MIMEDX GROUP, INC.
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TABLE OF CONTENTS
PART
This Form 10-K and certain information incorporated herein by reference contain forward-looking statements and information within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. This information includes assumptions made by, and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources, acceptance of the Company’s products by the market, and management’s plans and objectives. In addition, certain statements included in this and our future filings with the Securities and Exchange Commission (“SEC”), in press releases, and in oral and written statements made by us or with our approval, which are not statements of historical fact, are forward-looking statements. Words such as “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “seeks,” “plan,” “project,” “continue,” “predict,” “will,” “should,” and other words or expressions of similar meaning are intended by us to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements are found at various places throughout this report and in the documents incorporated herein by reference. These statements are based on our current expectations about future events or results and information that is currently available to us, involve assumptions, risks, and uncertainties, and speak only as of the date on which such statements are made.
Our actual results may differ materially from those expressed or implied in these forward-looking statements. Factors that may cause such a difference, include, but are not limited to those discussed in Part I, Item 1A, “Risk Factors,” below. Except as expressly required by the federal securities laws, we undertake no obligation to update any such factors, or to publicly announce the results of, or changes to any of the forward-looking statements contained herein to reflect future events, developments, changed circumstances, or for any other reason.
As used herein, the terms “MiMedx,” “the Company,” “we,” “our” and “us” refer to MiMedx Group, Inc., a Florida corporation (formerly Alynx, Co.), and its consolidated subsidiaries as a combined entity, except where it is clear that the terms mean only MiMedx Group, Inc.
Overview
MiMedx Group, Inc. (“was incorporated in Florida on February 28, 2008. MiMedx Group”)® is an integrated developer, manufacturer and marketer of patent-protected biomaterial-based products. MiMedx Group is emergingpatent protected regenerative biomaterial products and allografts processed from a development-focused start-up company into a fully integrated operating company with the expertise to capitalize on its science and technology and the capacity to generate sales growth and profitability.
“Repair, don’t replace”human amniotic membrane. “Innovations in Regenerative Biomaterials" is the mantra offramework behind our mission to give physicians products and tissues to help the MiMedx Group biochemists, engineers,body heal itself. Our biomaterial platform technologies include the device technologies HydroFix® and designers who are developing today’s biomaterial-based solutions for patientsCollaFixTM, and physicians. Market research shows the first desire of patients ranging from active baby-boomersour tissue technologies, AmnioFix® and weekend warriors to high-school and professional athletes is to augment repair when possible, rather than replace traumatized, but otherwise healthy tissues and structures. Clinical research has proven that biomaterials can be used to achieve augmentation and repair.EpiFix®.
Recent Events
On January 5, 2011, the Company acquired all of the outstanding equity interests in Surgical Biologics, LLC, for an aggregate of $500,000 in cash, $1,200,000$1,250,000 in notes payable, 5,200,0005,250,000 shares of MiMedx Common Stock, $183,000 in debt, and certain additional contingent considerations. This strategic acquisition brings together market leading know-how in amnion tissue processing technology with a global distribution network uniquely positioned to rapidly exploit significant market opportunities across multiple surgical indications.consideration.
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Surgical Biologics, (“SB”), is locatedLocated in Kennesaw, Georgia.Georgia, Surgical Biologics develops bioimplantsallografts and other products processed from human amniotic membrane that can be used for a wide range of surgical indicationsmedical applications, including ocular surface repair, gum repair, wound care, burns,nerve and tendon repair, spine repair, burn treatment, and many other types of surgeryprocedures that require the repair of a patient’s integumental (native) tissue. SB is focused on developing technologically innovative bioimplants that offerThis strategic acquisition brings together amnion tissue processing technology with our global distribution network in order to position the surgeon a variety of clinical options; allowingCompany for greater flexibility in treatment, as well as improved surgical results.market opportunities across multiple indications.
Surgical Biologics currently distributes tissue in several different membrane subsegments, such as ocular, dental, spine and wound care. The wound care and tissue management market in the U.S. is currently valued at approximately $7.4B, while the regenerative dental market accounts for $232M. The Millennium Research Group has projected the anti-adhesion market to reach an estimated $500M in 2012, whereas experts agree that the ocular market is valued at approximately $100M. Each market’s sub-segment has unique competitors, products and distribution methods. Amniotic membrane, as processed by SB, has unique “bio-active” properties that offer benefits that most competitive products cannot offer. SB’s tissues provide anti-inflammatory, anti-angiogenesis, anti-scarring and barrier properties as well as enhanced healing at the surgical site.
Surgical Biologics has developed a specialized process for the processing of its products.amniotic membrane to produce a safe, effective and minimally manipulated allograft for homologous use. This patent pending process, named Purion™Purion®, consists of unique methods whichwas engineered to maximize yield, while minimizing manufacturing costs. The Purion™ process was engineeredprocessing costs and to create an implantallograft that is optimized for ease of use while providing the patient with the maximum assurance of safety. Surgical Biologics’ amniotic membrane allografts have unique “bio-active” properties that offer benefits that most competitive products cannot offer. Surgical Biologic’s tissues provide anti-inflammatory, anti-immunogenic, anti-scarring and barrier properties, as well as enhanced healing at the surgical site.
At the time of the acquisition, Surgical Biologics currentlydistributed tissue in several different membrane sub segments, such as ocular, dental, and spine. During 2011, the Company launched EpiFix®, an allograft specifically processed to offer a wide variety of wound healing and wound care options. Much of the clinical usage of EpiFix® has seven patents pendingbeen for wound care patients suffering from diabetic ulcers, pressure ulcers, vein circulation ulcers, or artery circulation ulcers.
The Company further expanded its amnion product offering in 2011 with the introduction of AmnioFix® Wrap for both nerve and tendon repair applications. Subsequent to year end, the Company announced the launch of AmnioFix® Injectable, which is an allograft composed of micronized amniotic tissue, uniquely processed to optimize performance and ease of use.
On the device technology side of our business, during 2011, the Company received 510(k) clearance for our HydroFix® Orthoshield device, which is indicated for the management and protection of tendon injuries in which there has been no substantial loss of tendon tissue. Also in 2012, the Company received the CE certification for the Company’s proprietary CollaFixTM Surgical Mesh CD, which is a Class III product in Europe.
Our Technology and Products
AmnioFix® and EpiFix®
MiMedx is the leading supplier of allografts processed from amniotic tissue, having supplied over 70,000 allografts to date for application in the Ophthalmic, Orthopedic, Dental, Spinal and Wound Care segments of healthcare.
Our current amnion products, AmnioFix® and EpiFix®, are processed from human tissue according to the American Association of Tissue Banks (AATB) regulations, and are considered tissue under Section 361 of the Public Health Service Act. This means that have been filed withAmnioFix® and EpiFix® are regulated differently than the other two MiMedx platform technologies, CollaFixTM and HydroFix®, which are regulated as medical devices and therefore need FDA clearances or approvals prior to marketing in the United States. Because AmnioFix® and EpiFix® are regulated as tissue, they do not need premarket clearance or approval in the United States, Patent Office. which accelerates our ability to bring new products to market. Please refer to the Government Regulation section of this document for additional discussion regarding the regulatory pathways of our technologies.
The patent filings consistAmnioFix® and EpiFix® allografts can be used for a wide range of procedures including ocular surface repair, gingival recession repair, wound care, burns, and many other types of procedures for the repair of a patient’s integumental (native) tissue. As discussed above, amniotic membrane, as processed by MiMedx, has unique “bio-active” properties that offer benefits that most competitive products cannot offer.
Natural human amniotic membrane is composed of multiple layers that contain:
| o | Collagen types IV, V, and VII |
| o | TIMPs 1,2,4, Tissue Inhibitor of Metalloproteinase 1, 2, 4 |
| o | Epidermal Growth Factor (EGF) |
| o | Transforming Growth Factor Beta (TGF-β) |
| o | Fibroblast Growth Factor (FGF) |
| o | Platelet Derived Growth Factors A & B (PDGF A&B) |
Amniotic membranes have been used clinically for over 100 years. The first clinical uses of fresh amnion were for wound care patients and burn victims. There have been over 150 publications on the use of amniotic membrane for uses ranging from wound care to gingival recession and from pterygium repair to reduction of fibrous tissue following spinal surgery. The amniotic membrane has been shown to reduce inflammation, down regulate scar tissue and promote the regeneration of soft tissues.
Amniotic membrane has been shown to lack certain HLA antigens that elicit an immune response. Amniotic Membrane is considered immunoprivileged. Some dehydrated amniotic membranes include the epithelial layer, which studies have shown contributes significant immunosuppressive properties to dehydrated amniotic membrane products.
Our Purion® process for both AmnioFix® and EpiFix® is a proprietary tissue processing technology that produces an allograft which is safe, effective, and minimally manipulated. Critical processing steps, including sterilization, have been validated to ensure tissue integrity and safety. Our unique processing technique specifically focuses on maintaining the delicate multi-layered structure and collagen matrix of the intellectual property usedtissue. The Purion® process does not subject materials to process tissues and/ultra low temperature conditions during processing or applystorage. This technique helps maintain graft structure, provides optimal performance and allows the tissuesallograft to be stored at room temperature. Additionally, each allograft incorporates specialized visual embossments that assist the surgeon with proper graft placement and orientation.
Our team is dedicated to providing safe, superior allografts that exceed customer expectations. To better satisfy the requirements and expectations of our customers, the Company maintains strict control on quality from the time of procurement. The Company has developed and implemented a Quality Management System in a unique manner in surgery.compliance with both the Food and Drug Administration (FDA) and the AATB. Using this Quality Management System, the Company maintains strict control over each step of the manufacturing process.
In addition to the existing implants, SB is in the final stages of development of new offerings for the wound care, burn, general surgery, gynecologyregulating recovery and ENT surgery markets. Thus far, amniotic tissues for these uses show great promise, andprocessing activities, the Company has begun limited commercial distributionalso established guidelines for such purposes. donor eligibility, screening and testing. All donor records and test results are reviewed by our Medical Director prior to the release of the tissue. Only tissue from donors that test negative or non-reactive for infectious diseases and acceptable bacterial results are released for transplant.
The wound care tissue, which is undergoing a multi-center clinical evaluation, also has shown particular promise; and the Company believes that this tissue has the potential to surpass all other products in commercial distribution. SB continues to research new opportunities for amniotic tissue, and currently has several additional offerings in the firstvarious stages of conceptualization.conceptualization and development.
CollaFixTM
Our Strategy
The Company’s initial business strategy was to identify and acquire innovative new medical products and technologies, focused primarily on the musculoskeletal market, as well as novel medical instrumentation and surgical techniques. We subsequently refined our strategy to focus on our proprietary biomaterial technologies that can be transformed into unique medical devices that fill an unmet or underserved clinical need. Our HydroFix™ hydrogel technology and our CollaFix™ collagen fiber technology are proprietary platforms that can serve as the basis for medical devices in various orthopedic and orthobiologic applications, such as spine, sports medicine, and trauma. We also have identified multiple product opportunities in general surgery, drug delivery, wound management and cardiac markets, among others.
Our plan is to focus our internal commercialization efforts relative to our HydroFixCollaFixTM and CollaFixTM materials on orthopedics and orthobiologic applications. As appropriate, we may partner with large, established companies in the general surgery, drug delivery, wound management, cardiac and other markets. Initial conversations with respect to such external relationships have been initiated, but they will take time to develop.
We have organized an advisory panel of leading physicians to provide insight into our primary fields of interest for new products and technology, as well as guidance and advice with respect to ongoing product development programs.
Our core focus is on near-term opportunities for each of our technologies, advancing them through the regulatory process, establishing reliable and cost-effective manufacturing, and establishing an effective distribution system.
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History of MiMedx Group, Inc.
MiMedx Group, Inc. originally was formed as a Utah corporation on July 30, 1985, under the name Leibra, Inc. We later changed domicile, through a merger, to Nevada, and subsequently changed our name to Alynx, Co. We had several additional name changes in connection with various business acquisitions, all of which were discontinued or rescinded. We were an inactive shell corporation for 10 years or more, seeking to acquire an interest in a business with long-term growth potential. On March 6, 2007, Alynx, Co. filed a registration statement with the SEC on Form 10-SB to register its common stock under the Securities Exchange Act of 1934.
In a merger consummated on February 8, 2008, Alynx, Co. acquired MiMedx, Inc., a Florida-based, privately-held, development-stage medical device company (“MiMedx”) founded by Steve Gorlin, currently Vice Chairman of MiMedx Group, Inc. MiMedx’s assets included three development units focused on the development of medical devices based on their respective patented and proprietary technologies. MiMedx’s primary development unit was focused on the development of products for the repair of soft tissue, such as tendons, ligaments and cartilage, using a collagen fiber-based platform predicated on certain cross linking technology, which was licensed from Shriners’ Hospital for Children and University of South Florida Research Foundation in January 2007. The assets of MiMedx also included 100% of the membership interests in SpineMedica, LLC (“SpineMedica”), a development-stage company focused on Orthopedic-Spine biomaterial technologies using a poly-vinyl alcohol (“PVA”) based hydrogel that its predecessor, SpineMedica Corp., licensed from SaluMedica, LLC for applications related to the spine in August 2005, and for applications related to the hand (excluding the wrist) and rotator cuff in August 2007. In October 2009, the license agreement was amended to exclude applications related to the hand. Additionally, MiMedx’s assets included certain intellectual property related to implants for use in fracture fixation in the upper extremities, which we referred to as the LeveL Orthopedics assets. These assets had been contributed to, or developed on behalf of, MiMedx pursuant to a consulting agreement it had entered into in September 2007, with Thomas J. Graham, M.D., a leading hand surgeon.
On March 31, 2008, Alynx, Co. merged into MiMedx Group, Inc., a Florida corporation and wholly-owned subsidiary that had been formed on February 28, 2008, for purposes of the merger. MiMedx Group, Inc. was the surviving corporation in the merger. Also on March 31, 2008, MiMedx entered into a license with SaluMedica, LLC, for the PVA-based hydrogel biomaterial for applications as a surgical sheet outside of the spine.
To assist the Company in transitioning from a development stage company to an operating company, effective February 24, 2009, the Company’s Board of Directors appointed Parker H. “Pete” Petit to serve as the Company’s Chairman of the Board, President and Chief Executive Officer. Mr. Petit has over 30 years’ experience in the healthcare products and services markets, and a track record of having successfully nurtured several companies from the development stage to industry leadership. In September 2009, Mr. Petit recruited another experienced medical device executive, William C. Taylor, to become the Company’s President and Chief Operating Officer. Mr. Taylor has over 20 years’ of medical device design, development, and manufacturing experience.
On April 20, 2009, we received clearance from the U.S. Food and Drug Administration (the “FDA”) to market our Paradís Vaso Shield™ device, indicated for use as a cover for vessels following anterior vertebral surgery. In October 2009, we divested our LeveL Orthopedics assets in order to focus exclusively on biomaterials, and also relinquished the SaluMedica license for the hydrogel application in the hand.
Prior to the 4th quarter of 2009, the Company explored business strategies through our three development units, MiMedx, SpineMedica and LeveL Orthopedics. After the sale of the LeveL assets and a thorough review of the strategic direction of the Company, management made the decision in late 2009 to consolidate the organizational structure. Instead of independent development teams and manufacturing locations, we now have integrated development teams and all manufacturing has been consolidated into one site. Our Tampa, Florida location focuses on early stage product and process development. Our Marietta, Georgia location houses our corporate headquarters, our development and sales teams and all manufacturing and distribution operations.
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In December 2009 we made the decision to simplify our corporate and technology branding in order to build a stronger brand identity. Our new branding strategy is to focus on MiMedx Group, Inc. as the corporate brand identity and to brand each of our technologies, rather than each product embodying our technologies. Our PVA Hydrogel technology is now called HydroFix™ and our collagen fiber technology is now called CollaFix™. During 2010, we transitioned the name of our current product from Paradís Vaso Shield™ to HydroFix™ Vaso Shield.
In February 2010, the Company received the CE Mark for its HydroFixTM Spine Shield device, which is indicated for use in certain locations along the anterior spine as a plane of idissection during revision surgery.
In June 2010, the Company received 510(k) clearance for additional thicknesses and sizes of its HydroFixTM Vaso Shield.
In December 2010, the Company received the CE Mark for its HydroFixTM Spine Shield device as a post surgical adhesion barrier.
In December 2010, the Company signed an agreement to acquire a third proprietary technology platform. The transaction, which closed in early January 2011, and the technology are discussed above under “Recent Events.”
Our Technology
CollaFix™
The CollaFix™ technology combines an innovative means of creating fibers from soluble collagen and a specialized cross-linking process. MiMedx utilizes two separate cross-linking technologies for various applications. Initial laboratory and animal testing shows that the cross-linked collagen fibers produce a very strong, biocompatible, and durable construct that can be transformed into surgical meshes intended to treat a number of orthopedic soft-tissue trauma and disease disorders.
Embodiments and benefits of products that we believe, based on preliminary studies, could be developed using this licensed technology are:
Initial tests of cross-linked fibers appear to demonstrate they are stronger than existing collagenous tissue, including healthy tendons and ligaments. These fibers form the fundamental unit from which a variety of devices could be configured as follows:
| • | | Linear and braided arrays for tendon and ligament repair |
|
| • | | Cross-helical arrays forming tubular structures that also can be cut to form flat patches |
|
| • | | Woven meshes for general surgical use; |
Linear and braided arrays for tendon and ligament repair
Cross-helical arrays forming tubular structures that also can be cut to form flat patches
Woven meshes for general surgical use;
CollaFixTM biomaterials have been tested and results preliminarily suggest that the materials are biocompatible and biodegradable;
| • | | Biocompatibilization (making a material biocompatible that may otherwise not be) of in-dwelling medical devices by coating with MiMedx proprietary NDGA (nordihydroguaiaretic acid) polymerized collagen; |
|
| • | | NDGA treatment of xenograft (animal in origin) and allograft (human in origin) materials could make them more biocompatible and possibly improve functional lifetime; and |
CollaFixTM Biomaterials coupled with MiMedx proprietary NDGA (nordihydroguaiaretic acid) polymerization can be used to coat synthetic indwelling medical devices to improve their biocompatibility;
NDGA treatment of xenograft (animal in origin) and allograft (human in origin) materials could make them more biocompatible and possibly improve functional lifetime; and
Cross-linked collagen-based biorivets have the potential to be used for bone fracture fixation.
Our core collagen technology is protected by patents, patent applications and trade secrets. The core patent covers the polymerization chemistry of NDGA as applied to biological materials, bioprostheses, or devices created through its application. It covers chemistries and compounds that have the reactive groups that are responsible for the effectiveness of NDGA, including a variety of organically synthesized NDGA analogs and natural compounds. Multiple medical products potentially could be developed and patented that are all tied to the core patented technology. Our core fiber technology is a closely heldguarded trade secret.
We are currently pursuing
In January 2012, the manufacture and optimization of various collagen constructs andCompany received the CE certification for its proprietary CollaFixTM Surgical Mesh CD, which is a Class III product in Europe. The certification was issued by the Company’s notified body, AMTAC Certification Services, Limited, based in the United Kingdom. The CE marking, also known as “CE Mark,” is a mandatory conformity mark on medical devices placed on the market in the European Economic Area (EEA). The CE mark certifies that a product is compliant with the European Council Directive 93/42/EEC concerning medical devices, also known as the Medical Device Directive or MDD. To date, we are focused on advancing our products through the regulatory process to receive FDA clearance to introduce our products to the market.have not yet received any U.S. clearances or approvals for CollaFixTM.
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We may license rights to specific aspects of our collagen technology to third parties for use in applications and indications that we choose not to exploit ourselves.
HydroFix™
HydroFix®
We license rights to a PVA polymer, which is a water-based biomaterial that can be manufactured with a wide range of mechanical properties, including those that appear to mimic closely the mechanical and physical properties of natural, healthy human tissue. This hydrogel has been used in other orthopedic and general surgery device applications, and we believe it has demonstrated biocompatibility and durability inside the human body. Regulatory agencies both inside and outside the United States have cleared the hydrogel material for use inside the body for several applications. For example, in the United States, the FDA has cleared devices using the hydrogel material for use as a cover for vessels following anterior vertebral surgery as well as for use next to nerves. In the European Union and Canada, devices using the hydrogel material have been cleared for use next to nerves, to replace worn-out and lesioned cartilage in the knee, and as a post-surgical adhesion inhibiting barrier for spine surgeries in specific locations.
As mentioned above, on
On April 20, 2009, we received FDA clearance via a 510(k), for our Paradís Vaso Shield™, recentlylater renamed HydroFix™ HydroFix® Vaso Shield (the “Vaso Shield”), which is a vessel guard made of our hydrogel material. Protection of veins and arteries is a common issue associated with many types of surgeries. Protection of the aorta, vena cava, iliac vessels and other anatomy is particularly important in anterior spine surgery. The HydroFix™HydroFix® Vaso Shield was designed to help physicians protect vessels followingduring anterior vertebral surgery. The FDA cleared the HydroFix™HydroFix® Vaso Shield as a vessel guard or cover forduring anterior vertebral surgery, however, the safety and effectiveness of this device for reducing the incidence, severity and extent of post-operative adhesion formation has not been established. During 2011, the Company received two additional 510(k) clearances for its HydroFix® VasoShield device; one for an expanded range of sizes and for a higher temperature exposure limit, and the second for additional information to be included in the marketing materials.
We have a similar version of the product for the European market called HydroFix™HydroFix® Spine Shield, which has received two CE marks. The device is classified as a post-surgical adhesion inhibiting barrier and is used in specific spine surgeries. TheIn April 2010, Spine Shield Class IIb for only anterior use with no contact with the central nervous system or central circulatory system received the CE marking, also known as “CE Mark,” is a mandatory conformity mark on many products placed on the single market in the European Economic Area (EEA). The CE marking certifies that a product has met European Union (EU) consumer safety, health or environmental requirements.mark. In December 2010, we received a second CE mark for HydroFix™the original HydroFix® Spine Shield (for Anterior use Class IIb in Europe) was renamed to be HydroFix® Anterior Shield and the HydroFix® Spine Shield Product was CE marked for useapplications in contact with the central circulatory system and the central nervous system.system (Class III in Europe). The CE marked HydroFix™HydroFix® Spine Shield is not available in the United States.
We are currently in
During 2011, the process of identifying other uses and indicationsCompany received 510(k) clearance for its HydroFix® OrthoShield device, which is indicated for the HydroFix™ technologies, including, but not limitedmanagement and protection of tendon injuries in which there has been no substantial loss of tendon tissue. The OrthoShield device is a permanent, protective sheet that minimizes soft tissue attachments to other areasthe device providing a protective environment for the repaired tendon to heal. The device is conformable, suturable, and biocompatible, providing surgeons with an easy to use option for tendon protection. The device also provides a smooth inner gliding surface for the tendon to move as part of the spinenormal motion.
Market Opportunity
The Company is a regenerative biomaterials company with three platform technologies. Our largest addressable market is in chronic wound care consisting of diabetic, venous and pressure ulcers. The Sports Medicine, General Surgery and OB/GYN soft tissue repair markets also represent significant market opportunities.
Each platform technology has competitive advantages that support our projected growth. Amniotic membrane has unique “bio-active” properties that offer benefits that most competitive products cannot offer. Surgical Biologic’s tissues provide anti-inflammatory, anti-scarring and barrier properties as well as healthcare categories outsideenhanced healing at the spine,surgical or wound site. It also can be stored at room temperature, with a five year shelf life and is easy for the physician to handle when treating a patient. Our CollaFixTM platform is the first biological, biodegradable, biomimetic technology that matches a human tendon in strength and stiffness. It also acts as a scaffold for cellular in-growth. Our HydroFix® platform has a micro pore structure that prohibits cellular attachment and has a very low immunogenic response.
The Company is focused primarily on the United States and Europe but will pursue other individual markets based upon the specific opportunity. The adoption of the technologies may vary depending on each country’s regulations, but the opportunities to help individuals in the different disease states remain similar and large.
In the US, the two key areas of focus for the products we market currently are the chronic wound care and orthopedic (including spine) markets. There are an estimated five million patients that have chronic wounds due to compromised health, such as generalpoor circulation or diabetes and do not heal with traditional wound care therapies and an estimated three million people needing some type of restorative sports medicine or spinal treatment. Our tissue technologies have shown marked improvements in healing these patients after remarkably short treatment periods. In the future, our tissue platforms will help reduce scarring in a variety of applications, including the estimated two million patients annually undergoing elective aesthetic procedures to reduce the signs of aging or the estimated almost one million patients annually undergoing some type of abdominal surgery obstetrics, and gynecology, maxilla-facial, plastic and cosmetic applications, and others.where scarring can limit the ability to reproduce, reduce sexual function, or generate post-operative pain.
Market Opportunity
In 2008,Europe, the valueCompany has similar opportunities to treat large populations of the Orthopedic-Biomaterials segment was estimatedpatients with our regenerative biomaterials. We believe there is tremendous opportunity to be $7.4 billion, representing over 20%treat a variety of the total Orthopedic Market. It is estimatedconditions, including close to seven million chronic wounds and burns, and close to one million tendon or ligament repair/ reconstructions.
Wound Care
The types of wounds that this market segment will grow at over 13% per year, which is more than double the growth rate for the overall Orthopedics Market. The Biomaterials market is expectedpresent themselves to grow tophysicians on a value of $9.4 billion in 2011, mainly due to advancements in materials science technology, the incidence ofdaily bases are diverse. There are acute wounds caused by surgical intervention, trauma and disease associated with the baby-boomer population and resource focus and investment (MedMarket Diligence, Report #M625, “Emerging Trends, Technologies and Opportunities in the Markets for Orthopedic Biomaterials, Worldwide,” 2008).
Orthopedics is one of the largest medical sectors utilizing biomaterials. The development of advanced generation products has prompted many orthopedic companies whose foundations lie in traditional therapies to focus on biomaterials due to physician and patient demand. We believe that new biomaterial products will continue to replace existing products.
The main orthopedic biomaterials markets driving growth are connective and soft tissues, such as tendon and ligament repair (tendons connect muscle to bone and ligaments connect bone to bone), meniscus repair, bone grafts, resorbable technologies,and cartilage repair.
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We believe that the number of procedures that might utilize our products is large. A 2009 iData report, US Market for Orthopedic Soft Tissue and Sports Medicine, stated that in 2009, the combined orthopedic soft tissue repair market was valued at over $1.05B. In addition, another iData report, US Market for Spinal Implants, MIS and VCF, reported the total US spinal implant market in 2008 to be $4.75B, a 9% growth over 2007.
Rotator cuff injuries represent a leading cause of shoulder instability and result in approximately 400,000 invasive procedures annually, according to MedTech Insight, an industry marketing research firm.
Also, the CollaFix™ biomaterials and related processes under license may prove suitable for use in general surgical procedures for reinforcement of soft tissue where weakness exists or scar tissue formation is not desirable.
burns. The market revenue for biomaterials in wound care is expected to rise at an accelerated compound annual growth rate of 16.5% from 2006-2013. Combination products (biomaterial dressings that also possess moist dressing, antimicrobials, or alginates) are further driving growth and gaining market share from other advanced wound dressing segments,2006-2013 according to the Frost and Sullivan US Interactive Wound Care Markets Report for 2008.
Tendon
Approximately 6,700,000 chronic wounds are treated in the US annually. Chronic wounds are defined as wounds that are delayed in closing compared to healing in an otherwise healthy individual. Some of the most common types of chronic wounds are diabetic foot ulcers, venous leg ulcers, pressure ulcers, arterial ulcers, and Ligament Repair Technologies
Advancements in tendon surgery have focused largely on augmenting the standard of care using synthetic and biomaterials including collagen based devices. Advancements in ligament surgery have focused largely on new methods of graft fixation using interference screws and anchors, which have opened new approaches to repair. We believe there is a new wave of development for ligament and tendon repair, including collagen matrices, allografts and tissue engineered tendons and ligamentssurgical wounds that we believe will change how physicians treat these procedures. Therapeutic modalities we continuebecome infected. MiMedx currently intends to focus on two primary chronic wound markets, which are relatedvenous leg ulcers and diabetic foot ulcers.
The physician’s goal when treating traumatic wounds is to heal the wound, but allowing the patient to retain natural function in the area of the wound with minimal scarring and infection. If a wound becomes infected, it can lead to a loss of limb or life. For the most part, physicians heal acute wounds without incident, but with scarring. However, physicians dealing with chronic wounds are mainly concerned with closing the wound as quickly as possible to minimize the risk of an infection that could lead to loss of limb or life.
EpiFix® Dehydrated Human Amniotic Membrane Allograft acts as a tissue regeneration graft that delivers essential wound healing factors, extracellular matrix proteins and inflammatory mediators to help reduce inflammation, enhance healing, and reduce scar tissue formation. EpiFix® is used for the treatment of all types of chronic and repair of soft tissues during tendon repair surgery, including reinforcement of the rotator cuff, patellar, Achilles, biceps, quadriceps or other tendons. Following clinical development of the above, we planacute, partial and full-thickness wounds. EpiFix® is not limited to focus on treatments for ligaments and joints, such as medial and lateral collateral ligaments of the knee, elbow and ankle and meniscal repair. Our products potentially could be used in other orthopedic categories as well.
PVA-Based Biomaterials
Our PVA based biomaterial, HydroFix™, has been used in several medical device applications and is cleareda specific wound type by the FDA like other technologies and is allowed to be used to heal all types of wounds. EpiFix® is a biologically active tissue allograft that stores at room temperature (0°-38°C) for up to five years. Certain cultured skin substitutes currently on the market require -80°C storage and expire only six months from time of manufacture. Another leading skin substitute is delivered on demand and has strict temperature controls between 20° - 23° Celsius with a ten day shelf-life. These competitors’ logistics complications highlight the distinct advantages of EpiFix®.
In addition, our strategic move to supply multiple sizes of grafts (16mm disc, 2x3 cm, 4x4 cm, 7x7cm) minimizes product waste. Both of the two leading competitors’ products come in only one size each, 2 inch x 3 inch (38 cm2) and 75mm disc (42 cm2). Since the average diabetic ulcers are approximately 2.5 cm2, using one of the competitors’ products would result in significant waste.
Chronic Sports/Work Tissue Injury
AmnioFix® Injectable addresses the chronic sports/work soft tissue injury market including but not limited to tennis elbow, golfers elbow, plantar fasciitis, tendonitis, bursitis and sprains. Soft tissue injuries are often caused by either a trauma or overuse of the affected area. Micro-tears in the tissue form and become inflamed. Scar tissue may form and impede a full recovery. Steroids are often used as a first line to help the patient cope with the pain and assist with recovery. There are a number of patients that do not get relief with steroids or do not want to use steroids, and over-use of steroids can cause long-term damage to the tissue. We believe AmnioFix® Injectable is the best option for the patient to help to reduce inflammation and scar formation, and enhance healing of micro-tears in soft tissue.
Spine Repair and Vessel Protection
Our AmnioFix® technology also is used as a graft to reduce the amount of scar tissue formation, provide a local anti-inflammatory and help with the soft tissue healing of the area. A reduction of scar tissue is necessary if the patient needs to have an additional surgical procedure in the future, as it may facilitate the re-access to the surgical site as well as help with scar attachment to the spinal dura. There are approximately 850,000 spinal surgeries per year(1) and most of them potentially could use AmnioFix® to reduce scarring and inflammation during the primary procedure and reduce the time during reoperations or follow-up surgeries.
(1)Intellab - Worldwide markets for Emerging Technologies, 2009
Our HydroFix® Vaso Shield sheet is FDA cleared as a vessel protector to protect the major vessels from the anterior spinal column during an anterior spinal procedure. Outside the United States, HydroFix® Spine Shield is CE marked for use asfor the anterior and posterior spine to provide a coverbarrier for vessels following anterior vertebral surgeryscar tissue attachment (adhesions). This permanent sheet is a physical barrier between two tissue types and for use ascould help with the re-access to the surgical site on a nerve cuff (SaluMedica, LLC). We have licensed the right to use Salubria®, SaluMedica LLC’s formulation, or similar PVA-based biomaterials for certain applications within the body under a world-wide license (see “Collaborations and License Agreements”). The material, as Salubria®, has been sold in Europe for certain applications for over seven years. The PVA-based hydrogel can be processed to have mechanical and physical properties similar to that of human tissue. The biostable hydrogel composition contains water in similar proportions to human tissue, mimicking human tissue’s strength and compliance. For certain applications, the PVA-based hydrogel has been formulated to be wear-resistant and strong. The base organic polymer is known to be biocompatible and hydrophilic. These properties make it a candidate for use as an implant, and may prove suitable for development into medical products addressing various applications. The PVA-based hydrogel and products formed therefrom are MRI compatible (allowing for Magnetic Resonance Imaging of a patient with no artifacts or special safety precautions necessary). revision.
We currently license the PVA-based hydrogel for use in the spine, rotator cuff and as a surgical sheet.
Spine Anatomy
Competition
EpiFix® and DisordersAmnioFix® Product lines
Competitive technologies
There are many competitive technologies that are focused on addressing the chronic wound care market. The spinetechnologies that we believe we can displace and/or replace are culture skin substitutes and topical growth factors. Although we are reimbursed under the category of “skin substitute,” our amniotic tissue is consideredmore than just a skin substitute - it is a membrane that regenerates multiple different types of tissues and is truly a regenerative tissue graft.
Cultured skin substitutes
Cultured skin substitutes were deployed for the treatment of chronic wounds over ten years ago. There are limitations to these products:
| Ÿ | Requires special handling to minimize damage to the tissue |
| Ÿ | Requires special shipping and storage -80°C or refrigeration. |
| Ÿ | Some require special thawing procedures taking up staff resources |
| Ÿ | Limited to only one size creating tremendous waste |
Topical Growth Factors and Platelet Rich Plasma (PRP)
There are two approaches to delivering topical growth factors to assist in healing. The first, which has been approved by the FDA, is yeast derived rhPDGF which is delivered in a gel that requires refrigeration. It is only approved for use on neuropathic diabetic foot ulcers. The second approach is platelet rich plasma (“PRP”), which is blood plasma with concentrated platelets. The platelets found in PRP are concentrated and include growth factors, as well as bioactive proteins. Although PRP has been used in many procedures, there continue to be many challenges with PRP usage, including the procedure the patient must go through to get the blood and the time it takes to process the blood. Moreover, the patient’s health will mandate the quality of the PRP. Additionally, the capital requirements for equipment and subsequent disposal costs associated with each procedure can be quite large. A further challenge is ensuring the PRP material stays in the location where placed by the physician.
Amnion and Amniotic Fluid
There are competing companies that are marketing amniotic tissue and fluid as well. To date, all the amniotic fluid on the market is cryopreserved, requiring special storage and precise thawing protocols. Most competitive amnion grafts are cryopreserved single layer amnion grafts. These grafts have the same issue as some of the cultured skin substitutes, with special storage requirements, thaw time, and hard to handle characteristics. Some use chemicals to fix or crosslink proteins to help with the tissue sterilization and for storage. Crosslinking creates a material that is more durable, but the crosslinking alters the resumption profile of the tissue. If competitors begin to dehydrate and layer their grafts, we believe our strong intellectual property efforts will afford us the right to prevent competitors from selling those products that violate our patents.
CollaFixTM Products
There are currently a large number of devices on the market used to reinforce surgically repaired soft tissues. These include hardware (screws, pins, disposables) as well as allografts, synthetic products and xenografts (derived from porcine, bovine and equine tissues).
There are several technologies currently on the market or anticipated to enter the market for ligament and tendon repair and/or replacements. Those technologies include collagen matrices, cell-seeded polymer scaffolds, cryopreserved allografts, fibroblast-seeded ligament analogs, and small intestinal submucosa.
These technologies may or may not utilize cross-linking agents, which are FDA-approved and used in the manufacturing of collagen for soft-tissue repair. The current market leader is the Restore Orthobiologic Soft Tissue Implant from DePuy. It utilizes small intestinal submucosa of porcine origin. We believe our collagen fiber-based devices will provide better reinforcement for tendon and ligament repair because they are made of high strength cross-linked collagen fibers and, by mimicking the natural fiber orientation in tendons and ligaments, they provide targeted mechanical properties equivalent to those of tendons and ligaments.
There are a few synthetic products, such as W.L. Gore’s GoreTex, 3M Kennedy Ligament Augmentation Device (“LAD”), and Stryker’s Meadox Dacron Ligament Augmentation Graft which were developed for use in Anterior Cruciate Ligament (ACL) reconstruction. These were first and second generation soft-tissue repair products and generally produce results that we believe are less satisfactory than those containing soft-tissue constructs, because the materials tend to stretch and become deformed over time.
HydroFix® Products
Spinal orthopedic and neurosurgeons to be the most complex motion segmentactively seek treatment alternatives and utilize various technologies during different stages of the human body. It providespatient care continuum. Until the recent success of non-fusion technologies, spine implant market manufacturers have focused almost exclusively on refining and improving spinal fusion techniques. Multiple fusion techniques and products are available to patients today.
Regardless of the type of surgery, fusion or TDR, physicians commonly deal with venous injury during anterior spinal revision surgery. Currently, competition for vessel guards for this specific application is limited. W.L. Gore & Associates, Inc. is the dominant manufacturer in this area.
Marketing and Sales
We have assembled a balance between structural supportnetwork of independent sales representatives and flexibility. It consistsstocking distributors to sell our MiMedx-labeled products domestically, and we are continuing to assemble a network of 26 separate bones called vertebraestocking distributors for international distribution. We also have a number of private label and OEM relationships, where our tissue is packaged and branded in accordance with the customer’s specifications.
Reimbursement
Most of our products are purchased by doctors, hospitals or ambulatory surgery centers that are connected togetherreimbursed by connective tissue to permit a normal range of motion. The spinal cord,third-party payers. In the body’s central nerve conduit, is enclosed within the spinal column. Vertebrae are paired into what are called motion segments that move by means of three joints: two facet jointsU.S., such payers include governmental programs (e.g., Medicare and one spinal disc.
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The four major categories of spine disorders are degenerative conditions, deformities, traumaMedicaid), private insurance plans, managed care programs and tumors. The largest market is degenerative conditions of the vertebral discs. These conditions can result in instability, pressureworkers’ compensation plans. Governmental payment programs have prescribed reimbursement rates for procedures and impingement on the nerve roots as they exit the spinal column, causing often severemedical products. Similarly, private third-party payers have carefully negotiated payment levels for procedures and debilitating pain in the back, arms and/or legs.
Current Treatments for Spine Disorders
The current prescribed treatment for spine disorders depends on the severity and duration of the disorder. Initially, physicians typically prescribe non-operative procedures including bed rest, medication, lifestyle modification, exercise, physical therapy, chiropractic care and steroid injections. Non-operative treatment options are often effective; however, other patients require spine surgery. According to Knowledge Enterprises, Inc., the number of spine surgery procedures grew to over 1.2 million per year in 2005 in the United States. The most common spine surgery procedures are: discectomy, the removal of all or part of a damaged disc; laminectomy, the removal of all or part of a lamina, or thin layer of bone, to relieve pinching of the nerve and narrowing of the spinal canal; and fusion, where two or more adjoining vertebrae are fused together to provide stability.
Spine Repair and Vessel Protection
MedTech Insight, LLC’s March 2007 report on “United States Markets for Spinal Motion Preservation Devices,” states that an estimated 50 million peoplemedical products. In addition, in the United States, sufferan increasing percentage of insured individuals are receiving their medical care through managed care programs, which monitor and may require pre-approval of the services that a member will receive. Private pay possibilities exist as a financing mechanism for purchasing our products as well, but our success substantially depends on adequate levels of third-party reimbursement for our products.
In those countries outside the U.S. where our products are approved for sale, we expect that sales volumes and prices of our products will be influenced by the availability of reimbursement from back pain. This report also statesgovernments or third-party payers. If adequate levels of reimbursement from governments or third-party payers outside of the U.S. are not obtained, international sales of our products will be limited. Outside of the U.S., reimbursement systems vary significantly by country. Many foreign markets have government-managed health care systems that in 2004, more than 1 million spine surgeries were performedgovern reimbursement for medical devices and procedures and often require special consideration for reimbursement for a new device.
We are currently working with industry reimbursement consultants to aid in the reimbursement planning for our products. At this time there can be no assurance that reimbursement policies will provide an acceptable return on our products.
Government Regulation
United States—far more than the number of hipStates
Human Amniotic Tissue
As discussed above, our AmnioFix® and knee replacements combined. Factors driving growthEpiFix® platforms are human tissue, and qualify under Section 361 of the spine surgeryPublic Health Service Act as products that do not require premarket review under a drug, device or biological product market includeapplication. The FDA believes that all human cells, tissue and cellular and tissue-based products (HCT/Ps) meet the growing number of people with degenerative disc disease, which typically is caused by gradual disc damage and often results in disc herniation and chronic, debilitating lower back pain. It is most common among otherwise healthy people in their 30s and 40s and affects approximately half of the United States population age 40 and older.
A disc herniation, or abnormal bulge or rupture, is often caused by degenerative disc disease but may also result from trauma and/or injury. As we age, the disc’snucleus pulposus, or the centerdefinition of a spinal disc, loses its water contentdrug, device or biological product. However, the agency recognizes that human tissue was designed, or evolved, to perform certain functions in the human body with exquisite safety and effectiveness. FDA's regulations set out the disc beginscriteria an HCT/P must meet in order to degenerate, becoming drier, less flexible, and prone to damagebe marketed without premarket approval or tears. Byclearance:
| Ÿ | The HCT/P must be minimally manipulated; |
| Ÿ | The HCT/P must be intended for homologous use (defined as the product performing the same basic function in the donor and in the recipient); |
| Ÿ | The HCT/P must not be not combined with another article; and |
| Ÿ | The HCT/P must not have a systemic effect and is not dependent on the metabolism of living cells for its primary function. |
When an HCT/P meets all the time a person reaches age 80, the nucleus pulposus’ water content decreases to approximately 74%; during the first year of a person’s life, the water content is approximately 90%. Theannulus fibrosus,or the outer rim of a spinal disc, also may be damaged by general wear and tear or by injury and can cause bulging and impingement on adjacent nerve roots.
Repair of herniated intervertebral discs or damage as a result of degenerative disc disease commonly involves surgical intervention such as fusion or total disc replacement (TDR). Postsurgical adhesions and fibrosis formation are a common consequence of the normal healing process. The presence of fibrosis may render reoperations or follow-up surgeries risky and have caused nerve root tethering in some patients.
One approach to protecting vessels following anterior vertebral surgery is to provide a barrier between the anterior spine and adjacent vessels. Some studies, not performed by us, have demonstrated that the application of a barrier to protect adjacent vessels may create a dissection planeabove criteria, no FDA review for future surgeries in that anatomical area.
The safety and effectiveness under a drug, device, or biological product marketing application is required. However, the processor of the FDA cleared HydroFix™ Vaso Shield device for reducing the incidence, severity and extent of post-operative adhesion formation has not been established.
Another market for which a barrier or plane of dissection-type producttissue is needed is in gynecological uses where the removal and surgical cutting of fibroids and cysts, hysterectomies, and other procedures may leadrequired to post-surgical adhesions. Such adhesions may result in infertility and pelvic pain. Gynecological surgery provides a compelling market because of the high volume of procedures worldwide, and because gynecological infertility surgery is frequently followed up by a laparoscopic second-look procedure at the disease site.
There are many other medical categories for which scar-tissue and fibrosis formation are complicating issues and the Company is researching opportunities for expansion of this product platform.
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Medical Advisory Board
We have empanelled a number of key scientists and physician opinion leaders in relevant fields by asking them to serve on our Medical Advisory Board (“MAB”). Each has entered into a consulting agreementregister with the Company.FDA, comply with regulations regarding labeling, donor eligibility, screening and testing, process the tissue in accordance with established Good Tissue Practices, and report any adverse events.
Medical Devices
Our MAB includes scientistsHydroFix® and physicians who move medicine forward by scientific endeavor, such as publishing, teaching and developing new solutions to treat injury and diseases. Several members chair their respective departments at university medical schools, teaching institutions and fellowship programs.
One of the most well-known of our MAB members is James Andrews, M.D., of Birmingham, Alabama, and Gulf Breeze, Florida. Dr. Andrews is one of the most respected sports-medicine physicians in the world. He is the physician for several National Football League and Major League Baseball teams and treats many of the highest-paid professional athletes from numerous teams and from a multitude of sports, including Drew Brees, the 2010 Superbowl MVP, and is regularly profiled in newspapers and magazines. Dr. Andrews also runs a sought-after fellowship program.
The MAB consists of 14 individuals and is grouped by specialty. Robert Guldberg, Ph.D. is working with us in all of our concentration areas, spine, sports medicine and upper and lower extremities. Others that are advising us in the spine area are: Richard Guyer, MD; Paul Jeffords, MD; Thomas Terrimani, MD; and Thomas Zdeblick, MD. Our Sports Medicine group consists of James Andrews, MD; Neal ElAttrache, MD; Timothy Kremcheck, MD; and Lonnie Paulos, MD. The Upper and Lower extremity group includes Martin Boyer, MD; Glenn Gaston, MD; Mark Glazebrook, MD; Jeff Johnson, MD and Gary Lourie, MD.
Government Regulation
Our productsCollaFixTM product platforms are medical devices subject to extensive regulation by the FDA, under the Federal Food, Drug, and Cosmetic Act and they are also regulated in the European Union throughEconomic Area by the Medical Device Directive.Directive 93/42/EEC. Similar registration/licensing regulations apply in other countries. These regulations govern, among other things, the following activities:
product design and development;
premarket clearance or approval;
advertising and promotion;
product sales and distribution; and
medicalMedical device reporting/Vigilance reporting.
Each medical device that we distributedistributed commercially in the U.S. likely will require either 510(k) clearance or Premarket Approval (“PMA”) from the FDA prior to marketing. Devices deemed to pose relatively less risk are placed in either Class I or II which requires the manufacturer to submit a premarket notification requesting permissionclearance for commercial distribution; thisdistribution. This is known as 510(k) clearance, which indicates that the device is substantially equivalent to devices already legally on the market. Most Class I devices are considered very low risk and are exempted from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously 510(k) cleared device or a pre-amendment Class III device for which PMA applications have not been required, are placed in Class III, requiring PMA approval.
Some of our products contain biologic materials. Wematerials and we believe that the FDA will regulate our products as medical devices. However, the FDA may determine that some of our products are combination products comprised of a biologic and medical device component. For a combination product, the FDA must determine which center or centers within the FDA will review the products and under what legal authority the products will be reviewed. While we believe our products would likely be regulated under the medical device authorities even if they are deemed “combination products,” there can be no assurances that the FDA will agree. In addition, the review of combination products is often more complex and more time consuming than the review of a product under the jurisdiction of only one center within the FDA.
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510(k)510(k) Clearance Pathway
To obtain 510(k) clearance for one of our products, we must submit a premarket notification demonstrating that the proposed device is substantially equivalent in intended use and in safety and effectiveness to a previously 510(k) cleared device or a device that was in commercial distribution before May 28, 1976, for which the FDA has not yet called for submission of PMA applications. The FDA’s 510(k) clearance pathway usually takes from four to 12 months, but it can take significantly longer for submissions that include clinical data.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, technological characteristics, performance or labeling requires a new 510(k) clearance or could require a PMA approval. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review any such decision. If the FDA disagrees with a manufacturer’s decision not to seek a new 510(k) clearance, the agency may retroactively require the manufacturer to seek 510(k) clearance or PMA approval. As part of the PMA review, theThe FDA typically will inspectinspects the manufacturer’s facilities for compliance with 21 CFR Part 820 Quality System Regulation or QSR,(QSR) which define the requirements which prescribe elaborate testing, control, documentationfor a quality system. A Quality System consists of organizational structure, responsibilities, procedures, processes and otherresources for implementing controls and monitoring to ensure the quality assurance procedures.and integrity of the product.
The FDA also can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA approval is obtained.
PMA Approval Pathway
If 510(k) clearance is unavailable for one of our products, thea product it must follow the PMA approval pathway, which requires proof of the safety and effectiveness of the device to the FDA’s satisfaction. The PMA approval pathway is much more costly, lengthy and uncertain. It generally takes from one to three years and can take even longer.
A PMA application must provide extensive preclinical and clinical trial data and also information about the device and its components regarding, among other things, device design, manufacturing and labeling. As mentioned above, in conjunction with a PMA review, the FDA typically will inspect the manufacturer’s facilities for compliance with QSR requirements, which prescribe elaborate testing, control, documentation and other quality assurance procedures.requirements.
Upon submission, the FDA determines if the PMA application is sufficiently complete to permit a substantive review, and, if so, the application is accepted for filing. The FDA then commences an in-depth review of the PMA application, which typically takes one to three years, but may take longer. The review time is often significantly extended as a result of the FDA asking for more information or clarification of information already provided. The FDA also may respond with a “not approvable” determination based on deficiencies in the application and require additional clinical trials that are often expensive and time consuming and can delay approval for months or even years. During the review period, an FDA advisory committee may be convened to review the application and recommend to the FDA whether, or upon what conditions, the device should be approved. Although the FDA is not bound by the advisory panel decision, the panel’s recommendation is important to the FDA’s overall decision making process.
If the FDA’s evaluation of the PMA application is favorable, the FDA typically issues an “approvable letter” requiring the applicant’s agreement to specific conditions (e.g., changes in labeling) or specific additional information (e.g., submission of final labeling) in order to secure final approval of the PMA application. Once the approvable letter is satisfied, the FDA will issue a PMA for the approved indications, which can be more limited than those originally sought by the manufacturer. The PMA can include post approval conditions that the FDA believes necessary to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, promotion, sale and distribution. Failure to comply with the conditions of approval can result in material adverse enforcement action, including the loss or withdrawal of the approval. Even after approval of a PMA, a new PMA or PMA supplement is required in the event of a modification to the device, its labeling or its manufacturing process.
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Clinical Trials
A clinical trial is generally required to support a PMA application and is sometimes required for a premarket notification. Such trials generally require submission of an application for an Investigational Device Exemption, or IDE. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE must be approved in advance by the FDA for a specified number of patients (unless the product is deemed a non-significant risk device eligible for more abbreviated IDE requirements). Clinical trials are subject to extensive monitoring, record keeping and reporting requirements. Clinical trials may begin once the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical trial sites, and must comply with FDA regulations. To conduct a clinical trial, we also are required to obtain the patients’ informed consent that complies with both FDA requirements and state and federal privacy and human subject protection regulations. We, the FDA or the IRB could suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA approval to market the product in the U.S.
Post market
After a device is placed on the market, numerous regulatory requirements apply. These include: the Quality System Regulation, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures during the manufacturing process; labeling regulations; the FDA’s general prohibition against promoting products for unapproved or “off-label” uses; and the Medical Device Reporting regulation, which requires that manufacturers report to the FDA if their device caused or contributed, or 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. Class II devices also can have special controls such as performance standards, post market surveillance, patient registries, and FDA guidelines that do not apply to Class I devices.
We are
The manufacturer is subject to inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements. If the FDA finds that we have failed to comply, it can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions such as:
fines, injunctions, and civil penalties;
recall or seizure of our products;
operating restrictions, partial suspension or total shutdown of production;
refusing our requests for 510(k) clearance or PMA approval of new products;
withdrawing 510(k) clearance or PMA approvals already granted; and
The FDA also has the authority to require repair, replacement or refund of the cost of any medical device that we have manufactured or distributed.
International
International sales of medical devicesthe Company’s products are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ. In addition, the export of certain of ourMiMedx Group products that have not yet been cleared or approved for domestic distribution may be subject to FDA export restrictions. There can be no assurance that we will receive on a timely basis, if at all, any foreign government or United States export approvals necessary for the marketing of our products abroad.
The primary regulatory environment in Europe is that of the European Union, which consists of twenty-seven countries, encompassing most of the major countries in Europe. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. The European Union has adopted numerous directives and standards regulating design, manufacture, clinical trials, labeling, and adverse event reporting for medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear a CE Mark and can be commercially distributed throughout Europe. For tissue products, the Company must submit for approval and clearance with each individual country, supporting the compliance of the product with the country’s directives and/or standards. Once approved, the tissue product can be distributed within that particular country. The method of assessing conformity varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third party assessment by a “Notified Body.” This third party assessment may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s product. AnA successful assessment by a Notified Body resident in one country within the European Union is required in order for a manufacturer to commercially distribute the product throughout the European Union.Economic Area EEA.
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Export of Uncleared or Unapproved Devices
Export of devices eligible for the 510(k) clearance process, but not yet cleared to market, is permitted without FDA approval, provided that certain requirements are met. Unapproved devices subject to the PMA process can be exported to any country without FDA approval provided that, among other things, they are not contrary to the laws of the country to which they are intended for import, they are manufactured in substantial compliance with the Quality System Regulations, and they have been granted valid marketing authorization by any member country of the European Union, Australia, Canada, Israel, Japan, New Zealand, Switzerland or South Africa. If these conditions are not met, FDA approval must be obtained, among other things, by demonstrating to the FDA that the product is approved for import into the country to which it is to be exported and, in some cases, by providing safety data for the device. There can be no assurance that the FDA will grant export approval when necessary or that countries to which the device is to be exported will approve the device for import. Our failure to obtain necessary FDA export authorization and/or import approval could have a material adverse effect on our business, financial condition and results of operation.
Regulatory Status of our Products
On April 20, 2009, the Company
The clearances and CE markings we have received FDA clearance to market the HydroFix™ Vaso Shield (formerly called Paradís™ Vaso Shield) device, indicated for use as a cover for vessels following anterior vertebral surgery. The proprietary, patented, and PVA based membrane may reduce the risk of associated injury following anterior vertebral surgeries by providing a vessel cover. We have products under development that may qualify for 510(k) clearance, such as our collagen fiber implants and additional sheet products made from PVA-based hydrogel. In 2010, two HydroFix™ 510(k) submissions were cleared in the U.S. Additionally, two HydroFix™ CE Marks (European clearance) were issued. One additional HydroFix™ 510(k) submission, one CollaFix™ collagen fiber 510(k) submission, and one CollaFix™ collagen fiber CE Mark submission were in process at the end of the year. No assurances can be made regarding the outcome of these in-process submissions or the timeframe needed for completion of the process.
Reimbursement—Procedures, Profitability and Costs
Our products likely will be purchased by hospitals or ambulatory surgery centers that are reimbursed by third-party payers. In the U.S., such payers include governmental programs (e.g., Medicare and Medicaid), private insurance plans, managed care programs and workers’ compensation plans. Governmental payment programs have prescribed reimbursement rates for procedures and medical products. Similarly, private third-party payers have carefully negotiated payment levels for procedures and medical products. In addition, in the United States, an increasing percentage of insured individuals are receiving their medical care through managed care programs, which monitor and may require pre-approval of the services that a member will receive. Our success depends on adequate levels of third-party reimbursement for our products.
In those countries outside the U.S. where our products are approved for sale, we expect that sales volumes and prices of our products will be influenced bydiscussed under the availability of reimbursement from governments or third-party payers. If adequate levels of reimbursement from governments or third-party payers outsidedescription of the U.S. are not obtained, international sales of our products will be limited. Outside ofrespective technologies under the U.S., reimbursement systems vary significantly by country. Many foreign markets have government-managed health care systems that govern reimbursement for medical devicesheading “Our Technology and procedures and often require special consideration for reimbursement for a new device.Products.”
We are currently working with industry reimbursement consultants to aid in the reimbursement planning for our products. At this time there can be no assurance that reimbursement policies will provide an acceptable return on our products.
CompetitionLicenses
CollaFix™ Products
In the US in 2007, approximately 2,090,000 orthopedic soft tissue repair procedures were performed. This procedure volume is growing at a rate of 4.5% supported by the rising number of sports-related injuries, particularly among the increasingly active aging population. Source: US Markets for Orthopedic Soft Tissue Solutions 2008, Millennium Research Group
There are currently a large number of devices on the market used to reinforce surgically repaired soft tissues. These include hardware (screws, pins, disposables) as well as allografts, synthetic products and xenografts (derived from porcine, bovine and equine tissues).
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Leading Competitors in the Orthopedic Soft Tissue Solutions Market, as a % of Total, US, 2007.
| | | | |
| | Percent of US total | |
Leading Competitors | | Soft Tissue Market | |
Arthrex | | | 33.8 | % |
DePuy Mitek | | | 17.1 | % |
Smith and Nephew | | | 13.2 | % |
CONMED Linvatec | | | 5.8 | % |
Genzyme Biosurgery | | | 3.4 | % |
Musculoskeletal Transplant Foundation | | | 3.2 | % |
Biomet Sports Medicine | | | 3.1 | % |
AlloSource | | | 2.7 | % |
ArthroCare | | | 2.1 | % |
LifeNet Health | | | 1.9 | % |
Other | | | 13.7 | % |
Source: US Markets for Orthopedic Soft Tissue Solutions 2008, Millennium Research Group
There are several technologies currently on the market or anticipated to enter the market for ligament and tendon repair and/or replacements. Those technologies include collagen matrices, cell-seeded polymer scaffolds, cryopreserved allografts, fibroblast-seeded ligament analogs, and small intestinal submucosa.
Competitors who market collagen based devices currently include:
| | | | |
Developer | | Product | | Cross-linking |
| |
DePuy | | RESTORE | | None |
Wright Medical Technology | | GraftJacket | | None |
Synovis | | OrthAdapt | | Carbodiimide |
ReGen Biologics | | Collagen matrices | | None |
Biomet/Organogenesis | | CuffPatch | | Carbodiimide |
The above technologies may or may not utilize cross-linking agents, which are FDA-approved and used in the manufacturing of collagen for soft-tissue repair. The current market leader is the Restore Orthobiologic Soft Tissue Implant from DePuy. It utilizes small intestinal submucosa of porcine origin. We believe our collagen fiber-based devices will provide better reinforcement for tendon and ligament repair because they are made of high strength cross-linked collagen fibers and, by mimicking the natural fiber orientation in tendons and ligaments, they provide targeted mechanical properties equivalent to those of tendons and ligaments.
There are a few synthetic products, such as W.L. Gore’s GoreTex, 3M Kennedy Ligament Augmentation Device (“LAD”), and Stryker’s Meadox Dacron Ligament Augmentation Graft which were developed for use in Anterior Cruciate Ligament (ACL) reconstruction. These were first and second generation soft-tissue repair products and generally produce results that we believe are less satisfactory than those containing soft-tissue constructs, because the materials tend to stretch and become deformed over time.
HydroFix™ Products
Spinal orthopaedic and neurosurgeons actively seek treatment alternatives and utilize various technologies during different stages of the patient care continuum. Until the recent success of non-fusion technologies, spine implant market manufacturers have focused almost exclusively on refining and improving spinal fusion techniques. Multiple fusion techniques and products are available to patients today.
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Regardless of the type of surgery, fusion or TDR, physicians commonly deal with venous injury during anterior spinal revision surgery. Currently, competition for vessel guards for this specific application is limited. W.L. Gore & Associates, Inc. is the dominant manufacturer in this area.
Collaborations and License Agreements
License Agreement between MiMedx, Shriners’ Hospitals for Children, and University of South Florida Research Foundation
We entered into a license agreement with Shriners’ Hospitals for Children and University of South Florida Research Foundation (collectively “Licensor”) in January 2007 for the worldwide, exclusive rights for all applications using NDGA-polymerized materials, including for reconstruction of soft tissue. We paid a one-time license fee of $100,000, plus issued to the Licensor 1,120,000 shares of our Common Stock, and the Licensor will receive future additional milestone payments and continuing royalties based on sales of all licensed products.
The license is perpetual and terminable by us at any time, in whole or in part. The licensor has the right to terminate this license in the event that any breach, which they are required to give us notice of, is not cured.
License Agreement between SpineMedica and SaluMedica, LLC
In August 2005 we entered into an exclusive, perpetual, worldwide, non-terminable, royalty-free, transferable license of certain patents and patent application rights held by SaluMedica, LLC that relate to a PVA-based hydrogel. SpineMedica has the right to manufacture, market, use and sell medical devices and products incorporating the claimed technology for all neurological and orthopedic uses related to the human spine, including muscular and skeletal uses. Some of the licensed patents and patent application rights are owned by SaluMedica, LLC and at least one of these patent and patent application rights is licensed by SaluMedica, LLC from Georgia Tech Research Corporation. In connection with this license agreement, SpineMedica also acquired certain of SaluMedica, LLC’s assets, including manufacturing and testing equipment and office equipment, and obtained a license to use the trademarks “SaluMedica™” and “Salubria® biomaterial.”
License Agreement between SaluMedica, LLC and Georgia Tech Research Corporation
Some of the patents and patent application rights licensed to SpineMedica by SaluMedica, LLC are licensed to SaluMedica, LLC from Georgia Tech Research Corporation. SaluMedica, LLC and Georgia Tech Research Corporation have agreed that in the event the license agreement between them is terminated for any reason (other than the expiration of the patents), Georgia Tech Research Corporation will license the technology to SpineMedica for uses related to the human spine on substantially the same terms as granted to SaluMedica, LLC without further payment.
Rotator Cuff License with SaluMedica, LLC
MiMedx has a Technology License Agreement, as amended by a First Amendment to Technology License Agreement, as well as a related Trademark License Agreement, all dated August 3, 2007, (collectively, the “Rotator Cuff License”) that provided MiMedx with the exclusive, fully-paid, worldwide, royalty-free, irrevocable and non-terminable (except as provided in the Rotator Cuff License), and sublicensable rights to develop, use, manufacture, market, and sell Salubria® biomaterial or similar PVA-based hydrogels for all neurological and orthopedic uses (including muscular and skeletal uses) related to the rotator cuff and the hand (excluding the wrist), but excluding the product SaluBridge (which is made from Salubria® biomaterial and is currently cleared for use by the FDA) (the “Licensed Rotator Cuff IP”). SaluMedica, LLC’s rights in the Licensed Rotator Cuff IP derive from and are subject to one or more licenses from Georgia Tech Research Corporation and, consequently, the Rotator Cuff License is subject to those same licenses. This license was amended in October 2009 to relinquish the license for uses related to the hand but we kept the rotator cuff license.
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Surgical Sheet License with SaluMedica, LLC
On March 31, 2008, we entered into an exclusive world-wide license with SaluMedica, LLC for a PVA-based hydrogel biomaterial for applications as a surgical sheet. The license covers both internal and external applications. In exchange for the exclusive, worldwide, perpetual license to develop, manufacture, and sell the “surgical sheet” technology for application anywhere in the body, we issued SaluMedica, LLC 400,000 shares of restricted Common Stock. In addition, SaluMedica, LLC is eligible to receive up to an aggregate additional 600,000 shares of restricted Common Stock if certain sales and revenue milestones are achieved not later than June 30, 2013. On December 31, 2009, we completed the sale of our first commercial product, the HydroFix™HydroFix® Vaso Shield, and met the first milestone under this agreement. As a result we issued 100,000 shares of Common Stock to the licensor valued at $71,000.
Intellectual Property
Our intellectual property includes licensed patents, owned and licensed patent applications and patents pending, proprietary manufacturing processes and trade secrets, brands, trademarks and trade names associated with our technology. Furthermore, we require employees, consultants and advisors to sign Proprietary Information and Inventions Agreements as well as Nondisclosure Agreements that assign to us and protect the intellectual property existing and generated from their work and that we may use and own exclusively.
The pending and provisional patent applications may not issue into patents, as is true with any provisional or patent application.
Worldwide, the MiMedx CollaFix™ and HydroFix™platform technologies are protected with 8ten patents and 41over 50 patent applications, as well as proprietary manufacturing processes and trade secrets.
Improvements to Technology
Any improvements to Salubria® developed by SaluMedica, LLC during the life of the licensed patents are included as part of the license from SaluMedica, LLC. The Company will own all improvements to Salubria® that we develop. However, we will license these improvements to SaluMedica, LLC for no additional consideration, provided that the use of these improvements must be unrelated to all neurological and orthopedic uses, including muscular and skeletal uses, related to the human spine.
Trademarks & Trade Names
We also own trademark and trade name registration of the mark Paradís Vaso ShieldTM and license the SaluMedica™ and Salubria® trademarks. We also have applied forown the trade name registration of the trademarks of MiMedx™MiMedx®, EpiFix®, AmnioFix®, HydroFix® and our product names.Purion®.
Manufacturing
Manufacturing
MiMedx Group performs research and early stage product and process development activities and operates a pilot production facility for its proprietary CollaFix™CollaFixTM cross-linked collagen products in its Tampa, Florida,Kennesaw, Georgia, facility. In the future, we may contract with third parties to perform certain manufacturing or assembly of the products that are developed and enter into strategic relationships for sales and marketing of products that we develop.
Our Marietta,Kennesaw, Georgia, facility is also our corporate headquarters, which houses our general management, sales, marketing, product development, quality and regulatory functions as well as the consolidation of our manufacturing operations for HydroFix™EpiFix®, AmnioFix®, HydroFix® and CollaFix™CollaFixTM.
We are subject to the FDA’s quality system regulations, state regulations, and regulations promulgated by the European Union. We are FDA registered, CE marked and ISO certified. Our facilities are subject to periodic unannounced inspections by regulatory authorities, and may undergo compliance inspections conducted by the FDA and corresponding state and foreign agencies.
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Suppliers
We have identified reliable sources and suppliers of collagen, source materials of NDGA, which we believe will provide a product in compliance with FDA guidelines. We engage in the manufacture of our own hydrogel products and accessibility to critical raw materials for the PVA-based biomaterial products is not inhibited by supply or market constraints.
Marketing and Sales
We planhave a comprehensive network of hospitals who participate in our placenta donation program. We have a dedicated staff who work at these hospitals, collecting donated placentas from mothers who consent to utilize our experienced management team to commercialize these medical technologies by advancing them through the proper regulatory approval processes, developing or arranging for reliable and cost-effective manufacturing, and to either sell or license the product lines to others or market and sell the products ourselves. For our first U.S. product, HydroFix™ Vaso Shield,donation, undergoing caesarian section births. In addition, we have assembled a networkentered into agreements with certain third party companies who also collect placenta donations in other hospitals. We believe that we have ensured an adequate supply of independent sales representatives and stocking distributorstissue to sell our products domestically. We have assembled and are continuing to assemble a network of stocking distributors for our first European product, HydroFix™ Spine Shield.meet anticipated demand.
Employees
As of December 31, 2010, we had 36 employees, of whom 32 are full-time and 4 are part-time employees. We consider our relationships with our employees to be satisfactory. None of our employees is covered by a collective bargaining agreement.
Litigation
We are not involved in any litigation, nor are we aware of any threatened litigation.
Research and Development
Our research and development efforts are focused on developing products for various surgical and orthopedic markets using NDGA biomaterials, and development of other sheet based spine products and other sheet products using a PVA-based hydrogel. Our research and development staff currently consists of 12 full time and 2 part time employees. To support development, we have contracts with outside labs who aid us in our research and development process.
Our research and development group has extensive experience in developing products related to our field of interest, and works with our PhysicianMedical Advisory BoardsBoard to design products that are intended to improve patient outcomes, simplify techniques, shorten procedures, reduce hospitalization and rehabilitation times and, as a result, reduce costs. To support development, we have contracts with outside labs who aid us in our research and development process. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” at Item 7 below for information regarding expenditures for research and development in each of the last two fiscal years.
Surgeon Training
Environmental Matters
The Company’s tissue preservation activities generate some chemical and Educationbiomedical wastes, consisting primarily of diluted alcohols and acids, human and animal pathological and biological wastes, including human and animal tissue and body fluids removed during laboratory procedures. The chemical and biomedical wastes generated by the Company are placed in appropriately constructed and labeled containers and are segregated from other wastes generated by the Company. The Company contracts with third parties for transport, treatment, and disposal of waste. The Company strives to remain compliant with applicable laws and regulations promulgated by the Resource Conservation and Recovery Act, the U. S. Environmental Protection agency and the Georgia Department of Natural Resources, Environmental Protection /division.
Employees
As of December 31, 2011, we had 52 employees, of whom 47 are full-time and five are part-time employees. We devote significant resources to workingconsider our relationships with our Medical Advisory Boards. We believe that the most effective wayemployees to introduce and build market demand for our products will be by partnering with leading surgeons from around the globe in the usesatisfactory. None of our products. We have access to state-of-the-art cadaver operating theaters and other training facilities at someemployees is covered by a collective bargaining agreement.
Litigation
None outside the ordinary course of the nation’s leading medical institutions. We intend to continue to focus on working with leading surgeons in the United States. See “Business-Medical Advisory Boards.”business.
Available Information
Our website address iswww.mimedx.com. We make available on this website under “Investor Relations — SEC Filings,” free of charge, our proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission (“SEC”). In addition, we post filings of Forms 3, 4, and 5 filed by our directors, executive officers and ten percent or more shareholders. We also make available on this website under the heading “Investor Relations — Corporate Governance” our Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee Charters as well as our Code of Business Conduct and Ethics.
The reference to our website does not constitute incorporation by reference of any information contained at that site.
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Risks Related to Our Business and Industry
We are a high-risk startup venture.
With the commercialization of our first products, we have transitioned from being a development company to an operating company. Nonetheless, most of our products are still in the early stages of development and deployment, and we have limited operating history. We do not currently have any material assets, other than cash, certain laboratory equipment, and certain intellectual property rights. Our business and prospects must be evaluated in light of the expenses, delays, uncertainties and complications typically encountered by businesses in our stage of development, many of which may be beyond our control. These include, but are not limited to, lack of sufficient capital, unanticipated problems, delays or expenses relating to product development, governmental approvals, and licensing and marketing activities, competition, technological changes and uncertain market acceptance. In addition, if we are unable to manage growth effectively, our operating results could be materially and adversely affected. We must overcome these and other business risks to be successful. Our efforts may not be successful. We may never be profitable. Therefore, investors could lose their entire investment.
Most
Many of our planned products are in the early stage of product development.
Many of the possible products we have rights to have had only limited research in the fields of use we currently intend to commercialize. Our product candidates will require testing and regulatory clearances or approvals. Accordingly, most of the products we are developing are not yet ready for sale and may never be ready for sale. The successful development of any products is subject to the risks of failure inherent in product development. These risks include the possibilities that any or all of these proposed products or procedures are found to be ineffective or toxic, or otherwise fail to receive necessary regulatory clearances or approvals; that the proposed products or procedures are uneconomical to market or do not achieve broad market acceptance; that third parties hold proprietary rights that preclude us from marketing them; or third parties market a superior or equivalent product. We are unable to predict whether our research and development activities will result in any additional commercially viable products or procedures. Furthermore, due to the extended testing and regulatory review process required before marketing clearances or approvals can be obtained, the time frames for commercialization of any products or procedures are long and uncertain.
| | Continuing disruptions in the overall economy and the credit and financial markets may adversely impact our ability to raise necessary additional capital. |
Continuing disruptions in the overall economy and the credit and financial markets may adversely impact our ability to raise necessary additional capital.
The capital and credit markets continue to be very volatile as a result of adverse conditions that have caused the failure and near failure of a number of large financial services companies. If the capital and credit markets continue to experience volatility and the availability of funds remains limited, it is possible that our ability to access the capital and credit markets may be limited or nonexistent because of these or other factors, and we require additional capital in the near future in order to continue operations.
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We will need additional financing to meet our future capital requirements.
We will require significant additional funds, either through additional equity or debt financings or collaborative agreements or from other sources to engage in research and development activities with respect to our potential product candidatesproducts and to establishhire the personnel necessary to successfully manage us.the commercialization of our products. We believe that our current cash and cash equivalents and committed line of credit will be sufficient to meet our projected operating requirements for the next twelve months. However, obtaining the required regulatory approvals and clearances and the planned expansion of our business will be expensive and time-consuming and we willmay in the future seek funds from public and private stock or debt offerings, borrowings under lines of credit or other sources. Our capital requirements will depend on many factors, including:
the revenue generated by sales of our products;the costs associated with expanding our sales and marketing efforts, including efforts to hire independent agents and sales representatives;18
general and administrative expenses.
| Ÿ | the revenue generated by sales of our products; |
| Ÿ | the costs associated with expanding our sales and marketing efforts, including efforts to hire independent agents and sales representatives; |
| Ÿ | the expenses we incur in developing and commercializing our products, including the cost of obtaining and maintaining FDA or other regulatory clearances and approvals for our HydroFix® and CollaFixTM products; and |
| Ÿ | general and administrative expenses. |
As a result of these factors, we mustwill raise additional funds now and in the future and such funds may not be available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing shareholders may experience dilution and the new equity or debt securities we issue may have rights, preferences and privileges senior to those of our existing shareholders. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our products or proprietary technologies, or grant licenses on terms that are not favorable to us. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, obtain the required regulatory clearances or approvals, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. Any of these events could adversely affect our ability to achieve our development and commercialization goals, which could have a material and adverse effect on our business, results of operations and financial condition.
We have a limited operating history. Further, we have incurred losses since inception. The actual extent of our future losses and the timing of profitability are highly uncertain, and we may never achieve profitable operations. The principal causes of our losses are likely to be primarily attributable to personnel costs, working capital costs, research and development costs, brand development costs and marketing and promotion costs. We may never achieve profitability.
| | We are in a highly competitive industry and face competition from large, well-established medical device manufacturers as well as new market entrants. |
We are in a highly competitive industry and face competition from large, well-established medical device manufacturers as well as new market entrants.
Competition from other medical device companies and from research and academic institutions is intense, expected to increase, subject to rapid change, and significantly affected by new product introductions and other market activities of industry participants. In addition to competing with universities and other research institutions in the development of products, technologies and processes, we compete with other companies in acquiring rights to products or technologies from those institutions. There can be no assurance that we can develop products that are more effective or achieve greater market acceptance than competitive products, 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 some or all of the following:
products which have been approved by regulatory authorities for use in the United States and/or Europe and which are supported by long-term clinical data;
significantly greater name recognition;
established relations with surgeons, hospitals, other healthcare providers and third party payors;
large and established distribution networks in the United States and/or in international markets;
greater experience in obtaining and maintaining regulatory approvals and/or clearances from the United States Food and Drug Administration and other regulatory agencies;
more expansive portfolios of intellectual property rights; and
greater financial, managerial and other resources for products research and development, sales and marketing efforts and protecting and enforcing intellectual property rights.
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Our competitors’ products will compete directly with our products. In addition, our competitors as well as new market entrants may develop or acquire new treatments, products or procedures that will compete directly or indirectly with our products. The presence of this competition in our market may lead to pricing pressure which would make it more difficult to sell our products at a price that will make us profitable or prevent us from selling our products at all. Our failure to compete effectively would have a material and adverse effect on our business, results of operations and financial condition.
| | Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain and may be inadequate, which would have a material and adverse effect on us. |
Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain and may be inadequate, which would have a material and adverse effect on us.
Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology, including our licensed technology. These legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. For example, our pending United States and foreign patent applications (and those we have or will have licenses to) may not issue as patents in a form that will be advantageous to us or may issue and be subsequently successfully challenged by others and invalidated. In addition, our pending patent applications include claims to material aspects of our products and procedures that are not currently protected by issued patents. Both the patent application process and the process of managing patent disputes can be time consuming and expensive. Competitors may be able to design around our patents or develop products that provide outcomes that are comparable or even superior to ours. Although we have taken steps to protect our intellectual property and proprietary technology, including entering into confidentiality agreements and intellectual property assignment agreements with some of our officers, employees, consultants and advisors, such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.
In the event a competitor infringes upon our licensed or pending patent or other intellectual property rights, enforcing those rights may be costly, uncertain, difficult and time consuming. Even if successful, litigation to enforce our intellectual property rights or to defend our patents against challenge could be expensive and time consuming and could divert our management’s attention. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents rights against a challenge. The failure to obtain patents and/or protect our intellectual property rights could have a material and adverse effect on our business, results of operations, and financial condition.
| | We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from developing our products, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetary damages. |
We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from developing our products, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetary damages.
Third parties could, in the future, assert infringement or misappropriation claims against us with respect to products we develop. Whether a product infringes a patent or misappropriates other intellectual property involves complex legal and factual issues, the determination of which is often uncertain. Therefore, we cannot be certain that we have not infringed the intellectual property rights of others. Our potential competitors may assert that some aspect of our product infringes their patents. Because patent applications may take years to issue, there also may be applications now pending of which we are unaware that may later result in issued patents that our products infringe. There also may be existing patents or pending patent applications of which we are unaware that our products may inadvertently infringe.
Any infringement or misappropriation claim could cause us to incur significant costs, place significant strain on our financial resources, divert management’s attention from our business and harm our reputation. If the relevant patents in such claim were upheld as valid and enforceable and we were found to infringe, we could be prohibited from selling any product that is found to infringe unless we could obtain licenses to use the technology covered by the patent or are able to design around the patent. We may be unable to obtain such a license on terms acceptable to us, if at all, and we may not be able to redesign our products to avoid infringement. A court could also order us to pay compensatory damages for such infringement, plus prejudgment interest and could, in addition, treble the compensatory damages and award attorney fees. These damages could be substantial and could harm our reputation, business, financial condition and operating results. A court also could enter orders that temporarily, preliminarily or permanently enjoin us and our customers from making, using, or selling products, and could enter an order mandating that we undertake certain remedial activities. Depending on the nature of the relief ordered by the court, we could become liable for additional damages to third parties.
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| | Our patents and licenses may be subject to challenge on validity grounds, and our patent applications may be rejected. |
Our patents and licenses may be subject to challenge on validity grounds, and our patent applications may be rejected.
We rely on our patents, patent applications, licenses and other intellectual property rights to give us a competitive advantage. Whether a patent is valid, or whether a patent application should be granted, is a complex matter of science and law, and therefore we cannot be certain that, if challenged, our patents, patent applications and/or other intellectual property rights would be upheld. If one or more of those patents, patent applications, licenses and other intellectual property rights are invalidated, rejected or found unenforceable, that could reduce or eliminate any competitive advantage we might otherwise have had.
| | The prosecution and enforcement of patents licensed to us by third parties are not within our control, and without these technologies, our product may not be successful and our business would be harmed if the patents were infringed or misappropriated without action by such third parties. |
The prosecution and enforcement of patents licensed to us by third parties are not within our control, and without these technologies, our product may not be successful and our business would be harmed if the patents were infringed or misappropriated without action by such third parties.
We have obtained licenses from third parties for patents and patent application rights related to the products we are developing, allowing us to use intellectual property rights owned by or licensed to these third parties. We do not control the maintenance, prosecution, enforcement or strategy for many of these patents or patent application rights and as such are dependent in part on the owners of the intellectual property rights to maintain their viability. Without access to these technologies or suitable design-around or alternative technology options, our ability to conduct our business could be impaired significantly.
| | Our NDGA License Agreement could be terminated. |
Our NDGA License Agreement could be terminated.
Under our license agreement with Shriners’ Hospitals for Children and University of South Florida Research Foundation dated January 29, 2007, it is possible for the licensor to terminate the agreement if we breach the license agreement and all of our cure rights are exhausted. If our license agreement were to be terminated, it would have a negative impact on our business.
| | We may be subject to damages resulting from claims that we, our employees, or our independent contractors have wrongfully used or disclosed alleged trade secrets of others. |
We may be subject to damages resulting from claims that we, our employees, or our independent contractors have wrongfully used or disclosed alleged trade secrets of others.
Some of our employees were previously employed at other medical device companies. We may also hire additional employees who are currently employed at other medical device companies, including our competitors. Additionally, consultants or other independent agents with which we may contract may be or have been in a contractual arrangement with one or more of our competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or independent contractors have used or disclosed any party’s trade secrets or other proprietary information. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail to defend such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to market existing or new products, which could severely harm our business.
| | SaluMedica, LLC may license the PVA-based hydrogel, the material used to make MiMedx’s HydroFix™ products and other products we are developing, and its trademark to third parties for use in applications unrelated to the spine, rotator cuff, or surgical sheet applications. This may expose us to adverse publicity if these uses are not proven safe and effective. |
SaluMedica, LLC may license the PVA-based hydrogel, the material used to make MiMedx’s HydroFix® products and other products we are developing, and its trademark to third parties for use in applications unrelated to the spine, rotator cuff, or surgical sheet applications. This may expose us to adverse publicity if these uses are not proven safe and effective.
Our licenses with SaluMedica, LLC allows us to use technology and/or know-how related to the material used to manufacture applications related to the spine, rotator cuff and surgical sheet, and allows us to use the Salubria® biomaterial trademark. SaluMedica, LLC may license the PVA-based hydrogel and rights related to the Salubria® biomaterial trademark to third parties for applications not related to the spine, rotator cuff, or surgical sheet. If the use of Salubria® biomaterial or the PVA-based hydrogel by these third parties results in product liability claims or has other adverse effects in patients, surgeons and patients may associate these claims and effects with our products, even if our products are nevertheless proven safe and effective. If Salubria® biomaterial experiences adverse publicity or is not proven safe and effective in other applications, sales of our products could be adversely affected.
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| | We depend on key personnel. |
We depend on key personnel.
Our success will depend, in part, upon our ability to attract and retain additional skilled personnel, which will require substantial additional funds. There can be no assurance that we will be able to find and attract additional qualified employees or retain any such personnel. Our inability to hire qualified personnel, the loss of services of our key personnel, or the loss of services of executive officers or key employees that that may be hired in the future may have a material and adverse effect on our business.
| | Our operating results may fluctuate significantly as a result of a variety of factors, many of which are outside of our control. |
Our operating results may fluctuate significantly as a result of a variety of factors, many of which are outside of our control.
We are subject to the following factors, among others, that may negatively affect our operating results:
| Ÿ | the announcement or introduction of new products by our competitors; |
| Ÿ | our ability to upgrade and develop our systems and infrastructure to accommodate growth; |
| Ÿ | our ability to attract and retain key personnel in a timely and cost effective manner; |
| Ÿ | the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure; |
| Ÿ | regulation by federal, state or local governments; and |
| Ÿ | general economic conditions as well as economic conditions specific to the healthcare industry. |
our ability to upgrade and develop our systems and infrastructure to accommodate growth;
our ability to attract and retain key personnel in a timely and cost effective manner;
the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure;
regulation by federal, state or local governments; and
general economic conditions as well as economic conditions specific to the healthcare industry.
As a result of our limited operating history, limited resources, and the nature of the markets in which we compete, it is extremely difficult for us to forecast accurately. We have based our current and future expense levels largely on our investment plans and estimates of future events although certain of our expense levels are, to a large extent, fixed. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenue relative to our planned expenditures would have an immediate adverse effect on our business, results of operations and financial condition. Further, as a strategic response to changes in the competitive environment, the Company may from time to time make certain pricing, service or marketing decisions that could have a material and adverse effect on our business, results of operations and financial condition. Due to the foregoing factors, our revenue and operating results are and will remain difficult to forecast.
| | The failure of government health administrators and private health insurers to reimburse patients for costs of services incorporating our current or potential products would materially and adversely affect our business. |
The failure of government health administrators and private health insurers to reimburse patients for costs of services incorporating our current or potential products would materially and adversely affect our business.
Our success depends, in part, on the extent to which reimbursement for the costs of products to users will be available from government health administration authorities, private health insurers and other organizations. Significant uncertainty usually exists as to the reimbursement status of newly approved healthcare products. Adequate third party insurance coverage may be unavailable for us, our sublicensees or partners to establish and maintain price levels sufficient for realization of an appropriate return on investment. Government and other third-party payers attempt to contain healthcare costs by limiting both coverage and the level of reimbursement of new products. Therefore, we cannot be certain that our products or the procedures performed with them will be covered or adequately reimbursed and thus we may be unable to sell our products profitably if third-party payors deny coverage or reduce their levels of payment below that which we project, or if our production costs increase at a greater rate than payment levels. If government and other third party payers do not provide adequate coverage and reimbursement for uses of the products incorporating our technology, the market’s acceptance of our products could be adversely affected.
| | Disruption of our manufacturing could adversely affect our business, financial condition and results of operations. |
Disruption of our manufacturing could adversely affect our business, financial condition and results of operations.
Our results of operations are dependent upon the continued operation of our manufacturing facilities. The operation of biomedical manufacturing plants involves many risks. Such risks include the risks of breakdown, failure or substandard performance of equipment, the occurrence of natural and other disasters, and the need to comply with the requirements of directives from government agencies, including the FDA. The occurrence of material operational problems could have a material adverse effect on our business, financial condition, and results of operations during the period of such operational difficulties.
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| | We currently have only one product cleared by the FDA for marketing, and may never develop or launch, any commercialized products. |
We may not be successful in commercializing all of our technologies.
We have had only limited sales.sales of our HydroFix® products. We have invested substantial time and resources in developing various additional products. Commercializationproducts using our HydroFix® and CollaFixTM technologies. Further commercialization of these products, including collagen fiber and PVA-based hydrogel products,technologies will require additional development, clinical evaluation, regulatory clearance or approval, significant marketing efforts and substantial additional investment before they can provide us with any revenue. Despite our efforts, ourany such products may not become commercially successful products for a number of reasons, including:
we may not be able to obtain regulatory clearance or approvals for oursuch products, or the approved indication may be narrower than we seek;
oursuch products may not prove to be safe and effective in preclinical or clinical trials;
physicians or hospitals may not receive any reimbursement from third party payors, or the level of reimbursement may be insufficient to support widespread adoption of oursuch products;
we may experience delays in our development program;programs;
any products that are approved may not be accepted in the marketplace by physicians or patients;
we may not be able to manufacture any of oursuch products in commercial quantities or at an acceptable cost; and
rapid technological change may make oursuch products obsolete.
| | We face the risk of product liability claims or recalls and may not be able to obtain or maintain adequate product liability insurance. |
We face the risk of product liability claims or recalls and may not be able to obtain or maintain adequate product liability insurance.
Our business exposes us to the risk of product liability claims that are inherent in the testing, manufacturing and marketing of medical devices, including those that may arise from the misuse or malfunction of, or design flaws in, our products. We may be subject to such claims if our products cause, or appear to have caused, an injury. Claims may be made by patients, healthcare providers or others selling our products. Defending a lawsuit, regardless of merit, could be costly, divert management attention and result in adverse publicity, which could result in the withdrawal of, or reduced acceptance of, our products in the market.
Although we have product liability insurance that we believe is adequate, this insurance is subject to deductibles and coverage limitations and we may not be able to maintain this insurance. If we are unable to maintain product liability insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect ourselves against potential product liability claims, we could be exposed to significant liabilities, which may harm our business. A product liability claim or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could result in significant costs and significant harm to our business.
| | If we are unable to sell, market and distribute our products, our business may be harmed. |
If we are unable to sell, market and distribute our products, our business may be harmed.
To achieve commercial success for our products, we must develop a sales and marketing force, or enter into arrangements with others to market and sell our products. In addition to being expensive, developing such a sales force is time consuming, and could delay or limit the success of any product launch. We may not be able to develop this capacity on a timely basis or at all. Qualified direct sales personnel with experience in the medical device market are in high demand, and there is no assurance that we will be able to hire or retain an effective direct sales team. Similarly, qualified independent medical device representatives both within and outside the United States are in high demand, and we may not be able to build an effective network for the distribution of our product through such representatives. We have no assurance that we will be able to enter into contracts with representatives on terms acceptable to us, or if we do, we may be subject to a number of risks, including:
We may be required to relinquish important rights to our products;
We may not be able to control the amount and timing of resources that our distributors may devote to the commercialization of our products;
Our distributors may experience financial difficulties; and
Business combinations or significant changes in a distributor’s business strategy may also adversely affect a distributor’s willingness or ability to complete its obligations under any arrangement.
Failure to market and distribute products to our customers in a timely and cost effective manner would cause our potential sales to decrease and our margins to fall.
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Off-label promotion of our products could result in substantial penalties.
We are only permitted to promote our products in the U.S. for the uses indicated on the respective label as cleared by the FDA. The U.S. Attorneys’ offices and other regulators, in addition to the FDA, have recently focused substantial attention on off-label promotional activities and have initiated civil and criminal investigations related to such practices. If it is determined by these or other regulators that we have promoted our products for off-label use, we could be subject to fines, legal proceedings, injunctions or other penalties.
| | To be commercially successful, we must convince surgeons that our products are safe and effective alternatives to existing surgical treatments and that our products should be used in their procedures. |
To be commercially successful, we must convince physicians that our products are safe and effective alternatives to existing surgical treatments and that our products should be used in their procedures.
We believe surgeonsphysicians may not widely adopt our products unless they determine, based on experience, clinical data and published peer reviewed journal articles, that the use of our products in a particular procedure is a favorable alternative to conventional methods. SurgeonsPhysicians may be slow to change their medical treatment practices for the following reasons, among others:
their lack of experience with prior procedures in the field using our products;
lack of evidence supporting additional patient benefits and our products over conventional methods;
perceived liability risks generally associated with the use of new products and procedures;
limited availability of reimbursement from third party payors; and
the time that must be dedicated to training.
In addition, we believe recommendations for and support of our products by influential surgeons are essential for market acceptance and adoption. If we do not receive this support or if we are unable to demonstrate favorable long-term clinical data, surgeons and hospitals may not use our products which would significantly reduce our ability to achieve expected revenue and would prevent us from becoming profitable.
| | Any failure in our efforts to train surgeons could significantly reduce the market acceptance of our products. |
Any failure in our efforts to train surgeons could significantly reduce the market acceptance of our products.
There will be a learning process involved for surgeonsphysicians to become proficient in the use of our products. It will be critical to the success of our commercialization efforts to train a sufficient number of surgeons and to provide them with adequate instruction in the use of our products. This training process may take longer than expected and may therefore affect our ability to generate sales. Convincing surgeons to dedicate the time and energy necessary for adequate training is challenging and we may not be successful in these efforts. If surgeonsphysicians are not properly trained, they may misuse or ineffectively use our products. This may result in unsatisfactory patient outcomes, patient injury, negative publicity, or lawsuits against us, any of which could have an adverse effect on our business.
| | We depend on a single or a limited number of third-party suppliers, and the loss of these third-party suppliers or their inability to supply us with adequate raw materials could adversely affect our business. |
For some of our products, we depend on a single or a limited number of third-party suppliers, and the loss of these third-party suppliers or their inability to supply us with adequate raw materials could adversely affect our business.
We rely on a limited number of third-party suppliers for the raw materials required for the production of our HydroFix® implant products. Furthermore, in some cases we rely on a single supplier. Our dependence on a limited number of third-party suppliers or on a single supplier, and the challenges we may face in obtaining adequate supplies of raw materials, involve several risks, including limited control over pricing, availability, quality, and delivery schedules. We cannot be certain that our current suppliers will continue to provide us with the quantities of these raw materials that we require or satisfy our anticipated specifications and quality requirements. Any supply interruption in limited or sole sourced raw materials could materially harm our ability to manufacture our products until a new source of supply, if any, could be identified and qualified. Although we believe there are other suppliers of these raw materials, we may be unable to find a sufficient alternative supply channel in a reasonable time or on commercially reasonable terms. Any performance failure on the part of our suppliers could delay the development and commercialization of our products, including limiting supplies necessary for clinical trials and regulatory approvals, or interrupt production of the existing products that are already marketed, which would have a material adverse effect on our business.
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We also expect to use collagen, a protein obtained from animal source tissue, as another significant material required to produce some of our anticipated products. We may not be able to obtain adequate supplies of animal source tissue, or to obtain this tissue from animal herds that we believe do not involve pathogen contamination risks, to meet our future needs or on a cost-effective basis. Any significant supply interruption could adversely affect the production of our products and delay our product development or clinical trial programs. These delays would have an adverse effect on our business.
| | We will need to increase the size of our organization, and we may be unable to manage rapid growth effectively. |
For our amniotic membrane products, we depend on the availability of sufficient quantities of placental tissue from human donors, and any disruption in supply could adversely affect our business.
The success of our amniotic membrane products depends upon, among other factors, the availability of sufficient quantities of placental tissue from human donors. If the supply of donated human tissue is materially reduced, this would restrict our growth and could have a material adverse impact on our revenues, financial condition, profitability, and cash flows.
We will need to increase the size of our organization, and we may be unable to manage rapid growth effectively.
Our failure to manage growth effectively could have a material and adverse effect on our business, results of operations and financial condition. We anticipate that a period of significant expansion will be required to address possible other acquisitions of business, products, or rights, and potential internal growth to handle licensing and research activities. This expansion will place a significant strain on management, operational and financial resources. To manage the expected growth of our operations and personnel, we must both modify our existing operational and financial systems, procedures and controls and implement new systems, procedures and controls. We must also expand our finance, administrative, and operations staff. Our current personnel, systems, procedures and controls may not adequately support our future operations. Management may be unable to hire, train, retain, motivate and manage necessary personnel or to identify, manage and exploit existing and potential strategic relationships and market opportunities.
Our business could be materially and adversely impacted by risks inherent in international markets.
We expect a significant percentage of our revenue to be from sales to customers outside the U.S. International sales subject us to inherent risks related to changes in the economic, political, legal and business environments in the foreign countries in which we do business, including the following:
| • | Ÿ | Fluctuations in currency exchange rates; |
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| • | Ÿ | Regulatory, product approval and reimbursement requirements; |
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| • | Ÿ | Tariffs and other trade barriers; |
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| • | Ÿ | Greater difficulty in accounts receivable collection and longer collection periods; |
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| • | Ÿ | Difficulties and costs of managing foreign distributors; |
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| • | Ÿ | Reduced protection for intellectual property rights in some countries; |
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| • | Ÿ | Burdens of complying with a wide variety of foreign laws; |
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| • | Ÿ | The impact of recessions in economicseconomies outside the U.S.; and |
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| • | Ÿ | Political and economic instability |
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| • | Ÿ | U.S. Export regulatory restrictions |
If we fail to successfully market and sell our products in international markets, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Recent and future acquisitions may cause integration problems, disrupt our business and strain our resources.
In early 2011, we made a strategic business acquisition, and may continue with such acquisitions in the future. Our success will depend, to a certain extent, on the future performance of these acquired business entities. These acquisitions, either individually or as a whole, could divert management attention from other business concerns and expose us to unforeseen liabilities or risks associated with entering new markets and integrating these new entities. Further, the integration of these entities may cause us to lose key employees or key customers. Integrating newly acquired organizations and technologies could be expensive and time consuming and may strain our resources. Consequently, we may not be successful in integrating these acquired businesses or technologies and may not achieve anticipated revenue and cost benefits.
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Risks Related to Regulatory Approval of Our Products and Other Government Regulations
| | Government regulation of our business is extensive and obtaining and maintaining the necessary regulatory approvals is uncertain, expensive and time-consuming. |
Government regulation of our business is extensive and obtaining and maintaining the necessary regulatory approvals is uncertain, expensive and time-consuming.
The process of obtaining regulatory clearances or approvals to market a medical device from the FDA, or similar regulatory authorities outside of the United States is costly and time consuming, and there can be no assurance that such clearances or approvals will be granted on a timely basis, or at all. The FDA’s 510(k) clearance process generally takes 30 days to 6six months from submission, depending on whether a Special or traditional 510(k) premarket notification has been submitted, but can take significantly longer. An application for premarket approval, or PMA, must be submitted to the FDA if the device cannot be cleared through the 510(k) clearance process and is not exempt from premarket review by the FDA. The PMA process almost always requires one or more clinical trials and can take one to three years from the date of filing, or longer. In some cases, the FDA has indicated that it will require clinical data as part of the 510(k) process.
There is no certainty that any of our products will be cleared by the FDA by means of either a 510(k) notice or a PMA application. Even if the FDA permits us to use the 510(k) clearance process, we cannot assure you that the FDA will not require either supporting data from laboratory tests or studies that we have not conducted, or substantial supporting clinical data. If we are unable to use the 510(k) clearance process for any of our products, are required to provide clinical data or laboratory data that we do not possess to support our 510(k) premarket notifications for any of these products, or otherwise experience delays in obtaining or fail to obtain regulatory clearances, the commercialization of such product will be delayed or prevented, which will adversely affect our ability to generate revenue. It also may result in the loss of potential competitive advantages that we might otherwise attain by bringing our products to market earlier than our competitors. Any of these contingencies could adversely affect our business.
Even if regulatory clearance is obtained, a marketed product is subject to continual review, and later discovery of previously unidentified problems or failure to comply with the applicable regulatory requirements may result in restrictions on a product’s marketing, recalls, or withdrawal of the product from the market as well as possible civil or criminal sanctions.
| | We expect to be required to conduct clinical trials for some of our products. We have no experience conducting clinical trials, they may proceed more slowly than anticipated, and we cannot be certain that our products will be shown to be safe and effective for human use. |
It is likely that the FDA’s regulation of both our tissue products and our medical devices will continue to evolve in the future. Complying with any such new regulatory requirements may entail significant time delays and expense, which could have a material adverse effect on the Company.
We expect to be required to conduct clinical trials for some of our products. These clinical trials may proceed more slowly than anticipated, and we cannot be certain that the results of these clinical trials will demonstrate that our products are safe and effective for human use.
In order to commercialize some of our products, we may be required to submit a PMA, which will require us to conduct clinical trials. Even if we seek FDA clearance of one our products through the 510(k) process, the FDA may require us to conduct a clinical trial in support of our 510(k). We will receive approval from the FDA to commercialize products requiring a clinical trial only if we can demonstrate to the satisfaction of the FDA, in well-designed and properly conducted clinical trials, that our product candidates are safe and effective and otherwise meet the appropriate standards required for approval for specified indications. Clinical trials are complex, expensive, time consuming, uncertain and subject to substantial and unanticipated delays. Before we may begin clinical trials that present a significant risk to subjects, we must submit and obtain FDA approval of an investigational device exemption, or IDE, that describes, among other things, the manufacture of, and controls for, the device and a complete investigational plan. Clinical trials may involve a substantial number of patients in a multi-year study. We may encounter problems with our clinical trials and any of those problems could cause us or the FDA to suspend those trials, or delay the analysis of the data derived from them.
A number of events or factors, including any of the following, could delay or prevent the completion of our clinical trials in the future and negatively impact or even foreclose our ability to obtain FDA approval for, and to introduce a particular product:
failure to obtain approval from the FDA or any foreign regulatory authority to commence an investigational study;
conditions imposed on us by the FDA or any foreign regulatory authority regarding the scope or design of our clinical trials;
| Ÿ | failure to obtain approval from the FDA or any foreign regulatory authority to commence an investigational study; |
delays in obtaining or in our maintaining required approvals from institutional review boards or other reviewing entities at clinical sites selected for participation in our clinical trials;
insufficient supply of our products or other materials necessary to conduct our clinical trials;
| Ÿ | conditions imposed on us by the FDA or any foreign regulatory authority regarding the scope or design of our clinical trials; |
difficulties in enrolling patients in our clinical trials;
negative or inconclusive results from clinical trials, or results that are inconsistent with earlier results, that necessitate additional clinical studies;
| Ÿ | delays in obtaining or in our maintaining required approvals from institutional review boards or other reviewing entities at clinical sites selected for participation in our clinical trials; |
serious or unexpected side effects experienced by patients in whom our products are implanted; or
| Ÿ | insufficient supply of our products or other materials necessary to conduct our clinical trials; |
failure by any of our third-party contractors or investigators to comply with regulatory requirements or meet other contractual obligations in a timely manner.
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| Ÿ | difficulties in enrolling patients in our clinical trials; |
| Ÿ | negative or inconclusive results from clinical trials, or results that are inconsistent with earlier results, that necessitate additional clinical studies; |
| Ÿ | serious or unexpected side effects experienced by patients in whom our products are implanted; or |
| Ÿ | failure by any of our third-party contractors or investigators to comply with regulatory requirements or meet other contractual obligations in a timely manner. |
Our clinical trials may not begin as planned, may need to be redesigned, and may not be completed on schedule, if at all. Delays in our clinical trials may result in increased development costs for our product candidates, which could cause our stock price to decline and limit our ability to obtain additional financing. In addition, if one or more of our clinical trials are delayed, competitors may be able to bring products to market before we do, and the commercial viability of our product candidates could be significantly reduced.
There may be unexpected findings, particularly those that may only become evident from larger scale clinical trials, as compared with the smaller scale tests we intend to do initially. The occurrence of unexpected findings in connection with our clinical trials or any subsequent clinical trial required by our regulators may prevent or delay obtaining regulatory approval, and may adversely affect coverage or reimbursement determinations. Our regulators may also determine that additional clinical trials are necessary, in which case approval may be delayed for several months or even years while these trials are conducted. The clinical trials may not show that products we develop are safe and effective. If we are unable to complete the clinical trials necessary to successfully support our regulatory applications, our ability to commercialize our products, business, financial condition, and results of operations would be materially adversely affected.
| | Our products contain biologic materials, and so may face additional obstacles to FDA clearance or approval. |
Our products contain biologic materials, and so may face additional obstacles to FDA clearance or approval.
To complete successful clinical trials, a product must meet the criteria for clinical approval, or endpoints, established in the clinical study. These endpoints are established in consultation with the FDA, following any applicable clinical trial design guidelines, to establish the safety and effectiveness for approval of devices subject to PMA approval, or to demonstrate the substantial equivalence of devices subject to 510(k) clearance. However, in the case of products which are novel or which target parts of the human body for which there are no FDA approved products, the scientific literature may not be as complete and there may not be established guidelines for the design of studies to demonstrate the effectiveness of such products. As a result, clinical trials considering such products may take longer than average and obtaining approval may be more difficult. Additionally, the endpoints established for such a clinical trial might be inadequate to demonstrate the safety and efficacy or substantial equivalence required for regulatory clearance because they do not adequately measure the clinical benefit of the product being tested. In certain cases additional data collected in the clinical trial or further clinical trials may be required by the FDA. Any delays in regulatory approval will delay commercialization of our products, which may have an adverse effect on our business.
The FDA regulates human therapeutic products in one of three broad categories: drugs, biologics or medical devices. The FDA’s scrutiny of products containing biologic materials may be heightened. Although we anticipate that most of our products under development will be regulated in the U.S. as medical devices, we will use biological materials in the production of several devices. FDA may conclude that some of our products are combinations of devices and biologicals, or may conclude that some of our products are biologics rather than devices, potentially requiring a different and more time consuming premarket clearance mechanism. Use of this biological material in our products may result in heightened scrutiny of such product which may result in further delays in, or obstacles to, obtaining FDA clearance or approval.
| | Subsequent modifications to our products may require new regulatory approvals, or may require us to cease marketing or recall the modified products until approvals are obtained. |
Subsequent modifications to our products may require new regulatory approvals, or may require us to cease marketing or recall the modified products until approvals are obtained.
Once our products receive FDA approval or clearance, subsequent modification to our products may require new regulatory approvals or clearances, including 510(k) clearances or premarket approvals, or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification does not require a new clearance or approval. However, the FDA can review a manufacturer’s decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required. We may make modifications that we believe do not or will not require additional clearances or approvals. If the FDA disagrees and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing our products as modified, which could require us to redesign our products and harm our operating results. In these circumstances, we may be subject to significant enforcement actions.
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If a manufacturer determines that a modification to a FDA-cleared device requires premarket clearance, then the manufacturer must file for a new 510(k) clearance or possibly a premarket approval application supplement. Where we determine that modifications to our products require a new 510(k) clearance or premarket approval application, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. Obtaining clearances and approvals can be a time consuming process, and delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth.
| | If we or our suppliers fail to comply with the FDA’s quality system regulations, the manufacture of our products could be delayed. |
If we or our suppliers fail to comply with the FDA’s quality system regulations, the manufacture of our products could be delayed.
We and our suppliers are required to comply with the FDA’s quality system regulations, which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of our products. The FDA enforces the quality system regulation through inspections. If we or our supplier fail a quality system regulations inspection or if any corrective action plan is not sufficient, FDA could take enforcement action, including any of the following sanctions and the manufacture of our products could be delayed or terminated:
untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
customer notifications for repair, replacement, refunds;
| Ÿ | untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; |
recall, detention or seizure of our products;
operating restrictions or partial suspension or total shutdown of production;
refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;
withdrawing 510(k) clearances on PMA approvals that have already been granted;
refusal to grant export approval for our products; or
| Ÿ | We and our sales personnel, whether employed by us or by others, must comply with various federal and state anti-kickback, self referral, false claims and similar laws, any breach of which could cause a material adverse effect on our business, financial condition and results of operations.customer notifications for repair, replacement, refunds; |
| Ÿ | recall, detention or seizure of our products; |
| Ÿ | operating restrictions or partial suspension or total shutdown of production; |
| Ÿ | refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products; |
| Ÿ | withdrawing 510(k) clearances on PMA approvals that have already been granted; |
| Ÿ | refusal to grant export approval for our products; or |
We and our sales personnel, whether employed by us or by others, must comply with various federal and state anti-kickback, self referral, false claims and similar laws, any breach of which could cause a material adverse effect on our business, financial condition and results of operations.
Our relationships with surgeons, hospitals and the marketers of our products are subject to scrutiny under various federal anti-kickback, self-referral, false claims and similar laws, often referred to collectively as healthcare fraud and abuse laws. Healthcare fraud and abuse laws are complex, and even minor, inadvertent violations can give rise to claims that the relevant law has been violated. Possible sanctions for violation of these fraud and abuse laws include monetary fines, civil and criminal penalties, exclusion from federal and state healthcare programs, including Medicare, Medicaid, Veterans Administration health programs, workers’ compensation programs and TRICARE (the healthcare system administered by or on behalf of the U.S. Department of Defense for uniformed services beneficiaries, including active duty and their dependents, retirees and their dependents), and forfeiture of amounts collected in violation of such prohibitions. Certain states have similar fraud and abuse laws, imposing substantial penalties for violations. Any government investigation or a finding of a violation of these laws would likely result in a material adverse effect on the market price of our common stock, as well as our business, financial condition and results of operations.
Anti-kickback laws and regulations prohibit any knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for the referral of an individual or the ordering or recommending of the use of a product or service for which payment may be made by Medicare, Medicaid or other government-sponsored healthcare programs. We have formed a Medical Advisory Board consisting of an aggregate of over 14 physicians and scientists to assist us with scientific research and development and to help us evaluate technologies. We have also entered into consulting agreements and product development agreements with surgeons, including some who may make referrals to us or order our products after our products are introduced to market. In addition, some of these physicians own our stock, which they purchased in arms’ length transactions on terms identical to those offered to non-surgeons, or received stock options from us as consideration for consulting services performed by them. We also may engage additional physicians on a consulting basis. While these transactions were structured with the intention of complying with all applicable laws, including the federal ban on physician self referrals, commonly known as the “Stark Law,” state anti-referral laws and other applicable anti-kickback laws, it is possible that regulatory or enforcement agencies or courts may in the future view these transactions as prohibited arrangements that must be restructured or for which we would be subject to other significant civil or criminal penalties, or prohibit us from accepting referrals from these surgeons. Because our strategy relies on the involvement of physicians who consult with us on the design of our product candidates, we could be materially impacted if regulatory or enforcement agencies or courts interpret our financial relationships with our physician advisors who refer or order our products to be in violation of applicable laws and determine that we would be unable to achieve compliance with such applicable laws. This could harm our reputation and the reputations of our physician advisors. In addition, the cost of noncompliance with these laws could be substantial since we could be subject to monetary fines and civil or criminal penalties, and we could also be excluded from federally funded healthcare programs, including Medicare and Medicaid, for non-compliance.
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The scope and enforcement of all of these laws is uncertain and subject to rapid change, especially in light of the lack of applicable precedent and regulations. There can be no assurance that federal or state regulatory or enforcement authorities will not investigate or challenge our current or future activities under these laws. Any investigation or challenge could have a material adverse effect on our business, financial condition and results of operations. Any state or federal regulatory or enforcement review of us, regardless of the outcome, would be costly and time consuming. Additionally, we cannot predict the impact of any changes in these laws, whether these changes are retroactive or will have effect on a going-forward basis only.
| | We face significant uncertainty in the industry due to government healthcare reform. |
We face significant uncertainty in the industry due to government healthcare reform.
Political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. Reforms being implemented or under consideration in the United States include mandated basic healthcare benefits, controls on healthcare spending, increases in insurance premiums and increased out-of-pocket requirements for patients, the creation of large group purchasing organizations that aim to reduce the costs of products that their member hospitals consume, and significant modifications to the healthcare delivery system. We anticipate that the U.S. Congress and state legislatures will continue to review and assess alternative healthcare delivery systems and payment methods. Due to uncertainties regarding the ultimate features of reform initiatives and the timing of their enactment and implementation, we cannot predict which, if any, of such reform proposals will be adopted, when they may be adopted or what impact reform initiatives may have on us.
Risks Related to the Securities Markets and Ownership of Our Common Stock
The price of our Common Stock has been, and will likely continue to be, volatile.
The market price of our Common Stock, like that of the securities of many other companies that are in, or are just emerging from, the development stage, has fluctuated over a wide range and it is likely that the price of our Common Stock will fluctuate in the future. Over the past two fiscal years, the closing price of our Common Stock, as reported by the OTC Bulletin Board, has fluctuated from a low of $.40$0.75 to a high of $6.35.$1.75. The market price of our Common Stock could be impacted by a variety of factors, including:
Fluctuations in stock market prices and trading volumes of similar companies or of the markets generally;
| Ÿ | Fluctuations in stock market prices and trading volumes of similar companies or of the markets generally; |
Our ability to successfully launch, market and earn significant revenue from our products;
Our ability to obtain additional financing to support our continuing operations;
| Ÿ | Our ability to successfully launch, market and earn significant revenue from our products; |
Disclosure of the details and results of regulatory applications and proceedings;
Changes in government regulation;
| Ÿ | Our ability to obtain additional financing to support our continuing operations; |
Additions or departures of key personnel;
Our investments in research and development or other corporate resources;
| Ÿ | Disclosure of the details and results of regulatory applications and proceedings; |
Announcements of technological innovations or new commercial products or services by us or our competitors;
Developments in the patents or other proprietary rights owned or licensed by us or our competitors;
| Ÿ | Changes in government regulation; |
The timing of new product introductions;
Actual or anticipated fluctuations in our operating results, including any restatements of previously reported results;
| Ÿ | Additions or departures of key personnel; |
Our ability to effectively and consistently manufacture our products and avoid costs associated with the recall of defective or potentially defective products;
Our ability and the ability of our distribution partners to market and sell our products;
| Ÿ | Our investments in research and development or other corporate resources; |
Changes in distribution channels; and
| Ÿ | Announcements of technological innovations or new commercial products or services by us or our competitors; |
The ability of our vendors to effectively and timely deliver necessary materials and product components.
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| Ÿ | Developments in the patents or other proprietary rights owned or licensed by us or our competitors; |
| Ÿ | The timing of new product introductions; |
| Ÿ | Actual or anticipated fluctuations in our operating results, including any restatements of previously reported results; |
| Ÿ | Our ability to effectively and consistently manufacture our products and avoid costs associated with the recall of defective or potentially defective products; |
| Ÿ | Our ability and the ability of our distribution partners to market and sell our products; |
| Ÿ | Changes in distribution channels; and |
| Ÿ | The ability of our vendors to effectively and timely deliver necessary materials and product components. |
Further, due to the relatively fixed nature of most of our costs, which primarily include personnel costs as well as facilities costs, any unanticipated shortfall in revenue in any fiscal quarter would have an adverse effect on our results of operations in that quarter. Accordingly, our operating results for any particular quarter may not be indicative of results for future periods and should not be relied upon as an indication of our future performance. These fluctuations could cause the trading price of our stock to be negatively affected. Our quarterly operating results have varied substantially in the past and may vary substantially in the future. In addition, the stock market has been very volatile, particularly on the OTC Bulletin Board where our stock is quoted. This volatility is often not related to the operating performance of companies listed thereon and will probably continue in the foreseeable future.
| | The concentrated Common Stock ownership by certain of our executive officers and directors will limit your ability to influence corporate matters. |
The concentrated Common Stock ownership by certain of our executive officers and directors will limit your ability to influence corporate matters.
As of December 31, 2010,2011, our directors and executive officers together beneficially owned approximately 29% of our outstanding Common Stock. This group has significant influence over our management and affairs and overall matters requiring shareholder approval, including the election of directors and significant corporate transactions, such as a merger or sale of our company or our assets, for the foreseeable future. This concentrated control will limit the ability of other shareholders to influence corporate matters and, as a result, we may take actions that some of its shareholders do not view as beneficial. In addition, such concentrated control could discourage others from initiating changes of control. As a result, the market price of our shares could be adversely affected.
| | The exercise of warrants or options or conversion of notes may depress our stock price and may result in dilution to our common stockholders. |
The exercise of warrants or options or conversion of notes may depress our stock price and may result in dilution to our common stockholders.
There are a significant number of outstanding warrants and options to purchase our stock, and there are a certain number ofas well as outstanding notes that are convertible into our Common Stock. If the market price of our Common Stock rises above the exercise price of outstanding warrants and options or the conversion price of the outstanding notes, holders of those securities may be likely to exercise their warrants and options or convert their notes and sell the Common Stock acquired upon exercise or conversion of such securities, as applicable, in the open market. Sales of a substantial number of shares of our Common Stock in the public market by holders of warrants, options, or notes may depress the prevailing market price for our Common Stock and could impair our ability to raise capital through the future sale of our equity securities. Additionally, if the holders of outstanding options, warrants, or notes exercise those options or warrants or convert those notes, as applicable, our common stockholders will incur dilution in their relative percentage ownership.
As of December 31, 2010,2011, warrants to purchase 6,003,9249,388,817 shares of our common stock at a weighted average exercise price of $1.21$1.00 per share were outstanding and exercisable; options to purchase 8,257,65010,333,583 shares of common stock were outstanding, of which 6,041,2206,000,497 were exercisable at a weighted average exercise price of $1.31$1.16 per share; and notesshare, the line of credit with a related party was convertible into 403,0001,342,726 shares of common stock, the senior secured promissory notes were convertible into 5,007,732 shares of common stock at a weighted average conversion price of $1.00 per share, were outstanding.the Convertible debt related to the acquisition was convertible into an estimated 1,149,836 shares of common stock at a weighted average conversion price of $1.13 per share and the short term earnout liability was convertible into an estimated 2,818,781 shares of common stock at a weighted average conversion price of $1.13 per share. There is also potential further dilution in the future from the long term portion of the earnout liability and from the unvested portion of the contingent warrants.
| | Our Common Stock is and likely will remain subject to the SEC’s “Penny Stock” rules, which may make its shares more difficult to sell. |
Our Common Stock is and likely will remain subject to the SEC’s “Penny Stock” rules, which may make its shares more difficult to sell.
Because the price of our Common Stock is currently and may remain less than $5.00 per share, it is expected to be classified as a “penny stock.” The SEC rules regarding penny stocks may have the effect of reducing trading activity in our shares, making it more difficult for investors to sell. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:
| Ÿ | make a special written suitability determination for the purchaser; |
| Ÿ | receive the purchaser’s written agreement to a transaction prior to sale; |
| Ÿ | provide the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; |
| Ÿ | obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has received the required risk disclosure document before a transaction in a “penny stock” can be completed; and |
| Ÿ | give bid and offer quotations and broker and salesperson compensation information to the customer orally or in writing before or with the confirmation. |
receive the purchaser’s written agreement to a transaction prior to sale;31
provide the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies;Table of Contentsobtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has received the required risk disclosure document before a transaction in a “penny stock” can be completed; and
give bid and offer quotations and broker and salesperson compensation information to the customer orally or in writing before or with the confirmation.
These rules make it more difficult for broker-dealers to effectuate customer transactions and trading activity in our securities and may result in a lower trading volume of our common stock and lower trading prices.
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Our Common Stock may be thinly traded.
| | Our Common Stock may be thinly traded. |
There is a minimal public market for our Common Stock. We cannot be certain more of a public market for our Common Stock will develop, or if developed, that it will be sustained. Our Common Stock will likely be thinly traded compared to larger more widely known companies. We cannot predict the extent to which an active public market for our Common Stock will develop or be sustained at any time in the future. If we are unable to develop or sustain a market for our Common Stock, investors may be unable to sell the Common Stock they own, and may lose the entire value of their investment.
| | Securities analysts may elect not to report on our Common Stock or may issue negative reports that adversely affect the stock price. |
Securities analysts may elect not to report on our Common Stock or may issue negative reports that adversely affect the stock price.
At this time, no securities analysts provide research coverage of our Common Stock, and securities analysts may elect not to provide such coverage in the future. Rules mandated by the Sarbanes-Oxley Act and a global settlement reached in 2003 among the SEC, other regulatory agencies, and a number of investment banks led to a number of fundamental changes in how analysts are reviewed and compensated. In particular, many investment banking firms are required to contract with independent financial analysts for their stock research. It may remain difficult for a company such as ours, with a smaller market capitalization, to attract independent financial analysts that will cover our Common Stock. If securities analysts do not cover our Common Stock, the lack of research coverage may adversely affect its actual and potential market price. The trading market for our Common Stock may be affected in part by the research and reports that industry or financial analysts publish about its business. If one or more analysts elect to cover us and then downgrade the stock, the stock price would likely decline rapidly. If one or more of these analysts cease coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline. This could have a negative effect on the market price of our shares.
| | We do not intend to pay cash dividends. |
We do not intend to pay cash dividends.
We have never declared or paid cash dividends on our capital stock. We currently expect to use available funds and any future earnings in the development, operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of any future debt or credit facility we may obtain may preclude us from paying any dividends. As a result, capital appreciation, if any, of our Common Stock will be an investor’s only source of potential gain from our Common Stock for the foreseeable future.
| | Shareholders may experience significant dilution if future equity offerings are used to fund operations or acquire complementary businesses. |
Shareholders may experience significant dilution if future equity offerings are used to fund operations or acquire complementary businesses.
If future operations or acquisitions are financed through the issuance of equity securities, shareholders could experience significant dilution. In addition, securities issued in connection with future financing activities or potential acquisitions may have rights and preferences senior to the rights and preferences of our Common Stock. The issuance of shares of our Common Stock upon the exercise of options may result in dilution to our shareholders.
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We may become involved in securities class action litigation that could divert management’s attention and harm its business.
| | We may become involved in securities class action litigation that could divert management’s attention and harm its business. |
The stock market in general and the stocks of medical device companies in particular have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance of the companies involved. If these fluctuations occur in the future, the market price of our shares could fall regardless of its operating performance. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has been brought against that company. If the market price or volume of our shares suffers extreme fluctuations, then we may become involved in this type of litigation which would be expensive and divert management’s attention and resources from managing the business.
| | Anti-takeover provisions in our organizational documents may discourage or prevent a change of control, even if an acquisition would be beneficial to shareholders, which could affect our share price adversely and prevent attempts by shareholders to replace or remove current management |
Anti-takeover provisions in our organizational documents may discourage or prevent a change of control, even if an acquisition would be beneficial to shareholders, which could affect our share price adversely and prevent attempts by shareholders to replace or remove current management
Our Articles of Incorporation and Bylaws contain provisions that could delay or prevent a change of control of our company or its Board of Directors that shareholders might consider favorable. Some of these provisions include:
authorizing the issuance of preferred stock which can be created and issued by the Board of Directors without prior common stock shareholder approval, with rights senior to those of the common stock;
restricting persons who may call shareholder meetings; and
allowing the Board to fill vacancies and to fix the number of directors.
| Ÿ | |
Item 1B. | | Unresolved Staff Commentsauthorizing the issuance of preferred stock which can be created and issued by the Board of Directors without prior common stock shareholder approval, with rights senior to those of the common stock; |
None
| Ÿ | restricting persons who may call shareholder meetings; and |
Item 2. | | PropertiesŸ | allowing the Board to fill vacancies and to fix the number of directors. |
Item 1B. Unresolved Staff Comments
None.
Our corporate headquarters are located in Marietta,Kennesaw, Georgia where we lease approximately 12,20020,300 square feet of office, laboratory and manufacturing space. We lease approximately 5,00021,200 square feet in Tampa, Florida,nearby, which primarily consists of laboratory, (2,000 feet)manufacturing and manufacturing (3,000 feet)warehouse space. We believe these facilities are adequate for our current activities but expect to lease additional space in conjunction with executing our business plan.
None outside the ordinary course of business.
| | |
Item 4. | | (Removed and Reserved) |
Item 4. Mine Safety Disclosures32
Not applicable.
| | |
Item 5. | | Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |
Item 5. Market for Registrant’s Common Equity, Related Shareholder Mattersand Issuer Purchases of Equity Securities
Our Common Stock was approved for quotation on the OTC Bulletin Board on July 19, 2007. Only a limited number of shares were traded after the approval of the quotation in July 2007. The Common Stock was traded with the trading symbol of “AYXC.”
Our common stock began trading under the symbol “MDXG” on April 2, 2008. The following table sets forth the high and low bid prices on the OTC Bulletin Board for our common stock, based on information provided from OTC Bulletin Board. These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.
| | | | | | | | | |
| | High* | | Low* | | |
Year Ended December 31, 2010 | | |
Year ended December 31, 2011 | | | High | | | Low | |
First Quarter | | $ | 1.75 | | $ | .75 | | | $ | 1.42 | | | $ | 1.04 | |
Second Quarter | | 1.55 | | 1.00 | | | | 1.15 | | | | 0.76 | |
Third Quarter | | 1.48 | | 0.99 | | | | 1.39 | | | | 1.00 | |
Fourth Quarter | | 1.35 | | 0.80 | | | | 1.25 | | | | 1.00 | |
Year Ended December 31, 2009 | | |
First Quarter | | $ | 4.40 | | $ | .40 | | |
Second Quarter | | .75 | | .40 | | |
Third Quarter | | .75 | | .42 | | |
Fourth Quarter | | .89 | | .60 | | |
Year ended December 31, 2010 | | High | | | Low | |
First Quarter | | $ | 1.75 | | | $ | 0.75 | |
Second Quarter | | | 1.55 | | | | 1.00 | |
Third Quarter | | | 1.48 | | | | 0.99 | |
Fourth Quarter | | | 1.35 | | | | 0.80 | |
| | |
* | | Adjusted to reflect the reverse stock split effective on April 2, 2008. |
Based upon information supplied from our transfer agent, there were approximately 7501,100 shareholders of record of our Common Stock as of March 15, 2011.1, 2012.
We have not paid any cash dividends on our Common Stock since our formation and do not intend to do so in the future.
To facilitate trading in the Company’s shares, the Board is considering applying for a listing on a national exchange. If the Board does determine to pursue listing on a national exchange, the Company may consider implementing a reverse split of its Common Stock.
Unregistered Sales of Equity Securities and Use of Proceeds
As reported in Note 710 “Common Stock Placements” in our consolidated financial statements as of and for the twelve months ended December 31, 2010, from January 1, 2011, through March 18, 2011, the Company sold an additional 1,088,7753,778,321 shares of Common Stock and issued an additional 544,3881,889,161 warrants and received cash proceeds of $1,088,775.approximately $3,731,000. See “Notes to Consolidated Financial Statements” for the terms of the Warrants. These sales were made in conjunction with the Company’s most recent private placement which commenced in October 2010 (“October 2010 Private Placement”).; the offering was closed during the quarter ended September 30, 2011, and no further sales occurred during the three months ended December 31, 2011.
The Company relied on Section 4(2) of the Securities Act of 1933 (the “Securities Act”) and Rule 506 of Regulation D under the Securities Act, as amended, to issue the securities described above because they were offered to accredited investors and a limited number of unaccredited investors who purchased for investment in transactions that did not involve a general solicitation.
Form 10-Q for the nine months ended September 30, 2010 filed November 15, 2010 and Form D dated November 29, 2010, also provide information related to unregistered sales of equity securities during the twelve months ended December 31, 2010.
We did not repurchase any shares during the last three months of 2010year ended December 31, 2011, and currently have no share repurchase plans or programs.
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| | |
Item 6. | | Selected Financial Data |
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations | | |
Item 7. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion and analysis of financial condition and results of operations, together with the financial statements and the related notes appearing at the end of this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
The discussion and analysis of our financial conditionscondition and results of operations are based on the Company’s financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue, if any, and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Overview
Overview
MiMedx Group, Inc. and subsidiaries (“MiMedx Group” or the “Company”) is an integrated developer, manufacturer and marketer of patent-protected biomaterial-basedpatent protected regenerative biomaterial products headquartedand allografts processed from human amniotic membrane. “Innovations in Marietta, Georgia. We operate in one business segment, Biomaterials. MiMedx GroupRegenerative Biomaterials" is emerging from a development-focused start-up company into a fully integrated operating company with the expertiseframework behind our mission to capitalize on its sciencegive physicians products and technologytissues to help the body heal itself. Our biomaterial platform technologies include the device technologies HydroFix® and the capacity to generate sales growth and profitability.
Prior to the 4th quarter of 2009, the Company explored business strategies through our three development units, MiMedx, SpineMedica and LeveL Orthopedics. After the sale of the LeveL assets and a thorough review of the strategic direction of the Company, management made the decision in late 2009 to consolidate the organizational structure. Instead of independent development teams and manufacturing locations, we have integrated development teams and all manufacturing has been consolidated into one site. Our Tampa, Florida location focuses on research and early stage product and process development. Our Marietta, Georgia, location, will houses our corporate headquartersCollaFixTM, and our developmenttissue technologies, AmnioFix® and sales teams, as well as all manufacturingEpiFix®. Our tissue technologies, processed from the human amniotic membrane, utilize our proprietary Purion® process that was developed by our wholly-owned subsidiary, Surgical Biologics, to produce a safe, effective and distribution operations.minimally manipulated implant. Surgical Biologics is the leading supplier of amniotic tissue, having supplied over 70,000 implants to date to distributors and OEMs for application in the Ophthalmic, Orthopedics, Spine, Wound Care and Dental sectors of healthcare.
Our initial business strategy was to identify and acquire innovative new medical products and technologies, focused initially on the musculoskeletal market, as well as novel medical instrumentation and surgical techniques. We subsequently refined our strategy to specialize in proprietary biomaterial technologies that can be transformed into unique medical devices that fill an unmet or underserved clinical need. Our HydroFix™HydroFix® hydrogel technology and our CollaFix™CollaFixTM collagen fiber technology are proprietary platforms that can serve as the basis for medical devices in various orthopedic and orthobiologic applications, such as spine, sports medicine, and trauma. We also have identified multiple product opportunities in general surgery, drug delivery, wound management and cardiac markets among others. During 2010, the Company looked to acquire technologies that could leverage the established distribution channels without the regulatory risk associated with the HydroFix® and CollaFixTM platforms. As a result of the search the Company acquired Surgical Biologics which was the market leader in amniotic tissue processing.
Our planfocus is to focus ouron soft tissue repair. Our internal commercialization efforts relative to our HydroFixTMEpiFix®, AmnioFix®, HydroFix® and CollaFixTMCollaFixTM materials onare targeting large markets totaling in excess of $10B, several of which are growing at high single or low double digits annually. Our targeted markets include wound management, orthopedics and orthobiologic applications.spine. As appropriate, we may partner with large, established companies in the general surgery, drug delivery, wound management, cardiac and other markets. Initial conversations with such external relationships have been initiated, but they will take time to develop.
Our distribution model is currently comprised of an evolving network of third party sales agents and stocking distributors managed by regional sales managers marketing MiMedx branded products. We have several OEM relationships targeting several niche markets. We also market our products internationally through stocking distributors.
We have organized an advisory panel of leading physicians to provide insight into our primary fields of interest for new products and technology, as well as guidance and advice with respect to ongoing product development programs.
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Our core focus is on near-term opportunities for each of our EpiFix® and AmnioFix® platforms while continuing to advance our device technologies advancing them through the regulatory process, establishing reliableprocess.
With the acquisition of Surgical Biologics we have added technologies that do not require a 510K or PMA clearance as both the EpiFix® and cost-effective manufacturing, and establishing an effective distribution system.
To implement our business plan and generate revenue from other sources, we must develop products and obtain regulatory clearances or approvals for those products in many jurisdictions. In 2010, we received two HydroFix™ CE Marks (European approval). The first was granted in February 2010 and is classified as a post-surgical adhesion inhibiting barrier and is used in specific spine surgeries. We recorded our first revenue for this product inAmnioFix® platforms are considered human tissue under Section 361 of the first quarter of 2010. In December 2010, we received a second CE mark for HydroFix™ Spine Shield for use in contact with the central circulatory system and the central nervous system. There was no revenue recorded in 2010 for this indicationPublic Health Services Act due to the fact that it was grantedthey are not more than minimally manipulated and are for homologous use only. Our near term focus for these products is on working with the private payers and Medicare to assure adequate and timely reimbursement. On January 1, 2012, our CMS C-Code went into effect which allows for Medicare reimbursement in late December.Ambulatory Surgery Centers and Hospital Outpatient Centers for EpiFix®. Additionally, we added the permanent position of Chief Medical Officer to lead the efforts related to reimbursement. We filled the position with a doctor who served for many years as Medical Director for a major private payer and has extensive experience working with Medicare. This individual is also responsible for managing our clinical trials.
Critical Accounting Policies
We believe that of our significant accounting policies, which are described in Note 2 to our financial statements appearing elsewhere in this report, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Goodwill and intangible assets:assets
Intangible assets include licensing rights and are accounted for based on FASB Accounting Standards Codification 350, “Intangibles — Goodwill and Other” (ASC 350), previously referred to as Financial Accounting Standard Statement No. 142 Goodwill and Other Intangible Assets. In that regard, goodwill is not amortized but is tested at least annually for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Intangible assetsThe accounting for a recognized intangible asset is based on its useful life to the reporting entity. An intangible asset with a finite useful lives are amortized using the straight-line method over a period of ten years, the remaining term of the patents underlying the licensing rights (considered tolife shall be the remainingamortized; an intangible asset with an indefinite useful life of the license).shall not be amortized. Significant judgments are involved in estimating future cash flows used to support the carrying value of goodwill and indefinite lived intangible assets.
Impairment of long-lived assets:assets
We evaluate the recoverability of our long-lived assets (finite lived intangible asset and property and equipment) whenever adverse events or changes in business climate indicate that the expected undiscounted future cash flows from the related assets may be less than previously anticipated. If the net book value of the related assets exceeds the expected undiscounted future cash flows of the assets, the carrying amount will be reduced to the present value of their expected future cash flows and an impairment loss would be recognized. Factors that may cause long-lived asset impairment include negative industry or economic trends and significant underperformance relative to historical or projected future operating results.
Share-based compensation:compensation
We follow the provisions of FASB Accounting Standards Codification 718, “Compensation — Stock Compensation” (ASC 718), previously referred to as Statement of Financial Accounting Standards No. 123R — Share-based Payments which requires the measurement and recognition of compensation expense for all share-based payment awards either modified or granted to employees and directors based upon estimated fair values. The Black-Scholes-Merton option-pricing model, consistent with the provisions of ASC 718, was used to determine the fair value of each option granted. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company uses projected volatility rates, which are based upon historical volatility rates, trended into future years. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s options.
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Recently Adopted Accounting PronouncementsDebt Instruments with Detachable Warrants and Beneficial Conversion Features
According to ASC-470 Debt Instruments with Detachable Warrants, proceeds from the FASB issued Accounting Standards Update No. 2009-01 (“ASU 2009-01”), which establishessale of debt instruments with stock purchase warrants (detachable call options) shall be allocated to the FASB Accounting Standards Codification™ astwo elements based upon the sourcerelative fair values of authoritative U.S. GAAP recognized by the FASBdebt instrument without the warrants and of the warrants themselves at the time of issuance. The Black-Scholes-Merton pricing model, consistent with the provisions of ASC 470, was used to be applied by nongovernmental entities. The Company adopted ASU 2009-01 during the three months ended September 30, 2009, and its adoption did not have any impact on the Company’s consolidated financial statements.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASU 2009-05”), which clarified how to measuredetermine the fair value of liabilitieseach warrant granted. The portion of the proceeds so allocated to the warrants is accounted for as paid-in capital. The remainder of the proceeds is allocated to the debt instrument portion of the transaction. Also, the embedded beneficial conversion feature present in circumstances whenthe convertible instrument is recognized separately at issuance by allocating a quoted price in an active marketportion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital.
Contingent Consideration
The Agreement and Plan of Merger between the Company and the former owners of Surgical Biologics (“the Merger”) dated January 5, 2011 involves the potential for the identical liabilitypayment of future contingent consideration in MiMedx common stock. Payment of the additional consideration is not available. ASU 2009-05 is effective forcontingent on the first reporting period beginningacquired company reaching sixty percent (60%) of the excess of the amniotic tissue based gross revenues in calendar year 2011 over gross revenues in calendar year 2010 minus any FDA approval costs. The payment shall be made as the aggregate number of shares of MiMedx Common Stock per a specified formula in the Agreement and Plan of Merger. In addition the Company shall deliver to the former owners of Surgical Biologics an aggregate number of shares of the Company equal to thirty percent (30%) of the Gross Revenues in calendar year 2012 over the Gross Revenues in calendar year 2011 minus any FDA approval costs. The Company shall deliver the contingent consideration no later than 30 days after the issuanceCompany files its Form 10-K. The contingent consideration was originally recorded at the estimated fair value of this standard.the contingent milestone payment on the acquisition date. The Company adopted ASU 2009-05,fair value of the contingent milestone consideration was remeasured at the estimated fair value as of December 31, 2011 with the change in fair value recognized as income or expense within Other Income (Expense) in the condensed consolidated statements of earnings.
At December 31, 2011, the fair value of the contingent consideration tied to 2011 revenue was calculated to be approximately $3,185,000 and its adoption did not have an impact on its consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (“ASU 2009-13”), which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather thanliability adjusted and recorded as a combined unit. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified beginningcurrent liability in fiscal years on or after June 15, 2010. Early adoption is permitted. The Company does not expect the adoption of this standard to have any effect on its financial statements until or unless it enters into agreements covered by this standard.
In January 2010, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2010-06 to Topic 820 —Fair Value measurements and Disclosures. This update provided requirements of new disclosures of significant transfers and also clarified existing disclosures around the level of disaggregation of each class of assets and liabilities, and about fair value inputs and valuation techniques. This updates was effective for interim and annual reporting periods beginning after December 15, 2009. Adoption of this update did not have a material impact on our financial statements.
In February 2010, the FAST issued ASU 2010-09 to Topic 855 —Subsequent Events, to amend certain recognition and disclosure requirements related to subsequent events. The new guidance clarifies that management must evaluate, as of each reporting period, events or transactions that occur after theconsolidated balance sheet date throughand is due to be paid in MiMedx common stock not more than 30 days following the date thatfiling of our Form 10-K. The estimated maximum potential amount of undiscounted future contingent consideration tied to revenue for calendar year 2012 was approximately $4,225,000 and was recorded in the financial statements are issued. Management must perform its assessment for both interim and annual financial reporting periods. This update also exempts SEC filers from disclosingnon-current liability section of the date through which subsequent events have been evaluated. Adoption of this update did not have a material impact on our financial statements.consolidated balance sheet.
Recently IssuedAdopted Accounting Pronouncements Not Yet Adopted
In December 2010, the FASB issued ASU 2010-28 to Topic 350 —Accounting Standards Update (ASU) 2010-28: Intangibles — Goodwill and Other: When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (Topic 350). The amendments to the Codification in this update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. Goodwill of a reporting unit is required to be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This update is effective starting in the first quarter of 2011 with early adoption not permitted. Adoption of this update is not expected to have a materialhad no impact on our financial statements.
In December 2010, the FASB issued ASU 2010-29 to Topic 805 —2010-29: Business Combinations: Disclosure of Supplementary Pro Forma Information for Business Combinations (Topic 805). The amendments to the Codification in this ASU apply to any public entity that enters into business combination that are material on an individual or aggregate basis and specify that the entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The update is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning in January 2011 with early adoption permitted. We plan to adoptadopted this update for all acquisitionsthe acquisition completed in 2011.
Recently Issued Accounting Pronouncements Not Yet Adopted
In September 2011, the FASB issued ASU Update No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The amendment simplifies how entities test goodwill for impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Previous guidance under Topic 350 required an entity to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any. Under the amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning inafter December 15, 2011, and early adoption is permitted. Its adoption is not expected to significantly impact the Company’s consolidated financial statements.
In June 2011, the FASB issued ASU Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments to the Codification in this ASU will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The standard does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. This standard is effective for interim and annual periods beginning after December 15, 2011. Because this ASU impacts presentation only, it will have no effect on our financial condition, results of operations or cash flows.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). The amendments to the Codification in this ASU will provide a consistent definition of fair value and ensure that the appropriate disclosures.fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This guidance is effective for the Company beginning on January 1, 2012. Its adoption is not expected to significantly impact the Company’s consolidated financial statements.
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Results of Operations for the year ended December 31, 2010,2011, compared to the 9 months ended December 31, 2009
We are comparing the year ended December 31, 2010
Revenue
Total revenue increased from $789,000 in 2010 to $7,760,000 in 2011. Net tissue processing revenue resulting from the nine monthsSurgical Biologics acquisition was approximately $7,434,000 for the year ended December 31, 2009 as the Company changed its fiscal year end to December 31 at December 31, 2009. Therefore, 2010 results reflect an inherently longer operating period2011, and is a primary factor in increases in costs when comparing the two periods. Also in 2010, MiMedx emerged from being a development stage company into an operating company as we recorded our first significant revenue, as noted below.
Net Sales
Netnet product sales increased from $800 in 2009 to $789,000 in 2010. Product sales were $544,000 comprised primarily of sales of our HydroFix™for HydroFix® Vaso Shield products in the U.S. and HydroFix™HydroFix® Spine Shield products outside the U.S. Otherwas approximately $326,000 during the same period, compared to approximately $544,000 for the year ended December 31, 2010. The decrease in sales of HydroFix® products from the prior year was a result of our focus on tissue products and the Surgical Biologics acquisition. During the year ended December 31, 2010, we also had other revenue includedof $245,000 for the Qualifying Therapeutic Discovery Project grant from the U.S. Government. Net sales were lower than plan
Tissue Processing Costs and Cost of Products Sold
Products and processing costs as a percentage of total revenue for the year ended December 31, 2011 improved to 41% from 218% in the prior year. The improvement was due primarily to delaysthe increase in regulatory clearancesrevenue attributable to the products acquired in the Surgical Biologics transaction. It should be noted that as our sales levels and corresponding production levels increase, these costs as a percentage of productstotal revenues will continue to decrease resulting in both the HydroFix™ and CollaFix™ product platforms.higher gross margins.
Cost
Personnel costs represent approximately $1,960,000 or 62% of Product Sold
Cost of products sold was $1,720,000 representing thetotal manufacturing, of initial product sales and the costs associated with the ramp up of our manufacturing operations including the required quality assurance organization. As ofand regulatory spending for the year ended December 31, 2010, we had 9 employees devoted2011, compared to 73% for the year ended December 31, 2010. We employed 22 full-time and two part-time manufacturing and quality assurance activities. Personnel costs represent approximately 68.5%technicians at December 31, 2011, compared to nine full-time personnel for year ended December 31, 2010. The increase of total manufacturing13 full-time and quality assurance spending. Idle facility expense, excessive spoilage, extra freight, and handling costs are included in costtwo part-time employees was attributable to the acquisition of product sales and are not capitalized into inventories.Surgical Biologics. Allocation of fixed production overheads is based on the normal capacity of production facilities. We anticipate spending in the area of manufacturing and quality assurance to increase in support of production rate increases.
Research and Development Expenses
Research and development expenses during the year ended December 31, 2010, increased2011, decreased approximately $163,000$151,000 to $2,603,000 compared to $2,753,000 compared to $2,590,000 for the nine monthsyear ended December 31, 2009. 2010. The decrease was due primarily to a reduction in personnel and operating costs related to the closure of the Tampa facility of approximately $1,017,000, which was offset by the addition of Surgical Biologics research and development costs of approximately $562,000, and increased costs in administrative and product development for personnel, travel and patent legal costs of $304,000.
Our research and development expenses consist primarily of internal personnel costs, fees paid to external consultants, and supplies and instruments used in our laboratories. As of December 31, 2010,2011, we employed 12five employees devoted to research and development, validation of our manufacturing processes,compared to 12 full-time and the manufacturing of prototype devices. As of December 31, 2009, we had 28two part-time employees devoted to these efforts. Personnelefforts as of December 31, 2010. Internal personnel costs, representincluding salaries, severance and benefits, were approximately 54.7%$1,113,000 or 43% of total research and development expenses during the year ended December 31, 20102011, as compared to 55.5%approximately $1,462,000 or 53% for the nine monthsyear ended December 31, 2009. Fees paid to external consultants2010. Headcount reductions as a result of the Tampa facility closure occurred primarily in the second half of the year ended December 31, 2011. Development and suppliestesting represented approximately $761,000 or 29% and instruments used in our laboratories represent approximately 6.0% and 4.6% $584,000 or 21%, respectively, of research and development expenses during the year ended December 31, 20102011 as compared to 32.8% and 11.7% for the nine monthsyear ended December 31, 2009. Spending on animal studies increased 75.1% in support of our product release roadmap.2010. We anticipate our spending in the area of research and development in the foreseeable future to continue at comparable current levels as we progress our technologies through additional testingclinical trials in support of our marketing and validation in order to obtain clearance or approval from the FDA to market our technologies.reimbursement efforts.
Selling, General and Administrative Expenses
Selling, General and Administrative expenses for the year ended December 31, 2010,2011, increased approximately $3,384,000$4,916,000 to $11,764,000 compared to $6,848,000 compared to $3,463,000 for the nine monthsyear ended December 31, 2009. Included in our selling general and administrative expenses for the nine months ended December 31, 2009, is a $585,000 gain on settlement of accounts payable on expenses recorded in the prior fiscal year. Excluding the gain on settlement of payables our selling, general and administrative expenses increased $2,778,000 compared to the nine months ended December 31, 2009. The increase in selling, general and administrative expenses includes an investment of $1,061,000 in a global sales and distribution organization to support our growth objectives. The spending increase also includes $690,000 in additional share based compensation expense as well as $277,000 in increased depreciation and amortization expense.2010. Selling, General and administrative expenses consist of personnel costs, professional fees, sales commissions, sales training costs, industry trade show fees and expenses, product promotions and product literature costs, facilities costs and other sales, marketing and administrative costs. Duringcosts, depreciation and amortization, and share-based compensation. As of December 31, 2011, we employed 20 full-time and three part-time personnel in selling, general and administrative functions, compared to 11 full-time and two part-time personnel for the year ended December 31, 2010, salaries2010. The increase in staffing was primarily due to the acquisition of Surgical Biologics and benefits, excluding stock-based compensation, totaled $2,099,000 compared to $1,325,000additional sales and support personnel required for the nine monthsincreased sales and market development.
The acquisition of Surgical Biologics increased general and administrative expenses by approximately $2,686,000, including $236,000 in legal fees and $48,000 in external auditing fees, the majority of which is related to the merger, $596,000 in additional expenses for Surgical Biologics staff and general office expenses, $1,098,000 in sales and marketing expenses and rent, and $708,000 of depreciation and amortization. Our sales and marketing expenses increased by $1,369,000 as a result of our expanded sales team to support our rapid growth, increased commissions due to increased sales, and trade show and market launch expenses. Our share-based compensation increased by approximately $488,000, and our director fee expense increased by $185,000 as the result of restructuring board compensation in mid-2010, and was offset by $237,000 due to reductions in accounting, recruiting costs, consulting and travel costs.
During the years ended December 31, 2009.2011 and 2010, we recorded approximately $447,000 and $444,000 in depreciation expense, respectively. The $3,000 increase primarily relatesin depreciation was attributable to the investment in salesacquisition of Surgical Biologics and product management personnel whose responsibilities include building a global network of third party sales representatives and distributors as well as the management of our two product platforms. As of December 31, 2010, we employed 11 personnel in our selling, general and administrative organization as compared to 12 as of December 31, 2009.
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We have no off-balance sheet arrangements.
The Company emerged from being a development stage company in 2010. Planned principal operations have commenced, but the revenue has not been significant enough to fund ongoing operations. The Company’s cash requirements for the twelve months ended December 31, 20102011, arose out of general working capital needs.needs and the acquisition of Surgical Biologics. The Company funded its cash requirements primarily through a combination of debt and equity financings with a lesser amount derived from company revenue. As of December 31, 2010,2011, the Company had approximately $1,341,000$4,112,000 of cash and cash equivalents. Through March 15, 2011,The Company raised approximately $10,139,000 through its financing activities net of loan repayments and reduced the cash required by operating and investing activities by approximately $942,000 as compared to the prior year. The Company received an additional $1,089,000reported total current assets of proceeds related to salesapproximately $6,882,000 and current liabilities payable in cash of itsapproximately $4,732,000 after adjusting for the approximate $3,185,000 of short term earn-out liability payable in MiMedx common stock and warrants. On March 18, 2011,in the Board approved an agreement between the Company and its CEO whereby the CEO will provide the Company withsecond quarter of 2012. Also included in current liabilities is a convertible line of credit with a related party for approximately $1,296,000 which is due on December 31, 2012, which can be extended for an additional 12 months by paying a fee of up to $3.6 million to fund ongoing operating cash requirements.five percent of the amount due or $65,000. The Company believes that its anticipated cash from operations, existing cash and cash equivalents and the aforementioned line of creditanticipated cash from operations will enable the Company to meet its operational liquidity needs, fund its planned investing activities and pay its debt when due for the next twelve months.
We do not believe that the rate of inflation has had a material effect on our operating results. However, inflation could adversely affect our future operating results.
The Company’s business is anticipated to be directly dependent on foreign operations as the Company’s sales to customers outside the U.S. become significant. A portion of the Company’s total revenue areis anticipated to be dependent on selling to distributors outside the U.S., some of which will be invoiced in foreign currencies, primarily the EURO. There is also risk related to the changes in foreign currency exchange rates as it relates to sales operating expenses paid in EUROs. We are currently considering taking affirmative steps to hedge the risk of fluctuations in foreign currency exchange rates as revenue continues to increase. We do not expect our financial position, results of operations or cash flows to be materially impacted due to a sudden change in foreign currency exchange rates fluctuations relative to the U.S. Dollar over the next six months.
Our exposure to market risk relates to our cash and investments.
The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest our excess cash in debt instruments of the U.S. Government and its agencies, bank obligations, repurchase agreements and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of generally less than three months.