substantially increase our cash requirements. We
may not have the capability or financial capacity to undertake these activities on our own, or we may not be able to enter third-party relationships on acceptable terms, or at all. This may limit the
programs we can pursue and result in significant delays in the development, sale and manufacture of our products, and may have a material adverse effect on our business.
We distribute products through distribution arrangements that sometimes involve the consignment of inventory
to third parties, which results in additional risk and uncertainty as to the viability of consigned inventory, inventory accounting and tax consequences.
We have historically distributed our products either ourselves or through qualified third-party distributors. In some situations, we store
consigned inventory on site in freezers at end-use hospital or clinic facilities. We commercialize Grafix and Stravix through the efforts of our own direct distribution and marketing staff, as well as
through a network of specialty distributors for certain target markets. BIO
4
is sometimes commercialized through a consignment arrangement, and our agreement with Stryker and the end
users includes consignment terms, as does our agreement with Arthrex and the end users for Cartiform.
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Inventory
management, revenue recognition, and inventory and receivables accounting are complicated by a consignment arrangement. Because our consigned inventory must be stored at
80° C, it is at risk of thawing, resulting in the total loss of that inventory, which risk of loss is borne by us. From the revenue recognition perspective, no
revenue is recognized upon the placement of inventory into consignment, as we retain title and maintain the inventory on our balance sheet. For these products, revenue is recognized when we receive
appropriate notification that the product has been used in a surgical procedure. The Restatement corrected, among other things, errors in our prior revenue recognition related to various distributor
agreements, including several with consigned inventory. If we are unable to track and maintain proper controls related to consigned inventory, we could experience difficulty in accurately managing and
accounting for these consignment arrangements and any related tax implications.
We
monitor and verify the condition and status of all consigned inventory on at least a quarterly basis at our expense. We have increased the controls related to consigned inventory,
which has increased our operating expenses, and we will likely incur additional expenses in connection with our future planned improvements in our controls related to consigned inventory. In addition,
the FDA's, The American Association of Tissue Banks' and other accrediting agencies' rules, regulations or standards require that we monitor our consigned inventory, and require tracking of human
tissue and inventory as it moves through the supply chain.
Moreover,
should the FDA or any other regulatory authority determine that we are unable for any reason to continue to distribute consigned inventory, either on account of the viability
of that inventory or because of the withdrawal of necessary approvals or other qualifications allowing for the distribution and sale of that inventory, the value of that inventory may have to be
completely written off and our balance sheet adjusted accordingly. The complexity of our inventory management, or the application of rules, regulations and standards to our product inventory, or the
occurrence of any of these negative events, could have an adverse effect on our business, financial condition and results of operations.
We have no control over whether third parties with whom we contract can comply with applicable regulatory
requirements.
Our raw material suppliers, contract manufacturers and distributors, and other third parties that we contract with are subject to many or all of
the risks and uncertainties to which we are subject. Similar to us, they are subject to ongoing, periodic, unannounced inspection by the FDA and corresponding state and foreign agencies or their
designees to ensure strict compliance with applicable regulations and other governmental regulations and corresponding foreign standards.
However, we do not control compliance with these regulations and standards by our suppliers, distributors and other third parties with which we contract. They might not be able to comply with these
regulatory requirements. If they fail to comply with applicable regulations, the FDA or other regulatory authorities could issue orders of retention, recall, destruction or cessation of manufacturing,
or impose sanctions on us, including fines, injunctions, civil penalties, denial of any required marketing approval, delays, suspension or withdrawal of approvals, license revocation, product seizures
or recalls, operating restrictions and criminal prosecutions. Any of these actions could significantly and adversely affect the supply and distribution of our products and could have a material
adverse effect on our business, financial condition and results of operations.
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In addition to costs incurred in product development and management of the reimbursement processes, we will
incur additional operating expenses in connection with the expansion of our business.
We expect to continue to incur significant operating expenses in connection with our planned expansion of our business as we seek
to:
-
-
continue to develop, expand and support our distribution network of third-party distributors and independent sales professionals for the
distribution of Grafix, BIO
4
, Cartiform and other products;
-
-
continue to expand and support our internal sales force and marketing capabilities, through the hiring of sales and marketing professionals and
building an internal sales and marketing organization;
-
-
hire or engage additional manufacturing, quality control, quality assurance and management personnel as necessary to expand our manufacturing
operations;
-
-
expand our manufacturing capacity for our products, all of which must be manufactured in an FDA compliant and validated product manufacturing
facility; and
-
-
expand and protect our intellectual property portfolio for our products.
Our
ability to scale up our production capabilities for larger quantities of these products remains to be proven. Our costs in marketing and distributing these products will also
increase as production increases.
Our future capital needs are uncertain and we may need to raise funds in the future, and such funds may not
be available on acceptable terms or at all, especially if we fail to relist our common stock for trading on NASDAQ.
Continued expansion of our business will be expensive and we may seek funds from public and private stock offerings, borrowings under future
credit facilities or other sources. Our capital requirements will depend on many factors, including:
-
-
the revenues generated by sales of our products;
-
-
the costs associated with expanding our sales and marketing efforts;
-
-
the costs associated with the Restatement and the resolution of related legal proceedings;
-
-
the expenses we incur in manufacturing and managing the supply chain for our products;
-
-
the costs of developing and commercializing new products or technologies;
-
-
the cost of maintaining current products as 361 HCT/Ps or obtaining regulatory approval through the BLA regulatory pathway if any of our
products lose their 361 HCT/P status;
-
-
the number and timing of any acquisitions and other strategic transactions;
-
-
the costs associated with capital expenditures; and
-
-
unanticipated general and administrative expenses.
As
a result of these factors, we may seek to raise capital, and such capital may not be available on favorable terms, or at all, especially if we fail to relist our common stock for
trading on NASDAQ. Furthermore, if we issue equity or debt securities to raise capital, our existing stockholders may experience dilution, and the new equity or debt securities may have rights,
preferences and privileges senior to those of our existing stockholders. In addition, if we raise capital through collaboration, licensing or other similar arrangements, it may be necessary to
relinquish valuable rights to our products, potential products or proprietary technologies, or grant licenses on terms that are not
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favorable
to us. If we cannot raise capital on acceptable terms, we may not be able to develop or enhance our products, execute our business plan, take advantage of future opportunities, or respond to
competitive pressure, changes in our supplier relationships, or unanticipated customer requirements. Any of these events could adversely affect our ability to achieve our development and
commercialization goals, which could have a material adverse effect on our business, financial condition and results of operations.
If our manufacturing and storage facility is damaged or destroyed, our business and prospects would be
negatively affected.
If our manufacturing and storage facility or the equipment in the facility were to be significantly damaged or destroyed, we could suffer a loss
of some or all of the stored product, raw and other materials and work in process.
We
lease 61,203 square feet of space in Columbia, Maryland that houses essentially all of our operations. Currently, we maintain insurance coverage totaling $21.75 million against
damage to our property and equipment, an additional $7.35 million to cover business interruption and extra expenses, including R&D restoration expenses. If we have underestimated our insurance
needs, we will not have sufficient insurance to cover losses above and beyond the limits on our policies.
The use of our products in human subjects may expose us to product liability claims, and we may not be able
to obtain adequate insurance.
We face an inherent risk of product liability claims and only have limited safety data for our products. We derive the raw materials for our
products from human donor sources, the production process is complex and the handling requirements are specific, all of which increase the likelihood of quality failures and subsequent product
liability claims. We may not be able to obtain or maintain product liability insurance on acceptable terms with adequate coverage, or at all. If we are unable to obtain insurance, or if claims against
us substantially exceed our coverage, then our business could be adversely impacted. Whether or not we are ultimately successful in any product liability litigation, such litigation could consume
substantial amounts of our financial and managerial resources and could result in, among other things:
-
-
significant awards against us;
-
-
substantial litigation costs;
-
-
recall of the product;
-
-
injury to our reputation; or
-
-
adverse regulatory action.
Any
of these results could have a material adverse effect on our business, financial condition and results of operations.
We may implement a product recall or voluntary market withdrawal, which could significantly increase our
costs, damage our reputation and disrupt our business.
The manufacturing and marketing of our tissue products involve an inherent risk that our tissue products or processes do not meet applicable
quality standards and requirements. In that event, we may voluntarily implement a recall, report a HCT/P deviation or market withdrawal or may be required to do so by a regulatory authority. A recall
or market withdrawal of one of our products would be costly and would divert management resources. A recall, HCT/P deviation or market withdrawal regarding one of our products, or a similar product
manufactured by another entity, also could impair sales of
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our
products as a result of confusion concerning the scope of the recall or withdrawal, or as a result of the damage to our reputation for quality and safety.
We and our distributor sales representatives must comply with U.S. federal and state fraud and abuse laws,
including anti-kickback and false claims laws and equivalent foreign rules.
We are exposed to the risk that our employees, independent contractors, principal investigators, consultants, vendors or third-party
distributors may engage in fraudulent or other illegal activity. Misconduct by these parties could include, among other infractions or violations, intentional, reckless and/or negligent conduct or
unauthorized activity that violates FDA regulations, manufacturing standards, federal and state healthcare fraud and abuse laws and regulations, laws that require the true, complete and accurate
reporting of financial information or data, other commercial or regulatory laws or requirements and equivalent foreign rules. We have policies and procedures intended to prohibit and deter such
conduct, including a Code of Ethics for Interactions with Healthcare Professionals, a Code of Conduct, and a Whistleblower Policy. However, it is not always possible to identify and deter misconduct
by our employees and third parties. Our precautions to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental
investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations.
There
are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback and false claims laws. These laws are complex, and even minor
irregularities can
potentially give rise to claims that a statute or prohibition has been violated. Our and our distributor's relationships with physicians, other healthcare professionals and hospitals are subject to
scrutiny under these laws. The laws that may affect our ability to operate include:
-
-
the federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying
remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, items or services for which payment
may be made, in whole or in part, under federal healthcare programs, such as the Medicare and Medicaid programs. There can be both criminal and civil penalties for violations;
-
-
the federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be
presented, false or fraudulent claims for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement to induce a false claim payment. There are
also criminal penalties, including imprisonment and criminal fines, for making or presenting a false or fictitious or fraudulent claim to the federal government;
-
-
HIPAA, which created federal criminal laws that prohibit, among other actions, knowingly and willfully executing, or attempting to execute, a
scheme to defraud any healthcare benefit program including private third-party payors;
-
-
the federal Physician Payment Sunshine Act, which requires manufacturers of drugs, biologics and medical supplies for which payment is
available under Medicare, Medicaid or the Children's Health Insurance Program to report annually (with certain exceptions) to CMS information related to payments or other "transfers of value" made to
physicians and teaching hospitals, and requires applicable manufacturers and group purchasing organizations to report annually to CMS ownership and investment interests held by physicians and their
immediate family members and payments or other "transfers of value" to such physician owners;
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-
-
the federal Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions, which generally prohibit companies and their
intermediaries from making improper payments to government officials and/or other persons for the purpose of obtaining or retaining business; and
-
-
analogous state and foreign law equivalents of each of the above federal laws, such as:
-
-
anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial
insurers; or
-
-
state laws that require biologic and drug manufacturers to report information related to payments and other transfers of value to
physicians and other healthcare providers or marketing expenditures, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
Violations
of any of the laws described above or any other governmental regulations are punishable by significant civil, criminal and administrative penalties, damages, fines and
exclusion from government-funded healthcare programs, such as Medicare and Medicaid. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws,
the risks cannot be entirely eliminated. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.
In
the course of conducting our business, we must adequately address quality issues that may arise with our products, as well as defects in third-party components included in our
products. Although we have established internal procedures to minimize risks that may arise from quality issues, we may not be able to eliminate or mitigate occurrences of these issues and associated
liabilities. If the quality of our products does not meet the expectations of physicians or patients, then our brand and reputation could suffer and our business could be adversely impacted.
A significant portion of our revenues and accounts receivable come from government accounts.
We have significant sales to the federal government (whether we are selling our products directly to government accounts or through our current
distributors). Any disruption of our products on the Federal Supply Schedule or a change in the way the federal government purchases products like ours, or the price it is willing to pay for our
products, could materially and adversely affect our business, results of operations and financial condition.
Changes in internal purchasing procedures by the VA may have an adverse effect on our ability to sell our
products to VA hospitals and may have a material adverse effect on our sales and results of operations.
Recently, the VA announced a change in its internal purchasing procedures, which requires internal pre-authorization by a warranted contracting
officer for purchases of certain types of products, including Grafix and Stravix, for greater than $3,500, except for VA-owned inventory or a consignment agreement negotiated by a VA contracting
officer. Pre-authorization delays the purchase of our products. In addition, a pre-authorized product may only be used for the patient for whom authorization was granted. If such product is not used
for the authorized patient, it may not be used for any other patient and the product must be returned. These and other changes in purchasing procedures and policies by the VA could have an adverse
effect on our ability to sell our products to VA hospitals.
The ongoing cost-containment efforts of GPOs and integrated delivery networks ("IDNs") may have a
material adverse effect on our results of operations.
Many customers for our products use GPOs or are members of IDNs in an effort to contain costs. GPOs and IDNs negotiate pricing
arrangements with medical supply manufacturers and distributors, which negotiated prices are made available to a GPO's or IDN's affiliated hospitals and
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other
members. If we are not one of the providers selected by a GPO or IDN, affiliated hospitals and other members may be less likely to purchase our products, and, if the GPO or IDN has
negotiated a
strict compliance contract for another manufacturer's products, we may be precluded from making sales to members of the GPO or IDN for the duration of the contractual arrangement. Our failure
to respond to the cost-containment efforts of GPOs and IDNs may cause us to lose market share to our competitors and could have a material adverse effect on our sales and results of operations.
Significant disruptions of information technology systems or breaches of information security could adversely
affect our business.
We rely to a large extent upon information technology systems to operate our business. We collect, store and transmit large amounts of
confidential information (including, but not limited to, personal information and intellectual property). We also have outsourced significant elements of our operations to third parties, including
vital components of our information technology infrastructure. As a result, many third-party vendors may or could have access to our confidential information. The size and complexity of our
information technology and information security systems, and those of our third-party vendors (and the large amounts of confidential information that is present on them), make such systems potentially
vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees or vendors, or from malicious attacks by third parties. Such attacks are of
ever-increasing levels of sophistication and are made by groups and individuals with a wide range of motives (including, but not limited to, industrial espionage and market manipulation) and
expertise. Our efforts to prevent service interruptions or security breaches may not be sufficient. Any interruption or breach in our systems could result in the loss of critical or sensitive
confidential information or intellectual property, allow third parties to gain material, inside information that they could use to trade our securities, and could result in financial, legal, business,
operational and reputational harm to us.
We may expand our business through acquisitions, licenses, investments and other commercial arrangements in
other companies or technologies, which contain significant risks.
We periodically evaluate strategic opportunities to acquire companies, divisions, technologies, products and rights through licenses,
distribution agreements, investments or outright acquisitions to grow our business. In connection with one or more of those transactions, we may:
-
-
issue additional equity securities that would dilute our stockholders' value;
-
-
use cash that we may need in the future to operate our business;
-
-
incur debt that could have terms unfavorable to us or that we might be unable to repay;
-
-
structure the transaction in a manner that has unfavorable tax consequences, such as a stock purchase that does not permit a step-up in the tax
basis for the assets acquired;
-
-
be unable to realize the anticipated benefits, such as increased revenues, cost savings or synergies from additional sales;
-
-
be unable to secure the services of key employees related to the acquisition; and
-
-
be unable to succeed in the marketplace with the acquisition.
Any
of these items could materially and adversely affect our revenues, financial condition and profitability. Business acquisitions also involve the risk of unknown liabilities
associated with the acquired business, which could be material. Incurring unknown liabilities or the failure to realize the anticipated benefits of an acquisition could materially and adversely affect
our business if we are unable to recover our initial investment. Inability to recover our investment, or any write off of such
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investment,
associated goodwill or assets, could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Regulatory Approval and Other Government Regulations
Should the FDA determine that any of our current products do not meet regulatory requirements that permit
qualifying human cells, tissues and cellular and tissue-based products to be manufactured, stored, labeled and distributed without pre-marketing approval, we may be required to stop manufacturing and
distributing such products.
The FDA has developed a tiered, risk-based regulatory framework for human cells, tissues and cellular and tissue-based products, or so-called
361 HCT/Ps (meaning that they comply with section 361 of the Public Health Service Act and with 21 CFR Part 1271). The framework includes criteria for facility management, quality
assurance, donor selection and manufacture of 361 HCT/Ps. We believe that commercial sale of Grafix, Stravix, BIO
4
and Cartiform meets the regulatory definition of 361 HCT/P products and
as a result do not require the FDA's pre-marketing approval. Specifically, we believe all of our current products:
-
-
are minimally manipulated;
-
-
are intended for homologous use only, as reflected in our labeling, advertising, and all other indications of our objective intent
(
e.g.,
that Grafix be used only as a wound cover, that Stravix be used only as a surgical cover, that BIO
4
be used only for
augmentation of bone defects, and that Cartiform be used only as an osteochondral allograft);
-
-
are not combined with another article except for water, crystalloids, or a sterilizing, preserving or storage agent in a manner that raises no
new clinical safety concerns; and
-
-
do not have a systemic effect and are not dependent on the metabolic activity of living cells for their primary function.
These
criteria form the framework governing our advertising and promotional activities. If we advertise or promote any product in a manner that conveys an intent that it be used for
non-homologous uses, that suggests that the product's primary function depends on systemic effects or the metabolic activity of living cells, or that indicates that our manufacturing process
manipulates the product more than minimally by altering the original relevant characteristics of the tissue relating to its utility for reconstruction, repair, or replacement, we will risk causing our
products to no longer qualify as 361 HCT/Ps.
On
September 26, 2013, we received the Untitled Letter from the FDA. The agency uses untitled letters to communicate violations that the FDA does not consider of regulatory
significance sufficient to lead to an enforcement action. The Untitled Letter stated that Grafix and Ovation did not meet the definition of a 361 HCT/P. Among the grounds for the FDA's position were
our marketing claims, including wound healing claims for Grafix. Specifically, the Untitled Letter indicated that Grafix did not meet the requirements because it is dependent upon the metabolic
activity of living cells for its primary function and is not intended for autologous use or allogeneic use in a first or second degree relative. On September 30, 2013, we provided clarifying
information to the FDA addressing these concerns. Specifically, we communicated that while Grafix does retain the natural cell population, it is not enriched or expanded in any way; instead, the
tissue is preserved so that it closely resembles the source tissue in its native state in accordance with the FDA's definition of minimal manipulation.
In
order to make our marketing claims for Grafix clearer, we committed to the FDA to update our labeling and marketing materials for Grafix to that of a wound cover. By October 2014, we
completed all commitments made to the FDA, including the discontinuance of Ovation. In April 2016, the FDA performed a routine inspection of us, which included follow-up on the actions taken to
address the
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Untitled
Letter. In May 2016, we received an FDA Establishment Inspection Report which stated that there were no observations, findings, warnings or untitled letters for either the routine inspection
or the Untitled Letter follow-up.
In
March 2017, we completed the development of Prestige Lyotechnology as an alternative to cryopreservation, which previously had been the only method available for long-term
preservation of living cells and tissues, and which we are using to process our current products. We designed our new technology to preserve living cells within tissues while stored at room
temperatures. We intend to use Prestige Lyotechnology in developing placental products. We believe that any products based on our new technology will also comply with the above requirements for 361
HCT/Ps.
We
engage in ongoing communication with FDA representatives regarding the applicable regulatory requirements and pathways for our products and product candidates. Determining whether a
product complies with these regulatory requirements and pathways is complex and dependent upon numerous factors and subject to varying interpretations and conclusions. In November 2017, the FDA
finalized its Guidance Document entitled "Regulatory Considerations for Human Cell, Tissues, and Cellular Tissue-Based Products: Minimal Manipulation and Homologous Use." This document provides the
FDA's current guidance on 361 HCT/Ps. Specifically, it clarifies the FDA's definitions of minimal manipulation and homologous use. The FDA has given affected companies until November 2020 to determine
if they meet the requirements and, if not, to file an IND.
We
believe all of our current products (Grafix, Stravix, BIO
4
and Cartiform), as well as our products being developed using our Prestige Lyotechnology, meet, or will meet,
the FDA's current interpretations. However, the FDA may not agree with our views on these matters. Should the FDA decide that our current and future products do not meet the regulatory definition of
361 HCT/Ps, we will not be able to produce and distribute these products unless and until we submit a BLA and obtain pre-marketing approval from the FDA, which would require clinical trials and could
take years to obtain, at significant expense. This or any other determination by the FDA that adversely affects our ability to produce or to market any of our products or product candidates would have
a material adverse effect on our business, financial condition and results of operations.
Our business is subject to an inherently uncertain and evolving area of regulation.
The regulatory framework that the FDA has developed for 361 HCT/Ps is inherently uncertain and the FDA's regulation of 361 HCT/Ps is evolving.
The FDA may alter or recalibrate its regulatory interpretations and enforcement activities, including in the event a competitor
obtains pre-marketing approval for a product similar to any of our products. Further, the FDA could require that our products, which lack pre-marketing approval by the FDA, be taken off the market.
In
addition, while the FDA's advertising and promotional labeling regulations do not apply to 361 HCT/Ps, the agency could become more exacting with regard to acceptable advertising and
promotional activities for 361 HCT/Ps. Specifically, under FDA regulations, a manufacturer may not promote a 361 HCT/P in a manner that communicates an objective intent of the manufacturer for the
HCT/P to be used for non-homologous uses. In addition, a manufacturer risks undermining its product's 361 status if it describes its product in a way that suggests that the product does not otherwise
meet the criteria for qualifying as a 361 HCT/P, such as by emphasizing the metabolic activity of live cells in the product. Because various government agencies that regulate HCT/Ps, such as the FDA
and CMS, employ different terms to describe HCT/Ps and apply different criteria to its decisions, a risk exists that our sales representatives and other employees may use terms applicable to one
regulatory regime that are detrimental in another regulatory regime. An example would be that describing an HCT/P as treating a wound for purposes of justifying reimbursement could be interpreted by
the FDA as implying that the manufacturer intends the product to be used for non-homologous wound healing.
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If the FDA determines that any of our current products are not 361 HCT/Ps, or that any of our future products
are not 361 HCT/Ps, we will be required to seek and obtain pre-marketing regulatory approval.
If the FDA determines that one or more of our current products do not meet the criteria for 361 HCT/Ps, we will need to pursue pre-marketing
approval applicable to biologics in the United States, which is also referred to as licensure. We are currently considering product candidates that require licensure from the FDA. In the United
States, a company must complete rigorous preclinical testing and extensive clinical trials that demonstrate the safety, purity and potency of a biological product in order to apply for licensure to
market the product. The steps generally required by the FDA include:
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performance of preclinical (animal and laboratory) tests, in accordance with the FDA's cGLP regulations and other applicable requirements;
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submissions to the FDA of an IND, which must become effective before clinical trials may commence;
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approval by an independent IRB of each clinical site before a clinical trial is initiated;
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performance of adequate and well-controlled clinical trials according to the FDA's cGCP regulations, and any additional requirements for the
protection of human research subjects and their health information to establish the safety, purity and potency of the investigational biological product in the intended target population for its
intended use:
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establishment and validation of a consistent and reproducible manufacturing process intended for commercial use, including the collection of
appropriate manufacturing data;
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preparation and submission to the FDA of a BLA for marketing approval that includes substantial evidence of safety, purity and potency from
results of nonclinical testing and clinical trials;
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satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the biological product candidate is produced to
assess compliance with cGMPs and to assure that the facilities, methods and controls are adequate to preserve the biological product candidate's identity, safety, strength, quality, potency and
purity;
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potential FDA inspection of the nonclinical and clinical trial sites that generated the data in support of the BLA; and
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FDA review and approval of the BLA before any commercial sale or shipment of the product can begin again.
The
processes are expensive and can take many years to complete. If we are required to obtain pre-marketing approval from the FDA for any of our existing or future products, we may not
be able to demonstrate the safety, purity and potency of our products to the satisfaction of regulatory authorities. The start of clinical trials can be delayed or take longer than anticipated for
many and varied reasons, many of which are out of our control. Safety concerns may emerge that could lengthen the ongoing clinical trials or require additional clinical trials to be conducted.
Promising results in early clinical trials may not be replicated in subsequent clinical trials. Regulatory authorities may also require additional testing, and we may be required to demonstrate that
our products represent an improved form of treatment over existing therapies, which we may be unable to do without conducting further clinical trials. Moreover, if the FDA grants regulatory approval
of a product, the approval may be limited to specific indications or limited with respect to its distribution. Expanded or additional indications for approved products may not be approved, which could
limit our revenue opportunities.
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Our business is subject to continuing regulatory compliance by the FDA and other authorities, which is costly
and our failure to comply could result in negative effects on our business.
As discussed above, the FDA has specific regulations governing our tissue-based products, or HCT/Ps. The FDA's regulation of HCT/Ps includes
requirements for registration and listing of products, donor screening and testing, manufacture and distribution, labeling, record keeping and adverse-reaction reporting, and inspection and
enforcement. The FDA has broad regulatory and enforcement powers.
If
we fail to comply with the FDA regulations regarding our tissue-based products, the FDA could take enforcement action, including, without limitation, any of the following sanctions
that may be relevant to our current or future business operations, and the manufacture of our products or processing of our tissue could be delayed or
terminated:
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untitled letters and warning letters;
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orders of retention, recall, destruction and cessation of manufacturing;
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product seizures, injunctions and civil penalties;
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operating restrictions;
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refusing applications for licensure of new products;
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suspending current applications for licensure, or revoking or suspending licenses already granted;
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refusal to allow the importation of our products or raw materials; and
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criminal prosecution.
It
is likely that the FDA's regulation of HCT/Ps will continue to evolve in the future. Complying with any such new regulatory requirements may entail significant time delays and
expense, which could have a material adverse effect on our business, financial condition and results of operation.
In addition to FDA regulations, we are subject to other laws, rules, regulations and standards regarding the
use of human tissue.
We are registered with the FDA as a tissue bank. In addition, some states have their own tissue banking regulations. We are licensed as a tissue
bank in Maryland, California, New York and Florida. If we fail to comply with any of the requirements for licensure as a tissue bank, we will not be able to operate as a tissue bank and collect and
store donor tissue. The loss of this licensure could adversely impact the quantity of human tissue available to us and our ability to process our products, which could have a material adverse effect
on our business, financial condition and results of operations.
In
addition, procurement of certain human organs and tissues for transplantation is subject to the restrictions of NOTA, which prohibits the transfer of certain human organs, including
skin and related tissue, for valuable consideration, but permits reasonable payment associated with the removal, transportation, implantation, processing, preservation, quality control and storage of
human tissue and skin. We reimburse tissue banks, hospitals and physicians for their services associated with the recovery, storage and transportation of donated human tissue. If we were to be found
to have violated NOTA's prohibition on the sale or transfer of human tissue for valuable consideration, we would potentially be subject to criminal enforcement sanctions, which could materially and
adversely affect our business, financial condition and results of operations.
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Our business involves the use of hazardous materials that could expose us to environmental and other
liability.
We have facilities in Maryland that are subject to various local, state and federal laws and regulations relating to safe working conditions,
laboratory and manufacturing practices, and the use and disposal of hazardous or potentially hazardous substances, including chemicals, micro-organisms and various radioactive compounds used in
connection with our R&D and manufacturing activities. These laws include the Occupational Safety and Health Act, the Toxic Test Substances Control Act and the Resource Conservation and Recovery Act.
We cannot assure you that accidental contamination or injury to our employees and third parties from hazardous materials will not occur. We do not have insurance to cover claims arising from our use
and disposal of these hazardous substances other than limited clean-up expense coverage for environmental contamination due to an otherwise insured peril, such as fire.
Federal and state laws that protect the privacy and security of personal information may increase our costs
and limit our ability to collect and use that information and subject us to liability if we are unable to fully comply with such laws.
Numerous federal and state laws, rules and regulations govern the collection, dissemination, use, security and confidentiality of personal
information, including individually identifiable health information. These laws include:
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Provisions of HIPAA that limit how covered entities and business associates may use and disclose PHI, provide certain rights to individuals
with respect to that information and impose certain security requirements;
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HITECH, which strengthens and expands the HIPAA Privacy Rule and Security Rules and imposes data breach notification obligations;
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Other federal and state laws restricting the use and protecting the privacy and security of personal information, including health information,
many of which are not preempted by HIPAA;
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Federal and state consumer protection laws; and
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Federal and state laws regulating the conduct of research with human subjects.
As
part of our business operations, including our medical record keeping, third-party billing and reimbursement and R&D activities, we collect and maintain PHI in paper and electronic
format.
Standards related to health information, whether implemented pursuant to HIPAA, HITECH, state laws, federal or state action or otherwise, could have a significant effect on the manner in which we
handle personal information, including healthcare-related data, and communicate with payors, providers, patients, donors and others, and compliance with these standards could impose significant costs
on us or limit our ability to offer services, thereby negatively impacting the business opportunities available to us.
If
we are alleged to not comply with existing or new laws, rules and regulations related to personal information we could be subject to litigation and to sanctions that include monetary
fines, civil or administrative penalties, civil damage awards or criminal penalties.
We face significant uncertainty in the industry due to government healthcare reform.
There have been and continue to be proposals by the federal government, state governments, regulators and third-party payors to control
healthcare costs, and generally, to reform the healthcare system in the United States. With the Trump Administration and the 115th Congress, there have been certain regulatory and legislative
changes to the Patient Protection and Affordable Care Act (the
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"Affordable
Care Act"). For example, the Tax Cuts and Jobs Act enacted on December 22, 2017, eliminated the shared responsibility payment for individuals who fail to maintain minimum essential
coverage under section 5000A of the Internal Revenue Code of 1986, commonly referred to as the individual mandate, beginning in 2019. Additional legislative changes to and regulatory changes
under the Affordable Care Act remain possible. However, it remains unclear how any new regulations or legislation might affect the prices we may obtain for any of our products. Any reduction in
reimbursement from Medicare and other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms
may harm our business and prevent us from being able to attain and maintain profitability. We also cannot predict what further reform proposals, if any, will be adopted, when they will be adopted, or
what impact they may have on us.
Risks Related to Intellectual Property
Given our limited patent position in regard to our products, if we are unable to protect the confidentiality
of our proprietary information and know-how related to these products, our competitive position would be impaired and our business, financial condition and results of operations could be adversely
affected.
Our success depends, in part, on our ability to obtain patents, maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. Our policy is to file patent applications to protect technology, inventions and improvements that we consider important to our business and operations. We hold an
ownership interest in a number of pending and issued patents in the United States and foreign countries with respect to our products and technologies.
We
have pending patent applications in the United States Patent and Trademark Office, the European Patent Office, and the patent offices of other foreign jurisdictions, and it is
possible that we will need to defend patents from challenges by others from time to time in the future. Certain of our U.S. patents may also be challenged by parties who file a request for
post-grant review or inter partes reexamination under the America Invents Act of 2011 or ex parte reexamination. Post-grant proceedings are increasingly common in the United States and are costly to
defend. Our patent rights may not provide us with a proprietary position or competitive advantages against competitors. Furthermore, even if the outcome is favorable to us, the enforcement of our
intellectual property rights can be extremely expensive and time consuming.
A
significant amount of our technology, including our information regarding the manufacturing process for our products, is patent pending, unpatented or is maintained by us as trade
secrets or confidential know-how. In an effort to protect this proprietary information, we require our employees, consultants, service providers, advisors and other third parties to execute
confidentiality agreements upon the commencement of their relationships with us. These agreements require that all confidential information developed by the individual or entity or made known to the
individual or entity by us during the individual's or entity's relationship with us be kept confidential and not disclosed to third parties without prior written consent by us. These agreements,
however, may not provide us with adequate protection against improper use or disclosure of trade secrets or confidential information, and these agreements may be breached. For example, a portion of
the manufacturing methodology and know-how for Grafix is protected by trade secret or through confidentiality arrangements. A breach of confidentiality could affect our competitive position. Also,
others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or know-how.
Adequate
remedies may not exist in the event of unauthorized use or disclosure of our confidential information. The disclosure of our trade secrets or know-how could impair our
competitive position and could have a material adverse effect on our business, financial condition and results of operations.
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If our patent position does not adequately protect our products, others could compete against us more
directly, which would harm our business and have a material adverse effect on our business, financial condition and results of operations.
Patent law relating to the patentability and scope of claims in the biotechnology field is evolving and our patent rights are subject to this
additional uncertainty. The degree of patent protection that will be afforded to our products in the United States and other important commercial markets is uncertain and is dependent upon the scope
of protection decided upon by the patent offices, courts and governments in these countries. There is no certainty that our existing patents or others, if obtained, will provide us protection from
competition or provide commercial benefit. Others may independently develop similar products or processes to those developed by us, duplicate any of our products or processes or, if patents are issued
to us, design around any products and processes covered by our patents. We expect to, when appropriate, file product and process applications with respect to our inventions. However, we may not file
any such applications or, if filed, the patents may not be issued. Patents issued to or licensed by us may be infringed by the products or processes of others.
Because
of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any
related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantages of the patent. A portion of our technology, including certain know-how
regarding the production processes for our products, is unpatented and is maintained by us as trade secrets. The lack of patent protection for our products reduces the barrier for entry by others and
makes these products susceptible to increased competition, which could be harmful to our business.
If we infringe or are alleged to infringe intellectual property rights of third parties, it will adversely
affect our business, financial condition and results of operations.
Our research, development and commercialization activities, and the manufacture or distribution of our products, may infringe or be alleged to
infringe patents owned by third parties and to which we do not hold licenses or other rights. There may be patent applications that have been filed but not published that, when issued, could be
asserted against us. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages.
Further, if a patent infringement suit were brought against us, we could be enjoined from certain activities including a stop or delay in research, development, manufacturing or sales activities
related to the product or technology that is the subject of the suit.
As
a result of patent infringement claims, or in order to avoid potential claims, we may choose or be required to seek a license from the third party. These licenses may not be available
on acceptable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be
nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some
aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms.
The
cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such
litigation or proceedings more effectively than we can because of their greater financial resources. Patent litigation and other proceedings may also absorb significant management time. Uncertainties
resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace and, as a result, on our
business, financial condition and results of operations.
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We may become involved in lawsuits or administrative proceedings to protect or enforce our patents or the
patents of our service providers or licensors, which could be expensive and time consuming.
Litigation may be necessary to enforce patents issued or licensed to us, to protect trade secrets or know-how, or to determine the scope and
validity of proprietary rights. Litigation, post-grant review, reexamination, opposition or interference proceedings could result in substantial additional costs and diversion of management focus. If
we are ultimately unable to protect our technology, trade secrets or know-how, we may be unable to operate profitably.
Competitors
may infringe our patents or the patents of our service providers or licensors. As a result, we may be required to file infringement claims to protect our proprietary rights.
This can be expensive, particularly for a company of our size, and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is invalid or is unenforceable,
or may refuse to enjoin the other party from using the technology at issue. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being
invalidated or interpreted narrowly. Interference proceedings brought by the United States Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our
patent applications or those of our service providers or licensors. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction to our
management. We may not be able, alone or with our service providers and licensors, to prevent misappropriation of our proprietary rights.
Furthermore,
though we would seek protective orders where appropriate, because of the substantial amount of discovery required in connection with intellectual property litigation, there
is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during this kind of litigation, there could be public announcements
of the results of hearings, motions or other interim proceedings or developments. If investors perceive these results to be negative, the market price for our common stock could be significantly
harmed.
The prosecution and enforcement of patents licensed to us by third parties are not within our control, and
without these technologies, our products may not be successful and our business would be harmed if the patents were infringed or misappropriated.
We have obtained licenses from third parties for patents and patent application rights, allowing us to use intellectual property rights owned by
or licensed to these third parties. We do not control the maintenance, prosecution, enforcement or strategy for many of these patents or patent application rights and as such are dependent in part on
the owners of the intellectual property rights to maintain their viability. Their failure to do so could significantly impair our ability to exploit these technologies.
Risks Related to Our Common Stock
Our common stock has been delisted from trading on NASDAQ, which we expect to continue to have a material
effect on us and our stockholders.
As a result of the Restatement, we are delinquent in the filing of our Annual Reports on Form 10-K for the years ended
December 31, 2015 and December 31, 2016, and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016, June 30, 2016, September 30, 2016,
March 31, 2017, June 30, 2017 and September 30, 2017. NASDAQ formally delisted our common stock on April 28, 2017 as a result of our failure to timely file our SEC reports.
There can be no assurance whether or when our common stock will again be listed for trading on NASDAQ or any other national securities exchange. Further, the market price of our shares might decline
and become more volatile, and our stockholders may find that their ability to trade in our stock is limited. Furthermore, institutions whose charters do not allow them to hold securities in unlisted
companies might sell our shares, which could have a further adverse effect on the price of our stock.
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The trading price of the shares of our common stock is highly volatile, and purchasers of our common stock
could incur substantial losses.
Our stock price is volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme
volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the
price they paid for it. The market price for our common stock may be influenced by many factors, including:
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reduced access to a trading market for our common stock as a result of our delisting from NASDAQ;
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loss of investor confidence in us due to the Restatement;
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the recent changes in our senior management team and departures of other key personnel;
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the outcome of the existing lawsuits against us and the announcement of any future litigation matters, if any;
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the marketing and distribution of new products by our competitors;
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regulatory developments in the United States, generally or specific to us and our products;
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changes in the structure of healthcare payment systems;
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expiration or termination of our significant relationships with third parties;
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market conditions in the pharmaceutical and biotechnology sectors and issuance of securities analysts' reports or recommendations;
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sales of substantial amounts of our stock by existing stockholders;
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sales of our stock by insiders;
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variations in our financial results or those of companies that are perceived to be similar to us;
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general economic, industry and market conditions;
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announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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commercial, stockholder class action and derivative, intellectual property or product liability litigation against us; and
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the other factors described in this "Risk Factors" section.
There is no significant trading market or price discovery available for our common stock and purchasers of
our common stock may be unable to sell their shares.
Our common stock is currently quoted on the Pink OTC Markets Inc., referred to as the "pink sheets"; however trading to date has been
limited. If activity in the market for shares of our common stock does not increase, purchasers of our shares may find it difficult to sell their shares. The pink sheets are a less recognized market
than the NASDAQ and other stock exchanges and are often characterized by low trading volume and significant price fluctuations. These and other factors may further impair our stockholders' ability to
sell their shares when they want to and/or could depress our stock price. As a result, stockholders may find it difficult to dispose of their shares or obtain accurate quotations of the price of our
securities because smaller quantities of shares could be bought and sold, transactions could be delayed, and security analyst and news coverage of our Company may be limited. These factors could
result in lower prices and larger spreads in the bid and ask prices for our shares of common stock.
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We do not intend to pay cash dividends.
We currently do not intend to pay cash dividends for the foreseeable future. We currently intend to retain earnings, if any, to finance our
operations and growth. As a result, capital appreciation, if any, of our common stock will be an investor's only source of potential gain from our common stock for the foreseeable future.
Certain provisions of Maryland law and of our charter and bylaws contain provisions that could delay and
discourage takeover attempts and any attempts to replace our current directors by stockholders.
Certain provisions of Maryland General Corporation Law ("MGCL") and of our Maryland charter and Maryland bylaws contain
provisions that may make it more difficult to or prevent a third party from acquiring control of us or changing our Board and management. These include, but are not limited to, the
following:
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authorization of the board of directors to issue shares of preferred stock generally without stockholder approval;
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requirements that special meetings of stockholders may only be called by stockholders, upon request of stockholders holding at least 20% of the
capital stock issued and outstanding; and
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requirements that our stockholders comply with advance notice procedures in order to nominate candidates for election to our Board or to place
stockholders' proposals on the agenda for consideration at stockholder meetings.
Maryland
law also prohibits "business combinations" between us and an interested stockholder or an affiliate of an interested stockholder for five years after the most recent date on
which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in certain circumstances specified in the statute,
an asset transfer or issuance or reclassification of equity securities. Maryland law defines an interested stockholder as any person who beneficially owns 10% or more of the voting power of the
corporation's stock, or an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting
power of the corporation's then-outstanding voting stock. A person is not an interested stockholder if the board of directors of the corporation approved in advance the transaction by which the person
otherwise would have become an interested stockholder. However, such approval may be conditional.
After
the five-year prohibition, any business combination between the corporation and an interested stockholder or an affiliate of an interested stockholder generally must be recommended
by the board of directors and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of the then-outstanding shares of voting stock, and two-thirds of the votes
entitled to be cast by holders of the voting stock other than stock held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or stock held by an
affiliate or associate of the interested stockholder. These super-majority vote requirements do not apply if the holders of the common stock receive a minimum price, as defined under Maryland law, for
their stock in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its stock.
The
statute permits various exemptions from its provisions, including business combinations that are approved or exempted by the board of directors before the time that the interested
stockholder
becomes an interested stockholder. Our Board has not exempted us from the business combination statute. Consequently, unless the Board adopts an exemption from this statute in the future, the statute
will be applicable and may affect business combinations between us and other persons. The statute may discourage others from trying to acquire control of us or increase the difficulty of consummating
any such acquisition.
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Subtitle 8 of Title 3 of the MGCL ("Subtitle 8") permits a Maryland corporation with a class of equity securities registered under the Exchange Act, and with at
least three independent directors to elect to be subject to any or all of five provisions:
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a classified board;
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a two-thirds vote requirement to remove a director;
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a requirement that the number of directors be fixed only by the vote of the directors;
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a requirement that a vacancy on the board be filled only by the remaining directors and for the remainder of the full term of the directorship
in which the vacancy occurred; and
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a majority requirement for the calling of a special meeting of stockholders.
An
eligible Maryland corporation like us can elect into this statute by provision in its charter or bylaws or by a resolution of its board of directors, without stockholder approval.
Furthermore, we can elect to be subject to the above provisions regardless of any contrary provisions in the charter or bylaws. Pursuant to Subtitle 8, we have elected to provide that vacancies on our
Board may be filled only by the remaining directors and for the remainder of the full term of the class of directors in which the vacancy occurred.
Concentration of ownership of our common stock among our existing executive officers, directors and principal
stockholders may prevent others from influencing significant corporate decisions, and provisions in our charter allowing for a stockholder vote by consent in lieu of a meeting may make it easier for
stockholders holding a majority of our common stock to take action.
Our executive officers, directors and beneficial owners of 5% or more of our common stock and their affiliates, in aggregate, beneficially own
approximately 52.3% of our outstanding common stock as of March 28, 2018. Included among this 52.3%, Peter Friedli, the Chairman of the Board, and certain entities with which he is affiliated,
beneficially own approximately 42.9% of our outstanding common stock as of March 28, 2018. These persons, acting together, will be able to significantly influence all matters requiring
stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The interests of this group of stockholders may not coincide with our
interests or the interests of other stockholders.
Moreover,
as permitted by the MGCL, our charter provides that the holders of common stock entitled to vote generally in the election of directors may take action or consent to any action
by delivering a consent in writing or by electronic transmission of the stockholders entitled to cast not less than the minimum number of votes (which is generally either a majority of votes cast or a
majority of votes
entitled to be cast) that would be necessary to authorize or take the action at a stockholders meeting if the corporation gives notice of the action not later than ten (10) days after the
effective date of the action to each holder of the class of common stock and to each stockholder who, if the action had been taken at a meeting, would have been entitled to notice of the meeting.
Accordingly,
these persons acting together, and Mr. Friedli specifically, currently has, and will continue to have, a significant influence over the outcome of all corporate
actions requiring stockholder approval, including any actions that may be taken by stockholder consent in lieu of a meeting.
Risks Related to the Restatement of Financial Statements and Failure to File SEC Reports
We have restated our prior financial statements, which may lead to additional risks and uncertainties,
including loss of investor confidence and negative impacts on our stock price.
As discussed in the 2014 Form 10-K/A, we have restated our audited financial statements for the year ended December 31, 2014, and
as discussed in Note 15 to our financial statements included in
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Part II,
Item 8 of this Form 10-K, our unaudited interim financial statements for the periods ended March 31, 2015, June 30, 2015 and September 30, 2015. We
have filed this Form 10-K to, among other things, reflect the restatement of our 2015 interim financial statements.
As
a result of the Restatement, we have become subject to a number of additional costs and risks, including costs for accounting and legal fees in connection with or related to the
Restatement and the remediation of our material weaknesses in internal control over financial reporting. In addition, the attention of our management team has been diverted by these efforts. We are
subject to stockholder and other actions in connection with the Restatement and related matters. In addition, the Restatement and related matters could impair our reputation or could cause our
counterparties to lose confidence in
us. Each of these occurrences could have a material adverse effect on our business, financial condition, results of operations and stock price.
Our management has identified material weaknesses in the Company's internal control over financial reporting
which could, if not remediated, result in additional material misstatements in our consolidated financial statements. We may be unable to develop, implement and maintain appropriate controls in future
periods.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, and the Sarbanes-Oxley Act of
2002 and SEC rules require that our management report annually on the effectiveness of the Company's internal control over financial reporting. Among other things, our management must conduct an
assessment of the Company's internal control over financial reporting to allow management to report on, and our independent registered public accounting firm to audit, the effectiveness of the
Company's internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. As disclosed in Part II, Item 9A, "Controls and Procedures" of this
Form 10-K, our management, with the participation of our current Interim Chief Executive Officer and our current Chief Financial Officer, has determined that we had material weaknesses in the
Company's internal control over financial reporting as of December 31, 2017. Some of these material weaknesses contributed to the material misstatements in our previously filed annual audited
and interim unaudited consolidated financial statements, which were restated as part of the Restatement.
A
"material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. We are actively engaged in developing and implementing a remediation plan
designed to address such material weaknesses. However, additional material weaknesses in the Company's internal control over financial reporting may be identified in the future. Any failure to
implement or maintain required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, or could result in material
misstatements in our consolidated financial statements. These misstatements could result in a further restatement of our consolidated financial statements, cause us to fail to meet our reporting
obligations, reduce our ability to obtain financing or cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.
Although
we are working to remedy the ineffectiveness of the Company's internal control over financial reporting, there can be no assurance as to when the remediation plan will be fully
developed and implemented. Until our remediation plan is fully implemented, our management will continue to devote significant time, attention and financial resources to these efforts. If we do not
complete our remediation in a timely fashion, or at all, or if our remediation plan is inadequate, there will continue to be an increased risk that we will be unable to timely file future periodic
reports with the SEC and that our future consolidated financial statements could contain errors that will be undetected. Further and continued determinations that there are material weaknesses in the
effectiveness of the Company's
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control over financial reporting could also reduce our ability to obtain financing or could increase the cost of any financing we obtain and require additional expenditures of both money and
our management's time to comply with applicable requirements. For more information relating to the Company's internal control over financial reporting, the material weaknesses that existed as of
December 31, 2017 and the remediation activities undertaken by us, see Part II, Item 9A, "Controls and Procedures" of this Form 10-K.
We and certain of our former executive officers and current and former directors have been named as
defendants in litigation actions that could result in substantial costs and divert management's attention.
We are currently party to legal and other proceedings which are described under Part II, Item 3, "Legal Proceedings," of this
Form 10-K. We, and certain of our former executive officers and current and former directors, have been named as defendants in a purported class action lawsuit that allege, among other things,
that the defendants made materially false or misleading statements and material omissions in the Company's SEC filings in violations of federal securities laws. Further, stockholder derivative
complaints have been filed in Maryland state and federal court against individual members of the Company's Board and certain former executive officers alleging, among other things, that the defendants
(i) violated their fiduciary duties to the Company's stockholders; (ii) abused their ability to control and influence the Company; (iii) engaged in gross mismanagement of the
assets and business of the Company and (iv) were unjustly enriched at the expense of, and to the detriment of, the Company. The resolution of these matters may result in significant damages,
costs, and expenses, which could have a material adverse impact on our business, financial condition and results of operations.
In
addition, we could face suspension or disbarment from contracting with the VA and other government agencies as a result of the legal and other proceedings which are described under
Part II, Item 3, "Legal Proceedings," of this Form 10-K.
Our failure to timely file certain periodic reports with the SEC poses significant risks to our business,
each of which could materially and adversely affect our financial condition and results of operations.
We failed to file our Annual Reports on Form 10-K for the years ended December 31, 2015 and December 31, 2016 and our
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016, June 30, 2016, September 30, 2016, March 31, 2017, June 30, 2017 and
September 30, 2017. Consequently, we were not compliant with the periodic reporting requirements under the Exchange Act. We are filing this comprehensive Form 10-K as part of our effort
to become current in our filing obligations under the Exchange Act. Our failure to file those and possibly future periodic reports with the SEC could subject us to enforcement action by the SEC. Any
of these events could materially and adversely affect our financial condition and results of operations and our ability to register with the SEC public offerings of our securities for our benefit or
the benefit of our security holders. We have not amended, and do not intend to amend, our Quarterly Reports on Form 10-Q for the 2015 interim periods. We also do not intend to file separate
Annual Reports on Form 10-K for the years ended December 31, 2015 and December 31, 2016 or Quarterly Reports on Form 10-Q for the 2016 and 2017 interim periods.
Our failure to prepare and timely file our periodic reports with the SEC limits our access to the public
markets to raise debt or equity capital.
We did not file our Annual Reports on Form 10-K for the years ended December 31, 2015 and December 31, 2016 and our
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016, June 30, 2016, September 30, 2016, March 31, 2017, June 30, 2017 and
September 30, 2017 as required by the SEC. Because we have not complied with our reporting requirements with the SEC, we are limited in our ability to access the public markets to raise debt or
equity capital. Our limited ability to access the public markets could prevent us from pursuing transactions or implementing business
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strategies
that we might otherwise believe are beneficial to our business. Even if we regain and maintain compliance with our SEC reporting obligations prospectively, until one year from the date we
regain and maintain status as a current filer, we will be ineligible to use shorter and less costly filing forms, such as Form S-3, to register our securities for sale. We may use
Form S-1 to register a sale of our stock to raise capital or complete acquisitions, but doing so would likely take longer than using a shorter and less costly form, increase transaction costs
and adversely impact our ability to raise capital or complete acquisitions of other companies in a timely manner.