Overview
We are
a medical technology company focused on developing and
commercializing transformative technologies to improve clinical
outcomes and reduce healthcare expenditures in the chronic and
surgical wound and skin care markets. Our portfolio of products and
services will allow us to deliver comprehensive wound and skin care
solutions for patients in all care settings, including acute
(hospitals and long-term acute care hospitals
(“LTACHs”)) and post-acute (wound care clinics,
physician offices, skilled nursing facilities (“SNFs”),
home health, hospice, and retail). Each of our products, services,
and technologies contribute to our overall goal of achieving better
clinical outcomes at a lower overall cost for patients regardless
of where they receive care. We strive to be one of the most
innovative and comprehensive providers of effective wound and skin
care products and technologies and are continually seeking to
expand our offerings for patients requiring wound and skin care
treatments across the entire continuum of care in the United
States.
We
currently market seven products across chronic and surgical wound
care applications and have multiple products in our pipeline. We
license our products from research and development partners Applied
Nutritionals, LLC (“AN”) (through a sublicense with CGI
Cellerate RX, LLC (“CGI Cellerate RX”), an affiliate of
The Catalyst Group, Inc. (“Catalyst”)) and Rochal
Industries, LLC (“Rochal”) and have the right to
exclusively distribute certain products under development by Cook
Biotech Inc. (“Cook Biotech”). In 2021, we intend to
begin marketing three biologic products for surgical and wound care
applications pursuant to our marketing and distribution agreement
with Cook Biotech.
In June
2020, we formed a subsidiary, United Wound and Skin Solutions LLC
(“UWSS”), to hold certain investments and operations in
wound and skin care virtual consult services. We anticipate that
these various service offerings will allow clinicians/physicians
utilizing our technologies to collect and analyze large amounts of
data on patient conditions and outcomes that will improve treatment
protocols and ultimately lead to more evidence-based formulary to
improve patient outcomes. We intend to launch our initial virtual
consult service offerings in 2021. Through a combination of our
UWSS services and our Sanara products, we believe we will be able
to offer patient care solutions at every step in the continuum of
wound and skin care from diagnosis through healing.
Market Scale
A study
by a physician at the Department of Surgery for the Indiana
University Health Comprehensive Wound Center found that
approximately 8.2 million patients suffer from surgical and chronic
wounds each year in the United States. Furthermore, according to an
article published by the American
College of Surgeons and Surgical Infection Society, in the
United States, the annual treatment cost projections for all wounds
is approximately $28 billion with the estimated annual cost of
surgical site infections ranging from $3.5 billion to $10 billion.
The U.S. teledermatology market alone is estimated to grow from $5
billion in 2019 to $45 billion by 2027 according to a research
report by Fortune Business Insights. In addition to our surgical
wound and chronic wound divisions, the Company is planning to
launch virtual consult services through UWSS for both virtual wound
and virtual skin (dermatology) consultations.
Summary of our Product & Service Offerings and Development
Programs
We are
committed to developing and commercializing innovative products
that address the challenges physicians face in diagnosing and
treating wound and skin care ailments. The following table sets
forth our product and service portfolio:
Our
surgical wound care products, CellerateRX Surgical Activated
Collagen (Powder and Gel) (collectively, “CellerateRX
Surgical”), are used in a wide range of surgical specialties
to help promote patient healing and reduce the risk of
complications. The product is used in specialties including
cardiothoracic, colorectal, general surgery, hand, head and neck,
high-risk obstetrics and gynecology, Mohs surgery, neurosurgery,
oncology, orthopedic (hip and knee, sports, spine, joint, foot and
ankle, ortho trauma and ortho oncology), plastic/reconstructive,
podiatric, urology, and vascular. Currently, substantially all of
our revenue is derived from the sale of surgical wound care
products. We anticipate that chronic wound care products and UWSS
technology-based services will become meaningful drivers of revenue
in the future.
Our
chronic wound care products, HYCOL Hydrolyzed Collagen (Powder and
Gel) (collectively, “HYCOL”), BIAKŌS Skin and
Wound Cleanser (“BIAKŌS AWC”) and BIAKŌS Skin
and Wound Gel, are used across the post-acute continuum of care,
including home health, hospice, physician offices, podiatrists,
retail, SNFs, and wound care centers. Our chronic wound care
products can be used on stage I-IV pressure ulcers, diabetic foot
ulcers (“DFUs”), venous stasis, arterial, post-surgical
wounds, first- and second-degree burns and donor sites. BIAKŌS
AWC is also available in an irrigation bottle (BIAKŌS
Antimicrobial Skin and Wound Irrigation Solution) that can be used
in conjunction with negative pressure wound therapy installation
and dwell (“NPWTi-d”) and other wound irrigation
needs.
In
addition, we have a robust pipeline of products under development
for both the chronic and surgical wound care and virtual consult
markets. We believe our pipeline efforts will deepen our
comprehensive portfolio of offerings as well as allow us to address
additional clinical applications. Wound care products in our
pipeline include an over-the-counter hand and skin cleanser, an
antimicrobial skin protectant, a debrider product that leverages
the body’s own enzymes and moisture, a new wound bed
preparation device for use with BIAKŌS AWC, next generation
CellerateRX and HYCOL, a novel dressing that delivers oxygen to the
wound bed, and a sterile BIAKŌS product for use in surgical
settings. Additionally, Sanara expects to commercialize three
products with Cook Biotech in the second half of 2021. The first
two, FORTIFY TRG Tissue Repair Graft and FORTIFY FLOWABLE
Extracellular Matrix, are currently 510(k) cleared for use in the
surgical wound care segment, and VIM Amnion Matrix is categorized
by the U.S. Food and Drug Administration (“FDA”) as an
HCT/P, subject to regulation under Section 361 of the Public Health
Service Act (“PHSA”) (for which no premarket approval
or clearance is required).
The
UWSS technology-based services we expect to launch in 2021 include:
an electronic medical record (“EMR”) software platform
for both wound and skin conditions (WounDerm, LLC f/k/a Woundyne
Medical, LLC (“WounDerm”)), skin and wound virtual
consult services (DirectDerm Inc. (“DirectDerm”) and
MGroup Integrated Physician Services, P.A. (“MGroup”)),
and diagnostic products and services for chronic wounds (Precision
Healing Inc. (“Precision Healing”)).
As
detailed below, following the anticipated launch of UWSS’s
service offerings, we expect to be able to provide wound treatment
solutions for patients across the entire acute and post-acute
continuum of care:
Strategy
●
Drive additional market penetration as well as geographic expansion
for our products. We intend to leverage our comprehensive
product and technology-based services portfolio and relationships
with key constituents to deepen our presence in the surgical and
chronic wound and skin care markets. We believe the breadth and
flexibility of the products we offer allow us to address a wide
variety of wound types and sizes and offer significant new
opportunities for sales growth. In addition, we believe that as we
continue to offer new products and technology-based services, our
salesforce’s ability to reach additional customers in new and
existing geographic regions while penetrating further in existing
customer accounts will be enhanced.
●
Expand into new markets for our products and services. In
2020 we made significant investments in virtual consult
technologies and services. The COVID-19 pandemic has dramatically
increased demand for these services with expanded reimbursements
and patients being more comfortable seeing their care provider
virtually. We believe that the virtual consult technologies and
services that we will offer, when combined with our innovative and
highly efficacious products, will offer a differentiated
comprehensive wound and skin care solution for patients and care
givers.
●
Launch new innovative products. We are actively working with
third-party research and development partners to develop additional
proprietary products for the chronic and surgical wound and skin
care markets. We expect these products and services to deepen our
portfolio of technologies to treat chronic wounds as well as
improve surgical site outcomes. We are focused on offering
additional products and services that are more efficacious than
competing products and services and provide a stronger value
proposition (lower total cost to heal and less time to heal leading
to reduced costs to the healthcare system).
●
Capture patients throughout the entire continuum of care. We
intend to continue expanding our platform to aid in treating wound
and skin care patients as they progress through the healing process
in all care settings. As discussed above, in June 2020, we formed a
subsidiary, UWSS, to hold certain investments in technologies and
operations in wound and skin care virtual consult services. We
believe our service offerings will allow us to collect and analyze
large amounts of data on patient conditions and outcomes that will
improve treatment protocols and ultimately lead to more
evidence-based healing formularies to improve outcomes in the
future. We anticipate that this data will also enable us to
participate in the creation of new standards of care that promote
patient compliance and enable direct dialogue between patients,
clinicians and payors, resulting in greater satisfaction for
patients, their caregivers, clinicians and payors.
●
Seek and establish partnerships and product, technology, and/or
services acquisitions. We plan to continue to seek and
establish partnerships in the United States and internationally to
provide innovative products, services, and technologies. We believe
that partnerships will be a key driver of our growth in the future.
We also intend to selectively pursue acquisitions of businesses and
technologies that complement our existing strategy and
footprint.
●
Achieve meaningful operating margin improvement. We expect
to increase our margins through a dual-pronged approach. First, as
we scale the sales of our products, the leverage on salaries and
infrastructure costs (legal, finance, commercial operations support
and rent) as a percentage of revenue should decrease, increasing
our operating margin. Second, we expect to achieve higher gross and
operating margins as our UWSS services are commercialized and reach
sufficient scale.
Competitive Strengths
●
Comprehensive solution for improved wound care outcomes. We
are dedicated to offering a comprehensive portfolio of products and
services to improve wound care treatment outcomes. We are currently
developing the capability to provide telehealth services for the
diagnosis and treatment of wound and skin care patients. Our
product offerings are able to disinfect wounds and accelerate the
body’s healing process for acute and chronic wounds and allow
clinicians to provide a consistent plan of care for a patient from
diagnosis through treatment.
●
Wound care products for all care settings. Our wound care
product portfolio allows clinicians to personalize solutions to
meet the needs of individual wound care patients in all care
settings including acute (hospitals and LTACHs) and post-acute
(wound care clinics, physician offices, SNFs, home health, hospice,
and retail). Our experienced wound care sales force is highly
trained to assist clinicians to effectively deploy the full
complement of our product portfolio to effectively treat
wounds.
●
Innovative pipeline and proven clinical performance. We have
a robust pipeline of chronic and surgical wound and skin care
products that we expect to market in the near term. We believe the
efficacy of our offerings, will be proven via statistically
significant collected and analyzed clinical and health economic
outcomes data, resulting in expanded adoption of our products at a
lower overall cost to payors.
●
Attractive markets for acute and chronic wound care. We
believe the acute and chronic wound care markets will continue to
see accelerated growth given favorable global tailwinds that
include an aging population, increasing costs of health care,
recognition of difficult-to-treat infection threats such as
biofilms, and the increasing prevalence of diabetes and obesity. We
believe there will be growing adoption of our products due to their
clinical efficacy and cost effectiveness for all key constituents
compared to traditional wound care products.
●
Proven executive leadership team with a long-term track record of
value creation. We are led by a dedicated and seasoned
management team with significant industry experience who have
successfully executed our strategic implementation to date by
launching new products and technologies through investment in new
areas of growth. We believe our management has the vision and
experience to implement our future growth strategy.
Market Opportunities for our Products and Technology-Based
Services
In
October 2019, Centers for Medicare & Medicaid Services’
(“CMS”) reimbursement methodology for home health
agencies and SNFs (Patient Driven Group Model and Patient Driven
Payment Model, respectively) created unique opportunities to
provide efficacious wound healing inside of those sites of care in
unprecedented fashion. With those payment models now focused on a
patient’s characteristics (including number of wounds and
skin conditions) rather than the volume of services provided,
greater remuneration is provided to home health agencies and SNFs
for the treatment of wound care patients. As a result, the
incentive to transfer patients with both acute and chronic wounds
to more burdensome and costly care settings, such as inpatient or
outpatient wound-care centers, has been discouraged or eliminated.
This shift in vertical economics provides us with a unique
opportunity, in adjunctive fashion with home health agencies and
SNFs, to deliver highly technical and comprehensive wound care
where this most vulnerable patient population resides thus
achieving CMS’s desired results: better patient outcomes at a
lower total cost of care.
Chronic and Other Hard-to-Heal Wounds
According
to a study published by the Value
in Health journal, roughly 15% of the Medicare beneficiary
population has chronic nonhealing wounds. Chronic wounds do not
advance through the phases of healing in a normal progression and
do not show significant progress toward healing in 30 days. Factors
contributing to the chronicity of the wound may include pressure /
friction, trauma; insufficient blood flow and oxygenation in
locations such as the lower extremities; increased bacterial load;
excessive proteases; degraded growth factors; matrix
metalloproteinases (“MMPs”); senescent / aberrant
cells; or inappropriate treatment. Examples of chronic wounds
include DFUs, venous leg ulcers (“VLUs”), arterial
ulcers, pressure ulcers and hard-to-heal surgical/traumatic wounds.
In each of the various wound types, the presence of biofilms is a
frequent cause for chronification of wounds and the removal of
biofilms is a crucial step to commence healing. Biofilms need to be
eradicated to prevent further deterioration of the wound that may
result in additional negative patient outcomes. If not effectively
treated, these wounds can lead to potentially severe complications,
including further infection, osteomyelitis, fasciitis, amputation
and increased mortality. Chronic wounds are primarily seen in the
elderly population. For example, a 2019 study published in
Advances in Wound Care
reported that in the United States, 3% of the population over the
age of 65 had open wounds. According to the same study, in 2020,
the U.S. government estimated that the elderly population totaled
55 million people, suggesting that chronic wounds will continue to
be an increasingly persistent problem in this population. Four
common chronic and other hard-to-heal wounds are:
●
Diabetic Foot Ulcers. Diabetes can lead to a reduction in
blood flow, which can cause patients to lose sensation in their
feet and may prevent them from noticing injuries, sometimes leading
to the development of DFUs, which are open sores or ulcers on the
feet that may take several weeks to heal, if ever. According to the
2020 National Diabetes Statistics Report by the Center for Disease
Control and Prevention, in the United States alone, over 34 million
people, or approximately 10% of the population, suffer from
diabetes, a chronic, life-threatening disease. Of those that suffer
from diabetes, approximately 1.7 million people (or 5% of diabetics
in the United States) will develop DFUs on a yearly basis,
according to the CEO of Corstrata, a digital healthcare and wound
management firm specializing in the treatment of foot
ulcers.
●
Venous Leg Ulcers. VLUs develop as a result of vascular
insufficiency, or the inability for the vasculature of the leg to
return blood back toward the heart properly and, according to a
2013 report published by the International Journal of Tissue Repair and
Regeneration, VLUs affect approximately 600,000 people per
year in the United States alone. These ulcers usually form on the
sides of the lower leg, above the ankle and below the calf, and are
slow to heal and often recur if preventative steps are not taken.
The risk of venous ulcers can be increased as a result of a blood
clot forming in the deep veins of the legs, obesity, smoking, lack
of physical activity or work that requires many hours of
standing.
●
Pressure Ulcers. Pressure ulcers, also known as decubitus
ulcers or bed sores, are injuries to skin and underlying tissue
resulting from prolonged pressure, or pressure in combination with
shear or friction. Constant pressure on an area of skin reduces
blood supply to the area and over time can cause the skin to break
down and form an open ulcer. These often occur in patients who are
hospitalized or confined to a chair or bed and most often form on
the skin over bony areas, where there is little cushion between the
bone and the skin, such as heels, ankles, hips and the tailbone.
Annually, 2.5 million pressure ulcers are treated in the United
States in acute care facilities alone, according to a 2006 study
published in the Journal of the
American Medical Association.
●
Surgical/traumatic wounds. Surgical wounds form as a result
of various types of surgical procedures such as investigative or
corrective, minor or major, open (traditional) or minimal access
surgery, elective or emergency, and incisions (simple cuts) or
excision (removal of tissue), among others. Traumatic wounds form
as a result of cuts, lacerations or puncture wounds, which have
caused damage to the skin and underlying tissue. Severe traumatic
wounds may require surgical intervention to close the wound and
stabilize the patient. Surgical/traumatic hard-to-heal wounds
develop for various reasons, such as local surgical complications,
suboptimal closure techniques, presence of foreign materials,
exposed bones or tendons and infection. In the United States,
millions of people receive post-surgical wound care annually, and
the typical operative patient has comorbidities that create
challenges with post-operative wound healing.
Sanara Products
We
market and distribute wound and skin care products and services to
physicians, hospitals, clinics, and post-acute care settings. Our
products are primarily sold in the U.S. advanced wound care and
surgical tissue repair markets. We are actively seeking to expand
within our six focus areas of wound and skin care for the acute,
post-acute, and surgical markets: (1) debridement, (2) biofilm
removal, (3) hydrolyzed collagen, (4) advanced biologics, (5)
negative pressure wound therapy adjunct products, and (6) the
oxygen delivery system segment of the wound and skin care market.
The table below summarizes how we believe our current products and
product pipeline address our six focus areas:
Sanara’s
current product offerings include:
The
following products licensed from AN:
●
CellerateRX
Surgical Powder and Gel (through a sublicense with CGI Cellerate
RX, an affiliate of Catalyst);
●
HYCOL
Powder and Gel; and
The
following products licensed from Rochal:
●
BIAKŌS
Antimicrobial Skin and Wound Irrigation Solution; and
●
BIAKŌS
Antimicrobial Skin and Wound Gel.
Collagen
is important in all phases of wound healing: hemostasis,
inflammation, proliferation and remodeling. Collagen promotes the
development of granulation (the formation of new tissue from the
bottom of the wound bed), angiogenesis/vascularization, and
re-epithelialization (the migration of cells across granulation
tissue to close the wound). A healthy body produces native collagen
as the first step in the healing process. Native collagen is an
insoluble, rigidly coiled helical molecule that is critical to
wound healing and one of the first tissue structures deposited into
the wound base by fibroblasts. Native collagen must then be
hydrolyzed by proteases (e.g., collagenase or MMPs) into its
soluble component amino acid peptides in order to realize
additional biological benefits. Hydrolyzed collagen results from
the conversion of the coiled collagen helix into peptides which
support the cellular activities and migration associated with
granulation, angiogenesis and re-epithelialization.
CellerateRX
Surgical is a medical hydrolysate of Type I bovine collagen
indicated for the management of surgical, traumatic, and partial-
and full-thickness wounds as well as first- and second-degree
burns. It is manufactured in what we believe to be a trade secret
process and the powder is further processed for use in a sterile,
surgical environment. The gel is typically applied
post-operatively. CellerateRX Surgical products are primarily
purchased by hospitals and ambulatory surgical centers for use by
surgeons on surgical wounds. The predominance of CellerateRX
Surgical is used in foot and ankle, neuro/spinal, orthopedic/hip
and knee replacement, ortho trauma, and ortho oncology surgeries.
Additional specialties benefiting from the use of CellerateRX
Surgical include cardiothoracic, colorectal, general, general
trauma, gynecologic oncology, hand, head and neck, Mohs, obstetrics
and gynecology (including caesarean deliveries),
plastic/reconstructive, urologic, and vascular.
CellerateRX
Surgical is used in operative cases where patients might have
trouble healing normally due to underlying health complications.
There is always a risk of complication with surgical incisions.
This is especially true in patients with certain comorbidities,
including obesity, diabetes and hypertension. These complications
can include surgical site infections, dehiscence (where an incision
opens after primary closure) and necrosis. Surgeons use CellerateRX
Surgical to complement the body’s normal healing process. By
helping the body heal normally without complications, improved
patient outcomes are achieved, thereby reducing downstream costs
related to complications (such as re-operation, longer
hospitalization, re-admittance, extended rehabilitative care and
other additional treatments). Wound infections have become
increasingly problematic due to the high rates of surgical patient
comorbidities and the financial strain on insurance carriers as
well as hospitals who suffer exorbitant costs for readmission of
these patients within 30 days of surgery.
In a
prospective study published by SciMedCentral in 2017, of 102
consecutive neurosurgery cases in which a mixture of 5 grams of
CellerateRX Surgical powder and 1 gram Vancomycin powder was
applied at closure, there were no cases of wound dehiscence,
infection, complication or allergic reaction to the product. This
compares to neurosurgery infection rates ranging from as high as
24% for cranioplasty surgery to 6.3% for spine surgery patients.
Two similar retrospective studies are underway using CellerateRX
powder in ortho/spine surgeries and general/colorectal
surgeries.
HYCOL
Hydrolyzed Collagen products are a medical hydrolysate of Type I
bovine collagen intended for the management of full and partial
thickness wounds including pressure ulcers, venous and arterial leg
ulcers and DFUs. HYCOL is primarily used in SNFs, wound care
centers and physician offices and is currently approved for
reimbursement under Medicare Part B. HYCOL provides the benefit of
hydrolyzed collagen fragments directly in the wound bed. Therefore,
unlike with the body’s own native collagen or native collagen
products, the body does not have to break HYCOL down before use,
which is extremely beneficial when treating elderly and otherwise
compromised patients with comorbidities such as diabetes and
cardiovascular disease.
We
believe our CellerateRX and HYCOL products are unique in
composition, superior to other products in clinical performance,
demonstrate the ability to reduce costs associated with the
standards of care for their intended uses and have been safely used
on over seventy-five thousand patients.
BIAKŌS
AWC is an FDA 510(k) cleared, patented product that laboratory
tests show effectively disrupts extracellular polymeric substances
to eradicate mature biofilm microbes. BIAKŌS AWC is indicated
for the mechanical removal of debris, dirt, foreign materials, and
microorganisms from wounds including stage I-IV pressure ulcers,
DFUs, post-surgical wounds, first and second-degree burns as well
as grafted and donor sites. BIAKŌS AWC is effective in killing
free-floating microbes, immature, and mature bacterial biofilms and
fungal biofilms. In addition, safety studies demonstrated that
BIAKŌS AWC is biocompatible and supports the wound healing
process. Initial sales of BIAKŌS AWC occurred in July
2019.
BIAKŌS
AWC is also available in an irrigation bottle (BIAKŌS
Antimicrobial Skin and Wound Irrigation Solution) that can be used
in conjunction with NPWTi-d and other wound irrigation
needs.
BIAKŌS
Antimicrobial Wound Gel is an antimicrobial hydrogel wound dressing
that can be used alone or in combination with BIAKŌS AWC. In
February 2020, we received notification of FDA 510(k) clearance for
BIAKŌS Antimicrobial Wound Gel and launched the product in
November 2020 to complement BIAKŌS AWC.
BIAKŌS
AWC and BIAKŌS Antimicrobial Wound Gel are effective against
planktonic microbes as well as immature and mature biofilms. When
used together, the cleanser can be used initially to clean a wound
and disrupt biofilms (removing 99% in 10 minutes). The gel can then
be applied and remains in the wound for up to 72 hours helping to
continue disrupting biofilm microbes. In a study conducted in 2020,
BIAKŌS Antimicrobial Wound Gel, in combination with
BIAKŌS AWC, was compared to a number of wound cleansers to
treat chronic wounds such as pressure, diabetic, and venous ulcers
in the inflammatory phase of wound healing. The BIAKŌS system
reduced the biofilm burden by 7.5 logs (>99.99% reduction) by
the 24-hour time point and eradicated it by the 48-hour time point
while the remaining commercial controls reduced the
Methicillin-resistant Staphylococcus aureus (“MRSA”)
biofilms by less than 1 log. Below is a graphic summarizing the
efficacy of the use of BIAKŌS Antimicrobial Wound Gel in
combination with BIAKŌS AWC when reducing the MRSA mature
biofilm.
Sanara
MedTech recently executed a marketing and distribution agreement
with Cook Biotech to purchase, market, and distribute three
advanced biologics products:
●
FORTIFY
TRG Tissue Repair Graft;
●
FORTIFY
FLOWABLE Extracellular Matrix; and
FORTIFY TRG Tissue Repair Graft
is a freeze-dried, multi-layer small intestinal submucosa (SIS)
extracellular matrix (ECM) sheet. The graft is used for
implantation to reinforce soft tissue, has a thin profile, is
available in multiple sizes, and can be cut to size to accommodate
the patient’s anatomy. FORTIFY TRG Tissue Repair Graft is
provided sterile and can be hydrated with autologous blood fluid.
It is an FDA 510(k) cleared product and terminally sterilized. The
Company expects first sales of this product to occur in the second
half of 2021.
FORTIFY
FLOWABLE Extracellular Matrix is an advanced wound care device that
presents the SIS ECM technology in a way that can fill irregular
wound shapes and depths. FORTIFY FLOWABLE Extracellular Matrix is
indicated for the management of wounds including: partial and
full-thickness wounds, pressure ulcers, venous ulcers, diabetic
ulcers, chronic vascular ulcers, tunneled/undermined wounds,
surgical wounds (donor sites/grafts, post-Mohs surgery, post-laser
surgery, podiatric, wound dehiscence), trauma wounds (abrasions,
lacerations, second-degree burns, and skin tears) and draining
wounds. FORTIFY FLOWABLE Extracellular Matrix is provided sterile
and is intended for one-time use. It is a 510(k) cleared
product.
VIM
Amnion Matrix is a single layer sheet of amnion tissue that is
minimally processed to decellularize the material while maintaining
the structure and components of the extracellular matrix
environment. All tissues are collected from consenting donors,
tested for infectious diseases, and determined eligible for
transplantation by a licensed Medical Director. It is provided in
multiple sizes and terminally sterilized. The VIM Amnion Matrix is
intended for homologous use as a wound covering or barrier in
surgical, orthopedic, ophthalmic, and wound applications. It is
air-dried for off-the-shelf room temperature storage with no
product preparation. The graft is supplied sterile and is intended
for one-time use in a single patient.
We also
have the right to exclusively distribute PULSAR II Advanced Wound
Irrigation System (“PULSAR II”), a portable, no touch,
painless, selective hydro-mechanical debridement system that
effectively removes bacteria and necrotic tissue from wounds
without disrupting healthy tissue. While undergoing product
evaluations, it came to our attention that the pump component of
the Pulsar II could potentially overheat. As a result, we suspended
our plans for a full-scale product launch while we performed an
investigation. As a result of the investigation, we determined that
a simple design change was appropriate and our supplier, Wound Care
Solutions, Limited, agreed to credit us for our existing inventory
against any future purchases and implement a design enhancement for
future units. Pulsar II is a single patient use product, and there
currently are no Pulsar II units in the market. If we receive an
enhanced product that meets our quality standards, we intend to
relaunch the product, which we expect to occur, if at all, in late
2021.
Sanara Technology-Based Services
We are
currently developing the capability to offer various services
addressing chronic wound and skin care through our subsidiary UWSS.
UWSS was formed in June 2020, and we expect to report its
operations as a separate business division in 2021. UWSS currently
owns WounDerm and has investment interests in, or has exclusive
affiliations with, three companies, which include DirectDerm,
MGroup, and Precision Healing. We intend to begin launching
UWSS’s service offerings in 2021.
We
anticipate that our various service offerings will allow us to
collect large amounts of data on patient conditions and outcomes
that will improve treatment protocols and ultimately lead to more
evidence-based treatments to improve outcomes in the future. We
believe our planned service offerings through UWSS are complemented
by our existing product portfolio to complete the comprehensive
wound strategy.
UWSS
plans to offer the following services:
●
EMR software platform for both wound and skin
conditions
In
2020, we, through UWSS, made a minority investment in WounDerm to
fund further development of WounDerm’s imagery and data
sharing platform designed to meet our specified virtual
environment. In January 2021, we acquired the remaining interest of
WounDerm. WounDerm developed a software system that combines the
documentation functionality of wound care and dermatology EMRs with
a Health Insurance Portability and Accountability Act of 1996
(“HIPAA”)-secure online platform for provider and
caregiver collaboration. The software is expected to include a
complete wound and skin care specialty specific collaboration
platform that will allow for interoperability with client facing
EMRs, reduce the burden of duplicate documentation, and improve the
accuracy of assessments and treatment plans. Additionally, the
collaboration platform is expected to have the ability to import
images from any third party “wound tool” application or
EMR, as well as gather images and clinical information through an
Apple or Android based mobile app. We anticipate that the
proprietary software will provide for the correction of inaccurate
initial measurements performed by caregivers, as well as
adjustments for light and photo quality. We plan to have this
technology commercially available in mid-2021.
●
Virtual consultation services for both wound and skin care
conditions
DirectDerm is a
telemedicine company based in Palo Alto, California and has an
exclusive network of dermatologists licensed across 23 states who
have trained and/or teach at top U.S. medical institutions, and
whose service is covered by many of the major health plans in the
United States. UWSS is working to integrate its collaboration
platform into DirectDerm’s platform to provide virtual
consultations through DirectDerm’s network of board-certified
dermatologists to patients in all of UWSS’s healthcare
markets. DirectDerm plans to expand coverage to all 50 states in
2021.
MGroup
is a physician-owned and physician-led multispecialty wound care
group focused on utilizing telehealth and associated technologies
to build high-quality, cost-effective care delivery systems. MGroup
currently holds active medical licenses in 40 states with plans to
expand coverage to all 50 states in 2021. Our affiliation with
MGroup will provide us with the ability to offer wound care
telehealth services.
●
Diagnostic products and services for chronic wounds
The
Precision Healing product platform is a diagnostic imaging and
smart pad for assessing a patient’s wound and skin
conditions. This comprehensive skin and wound assessment technology
is designed to quantify biochemical markers to determine the
trajectory of a wound’s condition to enable better diagnosis
and treatment protocol. Precision Healing was formed by executives
and imaging specialists at Lumicell Corporation as well as
experienced wound care scientists and physicians. Precision Healing
expects to have its imaging device and smart pad commercially
available in 2021 and is currently being integrated into the
WounDerm EMR.
Sales and Marketing
We
currently employ seventeen surgical division regional sales
managers (“RSMs”) and five wound care division RSMs.
Our RSMs are recruited based on their previous industry experience
and professional performance and are required to have a minimum of
three years of experience successfully selling into similar
markets. We constantly evaluate new markets and sales opportunities
to add to our sales teams as warranted.
RSMs
are initially trained through an internal learning management
system, SanaraU, which gives them further product and surgical
specialty training including wound etiology, operating room
etiquette and credentialing requirements. After completing their
internal training, new hire RSMs participate in field training with
experienced RSM field trainers to get insights into best practice
as well as real world training. The initial training period lasts
approximately five weeks. RSMs are supported by regular updated
training modules on product information and best
practices.
A key
component of our sales and marketing efforts involves working with
physicians and clinicians to champion our products in their
facilities. Our surgical division works closely with surgeons and
health system stakeholders to demonstrate the efficacy and
beneficial impact of our products and successfully navigate the
hospital value analysis committee, (more commonly known as the
“VAC”), approval process, allowing our products to be
sold in those facilities. Similarly, our wound care division works
with clinicians to demonstrate the efficacy of our products in
their respective care settings. If our sales and marketing efforts
are successful, the clinicians then advocate for the use of our
products when medically necessary and push for their suppliers to
carry our products.
Our
surgical division markets and distributes CellerateRX Surgical.
CellerateRX Surgical is primarily purchased by hospitals and
ambulatory surgical centers for use by surgeons in their
facilities. CellerateRX Surgical is sold through a growing network
of independent surgical specialty sales agencies and Company
representatives who sell and support the products in surgical
settings. Over 750 hospitals and ambulatory surgical centers
currently have approval to use CellerateRX Surgical, with more
locations being consistently added. The current efforts of our
sales teams involve deeper penetration into these approved
locations.
Our
chronic wound division markets and distributes the following
products: BIAKŌS AWC, BIAKŌS Antimicrobial Skin and Wound
Gel, BIAKŌS Antimicrobial Skin and Wound Irrigation Solution,
and HYCOL powder and gel. Our chronic wound division primarily
distributes to post-acute care settings, including long-term care
facilities, home health, wound care centers, and professional
medical offices. Products are sold by Company representatives
supplemented by major medical-surgical distributors, independent
distributors, and DME distributors.
Manufacturing, Supply, and Production
We do
not own or operate and do not intend to establish our own
manufacturing facilities. We rely on, and plan to continue relying
on, contract manufacturing for our products. Our contract
manufacturing strategy is intended to drive cost leverage and scale
and avoid the high capital outlays and fixed costs associated with
constructing and operating manufacturing facilities. Our
manufacturing partners have internal compliance processes to
maintain the high quality and reliability of our products. They
utilize annual internal audits, combined with external audits by
regulatory agencies and commercial partners to monitor their
quality control practices. We believe our contract manufacturers
are well-positioned to support future expansion of our product
sales. We do source some packaging and marketing materials separate
from our licensing partners.
Reimbursement, Clinical Validation, and Clinical
Utility
We do
not promote our products based on their reimbursement status,
however, we are mindful of the benefits of a favorable
reimbursement coverage status to increase patient access and
support our research and development efforts to supply the highest
efficacy solutions.
Three
of our chronic wound care products (BIAKŌS Antimicrobial Skin
and Wound Gel, HYCOL Hydrolyzed Collagen Powder, and HYCOL
Hydrolyzed Collagen Gel) have HCPCS A codes and are eligible for
reimbursement through Medicare Part B. There is currently no
reimbursement for BIAKŌS AWC or BIAKŌS Antimicrobial Skin
and Wound Irrigation Solution. CellerateRX Surgical is currently
captured as part of the cost of the surgical
procedure.
We
anticipate that our UWSS services, once launched, will provide a
wealth of patient data to help us measure our products’
effectiveness on improving patient outcomes while simultaneously
reducing healthcare costs. We believe our reimbursement strategy,
including establishing the clinical validation, clinical utility
and health economics of our products, will allow us to drive
improved reimbursement coverage for our products and
technologies.
Competition
The
wound care market is served by a number of large, multi-product
line companies as well as a number of small companies. Our products
compete with primary dressings, advanced wound care products,
collagen matrices and other biopharmaceutical products.
Manufacturers and distributors of competitive products include
Smith & Nephew plc, Medline Industries, Inc., ConvaTec Group
plc, Mölnlycke Health Care AB, 3M Company, Integra
LifeSciences Holdings Corporation (which acquired ACell Inc. on
January 20, 2021) and numerous others. Many of our competitors are
significantly larger than we are and have greater financial and
personnel resources. We believe, however, that our products
outperform our competitors’ currently available equivalent
products for the specific application in which they are intended by
providing improved efficacy, better outcomes, and reduced cost of
patient care.
UWSS
plans to offer a comprehensive wound care and dermatology strategy
to expand cost-effective, high quality wound and skin care to all
patients throughout the care setting continuum. Although novel in
its comprehensive offerings and solutions, there are existing
competitors for each of the verticals in which UWSS plans to offer
services and solutions.
Existing
wound care imaging technology competitors include MolecuLight,
Wound-Vision, HyperMed Imaging, Inc., SpectralMD, Inc., Kent and
Tissue Analytics. However, we do not believe that any of these
existing platforms offer a bioassay evaluation in combination with
their imaging solution. In addition, there are existing wound
care-specific EMR documentation and telemedicine communication
platforms such as NetHealth, Swift Medical Inc., Corstrata, LLC and
Intellicure, Inc.
The
public health emergency caused by the COVID-19 pandemic has led to
the widespread adoption of telemedicine for all health care
clinical specialties, including wound care and dermatology. As
such, any clinical wound care or dermatology physician and/or
provider group that has incorporated telemedicine into their
practice could be considered competitive. However, the majority of
these groups are local or regional and do not incorporate the
comprehensive national care delivery platform that UWSS expects to
offer. Examples of large wound care specialty practices include
Vohra Physician Group, Healogics Specialty Physicians and
WoundTech.
Licensing Agreements
We do
not own the patents for the products we market, sell, and
distribute. We in-license the rights to market, sell, and
distribute our products from third parties.
CellerateRX Activated Collagen
On
August 27, 2018, we entered into an exclusive, world-wide
sublicense agreement with CGI Cellerate RX to distribute
CellerateRX Surgical and HYCOL products into the wound care and
surgical markets. We pay royalties of 3-5% of annual collected net
sales of CellerateRX Surgical and HYCOL. As amended, the term of
the sublicense extends through May 2050, with automatic
year-to-year renewal terms thereafter so long as our Net Sales (as
defined in the sublicense agreement) each year are equal to or in
excess of $1,000,000. If our Net Sales fall below $1,000,000 for
any year after the initial expiration date, CGI Cellerate RX will
have the right to terminate the sublicense agreement upon written
notice. Minimum royalties of $400,000 per year are payable for the
first five years of the sublicense agreement.
BIAKŌS Antimicrobial Wound Gel and BIAKŌS Antimicrobial
Skin and Wound Cleanser
On July
7, 2019, we executed a license agreement with Rochal, whereby we
acquired an exclusive world-wide license to market, sell and
further develop antimicrobial products for the prevention and
treatment of microbes on the human body utilizing certain Rochal
patents and pending patent applications (the “BIAKŌS
License Agreement”). Currently, the products covered by the
BIAKŌS License Agreement are BIAKŌS Antimicrobial Wound
Gel and BIAKŌS Antimicrobial Skin and Wound Cleanser. Both
products are 510(k) approved. Our Executive Chairman is a director
of Rochal, and indirectly a significant shareholder of Rochal, and
through the potential exercise of warrants, a majority shareholder
of Rochal. Another one of our directors is also a director and
significant shareholder of Rochal.
Recent
payments and future commitments under the terms of the BIAKŌS
License Agreement include:
●
In
March 2021, we issued 20,834 shares of our common stock to Rochal
as full payment of a $750,000 milestone which became due upon the
Company’s public offering of common stock in February
2021.
●
We will
pay Rochal a royalty of 2-4% of net sales. The minimum annual
royalty due to Rochal was $100,000 in 2020 and will increase by 10%
each subsequent calendar year up to a maximum amount of
$150,000.
●
We will
pay additional royalty annually based on specific net profit
targets from sales of the licensed products, subject to a maximum
of $1,000,000 during any calendar year.
Unless
previously terminated by the parties, the BIAKŌS License
Agreement will expire with the related patents in December
2031.
CuraShield Antimicrobial Barrier Film and No Sting Skin
Protectant
On
October 1, 2019, we executed a license agreement with Rochal
whereby we acquired an exclusive world-wide license to market, sell
and further develop certain antimicrobial barrier film and skin
protectant products for use in the human health care market
utilizing certain Rochal patents and pending patent applications
(the “ABF License Agreement”). Currently, the products
covered by the ABF License Agreement are CuraShield Antimicrobial
Barrier Film and a no sting skin protectant product.
Future
commitments under the terms of the ABF License Agreement
include:
●
The
Company will pay Rochal a royalty of 2-4% of net sales. The minimum
annual royalty due to Rochal will be $50,000 beginning with the
first full calendar year following the year in which first
commercial sales of the products occur. The annual minimum royalty
will increase by 10% each subsequent calendar year up to a maximum
amount of $75,000.
●
We will
pay additional royalties annually based on specific net profit
targets from sales of the licensed products, subject to a maximum
of $500,000 during any calendar year.
Unless
previously terminated or extended by the parties, the ABF License
Agreement will terminate upon expiration of the last U.S. patent in
October 2033. No commercial sales or royalty payments had been made
under ABF License Agreement as of December 31, 2020.
Debrider License Agreement
On May
4, 2020, we executed a product license agreement with Rochal,
whereby we acquired an exclusive world-wide license to market, sell
and further develop a debrider for human medical use to enhance
skin condition or treat or relieve skin disorders, excluding uses
primarily for beauty, cosmetic, or toiletry purposes (the
“Debrider License Agreement”).
Future
commitments under the terms of the Debrider License Agreement
include:
●
At the
time Rochal issues a purchase order to its contract manufacturer
for the first good manufacturing practice run of the licensed
products, we will pay Rochal $600,000 in cash.
●
Upon
FDA clearance of the licensed products, we will pay Rochal $500,000
in cash and $1,000,000, which at our option may be paid in any
combination of cash and our common stock.
●
We will
pay Rochal a royalty of 2-4% of net sales. The minimum annual
royalty due to Rochal will be $100,000 beginning with the first
full calendar year following the year in which first commercial
sales of the licensed products occur and increase by 10% each
subsequent calendar year up to a maximum amount of
$150,000.
●
We will
pay additional royalty annually based on specific net profit
targets from sales of the licensed products, subject to a maximum
of $1,000,000 during any calendar year.
Unless
previously terminated or extended by the parties, the Debrider
License Agreement will expire in October 2034. No commercial sales
or royalties had been recognized under the Debrider License
Agreement as of December 31, 2020.
Cook Biotech Marketing and Distribution Agreement
On
December 17, 2020, we entered into a marketing and distribution
agreement with Cook Biotech whereby we were appointed as the
exclusive distributor in the United States of three Cook advanced
biologic products. The first two products, FORTIFY TRG Tissue
Repair Graft and FORTIFY FLOWABLE Extracellular Matrix, are for use
in the surgical wound care segment, and VIM Amnion Matrix is for
use in the chronic wound care and surgical wound care segments. We
expect to commercialize these products in the second half of
2021.
Under
the terms of the agreement, we will purchase the products from Cook
Biotech at initial transfer prices stipulated in the agreement.
Cook Biotech may update the transfer prices annually based on
changes in the US Producer’s Price Index. Minimum annual
order quantities will be agreed upon by both parties after the
first year of the contract term. The agreement will terminate on
the third anniversary of the date on which the first commercial
sale to us from Cook Biotech is made, with automatic two-year
renewal terms unless notice of non-renewal is given by one party at
least one year prior to the end of the initial term or renewal term
that is then in effect.
Resorbable Bone Hemostat
We
acquired a patent in 2009 for a resorbable bone hemostat and
delivery system for orthopedic bone void fillers. This patent is
not part of our long-term strategic focus. We subsequently licensed
the patent to a third party to market a bone void filler product
for which we receive a 3% royalty on product sales over the life of
the patent, which expires in 2023, with annual minimum royalties of
$201,000. We pay two unrelated third parties a combined royalty
equal to eight percent (8%) of our net revenues and royalties
generated from products that utilize the acquired patented bone
hemostat and delivery system. To date, royalties received by us
related to this licensing agreement have not exceeded the annual
minimum of $201,000 ($50,250 per quarter). Therefore, our annual
royalty obligation under the terms of the license agreement has
been $16,080 ($4,020 per quarter).
Government Regulation
Our
operations are subject to comprehensive federal, state, and local
laws and regulations in the jurisdictions in which we or our
research and development partners or affiliates do business. The
laws and regulations governing our business and interpretations of
those laws and regulations and are subject to frequent change. Our
ability to operate profitably will depend in part upon our ability,
and that of our research and development partners and affiliates,
to operate in compliance with applicable laws and regulations. The
laws and regulations relating to medical products and healthcare
services that apply to our business and that of our partners and
affiliates continue to evolve, and we must, therefore, devote
significant resources to monitoring developments in legislation,
enforcement, and regulation in such areas. As the applicable laws
and regulations change, we are likely to make conforming
modifications in our business processes from time to time. We
cannot provide assurance that a review of our business by courts or
regulatory authorities will not result in determinations that could
adversely affect our operations or that the regulatory environment
will not change in a way that restricts our
operations.
FDA Regulation
Our
medical products and operations are regulated by the FDA and other
federal and state agencies. The products we currently market are
regulated as medical devices in the United States under the Federal
Food, Drug, and Cosmetic Act (“FDCA”), as implemented
and enforced by the FDA. The FDA regulates the development,
testing, manufacturing, labeling, packaging, storage, installation,
servicing, advertising, promotion, marketing, distribution, import,
export, and market surveillance of our medical
devices.
In
addition, we have entered into an agreement to market and
distribute VIM Amnion Matrix for use in the chronic wound care and
surgical wound care segments. VIM Amnion Matrix is a tissue-based
product regulated by FDA under Section 361 of the PHSA (42 U.S.C.
§ 264) and 21 C.F.R. Part 1271.
Device Premarket Regulatory Requirements
Before
being introduced into the U.S. market, each medical device must
obtain marketing clearance or approval from FDA through the 510(k)
premarket notification process, the de novo classification process
(summarized below under De Novo
Classification Process), or the premarket approval
application (“PMA”) process, unless they are determined
to be Class I devices or to otherwise qualify for an exemption from
one of these available forms of premarket review and authorization
by the FDA. Under the FDCA, medical devices are classified into one
of three classes—Class I, Class II or Class
III—depending on the degree of risk associated with each
medical device and the extent of control needed to provide
reasonable assurance of safety and effectiveness. Classification of
a device is important because the class to which a device is
assigned determines, among other things, the necessity and type of
FDA review required prior to marketing the device. Class I devices
are those for which reasonable assurance of safety and
effectiveness can be assured by adherence to general controls that
include compliance with the applicable portions of the FDA’s
Quality System Regulation (“QSR”), as well as
regulations requiring facility registration and product listing,
reporting of adverse medical events, and appropriate, truthful and
non-misleading labeling, advertising, and promotional materials.
The Class I designation also applies to devices for which there is
insufficient information to determine that general controls are
sufficient to provide reasonable assurance of the safety and
effectiveness of the device or to establish special controls to
provide such assurance, but that are not life-supporting or
life-sustaining or for a use which is of substantial importance in
preventing impairment of human health, and that do not present a
potential unreasonable risk of illness of injury.
Class
II devices are those for which general controls alone are
insufficient to provide reasonable assurance of safety and
effectiveness and there is sufficient information to establish
“special controls.” These special controls can include
performance standards, post-market surveillance requirements,
patient registries and FDA guidance documents describing
device-specific special controls. While most Class I devices are
exempt from the 510(k) premarket notification requirement, most
Class II devices require a 510(k) premarket notification prior to
commercialization in the United States; however, the FDA has the
authority to exempt Class II devices from the 510(k) premarket
notification requirement under certain circumstances. As a result,
manufacturers of most Class II devices must submit 510(k) premarket
notifications to the FDA under Section 510(k) of the FDCA (21
U.S.C. § 360(k)) in order to obtain the necessary clearance to
market or commercially distribute such devices. To obtain 510(k)
clearance, manufacturers must submit to the FDA adequate
information demonstrating that the proposed device is
“substantially equivalent” to a predicate device
already on the market. A predicate device is a legally marketed
device that is not subject to PMA, meaning, (i) a device that was
legally marketed prior to May 28, 1976 (“preamendments
device”) and for which a PMA is not required, (ii) a device
that has been reclassified from Class III to Class II or I, or
(iii) a device that was found substantially equivalent through the
510(k) process. If the FDA agrees that the device is substantially
equivalent to a predicate device currently on the market, it will
grant 510(k) clearance to commercially market the device. If there
is no adequate predicate to which the manufacturer can compare its
proposed device, the proposed device is automatically classified as
a Class III device. In such cases, the device manufacturer must
then fulfill the more rigorous PMA requirements or can request a
risk-based classification determination for the device in
accordance with the de novo
classification process.
The
de novo classification
process allows a manufacturer whose novel device is automatically
classified into Class III to request down-classification of its
device to Class I or Class II on the basis that the device presents
low or moderate risk, rather than requiring the submission and
approval of a PMA application. Under the Food and Drug
Administration Safety and Innovation Act of 2012
(“FDASIA”), the FDA is required to classify a device
within 120 days following receipt of the de novo classification request. If the
manufacturer seeks reclassification into Class II, the
classification request must include a draft proposal for special
controls that are necessary to provide a reasonable assurance of
the safety and effectiveness of the medical device. The FDA may
reject the classification request if it identifies a legally
marketed predicate device that would be appropriate for a 510(k) or
determines that the device is not low to moderate risk or that
general controls would be inadequate to control the risks and
special controls cannot be developed.
Devices
that are intended to be life sustaining or life supporting, devices
that are implantable, devices that present a potential unreasonable
risk of harm or are of substantial importance in preventing
impairment of health, and devices that are not substantially
equivalent to a predicate device are placed in Class III and
generally require FDA approval through the PMA process, unless the
device is a preamendments device not yet subject to a regulation
requiring premarket approval. The PMA process is more demanding
than the 510(k) premarket notification process. For a PMA, the
manufacturer must demonstrate through extensive data, including
data from preclinical studies and clinical trials, that the device
is safe and effective. The PMA must also contain a full description
of the device and its components, a full description of the
methods, facilities and controls used for manufacturing, and
proposed labeling. Following receipt of a PMA, the FDA determines
whether the application is sufficiently complete to permit a
substantive review. If the FDA accepts the application for review,
it has 180 days under the FDCA to complete its review of a PMA,
although in practice, the FDA’s review often takes
significantly longer, and can take up to several years. Before
approving a PMA, the FDA generally also performs an on-site
inspection of manufacturing facilities for the product to ensure
compliance with the QSR.
Thus
far, all of the medical devices that we currently market and
distribute have been cleared through 510(k) premarket notifications
filed by our third-party research and development partners, who are
the manufacturers of such devices. We also are continuing to work
through the development process for a number of products in our
pipeline. We are currently working on final formulation and the
development of a retail marketing strategy for an over-the-counter
hand and skin cleanser. Our debrider product, as well a novel
dressing that delivers oxygen to the wound bed and a sterile
BIAKŌS product, are currently under development at Rochal, and
we are in discussions concerning the best path for seeking
clearance and approval for these products. We are also exploring
new indications of use and improved formulas for a next generation
CellerateRX and a next generation HYCOL.
Clinical
trials are almost always required to support PMAs and are sometimes
required to support 510(k) submissions. All clinical investigations
of devices to determine safety and effectiveness must be conducted
in accordance with the FDA’s investigational device exemption
(“IDE”), regulations that govern investigational device
labeling, prohibit promotion of the investigational device, and
specify recordkeeping, reporting and monitoring responsibilities of
study sponsors and study investigators. If the device presents a
“significant risk,” as defined by the FDA, the agency
requires the device sponsor to submit an IDE application to the
FDA, which must become effective prior to commencing human clinical
trials. The IDE will automatically become effective 30 days after
receipt by the FDA, unless the FDA denies the application or
notifies the company that the investigation is on hold and may not
begin until the sponsor provides supplemental information about the
investigation that satisfies FDA’s concerns. If the FDA
determines that there are deficiencies or other concerns with an
IDE that require modification of the study, the FDA may permit a
clinical trial to proceed under a conditional approval. In
addition, the study must be approved by, and conducted under the
oversight of, an institutional review board (“IRB”),
for each clinical site. If the device presents a non-significant
risk to the patient according to criteria established by FDA as
part of the IDE regulations, a sponsor may begin the clinical trial
after obtaining approval for the trial by one or more IRBs without
separate authorization from the FDA, but must still comply with
abbreviated IDE requirements, such as monitoring the investigation,
ensuring that the investigators obtain informed consent, and
labeling and record-keeping requirements.
Device Post-market Regulatory Requirements
After a
device is cleared or approved for commercialization, and prior to
marketing, numerous regulatory requirements apply to the various
entities responsible for preparing a device for distribution,
including the manufacturer (including specification developer),
contract manufacturers, relabelers/repackagers, sterilizers and
initial importer, as applicable. These include:
●
establishment
registration and device listing;
●
development
of a quality management system, including establishing and
implementing procedures to design and manufacture devices in
compliance with the QSR (unless a device category is exempt from
this requirement by the FDA, such as in the case of many Class I
devices);
●
labeling
regulations that prohibit the promotion of products for uncleared
or unapproved uses (known as off-label uses), as well as
requirements to provide accurate and non-misleading information and
adequate information on both risks and benefits of the
device;
●
FDA’s
unique device identification requirements that call for a unique
device identifier (“UDI”) on device labels, packages,
and in some cases, on the device itself, and submission of data to
the FDA’s Global Unique Device Identification Database
(“GUDID”);
●
medical
device reporting regulations that require manufacturers to report
to the FDA if a device may have caused or contributed to a death or
serious injury or malfunctioned in a way that would likely cause or
contribute to a death or serious injury if it were to
recur;
●
corrections
and removal reporting regulations that require manufacturers report
to the FDA field corrections and product recalls or removals if
undertaken to reduce a risk to health posed by the device or to
remedy a violation of the FDCA that may present a risk to health;
and
●
post-market
surveillance regulations, which apply to Class II or III devices if
the FDA has issued a post-market surveillance order and the failure
of the device would be reasonably likely to have serious adverse
health consequences, the device is expected to have significant use
in the pediatric population, the device is intended to be implanted
in the human body for more than one year, or the device is intended
to be used to support or sustain life and to be used outside a user
facility.
Our
research and development partners and their contract manufacturers
may be subject to periodic scheduled or unscheduled inspections by
the FDA. If we are required to register with the FDA, by becoming
the manufacturer or specification developer of any medical device
for instance, then we also may be subject to such inspections by
FDA. If the FDA believes we or any of our research and development
partners or their contract manufacturers are not in compliance with
the QSR, or other post-market requirements, it has broad authority
to take significant enforcement actions to compel compliance.
Specifically, if the FDA determines that we or our research and
development partners or their contract manufacturers failed to
comply with applicable regulatory requirements, the agency can take
a variety of compliance or enforcement actions, which may result in
any of the following sanctions:
●
untitled
letters, warning letters, fines, injunctions, consent decrees and
civil penalties;
●
customer
notifications or repair, replacement or refunds;
●
mandatory
recalls, withdrawals, or administrative detention or seizure of our
products;
●
operating
restrictions or partial suspension or total shutdown of
production;
●
refusing
or delaying requests for 510(k) marketing clearance or approval of
pre-market approval applications relating to new products or
modified products;
●
reclassifying
a 510(k)-cleared device or withdrawing PMA approval;
●
refusal
to grant export approvals for our products; or
●
pursuing
criminal prosecution.
Any
such enforcement action by the FDA would have a material adverse
effect on our business. In addition, these regulatory controls, as
well as any changes in FDA policies, can affect the time and cost
associated with the development, introduction, and continued
availability of new products.
HCT/P Regulatory Requirements
Human
cells, tissues, and cellular and tissue-based products
(“HCT/Ps”) are regulated by FDA’s Center for
Biologics Evaluation and Research (“CBER”) or Center
for Devices and Radiological Health (“CDRH”) depending
on the type of product, how it is manufactured and its intended
uses. HCT/Ps that meet all of the criteria described in 21 C.F.R.
§ 1271.10(a) are regulated by CBER under Section 361 of the
PHSA (42 U.S.C. § 264) and 21 C.F.R. Part 1271 only
(“361 products”). Although 361 products do not require
premarket review by FDA prior to commercialization, manufacturers
of 361 products must register with FDA, submit a list of HCT/Ps
manufactured, and comply with current good tissue practices
(“cGTP”), among other things.
We have
entered into an agreement to market and distribute VIM Amnion
Matrix, which is manufactured from amniotic membrane and will be
marketed as a 361 product. Cook Biotech, as the manufacturer, must
comply with all requirements of Section 361 of the PHSA and 21
C.F.R. Part 1271 that are applicable to the products and may be
subject to periodic scheduled or unscheduled inspections by the FDA
to ensure compliance with cGTP.
Federal Trade Commission Regulatory Oversight
Our
advertising for our products and services is subject to federal
truth-in-advertising laws enforced by the Federal Trade Commission,
or FTC, as well as comparable state consumer protection laws. Under
the Federal Trade Commission Act (“FTC Act”), the FTC
is empowered, among other things, to (a) prevent unfair methods of
competition and unfair or deceptive acts or practices in or
affecting commerce; (b) seek monetary redress and other relief for
conduct injurious to consumers; and (c) gather and compile
information and conduct investigations relating to the
organization, business, practices, and management of entities
engaged in commerce. The FTC has very broad enforcement authority,
and failure to abide by the substantive requirements of the FTC Act
and other consumer protection laws can result in administrative or
judicial penalties, including civil penalties, injunctions
affecting the manner in which we would be able to market services
or products in the future, or criminal prosecution.
Fraud and Abuse and Transparency Laws and Regulations
Our
business activities (and the business activities of our research
and development partners and affiliates), including, but not
limited to, research, sales, promotion, distribution and medical
education, are subject to regulation by numerous federal and state
regulatory and law enforcement authorities in the United States,
including the Department of Justice, the Department of Health and
Human Services and its various divisions, CMS, the Health Resources
and Services Administration, the Department of Veterans Affairs,
the Department of Defense, and state and local governments. Our
business activities must comply with numerous healthcare laws,
including, but not limited to, anti-kickback and false claims laws
and regulations as well as data privacy and security laws and
regulations, which are described below.
The
federal Anti-Kickback Statute prohibits, among other things, any
person or entity, from knowingly and willfully offering, paying,
soliciting, or receiving any remuneration, directly or indirectly,
overtly or covertly, in cash or in kind, to induce or in return for
purchasing, leasing, ordering, or arranging for or recommending the
purchase, lease, furnishing, or order of any item or service
reimbursable under Medicare, Medicaid, or other federal healthcare
programs, in whole or in part. The term “remuneration”
has been interpreted broadly to include anything of value. The
Anti-Kickback Statute has been interpreted to apply to arrangements
between pharmaceutical manufacturers on one hand and prescribers,
purchasers, formulary managers, and beneficiaries on the other.
There are certain statutory exceptions and regulatory safe harbors
protecting some common activities from prosecution. The exceptions
and safe harbors are drawn narrowly, and practices that involve
remuneration that may be alleged to be intended to induce
prescribing, purchases, or recommendations may be subject to
scrutiny if they do not qualify for an exception or safe harbor.
Failure to meet all of the requirements of a particular applicable
statutory exception or regulatory safe harbor does not make the
conduct per se illegal under the Anti-Kickback Statute. Instead,
the legality of the arrangement will be evaluated on a case-by-case
basis based on a cumulative review of all of its facts and
circumstances. Several courts have interpreted the statute’s
intent requirement to mean that if any one purpose of an
arrangement involving remuneration is to induce referrals of
federal healthcare covered business, the statute has been violated.
The Patient Protection and Affordable Care Act, of 2010, as amended
(the “ACA”), modified the intent requirement under the
Anti-Kickback Statute to a stricter standard, such that a person or
entity no longer needs to have actual knowledge of the statute or
specific intent to violate it in order to have committed a
violation. In addition, the ACA also provided that a violation of
the federal Anti-Kickback Statute is grounds for the government or
a whistleblower to assert that a claim for payment of items or
services resulting from such violation constitutes a false or
fraudulent claim for purposes of the federal civil False Claims Act
(the “FCA”). The ACA further created new federal
requirements for reporting, by applicable manufacturers of covered
drugs, payments and other transfers of value to physicians and
teaching hospitals, and ownership and investment interests held by
physicians and other healthcare providers and their immediate
family members.
The
federal civil FCA, prohibits, among other things, any person or
entity from knowingly presenting, or causing to be presented, a
false or fraudulent claim for payment to, or approval by, the
federal government, knowingly making, using, or causing to be made
or used a false record or statement material to a false or
fraudulent claim to the federal government, or avoiding,
decreasing, or concealing an obligation to pay money to the federal
government. A claim includes “any request or demand”
for money or property presented to the U.S. government. The civil
FCA has been used to assert liability on the basis of kickbacks and
other improper referrals, improperly reported government pricing
metrics such as Best Price or Average Manufacturer Price, or
submission of inaccurate information required by government
contracts, improper use of Medicare provider or supplier numbers
when detailing a provider of services, improper promotion of
off-label uses not expressly approved by the FDA in a drug’s
label, and allegations as to misrepresentations with respect to the
products supplied or services rendered. Several pharmaceutical and
other healthcare companies have further been sued under these laws
for allegedly providing free product to customers with the
expectation that the customers would bill federal programs for the
product. Intent to deceive is not required to establish liability
under the civil FCA; however, a change in Department of Justice
policy now prohibits enforcement actions for knowing violations of
law based on non-compliance with agency subregulatory guidance.
Civil FCA actions may be brought by the government or may be
brought by private individuals on behalf of the government, called
“qui tam” actions. If the government decides to
intervene in a qui tam action and prevails in the lawsuit, the
individual will share in the proceeds from any fines or settlement
funds. If the government declines to intervene, the individual may
pursue the case alone. Since 2004, these FCA lawsuits against
pharmaceutical companies have increased significantly in volume and
breadth, leading to several substantial civil and criminal
settlements, as much as $3.0 billion, regarding certain sales
practices and promoting off label drug uses. Civil FCA liability
may be imposed for Medicare or Medicaid overpayments, for example,
overpayments caused by understated rebate amounts, that are not
refunded within 60 days of discovering the overpayment, even if the
overpayment was not caused by a false or fraudulent
act.
The
government may further prosecute conduct constituting a false claim
under the criminal FCA. The criminal FCA prohibits the making or
presenting of a claim to the government knowing such claim to be
false, fictitious, or fraudulent and, unlike the civil FCA,
requires proof of intent to submit a false claim. The civil
monetary penalties statute is another potential statute under which
drug and device companies may be subject to enforcement. Among
other things, the civil monetary penalties statute imposes fines
against any person who is determined to have presented, or caused
to be presented, claims to a federal healthcare program that the
person knows, or should know, is for an item or service that was
not provided as claimed or is false or fraudulent.
HIPAA
also created federal criminal statutes that prohibit knowingly and
willfully executing, or attempting to execute, a scheme to defraud
or to obtain, by means of false or fraudulent pretenses,
representations, or promises, any of the money or property owned
by, or under the custody or control of, a healthcare benefit
program, regardless of whether the payor is public or private,
knowingly and willfully embezzling or stealing from a health care
benefit program, willfully obstructing a criminal investigation of
a health care offense, and knowingly and willfully falsifying,
concealing, or covering up by any trick or device a material fact
or making any materially false statements in connection with the
delivery of, or payment for, healthcare benefits, items, or
services relating to healthcare matters. The ACA, as amended,
modified the intent requirement under the certain portions of these
federal criminal statutes such that a person or entity no longer
needs to have actual knowledge of the statute or specific intent to
violate it.
The ACA
further created federal requirements for reporting, by applicable
manufacturers of covered therapeutics, payments and other transfers
of value to physicians and teaching hospitals, and ownership and
investment interests held by physicians and other healthcare
providers and their immediate family members.
Many
states have also adopted laws similar to each of the above federal
laws, which may be broader in scope and apply to items or services
reimbursed by any third-party payor, including commercial insurers,
and some have transparency laws that require reporting price
increases and related information. Certain state laws also regulate
manufacturers’ use of prescriber-identifiable data. Certain
states also require implementation of commercial compliance
programs and compliance with the pharmaceutical industry’s
voluntary compliance guidelines and the applicable compliance
guidance promulgated by the federal government, or otherwise
restrict payments or the provision of other items of value that may
be made to healthcare providers and other potential referral
sources; impose restrictions on marketing practices; or require
drug manufacturers to track and report information related to
payments, gifts, and other items of value to physicians and other
healthcare providers. These laws may affect our future sales,
marketing, and other promotional activities by imposing
administrative and compliance burdens.
If our
operations are found to be in violation of any of the laws or
regulations described above or any other laws that apply to us, we
may be subject to penalties or other enforcement actions, including
criminal and significant civil monetary penalties, damages, fines,
disgorgement, imprisonment, exclusion from participation in
government healthcare programs, corporate integrity agreements,
debarment from receiving government contracts or refusal of new
orders under existing contracts, reputational harm, diminished
profits and future earnings, and the curtailment or restructuring
of our operations, any of which could adversely affect our ability
to operate our business and our results of operations.
Telemedicine Standards, and Related Laws and
Guidelines
We have
entered into a management agreement with Mgroup, which is a
physician-owned multispecialty wound care group with active medical
licenses in over 40 states. Through this partnership, we
expect to make available coordinated telemedicine services on our
platform. In connection with this arrangement, we expect to
administer non-clinical services to support the delivery of
telemedicine services, including billing, scheduling and a wide
range of other administrative and support services, and will be
paid a pre-determined, fair market value amount for those
services. We have also entered into a professional
services agreement with and made a minority investment
in DirectDerm, a dermatology telemedicine company based in
California, which has an exclusive network of dermatologists
licensed across 23 states.
The
delivery of telemedicine services directly or through contractual
relationships is subject to various federal, state, and local laws,
regulations and approvals, relating to, among other things, the
health provider licensure, adequacy and continuity of medical care,
medical practice standards (including specific requirements when
providing healthcare utilizing telemedicine technologies and
consulting services among providers), medical records maintenance,
personnel supervision, and prerequisites for the prescription of
medication. The application of some of these laws to telemedicine
is unclear and subject to differing interpretation. Further, laws
and regulations specific to delivering medical services utilizing
telemedicine technologies continues to evolve with some states
incorporating modality and consent requirements for certain
telemedicine encounters.
Telemedicine
services also implicate state corporate practice of medicine and
fee-splitting laws which vary from state to state and are not
always consistent among states. In addition, these requirements are
subject to broad powers of interpretation, enforcement discretion
by state regulators, and, in some cases, dated (yet still valid)
case law. Some of these requirements may apply to us or our
partners, even if we do not have a physical presence in the state,
based solely on the engagement of a provider licensed in the state
or the provision of telemedicine to a resident of the state.
However, regulatory authorities or other parties, including
providers in our affiliated provider network, may assert that,
despite these arrangements, we are engaged in the corporate
practice of medicine or that our contractual arrangements with
affiliated physician groups constitute unlawful fee-splitting. In
this event, failure to comply could lead to adverse judicial or
administrative action against us and/or our providers, civil or
criminal penalties, receipt of cease-and-desist orders from state
regulators, loss of provider licenses, or the need to make changes
to the arrangements with our affiliated provider network; each of
which could interfere with our business or prompt other materially
adverse consequences.
U.S. Federal and State Health Information Privacy and Security
Laws
There
are numerous U.S. federal and state laws and regulations related to
the privacy and security of personally identifiable information
(“PII”), including health information. In particular,
HIPAA as amended by the Health Information Technology for Economic
and Clinical Health Act, and its respective implementing
regulations establishes privacy and security standards that limit
the use and disclosure of PHI, and require the implementation of
administrative, physical, and technical safeguards to ensure the
confidentiality, integrity and availability of individually
identifiable health information in electronic form. Our affiliated
network providers and our hospital, health system and other
provider clients are all regulated as covered entities under HIPAA.
Since the effective date of the HIPAA Omnibus Final Rule on
September 23, 2013, HIPAA’s requirements are also directly
applicable to the independent contractors, agents and other
“business associates” of covered entities that create,
receive, maintain or transmit protected health information
(“PHI”) in connection with providing services to
covered entities. We are a business associate under HIPAA when we
are working on behalf of our affiliated providers.
Violations
of HIPAA may result in civil and criminal penalties. The civil
penalties range from $119 to $59,522 per violation, with a cap of
$1.8 million per year for violations of the same standard during
the same calendar year. However, a single breach incident can
result in violations of multiple standards. We must also comply
with HIPAA’s breach notification rule. Under the breach
notification rule, covered entities must notify affected
individuals without unreasonable delay in the case of a breach of
unsecured PHI, which may compromise the privacy, security or
integrity of the PHI. In addition, notification must be provided to
Health and Human Services (“HHS”) and the local media
in cases where a breach affects more than 500 individuals. Breaches
affecting fewer than 500 individuals must be reported to HHS on an
annual basis. The regulations also require business associates of
covered entities to notify the covered entity of breaches by the
business associate.
State
attorneys general also have the right to prosecute HIPAA violations
committed against residents of their states. While HIPAA does not
create a private right of action that would allow individuals to
sue in civil court for a HIPAA violation, its standards have been
used as the basis for the duty of care in state civil suits, such
as those for negligence or recklessness in misusing personal
information. In addition, HIPAA mandates that HHS conduct periodic
compliance audits of HIPAA covered entities and their business
associates for compliance. It also tasks HHS with establishing a
methodology whereby harmed individuals who were the victims of
breaches of unsecured PHI may receive a percentage of the Civil
Monetary Penalty fine paid by the violator. In light of the HIPAA
Omnibus Final Rule, recent enforcement activity, and statements
from HHS, we expect increased federal and state HIPAA privacy and
security enforcement efforts.
HIPAA
also required HHS to adopt national standards establishing
electronic transaction standards that all healthcare providers must
use when submitting or receiving certain healthcare transactions
electronically.
Many
states in which we or our research and development partners may
operate also have laws that protect the privacy and security of
sensitive and personal information, including health information.
These laws may be similar to or even more protective than HIPAA and
other federal privacy laws. For example, the laws of the State of
California are more restrictive than HIPAA. Where state laws are
more protective than HIPAA, we must comply with the state laws to
which we are subject, in addition to HIPAA. In certain cases, it
may be necessary to modify our planned operations and procedures to
comply with these more stringent state laws. Not only may some of
these state laws impose fines and penalties upon violators, but
also some, unlike HIPAA, may afford private rights of action to
individuals who believe their personal information has been
misused. In addition, state laws are changing rapidly, and there is
discussion of a new federal privacy law or federal breach
notification law, to which we may be subject.
In
addition to HIPAA, state health information privacy laws, we may be
subject to other state and federal privacy laws, including laws
that prohibit unfair privacy and security practices and deceptive
statements about privacy and security and laws that place specific
requirements on certain types of activities, such as data security
and texting.
In
recent years, there have been a number of well-publicized data
breaches involving the improper use and disclosure of PII and PHI.
Many states have responded to these incidents by enacting laws
requiring holders of personal information to maintain safeguards
and to take certain actions in response to a data breach, such as
providing prompt notification of the breach to affected individuals
and state officials. In addition, under HIPAA and pursuant to the
related contracts that we enter into with our business associates,
we must report breaches of unsecured PHI to our contractual
partners following discovery of the breach. Notification must also
be made in certain circumstances to affected individuals, federal
authorities and others.
Employees
As of
March 30, 2021, we had a staff of 41, consisting of 40 full-time
employees and 1 part-time employee.
Corporate Information
We were
incorporated in Texas on December 14, 2001. On March 15, 2019, we
entered into a Share Exchange Agreement with CGI Cellerate RX, an
affiliate of Catalyst, pursuant to which we acquired
Catalyst’s 50% equity interest in Cellerate, LLC
(“Cellerate”) in exchange for 1,136,815 shares of our
newly created Series F Convertible Preferred Stock (the
“Cellerate Acquisition”). Prior to the consummation of
the Cellerate Acquisition, we and Catalyst each owned a 50% equity
interest in Cellerate. The Cellerate Acquisition was accounted for
as a reverse merger, and Cellerate was deemed to be the accounting
acquirer. In May 2019, we changed our name to Sanara MedTech
Inc.
Our
principal executive offices are located at 1200 Summit Ave, Suite
414, Fort Worth, Texas 76102, telephone number (817) 529-2300. Our
website address is www.sanaramedtech.com. Information accessed
through our website is not incorporated into this annual report and
is not a part of this annual report.
Available Information
The
Company electronically files reports with the Securities and
Exchange Commission (the “SEC”). The SEC maintains an
Internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers
that file electronically with the SEC. Copies of the
Company’s Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K and amendments to those
reports filed or furnished to the SEC are also available free of
charge through the Company’s website
(http://www.sanaramedtech.com/), as soon as reasonably practicable
after electronically filing with or otherwise furnishing such
information to the SEC, and are available in print to any
shareholder who requests it.
The
risks below are those that we believe are the material risks that
we currently face, but are not the only risks facing us and our
business. If any of these risks actually occur, our business,
financial condition and results of operations could be materially
adversely affected. Below is a summary of our risk factors with a
more detailed discussion following.
●
The COVID-19
pandemic in the United States has and may continue to negatively
impact our business, financial condition and results of
operations.
●
We have had a
history of losses, which may continue as we expand our selling
efforts.
●
Our revenue growth
for a particular period is difficult to predict, and a shortfall in
forecast revenues may harm our operating results.
●
Our current
comprehensive wound and skin care strategy involves growth through
acquisitions and investments, which requires us to incur
substantial costs and potential liabilities for which we may never
realize the anticipated benefits.
●
If we cannot meet
our future capital requirements, our business will
suffer.
●
Failure to retain
and recruit key personnel would harm our ability to meet key
objectives.
●
Failure to manage
our growth strategy could harm our business.
●
We operate in
highly competitive markets and face competition from large,
well-established medical device manufacturers and telehealth
providers as well as new market entrants, and if we are unable to
compete within our markets or our products and services do not gain
market acceptance, our operating results and financial condition
could suffer.
●
Security breaches
and other disruptions could compromise our information and expose
us to liability, which would cause our business and reputation to
suffer.
●
If we fail to
maintain an effective system of internal controls over financial
reporting, we may not be able to accurately report our financial
results or prevent fraud and our business may be harmed and our
stock price may be adversely impacted.
●
The Loan Agreement
governing our revolving line of credit includes restrictive terms,
and our failure to comply with any of these terms could result in a
default, which would have an adverse effect on our
business.
●
We rely on our
research and development partners to design, manufacture and supply
the products we have licensed for marketing.
●
Our future success
will largely depend on our ability to maintain and further grow
clinical acceptance and adoption of our products, and we may be
unable to adequately educate healthcare practitioners on the use
and benefits of our products.
●
Competitors could
invent products superior to ours and cause our products and
technologies to become obsolete.
●
Disruption of, or
changes in, our distribution model or customer base could harm our
sales and margins.
●
If we are unable to
manage product inventory in an effective manner, our profitability
could be impaired.
●
Failure of any
third-party assessments to demonstrate desired outcomes in proposed
endpoints may result in adverse regulatory actions, reduce
physician usage or adoption of our products, or reduce the price,
coverage and/or reimbursement for our products, which could have a
negative impact on our business performance.
●
We may have
exposure to product liability claims.
●
Interruptions in
the supply of our products or inventory loss may adversely affect
our business, results of operations and financial
condition.
●
Our planned
expansion into wound and skin care virtual consult and other
services will require entrance into several markets in which we
have little or no experience and is dependent on our relationships
with affiliated professional entities to provide physician
services.
●
Recent and frequent
state legislative and regulatory changes specific to telemedicine
may present us with additional requirements and state compliance
costs, with potential operational impacts in certain
jurisdictions.
●
If we are unable to
adequately protect our intellectual property rights, we may not be
able to compete effectively.
●
CellerateRX
Surgical no longer has patent protection. Accordingly, CellerateRX
Surgical may be subject to competition from the sale of
substantially equivalent products that could adversely affect our
business and operations.
●
We are heavily
dependent on technologies and products we have licensed from third
parties, and we may need to license technologies and products in
the future, and if we fail to obtain licenses we need, or fail to
comply with our payment obligations in the agreements under which
we in-license intellectual property and other rights from third
parties, we could lose our ability to develop and commercialize our
products.
●
We may be found to
infringe on intellectual property rights of others.
●
Our business is
affected by numerous regulations relating to the labeling,
marketing and sale of our products.
●
Delays in or
changes to the FDA clearance and approval processes or ongoing
regulatory requirements could make it more difficult for us to
obtain FDA clearance or approval of new products or comply with
ongoing requirements.
●
Changes in
reimbursement policies and regulations by governmental or other
third-party payors may have an adverse impact on the use of our
products.
●
We rely on our
research and development partners to comply with applicable laws
and regulations relating to product classification and FDA
marketing authorization.
●
We and our
employees and contractors are subject, directly or indirectly, to
federal, state and foreign healthcare fraud and abuse laws,
including false claims laws. If we are unable to comply, or have
not fully complied, with such laws, we could face substantial
penalties.
●
Our or our research
and development partners’ use and disclosure of personally
identifiable information is subject to federal and state privacy
and security regulations, and our failure to comply with those
regulations or to adequately secure the information we hold could
result in significant liability or reputational harm and, in turn,
a material adverse effect on our client base, business, financial
condition and results of operations.
●
If we fail to
comply with extensive healthcare laws and government regulations,
we could suffer penalties or be required to make significant
changes to our operations.
●
Our officers,
employees, independent contractors, principal investigators and
commercial partners may engage in activities that are improper
under other laws and regulations, which would create liability for
us.
●
We could be
adversely affected if healthcare reform measures substantially
change the market for medical care or healthcare coverage in the
United States.
●
Defects, failures
or quality issues associated with our products could lead to
product recalls or safety alerts, adverse regulatory actions,
litigation and negative publicity that could materially adversely
affect our reputation, business, results of operations and
financial condition.
●
It is possible that
we will require additional capital to meet our financial
obligations and support business growth.
●
The trading price
of the shares of our common stock is highly volatile, and
purchasers of our common stock could incur substantial
losses.
●
Our common stock
does not have a vigorous trading market, and you may not be able to
sell your securities at or near ask prices, or at all.
●
The potential sale
of large amounts of common stock may have a negative effect upon
the market value of our shares.
●
A few of our
existing shareholders own a large percentage of our voting stock
and have control over matters requiring shareholder approval and
may delay or prevent a change in control or otherwise lead to
actual or potential conflicts of interest.
●
Our Certificate of
Formation includes provisions limiting the personal liability of
our directors for breaches of fiduciary duties under Texas
law.
●
Texas law and our
Certificate of Formation and bylaws contain anti-takeover
provisions that could delay or discourage takeover attempts that
shareholders may consider favorable.
●
Our failure to meet
the continued listing requirements of The Nasdaq Capital Market
could result in a delisting of our common stock.
Risks Related to How We Operate Our Business
The COVID-19 pandemic in the United States has and may continue to
negatively impact our business, financial condition and results of
operations.
The
COVID-19 pandemic is ongoing in the United States and most of the
world. On January 30, 2020 the World Health Organization declared a
global emergency, and since that time governments have instituted
measures to attempt to contain spread of the virus, including
temporary limitations on non-essential business activities and
elective surgical procedures in hospitals.
A
majority of our revenue is currently generated from the sale of
products in connection with surgical procedures, and a significant
portion of those sales are to hospitals. Beginning in March 2020,
many states issued orders suspending elective surgeries in order to
free-up hospital resources to treat COVID-19 patients. This
resulted in a reduction in demand for our surgical products
beginning in the second half of March 2020. Additionally, most
states limited access to SNFs to only resident caregivers, which
impeded our ability to provide education and product training to
the clinicians who use our products in these facilities. These
restrictions resulted in an overall decline in sales for the second
quarter of 2020. During the third and fourth quarters of 2020, we
saw a strong rebound in product sales as restrictions on elective
surgeries eased in our primary markets in Texas, Florida, and the
southeastern United States.
The
extent to which these events impact our business will depend on
future developments regarding the rate of infection of the virus
and the further or lessening of current or new restrictions put in
place to contain the pandemic.
We have had a history of losses, which may continue as we expand
our selling efforts.
We have
incurred net losses in most years since we began our current
operations in 2004. We plan to continue making significant
investments in our sales force and clinical programs, which
substantially increase our operating expenses. Consequently, we
will need to continue our revenue growth to become profitable in
future periods. We cannot offer any assurance that we will be able
to generate future sales growth. If we fail to achieve
profitability, our stock price may decline, and you may lose part
or all of your investment.
Our revenue growth for a particular period is difficult to predict,
and a shortfall in forecast revenues may harm our operating
results.
Because
we are a relatively small company, our revenue growth and,
consequently, results of operations are difficult to predict. We
plan our operating expense levels based primarily on forecasted
revenue levels. A shortfall in revenue could lead to operating
results being below expectations as we may not be able to quickly
reduce our fixed expenses in response to short-term revenue
shortfalls. We have experienced fluctuations in revenue and
operating results from quarter to quarter and anticipate that these
fluctuations will continue until we achieve a critical mass with
our product and service sales. These fluctuations can result from a
variety of factors, including:
●
economic
conditions worldwide, as well as economic conditions specific to
the healthcare industry, which could affect the ability of surgical
and post-acute facilities to purchase our products and could result
in a reduction in elective operative procedures;
●
governmental
regulations, including those adopted in response to the COVID-19
pandemic;
●
the
uncertainty surrounding our ability to attract new customers and
retain existing customers;
●
changes
in reimbursement rates for our products by government and private
insurers;
●
the
length and variability of our sales cycle, especially gaining
approvals for the use of our products in additional hospitals and
surgery centers, which makes it difficult to forecast the quarter
in which our sales will occur;
●
issues
including delays in the sourcing of our products;
●
the
timing of regulatory approvals;
●
the
timing of operating expense relating to the expansion of our
business and operations;
●
changes
in the pricing of our products and those of our
competitors;
●
the
development of new wound care products or product enhancements by
our competitors; and
●
actual
events, circumstances, outcomes and amounts differing from
assumptions and estimates used in preparing our operating plan and
how well we execute our strategy and operating plans.
As a
consequence, operating results for a particular future period are
difficult to predict and prior results are not necessarily
indicative of future results. Any of the foregoing factors, or any
other factors discussed elsewhere herein, could have a material
adverse effect on our business.
Our current comprehensive wound and skin care strategy involves
growth through acquisitions and investments, which requires us to
incur substantial costs and potential liabilities for which we may
never realize the anticipated benefits.
In
addition to internally generated growth, our current strategy to
expand into wound and skin care virtual consult and other services
involves growth through acquisitions and investments. Between
January 1, 2020 and December 31, 2020, we have made minority
shareholder investments in two businesses at a total cost of
approximately $1.1 million, and in February 2021, we made an
additional $0.6 million investment in such businesses. In addition,
in January 2021 we acquired WounDerm for aggregate consideration of
29,536 shares of our common stock.
We may
be unable to continue implementing our growth strategy, and our
strategy ultimately may be unsuccessful. We engage in evaluations
of potential acquisitions and investments and are in various stages
of discussion regarding possible acquisitions, certain of which, if
consummated, could be significant to us. Any new acquisition or
investment could result in material transaction expenses, increased
interest and amortization expense, increased depreciation expense
and increased operating expense, any of which could have a material
adverse effect on our operating results. In addition, if we are
unable to integrate businesses and operations that we acquire in
the future, our profitability could suffer. These acquisitions and
investments also involve other risks, including diversion of
management resources otherwise available for the running of our
business and the development of our business as well as risks
associated with entering markets in which our marketing teams and
sales force has limited experience or where experienced
distribution alliances are not available. We may not be able to
identify suitable acquisition or investment candidates in the
future, obtain acceptable financing or consummate any future
acquisitions or investments. In addition, certain potential
acquisitions may be subject to antitrust and competition laws,
which could impact our ability to pursue strategic acquisitions and
could result in mandated divestitures. If we are unsuccessful in
our current strategy to expand into wound and skin care virtual
consult and other services, we may be unable to meet our financial
targets and our financial performance could be materially and
adversely affected.
If we cannot meet our future capital requirements, our business
will suffer.
We have
a history of operating losses and negative cash flow from operating
activities, and future results of operations involve significant
risks and uncertainties. Factors that could affect our future
operating results and cause actual results to vary materially from
expectations include, but are not limited to, demand for our
products and services, new product and service offerings from
competitors, regulatory approval of our new products, technological
change, and dependence on key personnel. Although we have taken
steps to improve our overall liquidity, if our cash flow is
insufficient, we may be forced to seek additional debt or equity
financing in order to:
●
increase
marketing to address the market for surgical, wound and skin care
products and services;
●
take
advantage of opportunities, including more rapid expansion or
acquisitions of complementary products or businesses;
●
hire,
train and retain employees;
●
develop
and/or distribute new products; and/or
●
respond
to economic and competitive pressures.
If our
capital needs are met through the issuance of equity or convertible
debt securities, the percentage ownership of our current
shareholders may be reduced which may have a negative impact on the
market price of our common stock. Our future success may be
determined in large part by our ability to obtain additional
financing, and the incurrence of indebtedness would result in
increased debt service obligations which could result in operating
and financing covenants that would restrict our operations. There
can be no assurance that such financing would be available or, if
available, that such financing could be obtained upon terms
acceptable to us. If adequate funds are not available, or are not
available on acceptable terms, our operating results and financial
condition may suffer.
Failure to retain and recruit key personnel would harm our ability
to meet key objectives.
Our
success depends, in large part, on our ability to attract and
retain skilled executive, managerial, sales and marketing
personnel. We compete for such personnel with other companies, some
of which have greater financial resources than we do to recruit and
retain personnel. There can be no assurance that we will be able to
find and attract additional qualified employees or retain any such
executive officers and other key personnel. The inability to hire
qualified personnel or the loss of services of our executive
officers or key personnel may have a material adverse effect on our
business. Further, any inability on our part to enforce non-compete
arrangements related to key personnel who have left our company or
may leave our company in the future could have a material adverse
effect on our business.
Failure
to manage our growth strategy could harm our
business.
Our
ability to successfully implement our business plan and market and
sell our surgical, wound and skin care products and services
requires an effective plan for managing our future growth. We plan
to increase the scope of our operations at a rapid rate. Future
expansion efforts will be expensive and may strain our internal
operating resources. To manage future growth effectively, we must
maintain and enhance our financial and accounting systems and
controls, integrate new personnel and manage expanded operations.
If we do not manage growth properly, it could harm our operating
results and financial condition.
We operate in highly competitive markets and face competition from
large, well-established medical device manufacturers and telehealth
providers as well as new market entrants, and if we are unable to
compete within our markets or our products and services do not gain
market acceptance, our operating results and financial condition
could suffer.
Competition
from other medical device companies is significant and could be
significantly affected by new product introductions and other
activities of market participants. We compete with other companies
in acquiring rights to products or technologies from third-party
developers. Although our products have performed well in customer
evaluations, we are a relatively unknown brand in a market
dominated by companies with extensive product lines and large
customer bases. We may not, even with more efficacious products, be
able to secure contracts and achieve significant growth with large
national accounts.
In
addition, if we launch our wound and skin care virtual consult and
other service offerings, we will face competition from other
telehealth providers. The public health emergency caused by the
COVID-19 pandemic has led to the widespread adoption of
telemedicine for most health care clinical specialties, including
wound care and dermatology. As such, any clinical wound care or
dermatology physician and/or provider group that has incorporated
telemedicine into their practice could be considered competitive.
If we are unable to compete with other telehealth providers, our
operating results and financial condition may suffer.
Several
factors may limit the market acceptance of our products and
services, including the timing of regulatory approvals and market
entry relative to competitive products and services, the
availability of alternative products and services, the price of our
products and services relative to alternative products and
services, the availability of third-party reimbursement and the
extent of marketing efforts by third-party distributors or agents
that we retain. There can be no assurance that our products or
services will receive market acceptance in a commercially viable
period of time, if at all. Furthermore, there can be no assurance
that we can develop products and services that are more effective
or achieve greater market acceptance than competitive products and
services, or that our competitors will not succeed in developing or
acquiring products and technologies that are more effective than
those being developed by us, that would render our products and
technologies less competitive or obsolete.
Our
competitors enjoy several competitive advantages over us, including
but not limited to:
●
large
and established distribution networks in the U.S. and/or in
international markets;
●
greater
financial, managerial and other resources for products research and
development, sales and marketing efforts and protecting and
enforcing intellectual property rights;
●
greater
name recognition;
●
more
expansive portfolios of products and intellectual property rights;
and
●
greater
experience in obtaining and maintaining regulatory approvals and/or
clearances from the FDA and other regulatory agencies.
The
presence of competition in our market may lead to pricing pressure
which would make it more difficult to sell our products and
services at a profitable price or may prevent us from selling our
products at all. Our failure to compete effectively would have a
material adverse effect on our business.
Security breaches and other disruptions could compromise our
information and expose us to liability, which would cause our
business and reputation to suffer.
In the
ordinary course of our business, we use networks to collect and
store sensitive data, including intellectual property, proprietary
business information and important information of our customers,
suppliers and business partners, as well as personally identifiable
information of our customers and employees. The secure processing,
maintenance and transmission of this information is critical to our
operations. Despite our security measures, our information
technology and infrastructure may be vulnerable to attacks by
hackers or breached due to employee error, malfeasance or other
disruptions. Any such breach could compromise our networks and the
information stored there could be accessed, publicly disclosed,
lost or stolen. Any such access, disclosure or other loss of
information could result in the loss of existing customers,
difficulty in attracting new customers, backlash from negative
public relations, legal claims or proceedings, liability under laws
that protect the privacy of personal information, and regulatory
penalties. Further, such access, disclosure or loss may cause
disruption of our operations and the services we provide to
customers, damage to our reputation, and cause a loss of confidence
in our products and services, which could adversely affect our
business.
We have
programs, processes and technologies in place to prevent, detect,
contain, respond to and mitigate security related threats and
potential incidents. We undertake considerable ongoing improvements
to our systems, connected devices and information-sharing products
in order to minimize vulnerabilities, in accordance with industry
and regulatory standards. Because the techniques used to obtain
unauthorized access change frequently and can be difficult to
detect, anticipating, identifying or preventing these intrusions or
mitigating them if and when they occur, may be
challenging.
If we fail to maintain an effective system of internal controls
over financial reporting, we may not be able to accurately report
our financial results or prevent fraud and our business may be
harmed and our stock price may be adversely impacted.
Effective
internal controls over financial reporting are necessary for us to
provide reliable financial reports and to effectively prevent
fraud. Any inability to provide reliable financial reports or to
prevent fraud could harm our business. The Sarbanes-Oxley Act of
2002 (the “Sarbanes-Oxley Act”) requires management to
evaluate and assess the effectiveness of our internal control over
financial reporting. In order to comply with the requirements of
the Sarbanes-Oxley Act, we are required to continuously evaluate
and, where appropriate, enhance our policies, procedures and
internal controls. If we fail to maintain the adequacy of our
internal controls over financial reporting, we could be subject to
litigation or regulatory scrutiny and investors could lose
confidence in the accuracy and completeness of our financial
reports. We cannot provide any assurance that in the future we will
be able to fully comply with the requirements of the Sarbanes-Oxley
Act or that management will conclude that our internal control over
financial reporting is effective. If we fail to fully comply with
the requirements of the Sarbanes-Oxley Act, our business may be
harmed and our stock price may decline. In addition, because of its
inherent limitations, internal control over financial reporting may
not prevent or detect misstatements.
For
instance, our assessment, testing and evaluation of the design and
operating effectiveness of our internal control over financial
reporting resulted in our conclusion that as of December 31, 2019,
our internal control over financial reporting was not effective,
due to our small size and limited segregation of duties. As a
result of such determination, we implemented additional controls,
including the hiring of an additional full-time accounting
professional in January 2020, which enabled us to properly
segregate duties, and concluded that the material weakness was
remediated as of June 30, 2020. While we have concluded that the
material weakness has been remediated, projections of any
evaluation of the effectiveness of internal control over financial
reporting for future periods are subject to the risk that controls
may become inadequate because of changes in conditions or if the
degree of compliance with the policies or procedures deteriorate
over time.
The Loan Agreement governing our revolving line of credit includes
restrictive terms, and our failure to comply with any of these
terms could result in a default, which would have an adverse effect
on our business and prospects.
On
January 15, 2021, we entered into a loan agreement (the “Loan
Agreement”) with Cadence Bank, N.A. (“Cadence”)
that provides for a $2.5 million revolving line of credit. The Loan
Agreement governing our revolving line of credit requires us to
maintain compliance with certain financial covenants, including,
among others, a minimum liquidity of $1.0 million as of December
31, 2020 and March 31, 2021, a minimum Tangible Net Worth (as
defined in the Loan Agreement) of $1.0 million and, beginning with
the fiscal quarter ending June 30, 2021, a minimum Interest
Coverage Ratio (as defined in the Loan Agreement) of 1.5 to 1.0. A
breach of these covenants could result in a default under the Loan
Agreement. If amounts owed under the Loan Agreement are accelerated
because of a default and we are unable to pay such amounts, Cadence
may have the right to assume control of substantially all of our
assets.
If we
are unable to refinance or repay amounts that we borrow under our
revolving line of credit prior to its maturity date, our cash flow
would be directed to the repayment of our debt and would not be
available for operating our business. No assurance can be given
that any refinancing or additional financing will be possible when
needed or that we will be able to negotiate acceptable terms. In
addition, our access to capital is affected by prevailing
conditions in the financial and capital markets and other factors
beyond our control. There can be no assurance that market
conditions will be favorable at the times that we require new or
additional financing.
Risks Related to Our Products
We rely on our research and development partners to design,
manufacture and supply the products we have licensed for marketing.
If one of our partners fails to perform adequately or fulfill our
needs, we may be required to incur significant costs. We may also
face significant delays in our product introductions and
commercialization.
We do
not currently own any facility that may be used as a manufacturing
and processing facility, and we rely on our research and
development partners, from whom we license all of the products we
currently commercialize, to design, manufacture and supply such
products.
Our
research and development partners responsible for manufacturing our
products and their contract manufacturers are obliged to operate in
accordance with FDA’s current good manufacturing practices
(“cGMP”), current good tissue practices
(“cGTP”), and the Quality System Regulation
(“QSR”), as applicable, as well as other regulations
applicable to medical product manufacturers. The manufacture of
regulated medical products in compliance with cGMP, cGTP, and the
QSR, as applicable, requires significant expertise and capital
investment, including the development of advanced manufacturing
techniques and process controls. Manufacturers of medical products
often encounter difficulties in production, including difficulties
with production costs and yields, quality control, including
product stability and quality assurance testing, shortages of
qualified personnel, as well as compliance with strictly enforced
regulatory requirements, other federal and state regulatory
requirements and foreign regulations. If our research and
development partners or their contract manufacturers were to
encounter any of these difficulties or otherwise fail to comply
with their obligations to us or under applicable regulations, our
ability to commercialize our products would be jeopardized. Any
delay or interruption in the supply of products could have a
material adverse effect on our business.
The
manufacturers of our products may be unable to comply with
applicable FDA, state and foreign regulatory requirements. The FDA
or similar foreign regulatory agencies may also implement new
standards at any time, or change their interpretation and
enforcement of existing standards for manufacture, packaging or
testing of regulated products. We have little control over the
manufacturers’ compliance with these regulations and
standards. A failure of any of our current or future research and
development partners or their contract manufacturers to establish
and follow cGMP, cCTP, and the QSR, as applicable, and to document
their adherence to such practices may lead to significant delays in
obtaining marketing authorization of future products or the
ultimate launch of products. Failure by our current or future
partners or manufacturers or us to comply with applicable
regulations could also result in sanctions being imposed on us or
our partners, including fines, injunctions, civil penalties,
failure of the government to grant marketing authorization, delays,
suspension or withdrawal of authorization, seizures or recalls of
products, operating restrictions, and criminal prosecutions. If the
safety of any product supplied is compromised due to the
manufacturers’ failure to adhere to applicable laws or for
other reasons, we may not be able to successfully commercialize our
products. Any of these factors could cause a delay of
commercialization of our products, entail higher costs or impair
our reputation.
Our future success will largely depend on our ability to maintain
and further grow clinical acceptance and adoption of our products,
and we may be unable to adequately educate healthcare practitioners
on the use and benefits of our products.
Healthcare
practitioners play a significant role in determining the course of
a patient’s treatment and, ultimately, the type of products,
if any, that will be used to treat the patient. As a result, our
commercial success is heavily dependent on our ability to educate
practitioners on the use of our products in both surgical and
post-acute care settings. Acceptance and adoption of our products
in our markets depends on educating healthcare practitioners as to
the distinctive characteristics, benefits, safety, clinical
efficacy and cost-effectiveness of our products, including
potential comparisons to our competitors’ products, and on
training healthcare practitioners in the proper application of our
products. If we are not successful in convincing healthcare
practitioners of the merits and advantages of our products compared
to our competitors’ products, they may not use our products
and we will be unable to increase our sales and sustain growth or
profitability.
Convincing
healthcare practitioners to dedicate the time and energy necessary
to properly train to use new products and techniques is
challenging, and we may not be successful in these efforts. In
particular, as healthcare resources are strained due to the ongoing
COVID-19 pandemic, it may be more difficult to convince healthcare
practitioners to commit their time and resources to learning to use
a new product. If healthcare practitioners are not properly
trained, they may use our products ineffectively, resulting in
unsatisfactory patient outcomes, negative publicity or lawsuits
against us. Accordingly, even if our products show superior
benefits, safety or efficacy, based on head-to-head clinical
trials, in comparison to alternative treatments, our success will
depend on our ability to gain and maintain market acceptance for
our products. If we fail to do so, our sales will not grow and our
business, financial condition and results of operations will be
adversely affected. We may not have adequate resources to
effectively educate the medical community and our efforts may not
be successful due to physician resistance or negative perceptions
regarding our products.
Healthcare
practitioners may be hesitant to change their medical treatment
practices for the following reasons, among others:
●
lack or
perceived lack of evidence supporting greater efficacy versus
standard of care;
●
perceived
liability risks generally associated with the use of new products
and procedures;
●
limited
or lack of availability of coverage and reimbursement within
healthcare payment systems;
●
existing
sole-source supply contracts with purchasing entities, such as
hospital systems and group purchasing organizations, that do not
use our products;
●
pressure
to contain costs and use lower cost alternatives to our products;
and
●
the
time commitment that may be required for training to use new
products or technologies.
Competitors could invent products superior to ours and cause our
products and technologies to become obsolete.
The
wound care sector of the medical products industry is characterized
by a multitude of technologies and intense competition. Our
competitors currently manufacture and distribute a variety of
products that are, in many respects, comparable to our products.
Many suppliers of competing products are considerably larger and
have much greater resources than we have. In addition, many
specialized products companies have formed collaborations with
large, established companies to support research, development and
commercialization of wound care products which may be competitive
with ours. Academic institutions, government agencies and other
public and private research organizations are also conducting
research activities and may commercialize wound care products on
their own or through joint ventures. It is possible that these
competitors may develop technologies and products that are more
effective than any we currently have. If this occurs, any of our
products and technology affected by these developments could become
obsolete.
Disruption of, or changes in, our distribution model or customer
base could harm our sales and margins.
If we
fail to manage the distribution of our products properly, or if the
financial condition or operations of our reseller channels weaken,
there may be a material adverse effect on our business.
Furthermore, a change in the mix of our customers between service
provider and enterprise, or a change in the mix of direct and
indirect sales, could adversely affect our business.
Several
factors could also result in disruption of or changes in our
distribution model or customer base, which could harm our sales and
margins, including the following:
●
in some
instances, we compete with some of our resellers through our direct
sales, which may lead these channel partners to use other suppliers
that do not compete; and
●
some of
our resellers may have insufficient financial resources and may not
be able to withstand changes in business conditions.
If we are unable to manage product inventory in an effective and
efficient manner, our profitability could be impaired.
Many
factors affect the efficient use and planning of product inventory,
such as effectiveness of predicting demand, effectiveness of
preparing manufacturing to meet demand, efficiently meeting product
mix and product demand requirements and product expiration. Our
products have a shelf life of between 18 months and three years. If
we are unable to manage our product inventory efficiently or within
expected budget goals, or keep sufficient finished and in-process
product on hand to meet demand, our operating margins and long-term
growth prospects could be impaired.
We
place orders with our suppliers based on forecasts of demand and,
in some instances, may acquire additional inventory to accommodate
anticipated demand. Our forecasts are based on management’s
judgment and assumptions, each of which may introduce error into
our estimates. If we overestimate customer demand, our excess or
obsolete inventory may increase significantly, which would reduce
our gross margin and adversely affect our financial results.
Conversely, if we underestimate customer demand or if insufficient
manufacturing capacity is available, we would miss revenue
opportunities and potentially lose market share and damage our
customer relationships.
Failure of any third-party assessments to demonstrate desired
outcomes in proposed endpoints may result in adverse regulatory
actions, reduce physician usage or adoption of our products, or
reduce the price, coverage and/or reimbursement for our products,
which could have a negative impact on our business
performance.
Our
collaborators regularly conduct clinical studies designed to test a
variety of endpoints associated with product performance and use
across a number of applications. If a clinical study conducted by
our collaborators fails to demonstrate statistically significant
results supporting performance, use benefits or compelling health
economic outcomes from using our products, physicians may elect not
to use our products as a treatment for conditions that may benefit
from them. Furthermore, in the event of an adverse clinical study
outcome, our products may not achieve
“standard-of-care” designations, where they exist, for
the conditions in question, which could deter the adoption of our
products. Also, if serious adverse events are reported during the
conduct of a study, it could affect continuation of the study,
product marketing authorization by regulatory authorities and
product adoption by healthcare professionals or could cause
regulatory authorities to impose other restrictions on the product
or require additional warning or precaution statements to appear on
the product labeling. If our collaborators are unable to develop a
body of statistically significant evidence from our clinical
studies, whether due to adverse results or the inability to
complete properly designed studies, public and private payors could
refuse to cover our products, limit the manner in which they cover
our products, or reduce the price they are willing to pay or
reimburse for our products.
We may have exposure to product liability claims.
Although
we have contractual indemnity from the manufacturers of our current
products for certain liability claims related to their production,
we could face a product liability claim outside of the scope of the
contractual indemnities. We do not have, and do not anticipate
obtaining, contractual indemnification from parties supplying raw
materials or parties marketing the products we sell. In any event,
indemnification from the manufacturers of our products or from any
other party is limited by the terms of the indemnity and by the
creditworthiness of the indemnifying party. A successful product
liability claim or series of claims brought against us could result
in judgments, fines, damages and liabilities that could have a
material adverse effect on our business. We may incur significant
expense investigating and defending these claims, even if they do
not result in liability. Moreover, even if no judgments, fines,
damages or liabilities are imposed on us, our reputation could
suffer as result of a product liability claim, which could have a
material adverse effect on our business.
Product
liability insurance for the healthcare industry may become
prohibitively expensive, to the extent it is available at all. We
may not be able to maintain such insurance on acceptable terms or
be able to secure increased coverage as commercialization of our
products progresses, nor can we be sure that existing or future
claims against us will be covered by our product liability
insurance. In the event that we do not have adequate insurance or
contractual indemnification, product liability claims relating to
defective products could have a material adverse effect on our
business.
Interruptions in the supply of our products or inventory loss may
adversely affect our business, results of operations and financial
condition.
Our
products are manufactured using technically complex processes
requiring specialized facilities, highly specific raw materials and
other production constraints. The complexity of these processes, as
well as strict company and government standards for the manufacture
and storage of our products, subjects us to production risks. In
addition to ongoing production risks, process deviations or
unanticipated effects of approved process changes may result in
non-compliance with regulatory requirements including stability
requirements or specifications. Most of our products must be stored
and transported within a specified temperature range. For example,
if environmental conditions deviate from that range, our
products’ remaining shelf-lives could be impaired or their
safety and efficacy could be adversely affected, making them
unsuitable for use. These deviations may go undetected. Severe
weather conditions and natural disasters may make compliance with
these processes and maintenance of these standards more difficult,
and climate change threatens more extreme weather events, which
could increase our production risks. The occurrence of actual or
suspected production and distribution problems can lead to lost
inventories, and in some cases recalls, with consequential
reputational damage and the risk of product liability. The
investigation and remediation of any identified problems can cause
production delays and result in substantial additional expenses.
Any unforeseen failure in the storage of our products or loss in
supply could result in a loss of our market share and negatively
affect our revenues and operations.
Increased prices for, or unavailability of, raw materials used in
our products could adversely affect our business, results of
operations and financial condition.
Our
profitability is affected by the prices of the raw materials used
in the manufacture of our products. These prices may fluctuate
based on a number of factors beyond our control, including changes
in supply and demand, general economic conditions, labor costs,
fuel related delivery costs, competition, import duties, excises
and other indirect taxes, currency exchange rates, and government
regulation. Due to the highly competitive nature of the healthcare
industry and the cost containment efforts of our customers and
third-party payors, we may be unable to pass along cost increases
for key components or raw materials through higher prices to our
customers. If the cost of key components or raw materials
increases, and we are unable fully to recover these increased costs
through price increases or offset these increases through other
cost reductions, we could experience lower margins and
profitability. Significant increases in the prices of raw materials
that cannot be recovered through productivity gains, price
increases or other methods could adversely affect our business,
results of operations and financial condition.
Risks Related to Our Planned Expansion into Wound and Skin Care
Virtual Consult and Other Services
Our planned expansion into wound and skin care virtual consult and
other services could have a material adverse effect on our
business, financial condition or results of
operations.
We are
currently developing the capability to offer various services
addressing chronic wound and skin care through our wholly owned
subsidiary UWSS. UWSS’s services are expected to launch in
2021 and include an EMR software platform for both wound and skin
conditions through WounDerm, which we acquired in January 2021,
skin and wound virtual consult services through our affiliations
with DirectDerm and MGroup, and diagnostic products and services
for chronic wounds through our affiliation with Precision Healing.
Our planned expansion into wound and skin care virtual consult and
other services subjects us to risks associated with the use of new
and novel technologies, operational, financial, regulatory, legal
and reputational risks, as well as the risk that we may be unable
to timely or successfully launch our service offerings. The success
of UWSS’s operations depends upon our ability to
commercialize UWSS’s service offerings, and our failure to do
so could negatively affect our ability to generate revenue from
these activities.
Our planned expansion into wound and skin care virtual consult and
other services will require entrance into several markets in which
we have little or no experience, which may not be successful and
could be costly.
As part
of our planned expansion into wound and skin care virtual consult
services, we will be required to enter into other markets in which
we have little to no experience, including EMR, telehealth and
healthcare diagnostics. While we intend to expand our staff with
individuals with more experience in the EMR, telehealth and
diagnostic markets and will closely scrutinize individuals we
engage, we cannot provide assurance that we will be able to retain
or continue to hire well-qualified and experienced individuals or
that our assessment of individuals we retain will be accurate. As
we enter new markets, we will face new technological and
operational risks and challenges with which we are unfamiliar and
may incur significant costs. Entering new markets requires
substantial management efforts and skills to mitigate these risks
and challenges. Our lack of experience with certain of these new
markets may result in unsuccessful new market entries. If we do not
manage our entry into new markets properly, these costs and risks
could harm our business, financial condition or results of
operations.
Our planned expansion into the telehealth business is dependent on
our relationships with affiliated professional entities to provide
physician services, and our business would be adversely affected if
those relationships were disrupted.
There
is a risk that U.S. state authorities in some jurisdictions may
find that any future contractual relationships we enter into with
our affiliated professional entities who provide telehealth
services violate laws prohibiting the corporate practice of
medicine and professional fee-splitting laws. These laws generally
prohibit the practice of medicine by lay persons or entities or
sharing of professional fees with lay persons and are intended to
prevent unlicensed persons or entities from interfering with or
inappropriately influencing a physician’s professional
judgment. The corporate practice of medicine prohibition exists in
some form, by statute, regulation, board of medicine or attorney
general guidance, or case law, in most states and is subject to
change and to evolving interpretations by state boards of medicine,
state attorneys general and state courts. As such, we will be
required to continually monitor our compliance with laws in every
jurisdiction in which we plan to operate, and we cannot guarantee
that subsequent interpretation of the corporate practice of
medicine laws will not circumscribe our future business operations.
State corporate practice of medicine doctrines could also subject
physicians to penalties for aiding the corporate practice of
medicine, which could discourage physicians from participating in
our network of providers.
Due to
the prevalence of the corporate practice of medicine doctrine,
including in the states where we plan to conduct our telehealth
business, we expect to continue contracting with provider-entities
through management services agreements. Although we expect that
these relationships will continue, we cannot guarantee that they
will. A material change in our relationships with these provider
entities, whether resulting from a dispute among the parties, a
change in government regulation, or the loss of these affiliations,
could impair our ability to provide services to our future clients
and could have a material adverse effect on our business, financial
condition and results of operations. Any scrutiny, investigation or
litigation with regard to our future arrangements with these
professional entities could have a material adverse effect on our
business, financial condition, and results of
operations.
Recent and frequent state legislative and regulatory changes
specific to telemedicine may present us with additional
requirements and state compliance costs, with potential operational
impacts in certain jurisdictions.
The
state laws and regulations specific to telemedicine vary from state
to state and are continually evolving. In some cases, these laws
and regulations target “direct to consumer” telehealth
service offerings rather than specialty consultative services, such
as our planned acute telemedicine service offerings, and
incorporate informed consent, modality, medical records and follow
up care and other requirements. Thus, where new legislation and
regulations apply to our planned expansion into telemedicine
services, we may incur costs to monitor, evaluate, and modify
operational processes for compliance. All such activities will
increase our costs and could, in certain circumstances, impact our
ability to make telemedicine services available in a particular
state.
Risks Related to Intellectual Property
If we are unable to adequately protect our intellectual property
rights, we may not be able to compete effectively.
Part of
our success depends on our and our research development
partners’ ability to protect proprietary rights to
technologies used in certain of our products. We and our research
development partners rely on patents, copyrights, trademarks and
trade secret laws to establish and maintain proprietary rights in
our technology and products. However, these legal means afford only
limited protection and may not adequately protect our or our
research development partners’ rights or permit us to gain or
keep a competitive advantage. Patents and patent applications for
the products we have may not be broad enough to prevent competitors
from introducing similar products into the market. Our or our
research development partners’ patents or attempts to enforce
them may not be upheld by the courts. Efforts to enforce any of our
or our research development partners’ proprietary rights
could be time-consuming and expensive, which could adversely affect
our business and prospects and divert management’s attention.
There can be no assurance that our or our research and development
partners’ proprietary rights will not be challenged,
invalidated or circumvented or that such rights will in fact
provide competitive advantages to us.
CellerateRX Surgical is not currently protected by any pending
patent application nor any unexpired patent. Accordingly,
CellerateRX Surgical may be subject to competition from the sale of
substantially equivalent products that could adversely affect our
business and operations.
CellerateRX
Surgical has no patent protection, and therefore, in order to
continue to obtain commercial benefits from CellerateRX Surgical,
we will rely on product manufacturing trade secrets, know-how and
related non-patent intellectual property. The effect of CellerateRX
Surgical’s lack of patent protection depends, among other
things, upon the nature of the market and the position of our
products in the market from time to time, the size of the market,
the complexities and economics of manufacturing a competitive
product and applicable regulatory approval requirements. In the
event that competition develops substantially equivalent products,
this competition could have a material adverse effect on our
business, financial condition and operating results. The entrance
into the market of a product substantially equivalent to
CellerateRX Surgical may erode our product’s market share,
which may have a material adverse effect on our business, financial
condition and results of operations.
We are heavily dependent on technologies and products we have
licensed from third parties, and we may need to license
technologies and products in the future, and if we fail to obtain
licenses we need, or fail to comply with our payment obligations in
the agreements under which we in-license intellectual property and
other rights from third parties, we could lose our ability to
develop and commercialize our products.
We are
heavily dependent on licenses from our research and development
partners for all of our technologies and products and are party to
a sublicense agreement with CGI Cellerate RX, license agreements
with Rochal and a marketing and distribution agreement with Cook
Biotech. Our sublicense agreement and license agreements require
that we pay royalties to the sublicensor or licensor, as
applicable, based on our net sales of the sublicensed and licensed
products.
No
assurance can be given that our existing sublicense agreement,
license agreements or marketing and distribution agreement will be
extended on reasonable terms or at all. In addition, we expect we
will need to license intellectual property, technology and products
from third parties in the future and that these licenses will be
material to our business. No assurance can be given that we will
meet our minimum performance obligations or generate sufficient
revenue or raise additional financing to meet our payment
obligations in our agreements with CGI Cellerate RX, Rochal and
Cook Biotech or other license or marketing and distribution
agreements we enter into with third parties in the future. Any
failure to meet our minimum performance obligations or make the
payments required by our agreements may permit the licensor or
supplier to terminate the agreement. If we were to lose or
otherwise be unable to maintain these licenses or marketing and
distribution agreements for any reason, it would halt our ability
to commercialize our pipeline products. Furthermore, such loss of
these licenses or marketing and distribution agreements may enable
development of new products that may compete with our pipeline
products, and our competitors may gain proprietary position. Any of
the foregoing could result in a material adverse effect on our
business or results of operations.
We may be found to infringe on intellectual property rights of
others.
Third
parties, including customers, may in the future assert claims or
initiate litigation related to exclusive patent, copyright,
trademark and other intellectual property rights to technologies
and related standards that are relevant to us. These assertions may
emerge over time as a result of our growth and the general increase
in the pace of patent claim assertions, particularly in the U.S.
Because of the existence of a large number of patents in the
healthcare field, the secrecy of some pending patent applications
and the rapid rate of issuance of new patents, we believe that it
is not economically practical or even possible to determine in
advance whether a product or any of its components infringes or
will infringe the patent rights of others. The asserted claims or
initiated litigation can include claims against us or our
manufacturers, suppliers or customers alleging infringement of
their proprietary rights with respect to our existing or future
products or components of those products. Regardless of the merit
of these claims, they can be time-consuming, result in costly
litigation and diversion of technical and management personnel, or
require us to develop a non-infringing technology or enter into
license agreements. Where claims are made by customers, resistance
even to unmeritorious claims could damage customer relationships.
There can be no assurance that licenses will be available on
acceptable terms and conditions, if at all, or that our
indemnification by our suppliers will be adequate to cover our
costs if a claim were brought directly against us or our customers.
Furthermore, because of the potential for high court awards that
are not necessarily predictable, it is not unusual to find even
arguably unmeritorious claims settled for significant amounts. If
any infringement or other intellectual property claim made against
us by any third party is successful, or if we fail to develop
non-infringing technology or license the proprietary rights on
commercially reasonable terms and conditions, our business could be
materially and adversely affected.
Risks Related to Regulations
Our business is affected by numerous regulations relating to the
labeling, marketing and sale of our products.
Government
regulation by the FDA and similar agencies in other countries is a
significant factor in the development, manufacturing and marketing
of our products and in the acquisition or licensing of new
products. Complying with government regulations is often time
consuming and expensive and may involve delays or actions adversely
impacting the marketing and sale of our current or future
products.
Following
initial regulatory approval or clearance of any products that we or
our research and development partners may develop, we and/or our
research and development partners will be subject to continuing
regulatory review, including, but not limited to:
●
establishment
registration and device listing requirements;
●
QSR,
which governs the methods used in, and the facilities and controls
used for, the design, manufacture, packaging, labeling, storage,
installation, and servicing of finished devices;
●
labeling
requirements, which mandate the inclusion of certain content in
medical device labels and labeling, and when fully implemented,
will generally require the label and package of medical devices to
include a unique device identifier, and which also prohibit the
promotion of products for uncleared or unapproved, i.e.,
“off-label,” indications;
●
the
Medical Device Reporting regulation, which requires that
manufacturers and importers report to the FDA if their device may
have caused or contributed to a death or serious injury or
malfunctioned in a way that would likely cause or contribute to a
death or serious injury if it were to recur; and
●
the
Reports of Corrections and Removals regulation, which requires that
manufacturers and importers report to the FDA recalls (i.e.,
corrections or removals) if undertaken to reduce a risk to health
posed by the device or to remedy a violation of the FDCA that may
present a risk to health and that manufacturers and importers keep
records of recalls that they determine to be not
reportable.
Failure
to comply with applicable regulatory requirements can result in,
among other things, the FDA or other governmental
authorities:
●
imposing
fines and penalties on us;
●
preventing
us from manufacturing or selling our products;
●
delaying
or denying pending applications for approval or clearance of our
products or of new uses or modifications to our existing products,
or withdrawing or suspending current approvals or
clearances;
●
ordering
or requesting a recall of our products;
●
issuing
warning letters, untitled letters, or “It has Come to Our
Attention” letters;
●
imposing
operating restrictions, including a partial or total shutdown of
production or investigation of any or all of our
products;
●
refusing
to permit to import or export of our products;
●
detaining
or seizing our products;
●
obtaining
injunctions preventing us from manufacturing or distributing any or
all of our products;
●
commencing
criminal prosecutions or seeking civil penalties; and
●
requiring
changes in our advertising and promotion practices.
The
manufacturing facilities we or our research and development
partners use (and may use) to make any of our FDA-regulated
products are or may become subject to periodic review and
inspection by the FDA. If a previously unknown problem with a
product or a manufacturing or laboratory facility used or
contracted by us or one of our research and development partners is
discovered, the FDA may impose restrictions on that product or on
the manufacturing facility, including requiring us and/or our
research and development partner to withdraw the product from the
market. Any changes to an approved or cleared product, including
the way it is manufactured or promoted, often requires FDA review
and separate approval or clearance before the product, as modified,
may be marketed. In addition, for products we develop in the
future, we and our contract manufacturers may be subject to ongoing
FDA requirements for submission of safety and other post-market
approval information. If we violate regulatory requirements at any
stage, whether before or after marketing approval or clearance is
obtained, we may be fined, be forced to remove a product from the
market or experience other adverse consequences, which would
materially harm our financial results. Additionally, due to
limitations imposed on us by the scope of the cleared or approved
indications or intended use of our products and by FDA and Federal
Trade Commission (“FTC”) regulations relating to
promotional claims, we may not be able to obtain the labeling
claims necessary or desirable for product promotion.
Distribution
of our products outside the United States is subject to extensive
government regulation. These regulations, including the
requirements for marketing authorizations or product licenses
necessary to bring a medical product to market, the time required
for regulatory review and the sanctions imposed for violations,
vary from country to country. We do not know whether we will obtain
the marketing authorizations or product licenses necessary to
market our products in such countries or that we will not be
required to incur significant costs in obtaining or maintaining
these regulatory approvals.
If we fail to obtain or experience significant delays in obtaining
regulatory clearances or approvals to market future medical device
products, we will be unable to commercialize these products until
such clearance or approval is obtained.
The
developing, testing, manufacturing, marketing and selling of
medical devices is subject to extensive regulation by governmental
authorities in the U.S. and other countries. The process of
obtaining regulatory clearance and approval of certain medical
technology products is costly and time consuming. Inherent in the
development of new medical products is the potential for delay
because product testing, including clinical evaluation, is
typically required, especially for drugs, biologics and high-risk
devices, before such products can be approved for human use. With
respect to medical devices, such as those that we currently market,
before a new medical device, or a new indicated use of, or claim
for, an existing product can be marketed (unless it is a Class I
device), it must first receive either premarket clearance under
Section 510(k) of the Federal Food, Drug and Cosmetic Act or
approval of a PMA from the FDA, or be reclassified and receive
marketing authorization through the de novo classification process,
unless an exemption applies.
In the
510(k)-clearance process, the FDA must determine that the proposed
device is “substantially equivalent” to a Class I or II
device legally on the market, known as a “predicate”
device, with respect to intended use, technology, safety and
effectiveness to clear the proposed device for marketing. Clinical
data is sometimes required to support substantial equivalence for
certain device types. The PMA pathway requires an applicant to
demonstrate the safety and effectiveness of the device for its
intended use based, in part, on extensive data including, but not
limited to, technical, preclinical, clinical trial, manufacturing
and labeling data. The PMA process is typically required for
devices that are deemed to pose the greatest risk, such as
life-sustaining, life-supporting or implantable devices. If a
device is novel and there is no appropriate predicate to which the
applicant can demonstrate substantial equivalence, the device will
be automatically classified as a Class III device and require
approval through the PMA process prior to commercialization, unless
the applicant submits a de
novo classification request demonstrating that the novel
device should be reclassified into Class I or II. Demonstrating
that a novel device should be reclassified to Class I or II from
Class III typically requires extensive information and data on the
benefits and risks of the device, including performance data and
frequently data from one or more clinical studies. The 510(k), PMA
and de novo classification
approval processes can be expensive and lengthy.
Failure
to comply with applicable regulatory requirements can result in,
among other things, suspension or withdrawal of clearances or
approvals, seizure or recall of products, injunctions against the
manufacture, holding, distribution, marketing and sale of a product
and civil and criminal sanctions. Furthermore, changes in existing
regulations or the adoption of new regulations could prevent us
from obtaining, or affect the timing of, future regulatory
clearances or approvals. Meeting regulatory requirements and
evolving government standards may delay marketing of any new
products developed by us for a considerable period of time, impose
costly procedures upon our activities and result in a competitive
advantage to larger companies that compete against us.
We
cannot assure you that the FDA or other regulatory agencies will
clear or approve any products developed by us on a timely basis, if
at all, or, if granted, that clearance or approval will not entail
limiting the indicated uses for which we may market the product,
which could limit the potential market for any of these
products.
Changes to the FDA clearance and approval processes or ongoing
regulatory requirements could make it more difficult for us to
obtain FDA clearance or approval of new products or comply with
ongoing requirements.
New
government regulations may be enacted and changes in FDA policies
and regulations and, their interpretation and enforcement, could
prevent or delay regulatory clearance or approval of new products.
We cannot predict the likelihood, nature or extent of adverse
government regulation that may arise from future legislation or
administrative action, either in the U.S. or abroad. Therefore, we
do not know whether we or our research and development partners
will be able to continue to comply with such regulations or whether
the costs of such compliance will have a material adverse effect on
our business. Changes could, among other things, require different
labeling, monitoring of patients, interaction with physicians,
education programs for patients or physicians, curtailment of
necessary supplies, or limitations on product distribution. These
changes, or others required by the FDA could have an adverse effect
on our business, and specifically, on the sales of affected
products. The evolving and complex nature of regulatory science and
regulatory requirements, the broad authority and discretion of the
FDA and the generally high level of regulatory oversight results in
a continuing possibility that from time to time, we will be
adversely affected by regulatory actions despite ongoing efforts
and commitment to achieve and maintain full compliance with all
regulatory requirements. If we or our research and development
partners are not able to maintain regulatory compliance, we may not
be permitted to market our products and our business would
suffer.
Modifications to our current products may require new marketing
clearances or approvals or require us to cease marketing or recall
the modified products until such clearances or approvals are
obtained.
Any
modification to an FDA-cleared product that could significantly
affect its safety or efficacy, or that would constitute a major
change or modification in its indicated use, requires a new FDA
510(k) clearance or, possibly, a PMA. In addition, any significant
modification to an FDA-approved product, such as a new indication
for use, labeling changes, or manufacturing changes, requires
submission of a PMA supplement or 30-day notice for changes to
manufacturing procedures or methods of manufacture that affect the
safety and effectiveness of the product. The FDA requires every
manufacturer to make its own determination as to whether a
modification requires a new 510(k) clearance or PMA, but the FDA
may review and disagree with any decision reached by the
manufacturer. In the future, we or our research and development
partners may make additional modifications to our products after
they have received FDA clearance or approval and, in appropriate
circumstances, determine that new clearance or approval is
unnecessary. Regulatory authorities may disagree with our or our
research and development partners’ decisions not to seek new
clearance or approval and may require us or the research and
development partner that controls the marketing authorization for
the respective device to obtain clearance or approval for previous
modifications to our products. If that were to occur for a
previously cleared or approved product, we may be required to cease
marketing or recall the modified device until we obtain, or our
research and development partner obtains, the necessary clearance
or approval. Under these circumstances, we may also be subject to
significant regulatory fines or other penalties. If any of the
foregoing were to occur, our financial condition and results of
operations could be negatively impacted.
Failure to obtain or maintain adequate reimbursement or insurance
coverage for drugs, if any, could limit our ability to market those
drugs and decrease our ability to generate revenue. Changes in
reimbursement policies and regulations by governmental or other
third-party payors may have an adverse impact on the use of our
products.
The
pricing, coverage, and reimbursement of our products, if any, must
be sufficient to support our commercial efforts and other
development programs, and the availability and adequacy of coverage
and reimbursement by third-party payors, including governmental and
private insurers, are essential for most patients to be able to
afford medical treatments. Sales of our products depend
substantially, both domestically and abroad, on the extent to which
the costs of our products, if any, will be paid for or reimbursed
by health maintenance, managed care, and similar healthcare
management organizations, or government payers and private payors.
If coverage and reimbursement are not available, or are available
only in limited amounts, we may have to subsidize or provide
medical products for free or we may not be able to successfully
commercialize our products.
A
significant portion of our wound care products are purchased
principally for the Medicare and Medicaid eligible population by
hospital outpatient clinics, wound care clinics, durable medical
equipment (“DME”) suppliers and SNFs, which typically
bill various third-party payors, primarily state and federal
healthcare programs (e.g., Medicare and Medicaid), and managed care
plans, for the products and services provided to their patients.
Although the majority of our wound care products are currently
eligible for reimbursement under Medicare Part B, adjustments to
our reimbursement amounts or a change in CMS’s reimbursement
policies could have an adverse effect on our market opportunities
in this area. The ability of our customers to obtain appropriate
reimbursement for products and services from third-party payors is
critical to the success of our business because reimbursement
status affects which products our customers purchase. In addition,
our ability to obtain reimbursement approval in foreign
jurisdictions may affect our ability to expand our product
offerings internationally.
Third-party
payors have adopted, and are continuing to adopt, a number of
policies intended to curb rising healthcare costs. These policies
include the imposition of conditions of payment by foreign, state
and federal healthcare programs as well as private insurance plans,
and the reduction in reimbursement amounts applicable to specific
products and services.
Changes
in healthcare systems in the U.S. or internationally in a manner
that significantly reduces reimbursement for procedures using our
products or denies coverage for these procedures would also have an
adverse impact on the acceptance of our products and the prices
which our customers are willing to pay for them.
Moreover,
increasing efforts by governmental and private payors in the United
States and abroad to limit or reduce healthcare costs may result in
restrictions on coverage and the level of reimbursement for new
medical products and, as a result, they may not cover or provide
adequate payment for our products. We expect to experience pricing
pressures in connection with our products due to the increasing
trend toward managed healthcare, including the increasing influence
of health maintenance organizations and additional legislative
changes. The downward pressure on healthcare costs in general, and
prescription drugs or biologics in particular, has and is expected
to continue to increase in the future. As a result, profitability
of our current or future products, may be more difficult to
achieve.
We rely on our research and development partners to comply with
applicable laws and regulations relating to product classification
and FDA marketing authorization.
We rely
on our research and development partners, from whom we license all
of the products we currently commercialize, to determine the
appropriate classification for each such product and to comply with
applicable regulations related to obtaining the proper marketing
authorization. With respect to each medical device product we
license, our respective research and development partner designs
the product and determines whether the device should be classified
as a Class I, II, or III device and the appropriate FDA marketing
authorization pathway to pursue (i.e., 510(k), PMA or de novo classification). In addition,
we rely on our research and development partners to determine
whether specific legal or regulatory definitions or exemptions
apply to particular medical products, which individually may be
subject to FDA oversight as a device, drug, biologic or human
cellular or tissue-based product. The FDA has broad regulatory
authority to interpret and enforce the laws and regulations that
govern medical products in commercial distribution, and any adverse
determination by the FDA relating to one of our licensed products
could require significant cost and effort to comply.
For
example, our research and development partner, Cook Biotech, from
whom we have the right to exclusively distribute three biologic
products for surgical and wound care applications, has determined
that one such product, VIM Amnion Matrix, is intended for
homologous use as a wound covering or barrier. It is possible that
the FDA, after evaluating the product, its intended use and any
promotional claims, may not agree with Cook Biotech’s
conclusion that the VIM Amnion Matrix product is intended for
homologous use, which would change the legal framework under which
the product is regulated and may require Cook Biotech and us to
incur substantial costs and expend significant effort to bring the
product into compliance with applicable regulations. Such action by
the FDA may also require us to cease marketing operations relating
to the VIM Amnion Matrix product until the appropriate corrections
are complete.
We and our employees and contractors are subject, directly or
indirectly, to federal, state and foreign healthcare fraud and
abuse laws, including false claims laws. If we are unable to
comply, or have not fully complied, with such laws, we could face
substantial penalties.
Our
operations are subject to various federal, state and foreign fraud
and abuse laws. These laws may affect our operations, including the
financial arrangements and relationships through which we market,
sell and distribute our products. U.S. federal and state laws that
affect our ability to operate include, but are not limited
to:
●
the
federal Anti-Kickback Statute, which prohibits, among other things,
persons or entities from knowingly and willfully soliciting,
receiving, offering or paying any remuneration (including any
kickback, bribe, or rebate), directly or indirectly, overtly or
covertly, in cash or in kind in return for, the purchase,
recommendation, leasing or furnishing of an item or service
reimbursable under a federal healthcare program, such as the
Medicare and Medicaid programs;
●
federal
civil and criminal false claims laws and civil monetary penalty
laws, which prohibit, among other things, individuals or entities
from knowingly presenting, or causing to be presented, claims for
payment or approval from Medicare, Medicaid, or other government
payors that are false or fraudulent;
●
Section
242 of HIPAA codified at 18 U.S.C. § 1347, which created new
federal criminal statutes that prohibit a person from knowingly and
willfully executing a scheme or from making false or fraudulent
statements to defraud any healthcare benefit program (i.e., public
or private);
●
federal
transparency laws, including the so-called federal
“sunshine” law, which requires the tracking and
disclosure to the federal government by pharmaceutical and medical
device manufacturers of payments and other transfers of value to
physicians and teaching hospitals as well as ownership and
investment interests that are held by physicians and their
immediate family members; and
●
state
law equivalents of each of these federal laws, such as
anti-kickback and false claims laws that may apply to items or
services reimbursed by any third-party payer, including commercial
insurers, state laws that require pharmaceutical and medical device
companies to comply with their industry’s voluntary
compliance guidelines and the applicable compliance guidance
promulgated by the federal government or otherwise restrict certain
payments that may be made to healthcare providers and other
potential referral sources, state laws that require drug and
medical device manufacturers to report information related to
payments and other transfers of value to physicians and other
healthcare providers or marketing expenditures, state laws that
prohibit giving gifts to licensed healthcare professionals and
state laws governing the privacy and security of health information
in certain circumstances, many of which differ from each other in
significant ways and may not have the same effect, thus
complicating compliance efforts in certain circumstances, such as
specific disease states.
In
particular, activities and arrangements in the healthcare industry
are subject to extensive laws and regulations intended to prevent
fraud, waste and other abusive practices. These laws and
regulations may restrict or prohibit a wide range of activities or
other arrangements related to the development, marketing or
promotion of products, including pricing and discounting of
products, provision of customer incentives, provision of
reimbursement support, other customer support services, provision
of sales commissions or other incentives to employees and
independent contractors and other interactions with healthcare
practitioners, other healthcare providers and
patients.
Because
of the breadth of these laws and the narrow scope of the statutory
or regulatory exceptions and safe harbors available, our business
activities could be challenged under one or more of these laws.
Relationships between medical product manufacturers and health care
providers are an area of heightened scrutiny by the government. We
engage in various activities, including the conduct of speaker
programs to educate physicians, the provision of reimbursement
advice and support to customers, and the provision of customer and
patient support services, that have been the subject of government
scrutiny and enforcement action within the medical device
industry.
Government
expectations and industry best practices for compliance continue to
evolve and past activities may not always be consistent with
current industry best practices. Further, there is a lack of
government guidance as to whether various industry practices comply
with these laws, and government interpretations of these laws
continue to evolve, all of which create compliance uncertainties.
Any non-compliance could result in regulatory sanctions, criminal
or civil liability and serious harm to our reputation. Although we
have a comprehensive compliance program designed to ensure that our
employees’ and commercial partners’ activities and
interactions with healthcare professionals and patients are
appropriate, ethical, and consistent with all applicable laws,
regulations, guidelines, policies and standards, it is not always
possible to identify and deter misconduct, and the precautions we
take to detect and prevent this activity may not be effective in
preventing such conduct, mitigating risks, or reducing the chance
of governmental investigations or other actions or lawsuits
stemming from a failure to comply with these laws or
regulations.
If a
government entity opens an investigation into possible violations
of any of these laws (which may include the issuance of subpoenas),
we would have to expend significant resources to defend ourselves
against the allegations. Allegations that we, our officers, or our
employees violated any one of these laws can be made by individuals
called “whistleblowers” who may be our employees,
customers, competitors or other parties. Government policy is to
encourage individuals to become whistleblowers and file a complaint
in federal court alleging wrongful conduct. The government is
required to investigate all of these complaints and decide whether
to intervene. If the government intervenes and we are required to
pay damages, which in such cases are typically set at three times
the actual monetary damages, to the government, the whistleblower,
as a reward, is awarded a percentage of such damages or any
settlement amount. If the government declines to intervene, the
whistleblower may proceed on her own and, if she is successful, she
will receive a percentage of any judgment or settlement amount the
company is required to pay. The government may also initiate an
investigation on its own. If any such actions are instituted
against us, those actions could have a significant impact on our
business, including the imposition of significant fines, and other
sanctions that may materially impair our ability to run a
profitable business. In particular, if our operations are found to
be in violation of any of the laws described above or if we agree
to settle with the government without admitting to any wrongful
conduct or if we are found to be in violation of any other
governmental regulations that apply to us, we, our officers and
employees may be subject to sanctions, including civil and criminal
penalties, damages, fines, exclusion from participation in
government health care programs, such as Medicare and Medicaid,
imprisonment, the curtailment or restructuring of our operations
and the imposition of a corporate integrity agreement, any of which
could adversely affect our business, results of operations and
financial condition.
Our research and development partners’ use and disclosure of
personally identifiable information, including health information,
is subject to federal and state privacy and security regulations,
and our failure to comply with those regulations or to adequately
secure the information we hold could result in significant
liability or reputational harm and, in turn, a material adverse
effect on our client base, business, financial condition and
results of operations.
Numerous
state and federal laws and regulations, including HIPAA, govern the
collection, dissemination, use, privacy, confidentiality, security,
availability and integrity of PII, including protected health
information. HIPAA establishes a set of basic national privacy and
security standards for the protection of PHI by health plans,
healthcare clearinghouses and certain healthcare providers,
referred to as covered entities, and the business associates with
whom such covered entities contract for services, which likely
includes us. HIPAA requires healthcare providers and business
associates to develop and maintain policies and procedures with
respect to PHI that is used or disclosed, including the adoption of
administrative, physical, and technical safeguards to protect such
information. HIPAA also implemented the use of standard transaction
code sets and standard identifiers that covered entities must use
when submitting or receiving certain electronic healthcare
transactions, including activities associated with the billing and
collection of healthcare claims. HIPAA imposes mandatory penalties
for certain violations. HIPAA also authorizes state attorneys
general to file suit on behalf of their residents. Courts will be
able to award damages, costs and attorneys’ fees related to
violations of HIPAA in such cases. While HIPAA does not create a
private right of action allowing individuals to sue us in civil
court for violations of HIPAA, its standards have been used as the
basis for duty of care in state civil suits such as those for
negligence or recklessness in the misuse or breach of
PHI.
In
addition, HIPAA mandates that the Secretary of HHS conduct periodic
compliance audits of HIPAA covered entities or business associates
for compliance with the HIPAA Privacy and Security Standards. HIPAA
further requires that patients be notified of any unauthorized
acquisition, access, use or disclosure of their unsecured PHI that
compromises the privacy or security of such information, with
certain exceptions related to unintentional or inadvertent use or
disclosure by employees or authorized individuals. HIPAA specifies
that such notifications must be made without unreasonable delay and
in no case later than 60 calendar days after discovery of the
breach. If a breach affects 500 patients or more, it must be
reported to HHS without unreasonable delay, and HHS will post the
name of the breaching entity on its public web site. Breaches
affecting 500 patients or more in the same state or jurisdiction
must also be reported to the local media. If a breach involves
fewer than 500 people, the covered entity must record it in a log
and notify HHS at least annually.
Numerous
other federal and state laws protect the confidentiality, privacy,
availability, integrity and security of PII, including PHI. These
laws in many cases are more restrictive than, and may not be
preempted by, the HIPAA rules and may be subject to varying
interpretations by courts and government agencies, creating complex
compliance issues for us and our clients and potentially exposing
us to additional expense, adverse publicity and liability. In
addition, new health information standards, whether implemented
pursuant to HIPAA, congressional action or otherwise, could have a
significant effect on the manner in which we must handle healthcare
related data, and the cost of complying with standards could be
significant. If we do not comply with existing or new laws and
regulations related to PHI, we could be subject to criminal or
civil sanctions.
Because
of the extreme sensitivity of the PII we or our partners may store
and transmit, the security features of our technology platforms are
very important. If our security measures, some of which may be
managed by third parties, are breached or fail, unauthorized
persons may be able to obtain access to sensitive client and
patient data, including HIPAA-regulated PHI. As a result, our
reputation could be severely damaged, adversely affecting client or
investor confidence. Clients may curtail their use of or stop using
our products and services, which would cause our business to
suffer. In addition, we could face litigation, damages for contract
breach, penalties and regulatory actions for violation of HIPAA and
other applicable laws or regulations and significant costs for
remediation, notification to individuals and for measures to
prevent future occurrences. Any potential security breach could
also result in increased costs associated with liability for stolen
assets or information, repairing system damage that may have been
caused by such breaches, incentives offered to client or other
business partners in an effort to maintain our business
relationships after a breach and implementing measures to prevent
future occurrences, including organizational changes, deploying
additional personnel and protection technologies, training
employees and engaging third-party experts and consultants. While
we maintain insurance covering certain security and privacy damages
and claim expenses, our coverage may not be sufficient to
compensate for all liability.
Government regulation of healthcare creates risks and challenges
with respect to our compliance efforts and our business
strategies.
The
healthcare industry is highly regulated and is subject to changing
political, legislative, regulatory, and other influences. Existing
and new laws and regulations affecting the healthcare industry
could create unexpected liabilities for us, could cause us to incur
additional costs, and could restrict our operations. Many
healthcare laws are complex, and their application to specific
products and services may not be clear. In particular, many
existing healthcare laws and regulations, when enacted, did not
anticipate the services that we aim to provide. However, these laws
and regulations may nonetheless be applied to our business. Our
failure to accurately anticipate the application of these laws and
regulations, or other failure to comply, could create liability for
us, result in adverse publicity and materially affect its business,
financial condition, and results of operations.
If we fail to comply with extensive healthcare laws and government
regulations, we could suffer penalties or be required to make
significant changes to our operations.
The
healthcare industry is required to comply with extensive and
complex laws and regulations at the federal, state and local
government levels relating to, among other things:
●
licensure
of health providers, certification of organizations and enrollment
with government reimbursement programs;
●
necessity
and adequacy of medical care;
●
relationships
with physicians and other referral sources and referral
recipients;
●
billing
and coding for services;
●
properly
handling overpayments;
●
quality
of medical equipment and services;
●
qualifications
of medical and support personnel;
●
confidentiality,
maintenance, data breach, identity theft and security issues
associated with health-related and personal information and medical
records; and
●
communications
with patients and consumers.
Among
these laws are the federal Stark Law, the federal Anti-Kickback
Statute, the FCA, and similar state laws. If we fail to comply with
applicable laws and regulations, we could suffer civil sanctions
and criminal penalties, including the loss of our ability to
participate in the Medicare, Medicaid and other federal and state
healthcare programs. While we endeavor to ensure that our financial
relationships with referral sources such as hospitals and
physicians comply with the applicable laws (including applicable
safe harbors and exceptions), evolving interpretations or
enforcement of these laws and regulations could subject our current
practices to allegations of impropriety or illegality or could
require us to make changes in our operations. A determination that
we have violated these or other laws, or the public announcement
that we are being investigated for possible violations of these or
other laws, could have a material adverse effect on our business,
financial condition, results of operations or prospects, and our
business reputation could suffer significantly. In addition, other
legislation or regulations at the federal or state level may be
adopted that adversely affect our business.
Our officers, employees, independent contractors, principal
investigators, consultants, and commercial partners may engage in
misconduct or activities that are improper under other laws and
regulations, which would create liability for us.
We are
exposed to the risk that our officers, employees, independent
contractors (including contract research organizations CROs),
principal investigators, consultants and commercial partners may
engage in fraudulent conduct or other illegal activity and/or may
fail to disclose unauthorized activities to us. Misconduct by these
parties could include, but is not limited to, intentional, reckless
and/or negligent failures to comply with:
●
the
laws and regulations of the FDA and its foreign counterparts
requiring, among other things, compliance with good manufacturing
practice and/or quality system requirements, post-market vigilance
reporting, product marketing authorization requirements, facility
registration requirements, the reporting of true, complete and
accurate information to such regulatory bodies, including but not
limited to safety problems associated with the use of our
products;
●
laws
and regulations of the FDA and its foreign counterparts concerning
the conduct of clinical trials and the protection of human research
subjects, including but not limited to good clinical
practices;
●
other
laws and regulations of the FDA and its foreign counterparts
relating to the manufacture, processing, packing, holding,
investigating or distributing in commerce of medical devices,
biological products and/or HCT/Ps;
●
manufacturing
standards we have established; or
●
healthcare
fraud and abuse laws, including but not limited to, the
Anti-Kickback Statute, the Stark Law, the FCA, and state law
equivalents.
In
particular, companies involved in the manufacture of medical
products are subject to laws and regulations intended to ensure
that medical products that will be used in patients are safe and
effective, and, specifically, that they are not adulterated or
misbranded, that they are properly labeled, and have the identity,
strength, quality and purity that which they are represented to
possess. Further, companies involved in the research and
development of medical products are subject to extensive laws and
regulations intended to protect research subjects and ensure the
integrity of data generated from clinical trials and of the
regulatory review process. Any misconduct in any of these areas,
whether by our own employees or by contractors, vendors, business
associates, consultants, or other entities acting as our agents,
could result in regulatory sanctions, criminal or civil liability
and serious harm to our reputation. Although we have a
comprehensive compliance program designed to ensure that our
employees’, CRO partners’, principal
investigators’, consultants’, and commercial
partners’ activities and interactions with healthcare
professionals and patients are appropriate, ethical, and consistent
with all applicable laws, regulations, guidelines, policies and
standards, it is not always possible to identify and deter
misconduct, and the precautions we take to detect and prevent this
activity may not be effective in preventing such conduct,
mitigating risks, or reducing the chance of governmental
investigations or other actions or lawsuits stemming from a failure
to comply with these laws or regulations. If any such actions are
instituted against us, or our CRO partners, principal
investigators, consultants, or commercial partners, those actions
could have a significant impact on our business, including the
imposition of significant fines, and other sanctions that may
materially impair our ability to run a profitable
business.
We could be adversely affected if healthcare reform measures
substantially change the market for medical care or healthcare
coverage in the United States.
On
March 23, 2010, President Obama signed the Patient Protection and
Affordable Care Act (P.L. 111-148) and on March 30, 2010, the
signed the Health Care and Education Reconciliation Act (P.L.
111-152), collectively commonly referred to as the
“Healthcare Reform Law.” The Healthcare Reform Law
included a number of new rules regarding health insurance, the
provision of healthcare, conditions to reimbursement for healthcare
services provided to Medicare and Medicaid patients, and other
healthcare policy reforms. Through the law-making process,
substantial changes have been and continue to be made to the system
for paying for healthcare in the United States, including changes
made to extend medical benefits to certain Americans who lacked
insurance coverage and to contain or reduce healthcare costs (such
as by reducing or conditioning reimbursement amounts for healthcare
services and drugs, and imposing additional taxes, fees, and rebate
obligations on pharmaceutical and medical device companies). This
legislation was one of the most comprehensive and significant
reforms ever experienced by the healthcare industry in the United
States and has significantly changed the way healthcare is financed
by both governmental and private insurers. This legislation has
impacted the scope of healthcare insurance and incentives for
consumers and insurance companies, among others. Additionally, the
Healthcare Reform Law’s provisions were designed to encourage
providers to find cost savings in their clinical operations. This
environment has caused changes in the purchasing habits of
consumers and providers and resulted in specific attention to the
pricing negotiation, product selection and utilization review
surrounding pharmaceuticals and medical devices. This attention may
result in our current commercial products, products we may
commercialize or promote in the future, and our therapeutic
candidates, being chosen less frequently or the pricing being
substantially lowered. At this stage, it is difficult to estimate
the full extent of the direct or indirect impact of the Healthcare
Reform Law on us.
These
structural changes could entail further modifications to the
existing system of private payors and government programs (such as
Medicare and Medicaid), creation of government-sponsored healthcare
insurance sources, or some combination of both, as well as other
changes. Restructuring the coverage of medical care in the U.S.
could impact the reimbursement for medical services and procedures,
prescribed drugs, biologics and medical devices, including our
current commercial products, those we and our development or
commercialization partners are currently developing or those that
we may commercialize or promote in the future. If reimbursement for
the products we currently commercialize or promote, any product we
may commercialize or promote, or approved therapeutic candidates is
substantially reduced or otherwise adversely affected in the
future, or rebate obligations associated with any pharmaceutical
product we commercialize or promote are substantially increased, it
could have a material adverse effect on our reputation, business,
financial condition or results of operations.
Extending
medical benefits to those who currently lack coverage will likely
result in substantial costs to the U.S. federal government, which
may force significant additional changes to the healthcare system
in the United States. Much of the funding for expanded healthcare
coverage may be sought through cost savings. While some of these
savings may come from realizing greater efficiencies in delivering
care, improving the effectiveness of preventive care and enhancing
the overall quality of care, much of the cost savings may come from
reducing the cost of care and increased enforcement activities.
Cost of care could be reduced further by decreasing the level of
reimbursement for medical services or products (including our
current commercial products, our development or commercialization
partners or any product or medical service we may commercialize or
promote), or by restricting coverage (and, thereby, utilization) of
medical services or products. In either case, a reduction in the
utilization of, or reimbursement for our current commercial
products, any product we may commercialize or promote or for which
we receive marketing approval or clearance in the future, could
have a material adverse effect on our reputation, business,
financial condition, or results of operations.
Several
states and private entities initially mounted legal challenges to
the Healthcare Reform Law, and they continue to litigate various
aspects of the legislation. On July 26, 2012, the U.S. Supreme
Court generally upheld the provisions of the Healthcare Reform Law
at issue as constitutional. However, the U.S. Supreme Court held
that the legislation improperly required the states to expand their
Medicaid programs to cover more individuals. As a result, the
states have a choice as to whether they will expand the number of
individuals covered by their respective state Medicaid programs.
Some states have not expanded their Medicaid programs and have
chosen to develop other cost-saving and coverage measures to
provide care to currently uninsured individuals. Many of these
efforts to date have included the institution of Medicaid-managed
care programs. The manner in which these cost-saving and coverage
measures are implemented could have a material adverse effect on
our reputation, business, financial condition or results of
operations.
Further,
the healthcare regulatory environment has seen significant changes
in recent years and is still in flux. Legislative initiatives to
modify, limit, replace, or repeal the Healthcare Reform Law and
judicial challenges continue. We cannot predict the impact on our
business of future legislative and legal challenges to the
Healthcare Reform Law or other changes to the current laws and
regulations. The uncertainty around the future of the Healthcare
Reform Law, and in particular the impact to reimbursement levels,
may lead to uncertainty or delay in the purchasing decisions of our
customers, which may in turn negatively impact our product sales.
If there are not adequate reimbursement levels, our business and
results of operations could be adversely
affected.
The
financial impact of U.S. healthcare reform legislation over the
next few years will depend on a number of factors, including the
policies reflected in implementing regulations and guidance and
changes in sales volumes for therapeutics affected by the
legislation. From time to time, legislation is drafted, introduced
and passed in the U.S. Congress that could significantly change the
statutory provisions governing coverage, reimbursement, and
marketing of medical products and services. In addition,
third-party payor coverage and reimbursement policies are often
revised or interpreted in ways that may significantly affect our
business and our products.
While
in office, President Trump supported the repeal of all or portions
of the Healthcare Reform Law. President Trump also issued an
executive order in which he stated that it is his
administration’s policy to seek the prompt repeal of the
Healthcare Reform Law and in which he directed executive
departments and federal agencies to waive, defer, grant exemptions
from, or delay the implementation of the provisions of the
Healthcare Reform Law to the maximum extent permitted by law.
Congress has enacted legislation that repeals certain portions of
the Healthcare Reform Law, including but not limited to the Tax
Cuts and Jobs Act, passed in December 2017, which included a
provision that eliminates the penalty under the Healthcare Reform
Law’s individual mandate, effective January 1, 2019, as well
as the Bipartisan Budget Act of 2018, passed in February 2018,
which, among other things, repealed the Independent Payment
Advisory Board (which was established by the Healthcare Reform Law
and was intended to reduce the rate of growth in Medicare
spending).
Additionally,
in December 2018, a district court in Texas held that the
individual mandate is unconstitutional and that the rest of the
Healthcare Reform Law is, therefore, invalid. On appeal, the Fifth
Circuit Court of Appeals affirmed the holding on the individual
mandate but remanded the case back to the lower court to reassess
whether and how such holding affects the validity of the rest of
the Healthcare Reform Law. On March 2, 2020, the U.S. Supreme Court
granted the petitions for writs of certiorari to review this case
and allocated one hour for oral arguments, which occurred on
November 10, 2020. A decision from the Supreme Court is expected to
be issued in spring 2021. It is unclear how this litigation and
other efforts to repeal and replace the Healthcare Reform Law will
impact the policies and programs implemented under the Healthcare
Reform Law and the medical products industry more generally. We
also cannot predict the impact that this litigation against the
Healthcare Reform Law will have on our business, and there is
uncertainty as to what healthcare programs and regulations may be
implemented or changed at the federal and/or state level in the
United States or the effect of any future legislation or
regulation. Furthermore, we cannot predict what actions the Biden
administration will implement in connection with the Healthcare
Reform Law. However, it is possible that such initiatives could
have an adverse effect on our ability to obtain approval and/or
successfully commercialize products in the United States in the
future. For example, any changes that reduce, or impede the ability
to obtain, reimbursement for the type of products or services we
currently or intend to commercialize in the United States or that
reduce medical procedure volumes could adversely affect our
operations and/or future business plans.
Defects, failures or quality issues associated with our products
could lead to product recalls or safety alerts, adverse regulatory
actions, litigation and negative publicity that could materially
adversely affect our reputation, business, results of operations
and financial condition.
Quality
is extremely important to us and our customers due to the serious
and costly consequences of product failure. Quality and safety
issues may occur with respect to any of our products, and our
future operating results will depend on our ability to maintain an
effective quality control system and effectively train and manage
our workforce with respect to our quality system. The development,
manufacture and control of medical devices are subject to extensive
and rigorous regulation by numerous government agencies, including
the FDA and similar foreign agencies. Compliance with these
regulatory requirements, including but not limited to the
FDA’s QSR, good manufacturing practices and adverse
events/recall reporting requirements in the United States and other
applicable regulations worldwide, is subject to continual review
and is monitored rigorously through periodic inspections by the FDA
and foreign regulatory authorities. The FDA and foreign regulatory
authorities may also require post-market testing and surveillance
to monitor the performance of products cleared or approved for use
in their jurisdictions. Our manufacturing facilities and those of
our suppliers and independent sales agencies are also subject to
periodic regulatory inspections. If the FDA or other regulatory
authority were to conclude that we or our suppliers have failed to
comply with any of these requirements, it could institute a wide
variety of enforcement actions, ranging from a public warning
letter to more severe sanctions, such as product recalls or
seizures, withdrawals, monetary penalties, consent decrees,
injunctive actions to halt the manufacture or distribution of
products, import detentions of products made outside the United
States, export restrictions, restrictions on operations or other
civil or criminal sanctions. Civil or criminal sanctions could be
assessed against our officers, employees, or us. Any adverse
regulatory action, depending on its magnitude, may restrict us from
effectively manufacturing, marketing, and selling our
products.
In
addition, we cannot predict the results of future legislative
activity or future court decisions, any of which could increase
regulatory requirements, subject us to government investigations or
expose us to unexpected litigation. Any regulatory action or
litigation, regardless of the merits, may result in substantial
costs, divert management’s attention from other business
concerns and place additional restrictions on our sales or the use
of our products. In addition, negative publicity, including
regarding a quality or safety issue, could damage our reputation,
reduce market acceptance of our products, cause us to lose
customers and decrease demand for our products. Any actual or
perceived quality issues may also result in issuances of
physician’s advisories against our products or cause us to
conduct voluntary recalls. Any product defects or problems,
regulatory action, litigation, negative publicity or recalls could
disrupt our business and have a material adverse effect on our
business, results of operations and financial
condition.
Risks Related to Ownership of Our Common Stock
The issuance of shares upon the exercise of derivative securities
may cause immediate and substantial dilution to our existing
shareholders.
As of
March 30, 2021, we had 11,500 shares of common stock that were
issuable upon the exercise of vested outstanding stock options. The
issuance of shares upon the exercise of these options may result in
dilution to the equity interest and voting power of holders of our
common stock.
In the
future, we may also issue additional shares of common stock or
other securities convertible into or exchangeable for shares of
common stock. For instance, certain of the product license
agreements we have entered into with third parties require us to
make payments to such third parties upon the occurrence of certain
events. Pursuant to these product license agreements, we may choose
to make such payments in shares of our common stock. The issuance
of additional shares of our common stock may substantially dilute
the ownership interests of our existing shareholders. Furthermore,
sales of a substantial amount of our common stock in the public
market, or the perception that these sales may occur, could reduce
the market price of our common stock. This could also impair our
ability to raise additional capital through the sale of our
securities.
It is possible that we will require additional capital to meet our
financial obligations and support business growth.
We
intend to continue to make significant investments to support our
business growth and expect to require additional funds to respond
to business challenges. Accordingly, we may need to engage in
equity or debt financings to secure additional funds. If we raise
additional funds through future issuances of equity or convertible
debt securities, our existing shareholders could suffer significant
dilution, and any new equity securities we issue could have rights,
preferences and privileges superior to those of holders of our
common stock. Any debt financing that we secure in the future could
involve restrictive covenants relating to our capital raising
activities and other financial and operational matters, which may
make it more difficult for us to obtain additional capital and to
pursue business opportunities, including potential acquisitions. We
may not be able to obtain additional financing on terms favorable
to us, if at all. If we are unable to obtain adequate financing or
financing on terms satisfactory to us when and if we require it,
our ability to continue to support our business growth and to
respond to business challenges could be significantly impaired, and
our business may be harmed.
The trading price of the shares of our common stock is highly
volatile, and purchasers of our common stock could incur
substantial losses.
The
market price of our common stock has been and is likely to continue
to be highly volatile and could fluctuate widely in response to
various factors, many of which are beyond our control, including
the following:
●
technological
innovations or new products and services by us or by our
competitors, including announcements by us or our competitors of
significant contracts, acquisitions, strategic partnerships or
capital commitments;
●
additions
or departures of key personnel;
●
changes
in expectations as to our future financial
performance;
●
the
continued impact of the COVID-19 pandemic on our business
operations;
●
sales
of our common stock;
●
our
ability to execute our business plan;
●
loss of
any strategic relationship;
●
changes
in financial estimates by any securities analysts who follow our
common stock, our failure to meet these estimates or failure of
those analysts to initiate or maintain coverage of our common
stock;
●
general
market conditions, including market volatility;
●
fluctuations
in stock market prices and trading volumes of similar
companies;
●
economic,
political and other external factors;
●
period-to-period
fluctuations in our financial results;
●
applicable
regulatory developments in the United States and foreign countries,
both generally or specific to us and our products; and
●
intellectual
property, product liability or other litigation against
us.
Although
publicly traded securities are subject to price and volume
fluctuations, it is likely that our common stock will experience
these fluctuations to a greater degree than the securities of more
established and better capitalized organizations.
Our common stock does not have a vigorous trading market, and you
may not be able to sell your securities at or near ask prices, or
at all.
Although
there is a public market for our common stock, trading volume has
been historically low, which could impact our stock price and your
ability to sell shares of our common stock at or near ask prices,
or at all. We can give no assurance that a more active and liquid
public market for the shares of our common stock will develop in
the future.
The potential sale of large amounts of common stock may have a
negative effect upon the market value of our shares.
Sales
of a significant number of shares of our common stock in the public
market could harm the market price of our common stock and make it
more difficult for us to raise funds through future offerings of
common stock. As additional shares of our common stock become
available for resale in the public market, the supply of our common
stock will increase, which could decrease the price of our common
stock.
We have not paid, and we are unlikely to pay, cash dividends on our
securities in the near future. Because we have no current plans to
pay cash dividends on our common stock for the foreseeable future,
you may not receive any return on investment unless you sell your
common stock for a price greater than that which you paid for
it.
We have
not paid and do not currently intend to pay dividends on our common
stock, which may limit the current return available on an
investment in our stock. Future dividends on our stock, if any,
will depend on our future earnings, capital requirements, financial
condition and such other factors as our management may consider
relevant. Currently, we intend to retain earnings, if any, to
increase our net worth and reserves. Consequently, shareholders
will only realize an economic gain on their investment in our
common stock if the price appreciates. Shareholders should not
purchase our common stock expecting to receive cash dividends.
Because we currently do not pay dividends, and there may be limited
trading in our common stock, shareholders may not have any manner
to liquidate or receive any payment on their common stock.
Therefore, our failure to pay dividends may cause shareholders to
not see any return on their common stock even if we are successful
in our business operations. In addition, because we do not pay
dividends, we may have trouble raising additional funds, which
could affect our ability to expand our business
operations.
A few of our existing shareholders own a large percentage of our
voting stock and have control over matters requiring shareholder
approval and may delay or prevent a change in control or otherwise
lead to actual or potential conflicts of interest.
As of
March 30, 2021, our directors owned, and through their affiliates
controlled, more than 50% of our outstanding common stock. As a
result, our directors and their affiliates could have the ability
to exert substantial influence over all matters requiring approval
by our shareholders, including (i) the election and removal of
directors, (ii) any proposed merger, consolidation, or sale of all
or substantially all of our assets as well as other corporate
transactions and (iii) any amendment to our Certificate of
Formation, as amended (the “Certificate of Formation”).
This concentration of control could be disadvantageous to other
shareholders having different interests. This significant
concentration of share ownership may adversely affect the trading
price for our common stock because investors sometimes perceive
disadvantages in owning stock in companies with controlling
shareholders.
In
addition, our Certificate of Formation contains a provision which
under the Texas Business Organizations Code (the
“TBOC”) could allow the shareholders who own a majority
of our common stock to approve certain major transactions without
the approval of other shareholders that otherwise would be required
under Texas corporation law.
Our Certificate of Formation includes provisions limiting the
personal liability of our directors for breaches of fiduciary
duties under Texas law.
Our
Certificate of Formation contains a provision eliminating a
director’s personal liability to the fullest extent permitted
under Texas law. Pursuant to the TBOC, a corporation has the power
to indemnify its directors and officers against judgments and
certain expenses other than judgments that are actually and
reasonably incurred in connection with a proceeding, provided that
there is a determination that the individual acted in good faith
and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal
proceeding, had no reasonable cause to believe the
individual’s conduct was unlawful. However, no
indemnification may be made in respect of any proceeding in which
such individual is liable to the corporation or improperly received
a personal benefit and is found liable for willful misconduct,
breach of the duty of loyalty owned to the corporation, or an act
or omission deemed not to be committed in good faith.
The
principal effect of the limitation on liability provision is that a
shareholder will be unable to prosecute an action for monetary
damages against a director unless the shareholder can demonstrate a
basis for liability for which indemnification is not available
under the TBOC. This provision, however, should not limit or
eliminate our rights or any shareholder’s rights to seek
non-monetary relief, such as an injunction or rescission, in the
event of a breach of a director’s fiduciary duty. This
provision will not alter a director’s liability under federal
securities laws. The inclusion of this provision in our Certificate
of Formation may discourage or deter shareholders or management
from bringing a lawsuit against directors for a breach of their
fiduciary duties, even though such an action, if successful, might
otherwise have benefited us and our shareholders.
Texas law and our Certificate of Formation and bylaws contain
anti-takeover provisions that could delay or discourage takeover
attempts that shareholders may consider favorable.
Under
our Certificate of Formation, our board of directors can authorize
the issuance of preferred stock, which could diminish the rights of
holders of our common stock and make a change of control of the
Company more difficult even if it might benefit our shareholders.
The board of directors is authorized to issue shares of preferred
stock in one or more series and to fix the voting powers,
preferences and other rights and limitations of the preferred
stock. Accordingly, we may issue shares of preferred stock with a
preference over our common stock with respect to dividends or
distributions on liquidation or dissolution, or that may otherwise
adversely affect the voting or other rights of the holders of
common stock. Issuances of preferred stock, depending upon the
rights, preferences and designations of the preferred stock, may
have the effect of delaying, deterring or preventing a change of
control, even if that change of control might benefit our
shareholders.
In
addition, provisions of our Certificate of Formation and bylaws may
delay or discourage transactions involving an actual or potential
change in our control or change in our management, including
transactions in which shareholders might otherwise receive a
premium for their shares, or transactions that our shareholders
might otherwise deem to be in their best interests. For example,
our Certificate of Formation and bylaws (i) do not provide for
cumulative voting rights (therefore allowing the holders of a
majority of the shares of common stock entitled to vote in any
election of directors to elect all of the directors standing for
election, if they should so choose), (ii) require that special
meetings of the shareholders be called by the Chairman of the board
of directors, the President or the board of directors, or by the
holders of not less than ten percent (10%) of all the shares
issued, outstanding and entitled to vote, (iii) permit our board of
directors to alter, amend or repeal our bylaws or to adopt new
bylaws, and (iv) enable our board of directors to increase the
number of persons serving as directors and to fill vacancies
created as a result of the increase by a majority vote of the
directors present at a meeting of directors.
While
we are subject to the provisions of Title 2, Chapter 21, Subchapter
M of the TBOC, which provides that a Texas corporation that
qualifies as an “issuing public corporation” (as
defined in the TBOC) may not engage in specified types of business
combinations, including mergers, consolidations and asset sales,
with a person, or an affiliate or associate of that person, who is
an “affiliated shareholder,” the restrictions in Title
2, Chapter 21, Subchapter M of the TBOC do not apply to us because
we have elected, in the manner provided under the TBOC, not to be
subject to such provisions.
Our failure to meet the continued listing requirements of The
Nasdaq Capital Market could result in a delisting of our common
stock.
Our
shares of common stock are currently listed for trading on The
Nasdaq Capital Market under the symbol “SMTI.” If we
fail to satisfy the continued listing requirements of The Nasdaq
Stock Market, LLC (“Nasdaq”), such as the corporate
governance requirements, the shareholder’s equity requirement
or the minimum closing bid price requirement, Nasdaq may take steps
to delist our common stock. Such a delisting or even notification
of failure to comply with such requirements would likely have a
negative effect on the price of our common stock and would impair
your ability to sell or purchase our common stock when you wish to
do so. In the event of a delisting, we expect that we would take
actions to restore our compliance with Nasdaq’s listing
requirements, but we can provide no assurance that any such action
taken by us would allow our common stock to become listed again,
stabilize the market price or improve the liquidity of our common
stock, prevent our common stock from dropping below the Nasdaq
minimum bid price requirement or prevent future non-compliance with
Nasdaq’s listing requirements.