Cross-helical arrays forming tubular structures that also can be cut to form flat patches | · | CollaFixTM Biomaterials coupled with MiMedx proprietary NDGA (nordihydroguaiaretic acid) polymerization can be used to coat synthetic indwelling medical devices to improve their biocompatibility; |
Woven meshes for general surgical use;
| · | 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 have been tested and results preliminarily suggest that the materials are biocompatible and biodegradable;
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.
| · | 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 guarded trade secret.
In January 2012, the Company 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 have not yet received any U.S. clearances or approvals for CollaFixTM.
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®The Company is required to pay a royalty of 3% on all commercial sales revenue from the sale of products incorporating the licensed technology. The Company is also obligated to pay a $50,000 minimum annual royalty payment over the life of the license. The license terminates upon the expiration of the patent.
We continue to evaluate how best to exploit this technology. 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®
We license certain patents and patent application rights to a PVA polymer,PVA- based hydrogel, 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. Our licenses allow us to manufacture, market, use and sell medical devices and products incorporating the claimed technology for (i) all neurological and orthopedic uses related to the human spine, (ii) neurological and orthopedic uses (including muscular and skeletal use) related to the rotator cuff, but excluding the product SaluBridge (which is made from Salubria® biomaterial and is currently cleared for use by the FDA) and (iii) for application as a surgical sheet anywhere in the body. Our licenses are exclusive, world-wide and perpetual.
This hydrogel has been used in other orthopedic and general surgery device applications, and 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.
On April 20, 2009, we received FDA clearance via a 510(k), for our Paradís Vaso Shield™, later renamed 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 during anterior vertebral surgery. The FDA cleared the HydroFix®HydroFix® Vaso Shield as a vessel guard or cover during 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® VasoShieldHydroFix® Vaso Shield 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® Spine Shield, which has received two CE marks.HydroFix® Anterior Shield. The device, which is classified as a post-surgical adhesion inhibiting barrier and is used in specific spine surgeries. In April 2010, Spine Shield Class IIb(Class IIb), received the CE Mark for only anterior use with no contact with the central nervous system or central circulatory system received the CE mark. In December the original HydroFix®system. Our HydroFix® Spine Shield (for Anterior use Class IIb in Europe) was renamed to be HydroFix® Anterior Shield and the HydroFix® Spine Shield Product wasproduct is CE marked for applications in contact with the central circulatory system and central nervous system (Class III in Europe). The CE marked HydroFix®HydroFix® Anterior Shield and HydroFix® Spine Shield isare not available in the United States.
During 2011, the Company received 510(k) clearance for its HydroFix® OrthoShieldHydroFix® Ortho Shield device, which is indicated for the management and protection of tendon injuries in which there has been no substantial loss of tendon tissue. The OrthoShieldOrtho Shield device is a permanent, protective sheet that minimizes soft tissue attachments to the 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 normal motion.
In 2012, the Company received the CE mark for HydroFix® Crani Shield product. The device is intended to be used as a dura cover to provide a plane of dissection during revision surgery in cranial applications and is classified as a Class III device in Europe. The HydroFix® Crani Shield is not available in the United States.
Because the addressable market for our HydroFix® products is somewhat limited and we do not expect significant expansion in the sales of this product line, we recognized an impairment charge in 2012 and reduced the carrying value of the HydroFix® assets in our consolidated financial statements by $1,798,495. See Note 2 to Consolidated Financial Statements “Significant Accounting Policies” under the subheading “Impairment of Long-lived Assets.”
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 or that we may otherwise use and own.
Patents and Patent Applications
On December 6, 2012, the Company announced receipt of its first issued patent “Placental Tissue Grafts” related to tissue grafts derived from the placenta. This patent relates to the AmnioFix® brand grafts.
On February 11, 2013, the Company announced that it had been issued four additional U.S. patents for placental tissue grafts. The patents include “Placental Tissue Grafts,” “Improved Placental Tissue Grafts,” “Method For Inhibiting Adhesion Formation” and “Method for Treating a Wound Using Improved Placental Tissue Graft.” The first three of these patents relate to the AmnioFix® brand grafts and the last of these relates to the EpiFix® brand allografts.
More than twenty-five additional patent applications covering aspects of this technology are pending at the United States Patent and Trademark Office and with various international patenting agencies.
Worldwide, our HydroFix® and CollaFix™ technologies are protected with 20 issued patents and 49 patent applications.
Of course, the pending patent applications may not result in issued patents and even if they do, the claims may be substantially modified or reduced.
Trademarks & Trade Names
We also own the following trademarks MiMedx®, EpiFix®, AmnioFix®, HydroFix® and Purion®. We have filed several intent to use applications as well, including an application for the name “CollaFix™.”
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,Orthopedic, General Surgery, Urology 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’sMiMedx®’s tissues provide anti-inflammatory, anti-scarring and barrier properties as well as enhanced healing at the surgical or wound site. It alsoThey can be stored at room temperature, with a five year shelf life and isare 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®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)surgical markets. There are an estimated five6.5 million patients that have chronic wounds due to compromised health, such as poor circulation or diabetes, and do not heal with traditional wound care therapies and antherapies. An estimated three million people needingneed 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, ourOur tissue platforms will help reduce scarringscar tissue formation 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 where scarring can limit the ability to reproduce, reduce sexual function, or generate post-operative pain.
In Europe, the Company has similar opportunities to treat large populations of patients with our regenerative biomaterials. We believe there is tremendous opportunity to treat a variety of conditions, including close to seven million chronic wounds and burns, and close to one million tendon or ligament repair/reconstructions.
7Market opportunity numbers derived from the following sources:
Wound Repair Regen. 2009 Nov-Dec;17(6):763-71. doi: 10.1111/j.1524-475X.2009.00543.x. Human skin wounds: a major and snowballing threat to public health and the economy. Sen CK, Gordillo GM, Roy S, Kirsner R, Lambert L, Hunt TK, Gottrup F, Gurtner GC, Longaker MT.
2010 Report of Contents
the 2009 Statistics, National Clearinghouse of plastic surgery statistics, American Society of Plastic Surgeons
US Orthopedic Foot & Ankle and Hand, Wrist & Elbow Sports Medicine & Soft Tissue Device Market, Millennium Research Report 2011
Worldwide Markets and Emerging Technologies for Tissue Engineering and Regenerative Medicine, 2009, Intellab
Wound Care
ThePhysicians encounter a variety of wound types of wounds that present themselves to physicians on a daily bases are diverse. There arebasis, including acute wounds caused by surgical intervention, trauma and burns.burns, as well as chronic wounds that are delayed in closing compared to healing in an otherwise healthy individual. Chronic wounds include diabetic foot ulcers, venous leg ulcers, pressure ulcers, arterial ulcers, and surgical wounds that become infected. 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 according to the Frost and Sullivan US Interactive Wound Care Markets Report for 2008.
Approximately 6,700,0006.7 million 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 surgical wounds that become infected. MiMedx currently intends to focus on two primary chronic wound markets, which are venous leg ulcers and diabetic foot ulcers.
The physician’s goal when treating traumatic wounds is to heal the wound butwhile allowing the patient to retain natural function in the area of the wound with minimal scarringscaring and infection. If a wound becomes infected, it can lead to a loss of limb or life. For the most part,life, and physicians heal acute wounds without incident, but with scarring. However, physicians dealing with chronic wounds are mainly concerned with closingwant to close the wound as quickly as possible to minimize this risk. Patients with chronic wounds likely have comorbidities that complicate or delay the risk of an infection that could lead to loss of limb or life.healing cascade.
EpiFix®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®EpiFix® is used for the treatment of all types of chronic and acute, partial and full-thickness wounds. EpiFix®EpiFix® is not limited to a specific wound type by the FDA like other technologies and is allowed to be used to heal all types of wounds. EpiFix®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.processing. 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®EpiFix®.
In addition, our strategic move to supply multiple sizes of grafts (16mm disc, 2x3 cm, 4x4 cm, 7x7cm)(from 2cm2 to 49cm2) minimizes product waste. Both of the two leading competitors’ products come in only one size each, 2 inch x 3 inch (38 cm2) and 75mm75 mm disc (42 cm2). Since the averagemajority of diabetic ulcers are approximately 2.5 cmless than 6cm2, using one of the competitors’ products would result in significant waste.
Chronic Sports/Work Tissue Injury
AmnioFix®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®AmnioFix® Injectable is the best option for the patient to help to reduce inflammation and scar tissue formation, and enhance healing of micro-tears in soft tissue.
Spine Repair and Vessel Protection
Our AmnioFix®AmnioFix® technology also is used as a graft to reduce the amount ofbarrier membrane in procedures where scar tissue formation provide a localmay be problematic. AmnioFix® provides additional benefits including anti-inflammatory materials and growth factors that may 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®AmnioFix® to reduce scarring and inflammation during the primary procedure and may reduce the time during reoperations or follow-up surgeries.
(1)Intellab - Worldwide markets for Emerging Technologies, 2009
Our HydroFix®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®HydroFix® Spine Shield is CE marked for use for the anterior and posterior spine to provide a barrier for scar tissue attachment (adhesions). This permanent sheet is a physical barrier between two tissue types and could help with the re-access to the surgical site on a revision.Marked.
We currently license the PVA-based hydrogel for use in the spine, rotator cuff and as a surgical sheet.
Competition
EpiFix® and AmnioFix® Product lines
Competitive technologies
There are many competitive technologies that are focused on addressing the chronic wound care market. The technologies 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 more 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 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.
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 network of independent sales representatives and stocking distributors to sell our MiMedx-labeled surgical products domestically, and we are continuing to assemblealso have a network of stocking distributors for international distribution.
In 2012, we established a direct sales force for Government accounts and are developing a direct sales force for commercial wound care. While we incurred significant costs due to these initiatives in 2012 and expect to incur significant additional costs in 2013, it is our expectation that this investment in the direct sales network will lead to higher revenue in 2013 and beyond. No assurance can be given that these efforts will be successful.
We also have a number ofcontinue to pursue private label or “OEM” relationships, which allow us to leverage the sales and OEM relationships, wheredistribution resources of our tissue is packaged and branded in accordance with the customer’s specifications.private label customers.
Reimbursement
MostIn 2012, 40% of our products were purchased for government accounts, which do not depend on reimbursement from third parties. With the exception of government accounts, most medical devices and tissue products are purchased by doctors, 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 often 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. Private pay possibilities exist as a financing mechanism for purchasingAccordingly, our products as well, but our successgrowth 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 governments 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 govern reimbursement for medical devices and procedures and often require special consideration for reimbursement for a new device.product.
Because EpiFix® is a new product, we often need to convince a payer of its safety, efficacy and cost effectiveness before they will reimburse for EpiFix®. As of March 1, 2013, five of the nine Medicare Administrative Contractors have agreed to cover our EpiFix® product for treatment of chronic wounds in the lower extremities. In addition to having to convince private payers as to the efficacy and cost effectiveness of EpiFix®, coverage and reimbursement by private payers also varies according to the patient’s benefit coverage with each individual payer. Payment may be based on the contract between the physician provider and the payer, and varies according to each individual contract. Therefore, we do not have reliable data as to how many commercial payers reimburse for EpiFix®, for which indications or at what rate. We are currently working with industrydevoting considerable resources to clinical trials to support reimbursement consultantsof our products. We also have established a reimbursement support group to aidfacilitate payments to providers as well as to assist in educating payers about the reimbursement planning formerits of our products.
Our surgical products (AmnioFix® and HydroFix®) generally are bundled as part of a hospital’s bill for a diagnosis-related group (DRG). In these cases, we also must convince the hospital that our products are both efficacious and cost-effective.
At this time there can be no assurance that reimbursement policies will provide an acceptable return on our products.
Customer Concentration
The Company provides products to Government accounts, including the Veteran’s Administration, through a distributor relationship. In 2012, sales to this distributor represented 40% of our revenues. The distribution agreement has a term of three years ending in April 2015, and has the potential to be extended for two additional one year terms. This distribution relationship is different than our other distribution relationships in that we have our own sales force selling into those accounts with the distributor handling all the back-office paperwork and contracting matters.
Another of our distributors represented an additional 21% of our total revenues in 2012. Our agreement with this distributor initially had a one year term and has been renewed on an annual basis. The current term expires in November 2013. We expect the agreement to be renewed.
Government Regulation
United States Regulation of Our Products
Human Amniotic Tissue
As discussed above, our AmnioFix®Our EpiFix® and EpiFix® platformsAmnioFix® products are derived from human tissue. The FDA has specific regulations governing human cells, tissues and cellular and tissue-based products, or HCT/Ps. An HCT/P is a product containing or consisting of human cells or tissue and qualifyintended for transplantation into a human patient. HCT/Ps that meets the criteria for regulation solely under Section 361 of the Public Health Service Act as products that do(so-called “361 HCT/Ps”) are not requiresubject to any premarket review underclearance or approval requirements and are subject to less stringent post-market regulatory requirements.
To be a drug, device or biological361 HCT/P, a product market application. The FDA believes that all human cells, tissue and cellular and tissue-based products (HCT/Ps) meet the definition of a drug, 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 criteria an HCT/Pgenerally must meet in order to be marketed without premarket approval or clearance:all four of the following criteria:
| Ÿ· | The HCT/PIt must be minimally manipulated; |
| Ÿ· | The HCT/PIt must be intended for homologous use (defined as the product performing the same basic function in the donor and in the recipient);use; |
| Ÿ· | The HCT/P mustIts manufacture does not be not combinedinvolve combination with another article;article, except for water, crystalloids or a sterilizing, preserving or storage agent; and |
| Ÿ· | The HCT/P mustIt does not have a systemic effect and is not dependent onupon the metabolismmetabolic activity of living cells for its primary function. |
If an HCT/P meets all the above criteria, no FDA review for safety and effectiveness under a drug, device, or biological product marketing application is required. However, the processor of the tissue is required to register with the FDA, comply with regulations regarding labeling, record keeping, donor eligibility, screening and testing, process the tissue in accordance with established Good Tissue Practices, and report any adverse events. MiMedx continues to comply with all applicable regulations, as demonstrated by several FDA and other agency on-site audits.
The American Association of Tissue Banks has issued operating standards for tissue banking. Compliance with these standards is a requirement in order to become a licensed tissue bank. In addition, some states have their own tissue banking regulations.
In addition, procurement of certain human organs and tissue for transplantation is subject to the restrictions of the National Organ Transplant Act (“NOTA”), which prohibits the transfer of certain human organs, including skin and related tissue for valuable consideration, but permits the reasonable payment associated with the removal, transportation, implantation, processing, preservation, quality control and storage of human tissue and skin. We reimburse tissue banks, hospitals and physicians for their services associated with the recovery, storage and transportation of donated human tissue. If we were to be found to have violated NOTA’s prohibition on the sale or transfer of human tissue for valuable consideration, we would potentially be subject to criminal enforcement sanctions, which could materially and adversely affect our results of operations.
Medical Devices
Our HydroFix®HydroFix® and CollaFixTM product platforms are medical devices subject to regulation by the FDA, under the Federal Food, Drug, and Cosmetic Act and they are also regulated in the European Economic Area by the Medical Device 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;
| · | Product design and development; |
| · | Premarket clearance or approval; |
| · | Advertising and promotion; |
| · | Product sales and distribution; and |
| · | Medical device reporting/Vigilance reporting. |
premarket clearance or approval;
advertisingMedical Devices are classed as I, II and promotion;
product sales and distribution; and
Medical device reporting/Vigilance reporting.
Each medical device distributed commerciallyIII in the U.S. will requirewith Class II and III requiring either a 510(k) clearance or Premarket Approval (“PMA”) from the FDA prior to marketing. Devices deemed substantially equivalent to legally marketed devices are deemed to pose relatively less risk are placed in eitherdeemed Class I or II, which requires the manufacturer to submit a premarket notification requesting clearance for commercial distribution. 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 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 and weWe believe that the FDA will regulate our next generation products as medical devices.devices, biologics or drugs. 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.
510(k) Clearance Pathway
To obtain 510(k) clearance for our Next Generation 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 fourthree 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. The FDA typically inspects the manufacturer’s facilities for compliance with 21 CFR Part 820 Quality System Regulation (QSR) which define the requirements for a quality system. A Quality System consists of organizational structure, responsibilities, procedures, processes and resources for implementing controls and monitoring to ensure the quality 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 a 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.
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.
Clinical Trials
A clinical trial is generally required to support a PMA, Biologic or Drug 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. ToT o 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 marketMarket
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.
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 warning letter to more severe sanctions such as:
fines, injunctions, and civil penalties;
| · | Fines, injunctions, and civil penalties; |
recall or seizure of our products;
| · | Recall or seizure of our products; |
operating restrictions, partial suspension or total shutdown of production;
| · | Operating restrictions, partial suspension or total shutdown of production; |
refusing our requests for 510(k) clearance or PMA approval of new products;
| · | Refusing our requests for 510(k) clearance or PMA approval of new products; |
withdrawing 510(k) clearance or PMA approvals already granted; and
| · | 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.
Fraud, Abuse and False Claims
The Company is directly and indirectly subject to various federal and state laws governing relationships with healthcare providers and pertaining to healthcare fraud and abuse, including anti-kickback laws. In particular, the federal healthcare program Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for or recommending a good or service for which payment may be made in whole or part under federal healthcare programs, such as the Medicare and Medicaid programs. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. In implementing the statute, the Office of Inspector General of the U.S. Department of Health and Human Services (“OIG”) has issued a series of regulations, known as the “safe harbors.” These safe harbors set forth provisions that, if all their applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable element of a safe harbor may result in increased scrutiny by government enforcement authorities, such as the OIG. Many states have laws similar to the federal law.
The Federal False Claims Act (“FCA”) imposes civil liability on any person or entity that submits, or causes the submission of, a false or fraudulent claim to the U.S. Government. Damages under the FCA can be significant and consist of the imposition of fines and penalties. The FCA also allows a private individual or entity with knowledge of past or present fraud against the federal government to sue on behalf of the government to recover the civil penalties and treble damages. The U.S. Department of Justice (“DOJ”) on behalf of the government has previously alleged that the marketing and promotional practices of pharmaceutical and medical device manufacturers included the off-label promotion of products or the payment of prohibited kickbacks to doctors violated the FCA resulting in the submission of improper claims to federal and state healthcare entitlement programs such as Medicaid. In certain cases, manufacturers have entered into criminal and civil settlements with the federal government under which they entered into plea agreements, paid substantial monetary amounts and entered into corporate integrity agreements that require, among other things, substantial reporting and remedial actions going forward.
Healthcare fraud and abuse laws are complex, and even minor, inadvertent violations can give rise to claims that the relevant law has been violated. We make payments to physicians and hospitals for a variety of services, such as tissue procurement services, research, serving on our medical advisory board, consulting, and speaking to payers about our products in support of our reimbursement efforts. While these transactions were structured with the intention of complying with all applicable laws, including 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 significant civil or criminal penalties.
AdvaMed is one of the primary voluntary U.S. trade associations for medical device manufacturers. This association has established guidelines and protocols for medical device manufacturers in their relationships with healthcare professionals on matters including research and development, product training and education, grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. Adoption of the AdvaMed Code by a medical device manufacturer is voluntary, and while the OIG and other federal and state healthcare regulatory agencies encourage its adoption and may look to the AdvaMed Code, they do not view adoption of the AdvaMed Code as proof of compliance with applicable laws. As part of a Company-wide compliance plan adopted by the Company in February 2013, MiMedx has incorporated the principles of the AdvaMed Code in its standard operating procedures, sales force training programs, and relationships with health care professionals. Key to the underlying principles of the AdvaMed Code is the need to focus the relationships between manufacturers and healthcare professionals on matters of training, education and scientific research, and limit payments between manufacturers and healthcare professionals to fair market value for legitimate services provided and payment of modest meal, travel and other expenses for a healthcare professional under limited circumstances. The Company has incorporated these principles into its relationships with healthcare professionals under its consulting agreements, payment of travel and lodging expenses, research and educational grant procedures and sponsorship of third-party conferences. In addition, the Company has conducted training sessions on these principles. However, the Company cannot provide any assurance that regulatory or enforcement authorities will view these arrangements as being in compliance with applicable laws or that one or more of its employees or agents will not disregard the rules established by the Company.
See discussion below- “Risk Factors” under the heading “We and our sales representatives, whether employees or independent contractors, 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.”
International
International sales of the 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 MiMedx 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. A 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 Economic Area EEA.
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
The clearances and CE markings we have received for our products are discussed under the description of the respective technologies under the heading “Our Technology and Products.”
Licenses
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.
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® 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 platform technologies are protected with ten patents and over 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 own trademark and trade name registration of the mark Paradís Vaso ShieldTM and license the SaluMedica™ and Salubria® trademarks. We also own the trade name registration of the trademarks of MiMedx®, EpiFix®, AmnioFix®, HydroFix® and Purion®.
Manufacturing
MiMedx Group performs all tissue processing in Kennesaw, Ga. The Company expanded production capacity from one (1) to three (3) processing lines in the second quarter of 2012. The Company also performs research and early stage product and process development activities and operates a pilot production facility for its proprietary CollaFixTM cross-linked collagen products in its 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 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 EpiFix®, AmnioFix®, HydroFix® and CollaFixTM.location.
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.
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.
We have a comprehensive network of hospitals who participate in our placenta donation program. We have a dedicated staff who workthat works at these hospitals, collecting donated placentas from mothers who undergo Caesarian section births and consent to donation, undergoing caesarian section births.donation. In addition, we have entered into agreements with certain third party companies who also collect placenta donations in other hospitals. We believe that we have ensuredwill be able to procure an adequate supply of tissue to meet anticipated demand.
Research and Development
Our research and development group has extensive experience in developing products related to our field of interest, and works with our Medical Advisory Board 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,Clinical trials that demonstrate the safety, efficacy and cost effectiveness of our products are key to obtaining broader reimbursement for our products. In addition to our internal staff we have contractscontract with outside labs and physicians 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.
Environmental Matters
The Company’s tissue preservation activities generate some chemical and biomedical 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.Protection/division.
Employees
As of December 31, 2011,2012, we had 52166 employees, of whom 47159 are full-time and five7 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
None outside the ordinary course of business.
Available Information
Our website address is www.mimedx.com. We make available on this website under “Investor Relations“Investors — 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“Investors — 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.
Item 1A. Risk Risk Factors
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. experience and a history of net losses, and we may never achieve or maintain profitability.
We have a limited operating history and have focused primarily on research and development, clinical trials, product engineering, expanding our manufacturing capabilities, and building a sales force to market our EpiFix® and AmnioFix® products. We have incurred significant net losses over the last few years, including net losses of approximately $7.7 million in 2012, $10.2 million in 2011, and $11.4 million in 2010. At December 31, 2012, we had an accumulated deficit of approximately $69.7 million. We will continue to incur significant expenses for the foreseeable future as we expand our sales and marketing, research and development, and clinical activities. We may never generate sufficient revenues to achieve or sustain profitability. Even if we do achieve profitability, we may not currently have any material assets, other than cash, certain laboratory equipment, and certain intellectual property rights.be able to sustain or increase profitability. 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.
Many of our planned products are in the early stage of product development.
Many of the possible products we have rightsable 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 thatsuccessfully address 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 economyrisks, and the creditfailure to adequately do so could cause our business, results of operations, and financial marketscondition to suffer.
Our operating results may adversely impact our ability to raise necessary additional capital.
The capital and credit markets continue to be very volatilefluctuate significantly as a result of adverse conditions that have caused the failure and near failurea variety of a numberfactors, many of large financial services companies. If the capital and credit markets continue to experience volatility and the availabilitywhich are outside 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.control.
We will need additional financingare subject to meetthe following factors, among others, that may negatively affect 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 products and to hire the personnel necessary to successfully manage the commercialization of our products. We believe that our current cash and cash equivalents 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 may 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:results:
| Ÿ· | The announcement or introduction of new products by our competitors; |
| · | Failure of government and private health plans to adequately and timely reimburse the revenue generated by salesusers of our products; |
| Ÿ· | the costs associated with expandingOur ability to upgrade and develop our salessystems and marketing efforts, including effortsinfrastructure to hire independent agents and sales representatives;accommodate growth; |
| Ÿ· | the expenses we incurOur ability to attract and retain key personnel in developinga timely 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 effective manner; |
| Ÿ· | generalThe amount and administrative expenses.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 these factors,our limited operating history, limited resources, and the nature of the markets in which we will raise additional fundscompete, 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 future and such fundscompetitive environment, the Company may not be available on favorable terms,from time to time make certain pricing, service 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 termsmarketing decisions 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. Due to the foregoing factors, our revenue and operating results are and will remain difficult to forecast.
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 industryfield and face competition from large, well-established, tissue processors, medical device manufacturers as well as new market entrants.
Our business is in a very competitive and evolving field. Competition from other tissue processors, medical device companies and from research and academic institutions is intense, expected to increase, subject to rapid change, and could be significantly affected by new product introductionsintroductions.
Many of our products have short regulatory timeframes and other market activities of industry participants. In additionour competitors may be able 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 competitive products that are as or more effective or achieve greater market acceptance than competitiveour 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.
OurMany of our competitors enjoy severalhave competitive advantages over us, including some or all of the following:
| · | Significantly greater name recognition; |
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.
| · | Established relations with surgeons, hospitals, other healthcare providers and third party payers; |
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. | · | Large and established sales and 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; |
| · | Greater financial, managerial and other resources for product research and development, sales and marketing efforts and protecting and enforcing intellectual property rights. |
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 success will depend on our ability to perfect and protect our intellectual property rights related to our technologies as well as to develop new technologies and new applications for our technologies.
Our failure to compete effectively would have a material and adverse effect on our business, results of operations and financial condition.
The success of our human tissue products depends upon, among other factors, the availability of sufficient quantities of placental tissue from human donors. The availability of donated placental tissue could be adversely impacted by regulatory changes, public opinion of the donor process as well as our own reputation in the industry. Any disruption in the supply of donated human tissue could restrict our growth and could have a material adverse impact on our business and financial condition. We cannot be sure that the supply of human tissue will continue to be available at current levels or will be sufficient to meet our future needs.
Our EpiFix® and AmnioFix® products are derived from human tissue and therefore have the potential for disease transmission.
The utilization of human tissue creates the potential for transmission of communicable disease, including, but not limited to, human immunodeficiency virus (“HIV”), viral hepatitis, syphilis and other viral, fungal or bacterial pathogens. We are required to comply with federal and state regulations intended to prevent communicable disease transmission.
Although we maintain strict quality controls over the procurement and processing of our tissue, there is no assurance that these quality controls will be adequate. In addition, negative publicity concerning disease transmission from other companies’ improperly processed donated tissue could have a negative impact on the demand for our EpiFix® and AmnioFix® products.
We depend on key personnel.
Our success will depend, in part, upon our ability to attract and retain skilled personnel, including sales, managerial and technical personnel. There can be no assurance that we will be able to find and attract additional qualified employees to support our expected growth or retain any such personnel. Our inability to hire qualified personnel or the loss of services of our key personnel may have a material and adverse effect on our business, operations and results of operations.
We are dependent on our relationships with distributors and independent sales representatives to generate revenue.
We derive material revenues through our relationships with distributors and independent sales representatives. If such relationships were terminated for any reason, it could materially and adversely affect our ability to generate revenues and profits. The Company intends to obtain the assistance of additional distributors and independent sales representatives to continue its sales growth. We may not be able to find additional distributors and independent sales representatives who will agree to market and/or distribute our products on commercially reasonable terms, if at all. If we are unable to establish new distribution and independent sales representative relationships or renew current distribution and sales agency agreements on commercially acceptable terms, our business, financial condition and results of operations could be materially and adversely affected.
We are investing significant capital in expanding our sales force, and there can be no assurance that these efforts will result in significant increases in sales.
We are engaged in a major initiative to build and further expand our sales and marketing capabilities. As a result, we are investing in a direct sales force to allow us to reach new customers. The incurrence of these expenses impacts our operating results, and there can be no assurance that we will be successful in significantly expanding the sales of our products.
A significant portion of our revenues come from a limited number of accounts .
Three customers accounted for approximately 68% of revenues for the year ended December 31, 2012. We provide products to Government accounts, including the Veteran’s Administration, through a distributor that has a Federal Supply Schedule Contract that recently was extended through January 2018. These sales represented 40% of our revenue in 2012. Our agreement with the distributor has an initial term of three years ending in April 2015. The agreement has the potential of being extended for two additional one year terms. We believe the risk related to that concentration of revenue from a single distributor is mitigated by the fact that our own sales force calls on and has a personal relationship with the individual Veteran’s Administration facilities that represent most of that revenue. Therefore, we believe we eventually could regain much of the Veteran’s Administration business, even if our relationship with our distributor were terminated. Nevertheless, if our agreement with our distributor were terminated prematurely or if the distributor were for any reason unable to service the Government market, there could be a disruption of our Government accounts business that could materially and adversely affect our business, revenues and results of operations.
Another of our distributors represented 21% of total revenue in 2012. While we believe our relationship with this distributor is good, if this relationship were terminated for any reason, including non-renewal of our contract upon expiration of the current term in May 2013, our business, revenues and results of operations could suffer.
Our revenues depend on adequate reimbursement from public and private insurers and health systems.
Our success depends on the extent to which reimbursement for the costs of our products and related treatments will be available from third party payers, such as public and private insurers and health systems. Government and other third-party payers attempt to contain healthcare costs by limiting both coverage and the level of reimbursement of new products. Therefore, significant uncertainty usually exists as to the reimbursement status of new healthcare products. A significant number of public and private insurers and health systems currently do not provide reimbursement for our products. If we are not successful in obtaining adequate reimbursement for our products from these third party payers, the market’s acceptance of our products could be adversely affected. Inadequate reimbursement levels also likely would create downward price pressure on our products. Even if we do succeed in obtaining widespread reimbursement for our products, future changes in reimbursement policies could have a negative impact on our business, financial condition and results of operations.
Disruption of our manufacturing and processing could adversely affect our business, financial condition and results of operations.
Our results of operations are dependent upon the continued operation of our manufacturing and processing facilities. Risks that could impact our ability to use these facilities include the occurrence of natural and other disasters, and the need to comply with the requirements of directives from government agencies, including the FDA. The unavailability of our manufacturing and processing facilities could have a material adverse effect on our business, financial condition, and results of operations during the period of such unavailability.
To be commercially successful, we must convince physicians that our products are safe and effective alternatives to existing treatments and that our products should be used in their procedures.
We believe physicians will only adopt our products if they determine, based on experience, clinical data and published peer reviewed journal articles, that the use of our products in a particular procedure is a favorable alternative to conventional methods. Physicians may be slow to change their 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 payers; and |
| · | The time that must be dedicated to training. |
In addition, we believe recommendations for and support of our products by influential physicians 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, physicians and hospitals may not use our products, which would significantly reduce our ability to achieve expected revenue and would prevent us from becoming profitable.
We will need to expand 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 penetrate and service the market for our existing and anticipated future products and to continue to develop new products. 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. 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.
Additional financing may be necessary for implementation of our growth strategy.
We may require additional debt and/or equity financing to pursue our growth strategy. Given our limited operating history and history of net losses, there can be no assurance that we will be successful in obtaining additional financing. Lack of additional funding could force us to curtail substantially our growth plans or cease operations. Furthermore, our issuance of any additional securities would dilute the ownership of existing shareholders and may substantially reduce the price of our common stock. Furthermore, debt financing, if available, will require the payment of interest and may involve restrictive covenants that could impose limitations upon our operating flexibility. Our failure to successfully obtain additional future funding may jeopardize our ability to expand our business and operations.
We face the risk of product liability claims 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 manufacturing, processing and marketing of medical devices and human tissue 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.
We may implement a product recall or voluntary market withdrawal due to product defects, which could significantly increase our costs, damage our reputation and disrupt our business.
The manufacturing, marketing and processing of our tissue products and medical devices involves an inherent risk that our products may be defective or that our products or processes do not meet applicable quality standards and requirements. In that event, we may voluntarily implement a recall or market withdrawal or may be required to do so by a regulatory authority. A recall or market withdrawal of one of our products would be costly and would divert management resources. A recall or withdrawal of one of our products, or a similar product manufactured or processed by another manufacturer, also could impair sales of our products as a result of confusion concerning the scope of the recall or withdrawal, or as a result of the damage to our reputation for quality and safety.
We may not be successful in commercializing all of our technologies for our medical device products, such as HydroFix® and CollaFix™.
We have had only limited sales of our HydroFix® products. We have invested substantial time and resources in developing various additional products using our HydroFix® and CollaFixTM technologies. Further commercialization of these 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, any 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 such products, or the approved indication may be narrower than we seek; |
| · | Such 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 payers, or the level of reimbursement may be insufficient to support widespread adoption of such products; |
| · | We may experience delays in our development 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 such products in commercial quantities or at an acceptable cost; and |
| · | Rapid technological change may make such products obsolete. |
Our international business and prospects could be adversely impacted by risks inherent in international markets.
Sales to customers outside the United States subject us to inherent risks in the economic, political, legal and business environments in the foreign countries in which we do business, including the following:
| · | Fluctuations in currency exchange rates; |
| · | Regulatory, product approval and reimbursement requirements; |
| · | Tariffs and other trade barriers; |
| · | Greater difficulty in accounts receivable collection and longer collection periods; |
| · | Difficulties and costs of managing foreign distributors; |
| · | Reduced protection for intellectual property rights in some countries; |
| · | Burdens of complying with a wide variety of foreign laws; |
| · | The impact of recessions in economies outside the U.S.; |
| · | Political and economic instability; and |
| · | U.S. Export regulatory restrictions. |
Risks Related to Our Intellectual Property
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 theThe patent application process and the process of managing patent disputes can be time consuming and expensive. We cannot ensure that any of our pending patent applications will result in issued patents. 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.
The failure to obtain and maintain patents and/or protect our intellectual property rights could have a material and adverse effect on our business, results of operations, and financial condition. Whether a patent is valid is a complex matter of science and law, and therefore we cannot be certain that, if challenged, our patents would be upheld. If one or more of those patents are invalidated, that could reduce or eliminate any competitive advantage we might otherwise have had.
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 or defend 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
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 sufficient resourcesobtained licenses from third parties for patents and patent application rights related to enforce our HydroFix® and CollaFix™ technologies, allowing us to use intellectual property rights owned by or licensed to defend ourthese third parties. We do not control the maintenance, prosecution, enforcement or strategy for many of these patents or patent application rights against a challenge. The failure to obtain patents and/or protect ourand as such are dependent in part on the owners of the intellectual property rights to maintain their viability. Their failure to do so could have a material and adverse effect onsignificantly impair our business, results of operations, and financial condition.ability to exploit those technologies.
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 infringementthat our products infringe their patents or misappropriation claims against us with respect to products we develop.other intellectual property rights. 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 or processes infringe. There also may be existing patents or pending patent applications of which we are unaware that our products or processes 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 other intellectual property or are able to design around the patent.patent or other intellectual property. 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.
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.
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.
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.
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 partiesOur NDGA License Agreement 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 useour CollaFix™ 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.
We depend on key personnel.
Our success will depend, in part, uponUnder our ability to attractlicense agreement with Shriners’ Hospitals for Children 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 lossUniversity 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.
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. |
As a result of our limited operating history, limited resources, and the nature of the markets in which we compete,South Florida Research Foundation dated January 29, 2007, 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.
Our success depends, in part, on the extent to which reimbursementpossible for the costs of productslicensor to users will be available from government health administration authorities, private health insurersterminate the agreement if we breach the license agreement 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.
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.
We may not be successful in commercializing all of our technologies.
We have had only limited sales ofcure rights are exhausted. If our HydroFix® products. We have invested substantial time and resources in developing various additional products using our HydroFix® and CollaFixTM technologies. Further commercialization of these 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, any 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 such products, or the approved indication may be narrower than we seek;
such products may not provelicense agreement were 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 such products;
we may experience delays in our development 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 such products in commercial quantities or at an acceptable cost; and
rapid technological change may make such 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.
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.
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.
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. Ifterminated, 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 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 physicians 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. Physicians 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.
There will be a learning process involved for physicians 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 physicians 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.
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 effectnegative impact on our business.
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.
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; |
| Ÿ | Regulatory, product approval and reimbursement requirements; |
| Ÿ | Tariffs and other trade barriers; |
| Ÿ | Greater difficulty in accounts receivable collection and longer collection periods; |
| Ÿ | Difficulties and costs of managing foreign distributors; |
| Ÿ | Reduced protection for intellectual property rights in some countries; |
| Ÿ | Burdens of complying with a wide variety of foreign laws; |
| Ÿ | The impact of recessions in economies outside the U.S.; and |
| Ÿ | Political and economic instability |
| 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.
Risks Related to Regulatory Approval of Our Products and Other Government Regulations
GovernmentReclassification of our EpiFix® and AmnioFix® products could make the introduction of new tissue products more expensive and significantly delay the expansion of our tissue product offerings and subject us to additional post-market regulatory requirements
Our EpiFix® and AmnioFix® products are derived from human tissue. The FDA has specific regulations governing human cells, tissues and cellular and tissue-based products, or HCT/Ps. An HCT/P is a product containing or consisting of human cells or tissue intended for transplantation into a human patient. HCT/Ps that meet the criteria for regulation solely under Section 361 of the Public Health Service Act (so-called “361 HCT/Ps”) are not subject to any premarket clearance or approval requirements and are subject to less stringent post-market regulatory requirements.
To be a 361 HCT/P, a product generally must meet all four of the following criteria:
| · | It must be minimally manipulated; |
| · | It must be intended for homologous use; |
| · | Its manufacture does not involve combination with another article, except for water, crystalloids or a sterilizing, preserving or storage agent; and |
| · | It does not have a systemic effect and is not dependent upon the metabolic activity of living cells for its primary function. |
We believe that our EpiFix® and AmnioFix® products are properly classified as 361 HCT/Ps and not as medical devices, biologics or drugs. However, there can be no assurance that the FDA would agree that this regulatory classification applies to these products and any regulatory reclassification could have adverse consequences for us and make it more difficult or expensive for us to conduct our business by requiring premarket clearance or approval and compliance with additional post-market regulatory requirements. Additionally, increased regulatory scrutiny within the industry in which we operate could lead to increased regulation of our business is extensive and obtainingHCT/Ps, including 361 HCT/Ps. We also cannot assure you that the FDA will not impose more stringent definitions with respect to products that qualify as 361 HCT/Ps.
Obtaining and maintaining the necessary regulatory approvals is uncertain,for our medical device products are expensive and time-consuming.time-consuming and may impede our ability to exploit our HydroFix® and CollaFix™ technologies.
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 daysthree months to sixtwelve 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 contemplated additional medical device 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 productOur business is subject to continual review,continuing regulatory compliance by the FDA and later discovery of previously unidentified problemsother authorities, which is costly and or failure to comply could result in negative effects on our business.
As discussed above, the FDA has specific regulations governing our tissue-based products, or HCT/Ps. The FDA’s regulation of HCT/Ps includes requirements for registration and listing of products, donor screening and testing, processing and distribution (“Current Good Tissue Practices”), labeling, record keeping and adverse-event reporting, and inspection and enforcement.
Medical device products are subject to even more stringent regulation by the FDA. Even if pre-market clearance or approval is obtained, the approval or clearance may place substantial restrictions on the indications for which the product may be marketed or to whom it may be marketed, may require warnings to accompany the product or impose additional restrictions on the sale and/or use of the product. In addition, regulatory approval is subject to continuing compliance with regulatory standards, including the FDA’s quality system regulations.
If we fail to comply with the applicable regulatory requirements may result in restrictions on a product’s marketing, recalls,FDA regulations regarding our tissue products or withdrawalmedical devices, FDA could take enforcement action, including any of the product fromfollowing sanctions and the market as well as possible civilmanufacture of our products or criminal sanctions.processing of our tissue could be delayed or terminated:
| · | Untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; |
| · | Customer notifications for repair, replacement, refunds; |
| · | 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 or PMA approvals that have already been granted; |
| · | Refusal to grant export approval for our products; or |
It is likely that the FDA’s regulation of both our tissue products and our medical devicesdevice products 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.
Tissue Banks (“AATB”) has issued operating standards for tissue banking. Compliance with these standards is a requirement in order to become a licensed tissue bank. In addition, some states have their own tissue banking regulations.
In addition, procurement of certain human organs and tissue for transplantation is subject to the restrictions of the National Organ Transplant Act (“NOTA”), which prohibits the transfer of certain human organs, including skin and related tissue for valuable consideration, but permits the reasonable payment associated with the removal, transportation, implantation, processing, preservation, quality control and storage of human tissue and skin. We expectreimburse tissue banks, hospitals and physicians for their services associated with the recovery, storage and transportation of donated human tissue. If we were to be requiredfound to conduct clinical trialshave violated NOTA’s prohibition on the sale or transfer of human tissue for some of our products. These clinical trials may proceed more slowly than anticipated, andvaluable consideration, 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:
| Ÿ | failure to obtain approval from the FDA or any foreign regulatory authority to commence an investigational study; |
| Ÿ | conditions imposed on us by the FDA or any foreign regulatory authority regarding the scope or design of our clinical trials; |
| 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; |
| Ÿ | insufficient supply of our products or other materials necessary to conduct our clinical trials; |
| 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.
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.
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 significantcriminal enforcement actions.
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 clearancessanctions, which could materially 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 manufactureresults 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:
| Ÿ | untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; |
| Ÿ | customer notifications for repair, replacement, refunds; |
| Ÿ | recall, detention or seizure of our products; |
operations.
| 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,representatives, whether employed by usemployees or by others,independent contractors, 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,physicians, hospitals and the marketers of our productsother healthcare providers 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,physicians, 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,non-physicians, or received stock options from us as consideration for consulting services performed by them. We also may engage additional physicians on a consulting basis.basis and have entered into clinical trial agreements with physicians. 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.penalties. Because our strategy relies on the involvement of physicians who consult with us on the design of our product candidates,products, 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.
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.
The implementation of Contentsthe reporting and disclosure obligations of the Physician Payment Sunshine Act provisions of the Health Care Reform Law could adversely affect our business.
The Patient Protection and Affordable Care Act also includes new reporting and disclosure requirements, commonly referred to as the “Sunshine Act”, for manufacturers of drugs, biological, medical devices and medical supplies with regard to payments or other transfers of value made to certain physicians and teaching hospitals. Implementation had been delayed pending the issuance of applicable rules by the Centers for Medicare and Medicaid Services (“CMS”). On February 1, 2013, CMS released the final rule to implement the Sunshine Act. The final rule provides that data collection activities begin on August 1, 2013, and first disclosure reports are due by March 31, 2014 for the period August 1, 2013 through December 31, 2013.
The final rule implementing the Physician Payment Sunshine Act is complex, ambiguous, and broad in scope, and we are in the process of analyzing its application to our businesses. It is difficult to predict how the new requirements may impact existing relationships among manufacturers, distributors, physicians, and teaching hospitals and the costs of compliance with these new requirements if we determine that they apply to us.
We face significant uncertainty in the industry due to government healthcare reform.
Political, economicThere have been and regulatory influences are subjectingcontinue to be proposals by the federal government, state governments, regulators and third party payers to control healthcare costs, and generally, to reform the healthcare industry to fundamental changes. Reforms being implemented or under considerationsystem in the United States include mandated basic healthcare benefits, controls on healthcare spending, increases in insurance premiumsStates. There are many programs and increased out-of-pocket requirements for patients,which the creationdetails have not yet been fully established or the consequences are not fully understood. These proposals may affect aspects 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.our business. 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, wealso cannot predict which,what further reform proposals, if any, of such reform proposals will be adopted, when they maywill be adopted, or what impact reform initiativesthey may have on us.
Risks Related to the Securities Markets and Ownership of Our Common Stock
The price of our Common Stockcommon stock has been, and will likely continue to be, volatile.
The market price of our Common Stock,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 Stockcommon stock will fluctuate in the future. Over the past two fiscal years, the closing price of our Common Stock,common stock, as reported by the OTC Bulletin Board, has fluctuated from a low of $0.75$0.76 to a high of $1.75.$3.85. The market price of our Common Stockcommon stock could be impacted by a variety of factors, including:
| Ÿ· | Fluctuations in stock market prices and trading volumes of similar companies or of the markets generally; |
| Ÿ· | Our ability to successfully launch, market and earn significant revenue from our products; |
| Ÿ· | Our ability to obtain additional financing to support our continuing operations; |
| Ÿ· | Disclosure of the details and results of regulatory applications and proceedings; |
| Ÿ· | Changes in government regulation; |
| Ÿ· | Additions or departures of key personnel; |
| Ÿ· | Our investments in research and development or other corporate resources; |
| Ÿ· | Announcements of technological innovations or new commercial products or services by us or our competitors; |
| 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 Stockcommon stock ownership by certain of our executive officers and directors will limit your ability to influence corporate matters.
As of December 31, 2011,2012, our directors and executive officers together beneficially owned approximately 29%16% of our outstanding Common Stock.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.
There are a significant number of outstanding warrants and options to purchase our stock, as well as outstanding warrants and notes that are convertible into our Common Stock.common stock. If the market price of our Common Stockcommon 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 Stockcommon 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 Stockcommon stock in the public market by holders of warrants, options, or notes may depress the prevailing market price for our Common Stockcommon 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, 2011,2012, warrants to purchase 9,388,8173,129,168 shares of our common stock at a weighted average exercise price of $1.00$1.04 per share were outstanding and exercisable; options to purchase 10,333,58313,614,135 shares of common stock were outstanding, at a weighted average exercise price of $1.42 per share, which 6,000,4975,236,597 were exercisable at a weighted average exercise price of $1.16$1.05 per share, the line of credit with a related party was convertible into 1,342,726 shares of common stock,share; the senior secured promissory notes were convertible into 5,007,7325,313,527 shares of common stock at a weighted average conversion price of $1.00 per share,share; and the Convertible debt related to the acquisitionshort term earnout liability was convertible into an estimated 1,149,8361,508,419 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$3.84 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 Stockcommon 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 Stockcommon 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· | makeMake a special written suitability determination for the purchaser; |
| Ÿ· | receiveReceive the purchaser’s written agreement to a transaction prior to sale; |
| Ÿ· | provideProvide 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· | obtainObtain 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· | giveGive 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.
Our Common Stockcommon stock may be thinly traded.
There is a minimalAt times the public market for our Common Stock.common stock has been minimal. We cannot be certain more of a public market for our Common Stockcommon stock will continue to develop, or if developed, that it will be sustained. Our Common Stockcommon 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 Stockcommon 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,common stock, investors may be unable to sell the Common Stockcommon stock they own, and may lose the entire value of their investment.
Securities analysts may elect not to report on our Common Stockcommon stock or may issue negative reports that adversely affect the stock price.
At this time, notwo securities analysts provide research coverage of our Common Stock, and securitiescommon stock. However, there is no assurance that these analysts may elect notwill continue to provide such coverage in the future.report on our common stock or that additional analysts will initiate reporting on our common stock. 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.common stock. If securities analysts do not coverdiscontinue covering our Common Stock,common stock, the lack of research coverage may adversely affect its actual and potential market price. The trading market for our Common Stockcommon stock may be affected in part by the research and reports that industry or financial analysts publish about itsour 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 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 Stockcommon stock will be an investor’s only source of potential gain from our Common Stockcommon stock for the foreseeable future.
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.common stock.
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
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:
| Ÿ· | authorizingAuthorizing 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; |
| Ÿ· | restrictingRestricting persons who may call shareholder meetings; and |
| Ÿ· | allowingElecting directors on a staggered basis; and |
| ● | Allowing the Board to fill vacancies and to fix the number of directors. |
Item 1B. | Unresolved Staff Comments |
None.
Item 1B. Unresolved Staff Comments
None.
Our corporate headquarters are located in Kennesaw, Georgia where we lease approximately 20,300 square feet of office, laboratory and manufacturing space. We lease approximately 21,200 square feet nearby, which primarily consists of laboratory, manufacturing and warehouse space. We believe these facilities are adequate for ourOn January 31, 2013, the Company signed a lease agreement under which the Company will lease approximately 79,854 square feet of office, laboratory, and warehouse space which will become the Company’s new corporate headquarters. The Company expects to occupy the new facility and vacate its current activities but expect to lease additional spaceheadquarters building in conjunction with executing our business plan.May 2013.
None outside the ordinary course of business.
Item 4. Mine Safety DisclosuresItem 4. | Mine Safety Disclosures |
Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Shareholder Mattersand Issuer Purchases of Equity Securities | Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |
Our Common Stockcommon 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 Stockcommon 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.
Year ended December 31, 2012 | | High | | Low | |
First Quarter | | | $ | 1.40 | | | $ | 1.10 | |
Second Quarter | | | | 2.20 | | | | 1.03 | |
Third Quarter | | | | 2.99 | | | | 1.97 | |
Fourth Quarter | | | | 3.85 | | | | 2.59 | |
| | | | | | | | | |
Year ended December 31, 2011 | | High | | | Low | | High | | Low | |
First Quarter | | $ | 1.42 | | | $ | 1.04 | | | $ | 1.42 | | | $ | 1.04 | |
Second Quarter | | | 1.15 | | | | 0.76 | | | | 1.15 | | | | 0.76 | |
Third Quarter | | | 1.39 | | | | 1.00 | | | | 1.39 | | | | 1.00 | |
Fourth Quarter | | | 1.25 | | | | 1.00 | | | | 1.25 | | | | 1.00 | |
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 | |
Based upon information supplied from our transfer agent, there were approximately 1,100805 shareholders of record of our Common Stockcommon stock as of March 1, 2012.February 15, 2013.
We have not paid any cash dividends on our Common Stockcommon 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.common stock.
Unregistered Sales of Equity Securities and Use of Proceeds
As reported in Note 10 “Common Stock Placements” in our consolidated financial statements as of and forIn the twelve months ended December 31, 2011,fourth quarter os 2012, the Company sold an additional 3,778,321issued 532,260 unregistered shares of Common Stock and issued an additional 1,889,161 warrants and received cash proceeds of approximately $3,731,000. See “Notes to Consolidated Financial Statements” for the terms of the Warrants. These sales were madecommon stock in conjunctionconnection 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,conversion by Mr. Petit, our Chairman and no further sales occurred during the three months ended December 31, 2011.Chief Executive Officer, of his Convertible Senior Secured Promissory Note.
The Company relied on Section 4(2)Purchases of Equity Securities by the Securities Act of 1933 (the “Securities Act”)Issuer 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.Affiliated Purchasers
We did not repurchase any shares during the year ended December 31, 2011, and currently have no share repurchase plans or programs.of our common stock in 2012.
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsItem 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 condition 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
MiMedx Group, Inc. and subsidiaries (“MiMedx Group”MiMedx” or the “Company”) is an integrated developer, manufacturer and marketer of patent protected regenerative biomaterial products and allografts processed from human amniotic membrane. “Innovations in Regenerative Biomaterials" is the framework behind our mission to give physicians products and tissues to help the body heal itself. Our biomaterial platform technologies include the device technologies HydroFix®HydroFix® and CollaFixTM, and our tissue technologies, AmnioFix®AmnioFix® and EpiFix®EpiFix®. Our tissue technologies, processed from the human amniotic membrane, utilize our proprietary Purion®Purion® process that was developed by our wholly-owned subsidiary, Surgical Biologics LLC, to produce a safe, effective and minimally manipulated implant. Surgical Biologics is the leading supplier of amniotic tissue, having supplied over 70,000120,000 implants to date to distributors and OEMs for application in the Surgical, 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® hydrogel technology and our 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 focus is on soft tissue repair. Our internal commercialization efforts relative to our EpiFix®, AmnioFix®, HydroFix® and CollaFixTM materials are targeting large markets totalinglargest addressable market is in excesswound care consisting of $10B, several of which are growing at high single or low double digits annually. Our targeted markets include wound management, orthopedics and spine. As appropriate, we may partner with large, established companies in the general surgery, drug delivery, cardiac and other markets. Initial conversations with such external relationships have been initiated, but they will take time to develop.diabetic, venous & pressure ulcers. The Orthopedic, General Surgery, Urology & OBIGYN soft tissue repair market represent significant growth opportunities.
Our distribution model is currently comprised of direct sales, 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.
Our core focus is on near-term opportunities for our EpiFix® and AmnioFix® platforms whileplatforms. We are continuing to advanceevaluate our device technologies through the regulatory process.HydroFix® and CollaFixTM products to determine how to exploit this technology.
With the acquisition of Surgical Biologics we have added technologies that do not require a 510K510(K) or PMA clearance as both the EpiFix®EpiFix® and AmnioFix®AmnioFix® platforms are considered human tissue underregulated by Section 361 of the Public Health Services Act due to the fact that theythe products are not more than minimally manipulated and are for homologous use only. Our near termnear-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 Ambulatory Surgery Centers and Hospital Outpatient Centers for EpiFix®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 assetsImpairment of Long-Lived Assets
IntangibleGoodwill represents the excess of the purchase price over the fair value of net 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,acquired. No goodwill is not amortized but is tested at least annuallyimpairment has been recognized during 2012 or 2011.
The Company reviews its long-lived assets for impairment or more frequently ifwhenever events or changes in circumstances indicate that the carrying amount of an asset might be impaired. The accounting for a recognized intangible asset is based on its useful life to the reporting entity. An intangible asset with a finite useful life shall be amortized; an intangible asset with an indefinite useful life shallmay not be amortized. Significant judgments are involved in estimatingrecoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows usedexpected to supportbe generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Because our test indicated that the carrying value of goodwill and indefinite livedthe intangible assets.
Impairment of long-lived 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 bookto HydroFix® exceeded its fair 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 wouldof approximately $1,798,000 was recognized and the intangible asset carrying amount was adjusted to its new basis. The Impairment was reported as a separate line item in the Consolidated Statement of Operations and included Loss From Operations.
Judgment and complexity related to goodwill and impairment of long-lived assets involve consideration of:
| · | Significant underperformance relative to expected historical or projected future operating results, |
| · | Significant negative industry or economic trends, |
| · | Significant decline in the Company’s stock price for a sustained period, or |
| · | Significant decline in the Company’s market capitalization relative to net book value. |
Fair Value Measurements
The Company records certain financial instruments at fair value, including: cash equivalents and contingent consideration. The Company may make an irrevocable election to measure other financial instruments at fair value on an instrument-by-instrument basis; although as of December 31, 2012 the Company has not chosen to make any such elections. Fair value financial instruments are recorded in accordance with the fair value measurement framework.
The Company also measures certain non-financial assets at fair value on a non-recurring basis. These non-recurring valuations include evaluating assets such as long-lived assets, and non-amortizing intangible assets for impairment; allocating value to assets in an acquired asset group; and applying accounting for business combinations. The Company uses the fair value measurement framework to value these assets and reports these fair values in the periods in which they are recorded or written down.
The fair value measurement framework includes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair values in their broad levels. These levels from highest to lowest priority are as follows:
| · | Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities; |
| · | Level 2: Quoted prices in active markets for similar assets or liabilities or observable prices that are based on inputs not quoted on active markets, but corroborated by market data; and |
| · | Level 3: Unobservable inputs or valuation techniques that are used when little or no market data is available. |
The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include: estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist it in determining fair value, as appropriate.
Although the Company believes that the recorded fair value of its financial instruments is appropriate, these fair values may not be recognized. Factors that may cause long-lived asset impairment include negative industryindicative of net realizable value or economic trends and significant underperformance relative to historical or projectedreflective of future operating results.fair values.
Share-based compensationCompensation
We follow the provisions of FASB Accounting Standards Codification (“ASC”) 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.
Debt Instruments with Detachable Warrants and Beneficial Conversion Features
According to ASC-470 DebtASC470 “Debt” Instruments with Detachable Warrants, proceeds from the sale of convertible debt instruments with stock purchase warrants (detachable call options) shall be allocated to the two elements based upon the relative fair values of the debt 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 determine the fair value of each 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 the convertible instrument is recognized separately at issuance by allocating a portion 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 involvesinvolved the potential for the payment of future contingent consideration in MiMedx common stock. The contingent consideration was originally recorded at the estimated fair value of the contingent milestone payment on the acquisition date. Payment of the additional consideration iswas contingent on the acquired 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 bewas made as the aggregate number of shares of MiMedx Common Stockcommon stock per a specified formula in the Agreement and Plan of Merger. At December 31, 2011 the fair value of the contingent consideration tied to 2011 revenue was calculated to be approximately $3,185,000 and resulted in the issuance of approximately 2,632,576 shares of MiMedx common stock in April 2012. 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 Company files its Form 10-K. The contingent consideration was originally recorded at the estimated fair value of the contingent milestone payment on the acquisition date. The fair value of the contingent milestone consideration was remeasured at the estimated fair value as of December 31, 20112012 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, 2011,2012, the fair value of the contingent consideration tied to 20112012 revenue was calculated to be approximately $3,185,000$5,792,000 and the liability adjusted and recorded as a currentnon-current liability in the consolidated balance sheet and is due to be paid in MiMedx common stock not more than 30 days following the filing 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 non-current liability section of the consolidated balance sheet.
Recently Adopted Accounting Pronouncements
In December 2010,January 2012 the FASB issuedCompany adopted Accounting Standards Update (ASU) 2010-28: Intangibles — Goodwill(“ASU”) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Other: When to Perform Step 2 ofDisclosure Requirements in U.S. GAAP and IFRSs, which clarifies some existing concepts and expands the Goodwill Impairment Testdisclosures 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 had no impact on our financial statements.
In December 2010, the FASB issued ASU 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 combinationmeasurements that are estimated using significant unobservable (Level 3) inputs. The adoption of ASU 2011-04 did not have a material effect on an individual the Company’s financial condition, profitability, and/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 adopted this update for the acquisition completed in 2011.
Recently Issued Accounting Pronouncements Not Yet Adoptedcash flows.
In September 2011,January 2012 the FASB issuedCompany adopted 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 after 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 havehad no effect on our financial condition, results of operations or cash flows.
In May 2011,January 2012 the Company adopted ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which gives entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test. The adoption of ASU 2011-08 did not have a material effect on the Company’s financial condition, profitability, and cash flows.
In July 2012, the FASB issued ASU 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure RequirementsNo. 2012-02, which amends the guidance in U.S. GAAP and International Financial Reporting Standards (“IFRS”). The amendments toASC 350-30 on testing indefinite-lived intangible assets, other than goodwill, for impairment. Under the Codification in this ASU will providerevised guidance, companies testing an indefinite-lived intangible asset for impairment have the option of performing a consistent definition ofqualitative assessment before calculating the fair value and ensureof the asset (i.e. step 1 of the impairment test). If companies determine, on the basis of qualitative factors, that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhancesof the disclosure requirements particularly for Level 3 fair value measurements.indefinite-lived intangible asset is more likely than not less than the carrying amount, the two-step impairment test would be required. This guidanceupdate is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company adopted the Company beginningrevised guidance, and it did not have a material impact on January 1, 2012. Its adoption is not expected to significantly impact the Company’s consolidated financial statements.Consolidated Financial Statements.
Results of Operations for the year ended December 31, 2011,2012, compared to the year ended December 31, 20102011
Revenue
Total revenue increased from $789,000 in 2010 toapproximately $7,760,000 in 2011. Net2011 to $27,054,000 in 2012. The increase in revenue as compared to the prior year is due primarily to increased sales of our amniotic membrane tissue processing revenue resulting fromproducts, EpiFix® and AmnioFix®. The Company experienced an approximate increase of $8,508,000 or 189% in demand in the Surgical Biologics acquisition was approximately $7,434,000 for the year ended December 31, 2011, and our net productSports Medicine market which is predominantly sold through independent sales for HydroFix® Vaso Shield products in the U.S.agents and HydroFix® Spine Shield products outside the U.S. was 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 fromdistributors. This growth over the prior year was a resultdriven by the launch of our focus onAmnioFix® injectable as well as additional surgical applications such as prostatectomy surgery where the anti-scarring properties of the tissue products and the Surgical Biologics acquisition. During the year ended December 31, 2010, we also had otherwere deemed to be beneficial. The growth in Wound Care market revenue of $245,000 forapproximately $10,239,000 or 870% as compared to the Qualifying Therapeutic Discovery Project grant fromprior year was driven by the U.S. Government.addition of a direct sales force starting in the third quarter and continuing into the fourth quarter focusing on Government accounts. The sales executives hired have extensive experience in the wound care sector and maintain direct relationships with the physicians. Sales to government accounts are sold through a distributor who handles all of the contracting matters including invoicing and collection. This distributor is also a service disabled veteran owned small business. The Other markets category which includes our Ophthalmic and Dental tissue based products which are sold on an OEM basis as well as our HydroFix® medical device product sold through distributors increased approximately $546,000 or26% as compared to prior year.
Tissue Processing Costs and Cost of Products Sold
Products and processing costsCost of products sold as a percentage of total revenue for the year ended December 31, 2011 improved to 41%19.2% from 218% in the43.3% as compared to prior year. The improvement was due primarily to the increase in direct sales revenue, attributable to the products acquired in the Surgical Biologics transaction. It should be notedimproved product mix and higher production rates that as our sales levels and corresponding production levels increase, these costs asabsorb a greater percentage of total revenues will continuefixed manufacturing costs. During the year the Company increased its clean room capacity from one line to decreasethree lines, added 32 tissue processors to fully staff the new production lines and tripled the number of tissue recovery technicians. The expansion of production capacity was driven by increased demand for processed tissue. The new hires were given extensive training resulting in higher gross margins.
increasing daily processing rates over the course of the year. Personnel costs represent approximately $1,960,000$3,087,000 or 62%42.2% of total manufacturing, quality assurance and regulatoryrecovery spending for the year ended December 31, 2011, compared2012.
Beginning in 2012, the Company decided to 73%allocate both depreciation expense and share-based compensation to each functional area. These expenses were reclassified in the prior year to maintain comparability. The amount of depreciation expense in cost of products sold was approximately $156,000 and $105,000, and the amount of share-based compensation in cost of products sold was $98,000 for the yearyears ended December 31, 2010. We employed 22 full-time2012 and two part-time manufacturing and quality assurance technicians at December 31, 2011, compared to nine full-time personnel for year ended December 31, 2010. The increase of 13 full-time and two part-time employees was attributable to the acquisition of 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.respectively.
Research and Development Expenses
ResearchOur research and development expenses (“R&D expenses”) decreased approximately $92,000 or 3.1% to $2,885,000 during the year ended December 31, 2011, decreased approximately $151,000 to $2,603,0002012, compared to $2,753,000approximately $2,976,000 in the prior year. The decrease is primarily related to the closure of our Tampa research facility in mid-2011, along with decreased spending on animal studies for our CollaFix™ and HydroFix® products. Approximately $783,000, or 27.1%, of R&D expenses for the year ended December 31, 2010. The2012 were attributable to personnel costs, compared to approximately $1,186,000 or 39.8% for the year ended December 31, 2011. Clinical study costs were approximately $667,000 and $761,000 for the years ended December 31, 2012 and 2011, respectively. This decrease was due primarilyof approximately $94,000 is a result of lower costs in animal studies related to a reductionour CollaFix™ and HydroFix® products. It is expected that expenses related to clinical studies will increase in personnelsubsequent quarters driven by new market opportunities and operatingour reimbursement efforts. Spending on legal costs related to patent filings tripled to $611,000 for the closure ofyear ended December 31, 2012 from $204,000 for the Tampa facility of approximately $1,017,000, whichsame period in 2011. The increase was offsetdriven by the additionCompany’s focus on building a strong patent portfolio related to our EpiFix® and AmnioFix® platforms. Additionally, as described above in Cost of Surgical BiologicsProducts Sold, beginning in 2012, we decided to allocate both depreciation expense and share-based compensation expense to the appropriate functional areas, and have reclassified prior year amounts to maintain comparability. During the years ended December 31, 2012 and 2011, we recorded approximately $120,000 and $119,000 for depreciation expense, respectively, and approximately $289,000 and $255,000 for share-based compensation expense, respectively, to 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.development.
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, 2011, we employed five employees devoted to researchDuring the current year, the Company filed 3 international patent applications for the amniotic tissue technology and development, compared to 12 full-time1 international patent application for the collagen technology. The Company also filed 11 US patent applications, including 6 non-provisional applications for the amnion technology, 4 provisional applications for the amnion technology and two part-time employees devoted to these efforts as of December 31, 2010. Internal personnel costs, including salaries, severance and benefits, were approximately $1,113,000 or 43% of total research and development expenses1 non-provisional application for the collagen technology. Additionally, during the current year ended December 31, 2011, as compared to approximately $1,462,000 or 53%the Company was granted 1 US patent for the year ended December 31, 2010. Headcount reductions as a result ofamnion technology, 3 US patents for the Tampa facility closure occurred primarily inhydrogel technology, 1 US patent for the second half ofcollagen technology, and 2 European patents for the year ended December 31, 2011. Development and testing represented approximately $761,000 or 29% and $584,000 or 21%, respectively, of research and development expenses during the year ended December 31, 2011 as comparedcollagen technology. We expect overall R&D spending to the year ended December 31, 2010. We anticipate our spending in the area of research and development in the foreseeable future to continue at comparable current levelsincrease as we progresscontinue to invest in our technologies through additionalpatent portfolio as well as scientific and clinical trials in support ofstudies related to our marketing and reimbursement efforts.amnion technology.
Selling, General and Administrative Expenses
Selling, General and Administrative expenses for the year ended December 31, 2011,2012, increased approximately $4,916,000$9,789,000 or 87.5% to $11,764,000$20,971,000 compared to $6,848,000$11,181,000 for the year ended December 31, 2010. 2011. The increase was driven by costs associated with building our direct sales organization for government accounts and commercial accounts for wound care, building a customer service and sales training organization as well as increased commissions due to higher sales volume paid to both company personnel as well as third party representatives and distributors. Total headcount increased by 57 full and part time associates from 23 at the beginning of the year to 80 as of December 31, 2012. Also contributing to the increase was higher spending on support costs related to medical reimbursement including our reimbursement hotline, our information technology infrastructure to help manage the growth of the business, increased marketing costs including trade shows, increased share based compensation expense and a provision for anticipated costs associated with its management incentive program.
Selling, General and administrativeAdministrative 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, depreciation and amortization, and share-based compensation. AsPersonnel costs excluding sales commissions and bonuses represent approximately $6,288,000 or 30.0% of December 31, 2011, we employed 20 full-timetotal Selling, General and three part-time personnel in selling, general and administrative functions, compared to 11 full-time and two part-time personnelAdministrative expenses for the year ended December 31, 2010.2012, compared to approximately $3,144,000 or 28.1% in the year ended December 31, 2011. Sales commissions to both MiMedx personnel as well as third party representatives and distributors totaled $3,884,000 or 18.5% of total Selling, General and Administrative expenses for the year ended December 31, 2012, compared to $547,000 or 4.9% in the prior year. The increase in staffing was primarily duedriven by higher sales volume and the move to the acquisition of Surgical Biologics and additionala direct sales and support personnel requiredmodel for the increased sales and market development.wound care.
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,Historically, 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 ofCompany has reported 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,expense as part of Selling, General and our director fee expense increased by $185,000 asAdministrative expense. The Company decided to report these expenses in each functional area in order to more accurately present all of the result of restructuring board compensation in mid-2010, and was offset by $237,000 duecosts attributable to reductions in accounting, recruiting costs, consulting and travel costs.
each functional area. During the years ended December 31, 20112012 and 2010,2011, we recorded a total of approximately $447,000$465,000 and $444,000$447,000 in depreciation expense respectively.allocated to each functional area per the table below. The $3,000overall $19,000 increase in depreciation was attributable to the acquisitionpurchase of Surgical Biologicsadditional production and someoffice equipment and leasehold build-out to support our revenue growth and additional lab equipment acquired during the year ended December 31, 2011, offset by leasehold improvements in the terminated Marietta facility being fully depreciated.staff. We depreciate our assets on a straight-line basis, principally over five to seven years.
The following table shows the allocation of depreciation for the years ended December 31, 2012 and 2011, to operating departments:
Share based | | Year Ended December 31, | |
Depreciation expense included in: | | 2012 | | | 2011 | |
Cost of products sold | | $ | 155,987 | | | $ | 104,950 | |
Research and development | | | 120,260 | | | | 118,565 | |
Selling, general and administrative | | | 189,120 | | | | 222,987 | |
| | $ | 465,367 | | | $ | 446,502 | |
Share-based compensation for the yearyears ended December 31, 2012 and 2011, was approximately $2,539,000 and $1,659,000, as compared to $1,171,000 for the year ended December 31, 2010,respectively, an increase of approximately $488,000$880,000 or 42%53.0%. Increased employee stock option grants reflectreflecting management’s alignmentphilosophy of aligning employee compensation with investor objectives. Additionally, duringobjectives and the year ended December 31, 2011, we recorded approximately $416,000 expense related toincrease in the terminationmarket price of an exclusive licensing agreement, and approximately $6,000 as an adjustment toMiMedx common stock was the fair valueprimary reason for the increase in expense. The following table shows the allocation of the earn-out liability related to the acquisition of Surgical Biologics.
Duringshare-based compensation for the years ended December 31, 2012 and 2011, and 2010, weto operating departments:
| | Year Ended December 31, | |
Share-based compensation included in: | | 2012 | | | 2011 | |
Cost of products sold | | $ | 97,970 | | | $ | 98,366 | |
Research and development | | | 289,341 | | | | 254,997 | |
Selling, general and administrative | | | 2,151,410 | | | | 1,305,720 | |
| | $ | 2,538,721 | | | $ | 1,659,083 | |
We recorded approximately $1,336,000$1,380,000 and $668,000$1,336,000 in amortization expense related to intangible assets in the years ending December 31, 2012 and 2011, respectively. AllThe increase of approximately $45,000 is the $668,000 increaseresult of additional amortization recognized in amortization expense was attributablethe current year related to the acquisitionour development costs of Surgical Biologics.our AmnioFix® injectable product that we began selling in early 2012. We amortize our intangible assets over a period of three to fourteen years, which we believe represents the remaining useful lives of the patents underlying the licensing rights and intellectual property. We do not amortize goodwill but we test at least annually our goodwill for impairment and periodically evaluate other intangibles for impairment based on events or changes in circumstances as they occur.
We anticipate spending in the area of general and administrative expenses in the foreseeable future to continue at comparable current levels.44
Other Income / (Expense)
We recorded other expense of approximately $0 and $287,000 for the years ended December 31, 2011 and 2010, respectively. The $287,000 expense in 2010 was related to financing expense in conjunction with hybrid debt instruments issued during 2010.
Net Interest Expense
We recorded financing and net interest expense of approximately $433,000$2,307,000 during the year ended December 31, 20112012, compared to net interest expensewith approximately $433,000 of approximately $600,000 during the year ended December 31, 2010. Thefinancing and net interest expense during the year ended December 31, 2011, includes2011. The increase of approximately $320,000 amortization on the discounts on the acquisition convertible note, the convertible line of credit with a$1,874,000 is primarily due to interest related party, and theto our Convertible Senior Secured Promissory Notes. Accrued interest on the aforementioned notes and other obligations was approximately $110,000Notes, which were issued during the year, and we incurred approximately $3,000 foreign exchange loss duringlast quarter of 2011. The following table summarizes the current year. The approximate $600,000 interest expense recorded duringcharges for the year endedyearsended December 31, 2010, was primarily related to our 3% Convertible Notes issued in 2009.
40
| | Year Ended December 31, | |
| | 2012 | | | 2011 | |
| | Amortization of Debt Discount | | | Accrued Interest | | | Interest Expense, net | | | Total | | | Amortization of Debt Discount | | | Accrued Interest | | | Interest Expense, net | | | Total | |
Convertible Line of Credit with Related Party | | $ | 561,202 | | | $ | 60,904 | | | $ | — | | | $ | 622,106 | | | $ | 33,254 | | | $ | 42,726 | | | $ | — | | | $ | 75,980 | |
Convertible Debt related to acquisition | | | 170,509 | | | | 21,078 | | | | — | | | | 191,587 | | | | 266,991 | | | | 49,315 | | | | — | | | | 316,306 | |
Convertible Senior SecuredPromissory Notes | | | 961,941 | | | | 500,000 | | | | — | | | | 1,461,941 | | | | 14,907 | | | | 7,732 | | | | — | | | | 22,639 | |
Deferred financing related to Senior Secured Promissory Notes | | | 20,449 | | | | — | | | | — | | | | 20,449 | | | | — | | | | — | | | | — | | | | — | |
Other | | | — | | | | — | | | | 10,910 | | | | 10,910 | | | | — | | | | — | | | | 18,045 | | | | 18,045 | |
| | $ | 1,714,101 | | | $ | 581,982 | | | $ | 10,910 | | | $ | 2,306,993 | | | $ | 315,152 | | | $ | 99,773 | | | $ | 18,045 | | | $ | 432,970 | |
Contractual Commitments
The table below sets forth our known contractual obligations as of December 31, 2011:2012:
| | Payments due by period | |
| | | | | less than | | | | | | | | | More than | |
Contractual Obligations | | TOTAL | | | 1 year | | | 1-3 years | | | 3-5 years | | | 5 years | |
Convertible senior secured promissory notes | | $ | 5,000,000 | | | | — | | | | 5,000,000 | | | | — | | | | — | |
Convertible debt, line of credit with related party | | | 1,300,000 | | | | 1,300,000 | | | | — | | | | — | | | | — | |
Convertible debt, note related to acquisition of SB | | | 1,250,000 | | | | 1,250,000 | | | | — | | | | — | | | | — | |
Employment agreements | | | 483,934 | | | | 483,934 | | | | - | | | | — | | | | — | |
Operating lease obligations | | | 901,236 | | | | 480,244 | | | | 420,992 | | | | — | | | | — | |
Royalty payments | | | 140,000 | | | | 45,000 | | | | 95,000 | | | | — | | | | — | |
| | $ | 9,075,170 | | | | 3,559,178 | | | | 5,515,992 | | | | — | | | | — | |
| | | | | less than | | | | | | | | | More than | |
Contractual Obligations | | TOTAL | | | 1 year | | | 1-3 years | | | 3-5 years | | | 5 years | |
Convertible senior secured promissory notes (a) | | $ | 5,313,645 | | | $ | 5,313,645 | | | | | | | — | | | | — | |
Capital lease obligation | | | 87,041 | | | | 22,510 | | | | 60,135 | | | | 4,395 | | | | — | |
Operating lease obligations | | | 482,886 | | | | 350,696 | | | | 132,190 | | | | — | | | | — | |
Royalty payments | | | 600,000 | | | | 50,000 | | | | 150,000 | | | | 150,000 | | | | 250,000 | |
| | $ | 6,483,572 | | | $ | 5,736,851 | | | $ | 342,325 | | | $ | 154,395 | | | $ | 250,000 | |
| (a) | In January and February of 2013 all note holders elected to convert their notes including the Company’s Chairman and CEO, resulting in the issuance of 5,271,963 shares of common stock which represents the face value of their respective notes plus accrued but unpaid interest. The Company’s Chairman and CEO received 532,260 shares of common stock upon conversion of his note. |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Liquidity and Capital Resources
The Company emerged from being a development stage company in 2010. Planned principal operations have commenced, but the revenue has not been significant enoughRevenue continues to fund ongoing operations. The Company’s cash requirements for the twelve months ended December 31, 2011, arose out of general working capital 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.increase quarter over quarter while management maintains tight controls over spending. As of December 31, 2011,2012, the Company had approximately $4,112,000$6,754,000 of cash and cash equivalents. 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 reported total current assets of approximately $6,882,000 and current liabilities payable in cash of approximately $4,732,000 after adjusting for the approximate $3,185,000 of short term earn-out liability payable in MiMedx common stock in the second 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$18,089,000 at December 31, 2012 which can be extendedand total current liabilities of approximately $5,071,000 at December 31, 2012. The resulting current ratio for an additional 12 months by paying a feethe period improved to 3.6 as compared to 3.0 as of five percentDecember 31, 2011 when current liabilities are adjusted for approximately $2,425,000 of the amount due or $65,000. The Companycurrent portion of long term debt convertible into MiMedx common stock. Management believes that its anticipated cash from operating and financing activities and existing cash and cash equivalents and anticipated cash from operations will enable the Company to meet its operational liquidity needs and fund its planned investing activities and pay its debt when due for the next twelve months.year. For our long-term capital requirements, the company may seek additional debt and/or equity financing.
Discussion of cash flowsCash Flows
Net cash used in operations during the twelve monthsyear ended December 31, 2011,2012, decreased approximately $1,493,000$3,280,000 to $6,665,000$3,385,000 compared to $8,158,000$6,665,000 used in operating activities for the twelve month periodyear ended December 31, 2010,2011, primarily attributable to our increased sales activity. The changes in assetsactivity and liabilities included in the Statement of Cash Flows are net of the effects of the Surgical Biologics acquisition.improved gross margins.
Net cash used in investing activities during the twelve monthsyear ended December 31, 2011, increased2012, decreased approximately $551,000$120,000 to $703,000$583,000 compared to $152,000$703,000 used in investing activities for the twelve month periodyear ended December 31, 2010. Of the $551,000 increase, $467,000 was cash paid in conjunction with2011. 2012 activity included higher equipment purchases of approximately $97,000, while 2011 activity included approximately $466,000 related to the Surgical Biologics acquisition and approximately $335,000 was cash paid for additional lab equipment and furniture for the Kennesaw facility, somewhat offset by a grant from the Statestate of Georgia of $250,000.
Net cash flows from financing activities during the twelve monthsyear ended December 31, 2011, increased2012 decreased approximately $3,142,000$3,529,000 to $6,610,000 as compared to $10,139,000 compared to $6,997,000 during the twelve monthsyear ended December 31, 2010.2011. Cash flows from financing activities during the current year include approximately $5,000,000 related to our Senior Secured Promissory Note offering which closed in December, $3,731,000 related to our October 2010 Private Placement, $1,300,000 borrowed$6,001,000 received from our Revolving Secured Linethe exercise of Credit with a related party, approximately $296,000warrants, $1,052,000 received from the exercise of stock options, the repayment of approximately $99,000 outstanding under a line of credit assumed$427,000 in payments related to the acquisition of Surgical Biologics, and the payment of approximately $89,000$16,000 in principal and interestpayments on three notes assumed in the acquisition of Surgical Biologics.an equipment lease.
Due to the material amount of non-cash related items included in the Company results of operations, the Company has developed an Adjusted EBITDA metric which provides management with a clearer view of operational use of cash burn (see the table below). The adjustedAdjusted EBITDA loss for the year2012 was approximately $6,300,000$2,394,000 which is a reductionan improvement of approximately $1,930,000 or 23%$8,708,000 as compared to the previousprior year. This improvement was the result of increased revenue combined with reduced spending.and improved gross margins.
We use various numerical measures in investor conference calls, investor meetings and other forums which are or may be considered “Non-GAAP financial measures” under Regulation G. We have provided below for your reference, supplemental financial disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation. The following table provides reconciliation of reported Net Loss on a GAAP basis to Adjusted EBITDA defined as Earnings before Interest, Taxes, Depreciation, Amortization and Share BasedShare-Based Compensation:
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2011 | | | 2010 | | | 2012 | | | 2011 | |
Net Loss (Per GAAP) | | $ | (10,193,986 | ) | | $ | (11,419,753 | ) | | $ | (7,662,376 | ) | | $ | (10,193,986 | ) |
| | | | | | | | | | | | | | | | |
Add back: | | | | | | | | | | | | | | | | |
Income Taxes | | | - | | | | - | | |
| | | | | | | | | |
Financing expense associated with warrants issued in connection with convertible promissory note | | | - | | | | 595,679 | | |
| | | | | | | | | |
Financing (expense) associated with beneficial conversion of hybrid debt instrument | | | - | | | | 287,448 | | |
| | | | | | | | | |
Financing expense associated with beneficial conversion of note payable issued in conjunction with acquisition | | | 266,991 | | | | - | | | | 170,509 | | | | 266,991 | |
| | | | | | | | | | |
Financing expense associated with beneficial conversion of Line of Credit with Related Party | | | 33,254 | | | | - | | | | 561,202 | | | | 33,254 | |
| | | | | | | | | | |
Financing expense associated with beneficial conversion of Senior Secured Promissory Notes | | | 14,907 | | | | - | | | | 982,390 | | | | 14,907 | |
| | | | | | | | | | | | | | | | |
Other interest expense, net | | | 117,818 | | | | 3,970 | | | | 592,891 | | | | 117,818 | |
| | | | | | | | | | | | | | | | |
Depreciation Expense | | | 446,502 | | | | 444,259 | | | | 465,367 | | | | 446,502 | |
| | | | | | | | | |
Amortization Expense | | | 1,335,908 | | | | 667,932 | | | | 1,380,241 | | | | 1,335,908 | |
| | | | | | | | | |
Employee Share Based Compensation | | | 1,307,869 | | | | 996,307 | | | | 2,075,680 | | | | 1,307,869 | |
| | | | | | | | | |
Other Share Based Compensation | | | 351,214 | | | | 174,354 | | | | 463,041 | | | | 351,214 | |
| | | | | | | | | | | | | | | | |
Loss Before Interest, Taxes, Depreciation, Amortization and | | | | | | | | | |
Share Based Compensation | | $ | (6,319,523 | ) | | $ | (8,249,804 | ) | |
Impairment of Intangible Assets | | | | 1,798,495 | | | | - | |
| | | | | | | | | |
Fair Value Adjustment of Earn-out Liability | | | | 1,567,050 | | | | 5,803 | |
| | | | | | | | | |
Income (Loss) Before Interest, Taxes, Depreciation, Amortization and Share Based Compensation | | | $ | 2,394,490 | | | $ | (6,313,720 | ) |
Inflation
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.
| Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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 is 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.
| Financial Statements and Supplementary Data |
Index to Financial Statements
To the Board of Directors and
Stockholders of MiMedx Group, Inc.
We have audited the accompanying consolidated balance sheets of MiMedx Group, Inc. and subsidiaries as of December 201131, 2012 and 2010,2011, and the related consolidated statements of operations,income, comprehensive income, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). The Company is not requiredThose standards require that we plan and perform the audit to have, nor were we engaged to perform, an auditobtain reasonable assurance about whether the financial statements are free of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MiMedx Group, Inc. and subsidiaries as of December 31, 2011,2012 and 2010,2011, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Cherry, Bekaert & Holland, L.L.PWe also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), MiMedx Group, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2013 expressed an unqualified opinion.
Atlanta, Georgia
March 29, 2012
/s/ Cherry Bekaert LLP |
| |
Atlanta, Georgia |
| |
March 15, 2013 | |
MIMEDX GROUP, INC. AND SUBSIDIARIES
MIMEDX GROUP, INC. AND SUBSIDIARIES