Item 1A Risk Factors
Summary of Risk Factors
The following is a summary of the principal
risks and uncertainties that could materially adversely affect our business, financial condition, or results of operations. You should
read this summary together with the more detailed description of risk factors below under the heading “Risk Factors”.
Risk Factors.
This Annual Report on Form 10-K contains forward-looking
information based on our current expectations. Because our business is subject to many risks and our actual results may differ materially
from any forward-looking statements made by or on behalf of us, this section includes a discussion of important factors that could affect
our business, operating results, financial condition and the trading price of our securities. This discussion should be read in conjunction
with the other information in this Annual Report on Form 10-K, including our financial statements and the related notes and “Management’s
Discussion And Analysis Of Financial Condition And Results Of Operations.” The occurrence of any of the events or developments described
below could have a material adverse effect on our business, results of operations, financial condition, prospects and securities trading
prices. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business
operations.
Risks related to our Nasdaq listing
We may not be able to maintain compliance with
the continued listing rules of the Nasdaq Capital Market and a delisting could limit the liquidity of our stock, increase its volatility
and hinder our ability to raise capital.
During 2022, 2023, and
2024, the Company received notices from Nasdaq indicating that the Company was not in compliance with (i) Nasdaq Listing Rule 5550(b)(1),
which requires companies listed on The Nasdaq Stock Market to maintain a minimum of $2,500,000 in stockholders’ equity for continued
listing or (ii) Nasdaq Listing Rule 5550(a)(2) which requires companies listed on The Nasdaq
Stock Market to maintain a minimum of a $1.00 bid price for continued listing. The Company
regained compliance with the bid price requirement after the completion of its January 2025 reverse stock split. The Company regained
compliance with the stockholders’ equity requirement after the completion of the Company’s January 2025 public offering. Although
the Company has recently resolved all pending Nasdaq listing compliance issues, there can be no assurance that the Company will be able
to maintain compliance with all Nasdaq continued listing requirements in the future.
If our common stock is
delisted by Nasdaq, our common stock may be eligible for quotation on an over-the-counter quotation system or on the pink sheets. Upon
any such delisting, our common stock would become subject to the regulations of the SEC relating to the market for penny stocks. A penny
stock is any equity security not traded on a national securities exchange that has a market price of less than $5.00 per share. The regulations
applicable to penny stocks may severely affect the market liquidity for our common stock and could limit the ability of shareholders to
sell securities in the secondary market. In such a case, an investor may find it more difficult to dispose of or obtain accurate quotations
as to the market value of our common stock, and there can be no assurance that our common stock will be eligible for trading or quotation
on any alternative exchanges or markets.
Delisting from Nasdaq
could adversely affect our ability to raise additional financing through public or private sales of equity securities, would significantly
affect the ability of investors to trade our securities and would negatively affect the value and liquidity of our common stock. Delisting
could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest
and fewer business development opportunities.
Risks related to financial,
operational, commercial and manufacturing matters
The auditors of our
December 31,2023 financial statements expressed substantial doubt about our ability to continue as a going concern, which may hinder
our ability to obtain further financing.
Our past working capital deficiency, stockholders’
deficit and recurring losses from operations raised substantial doubt about our ability to continue as a going concern. As a result, our
independent registered public accounting firm included an explanatory paragraph in its report on our financial statements for the year
ended December 31, 2023, with respect to this uncertainty. As of December 31, 2024, we had cash of approximately $0.46 million. Subsequent
to December 31, 2024, the Company raised capital through two registered direct offerings and a public offering (refer to Note 17 –
Subsequent Events to our financial statements). We believe our current cash will fund our operating expenses and capital expenditure requirements
into the third quarter of 2026. If we are unable to raise capital when needed or on acceptable terms, we would be forced to delay, reduce,
or eliminate our technology development and commercialization efforts.
We have incurred significant
net losses since inception and anticipate that we will continue to incur net losses for the foreseeable future and may never achieve or
maintain profitability.
Since our inception, we have incurred significant
net losses. Our net losses were $6,992,927 and $4,911,374 for the years ended December 31, 2024, and 2023, respectively. As of December
31, 2024, we had an accumulated deficit of $51,262,311. To date, we have devoted our efforts toward securing financing, building and evolving
our technology platform, and complying with regulatory requirements as well as initiating marketing efforts for our products. We expect
to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase
substantially if, and as, we:
· build out our product pipeline;
· maintain, expand, protect and enforce our intellectual property portfolio.
To become and remain profitable, we must enhance
the marketing and commercial acceptance of our products. This will require us to be successful in a range of challenging activities, and
our expenses will increase substantially as we bring these products to market. We may never succeed in any or all of these activities
and, even if we do, we may never generate revenue that is significant or large enough to achieve profitability. If we do achieve profitability,
we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would
decrease the value of our company and could impair our ability to raise capital, develop new products, expand our business or continue
our operations. A decline in the value of our company also could cause stockholders to lose all or part of their investment.
We have identified a material weakness in our
internal control over financial reporting. Failure to maintain effective internal controls could cause our investors to lose confidence
in us and adversely affect the market price of our common stock. If our internal controls are not effective, we may not be able to accurately
report our financial results or prevent fraud.
Section 404 of the Sarbanes-Oxley Act of 2002,
or Section 404, requires that we maintain internal control over financial reporting that meets applicable standards. We may err in the
design or operation of our controls, and all internal control systems, no matter how well designed and operated, can provide only reasonable
assurance that the objectives of the control system are met. Because there are inherent limitations in all control systems, there can
be no assurance that all control issues have been or will be detected. If we are unable, or are perceived as unable, to produce reliable
financial reports due to internal control deficiencies, investors could lose confidence in our reported financial information and operating
results, which could result in a negative market reaction and a decrease in our stock price.
The Company is required, pursuant to Section 404,
to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting (see Item
9A Management’s Annual Report on Internal Control Over Financial Reporting). We disclose any material weaknesses identified by our
management in our internal control over financial reporting. As an “emerging growth company,” we will avail ourselves of the
exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control
over financial reporting under Section 404. However, we may no longer avail ourselves of this exemption when we cease to be an “emerging
growth company.” When our independent registered public accounting firm is required to undertake an assessment of our internal control
over financial reporting, the cost of our compliance with Section 404 will correspondingly increase. Our compliance with applicable provisions
of Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance-related
issues as we implement additional corporate governance practices and comply with reporting requirements. Moreover, if we are not able
to comply with the requirements of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting
firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price
of our stock could decline and we could be subject to sanctions or investigations by the U.S. Securities and Exchange Commission, or SEC,
or other regulatory authorities, which would require additional financial and management resources.
If we continue to have material weaknesses in
our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if
we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting
firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, we may be late with the
filing of our periodic reports, investors may lose confidence in the accuracy and completeness of our financial reports and the market
price of our common stock could be negatively affected.
We will need additional
funding, which may not be available on acceptable terms, or at all. Failure to obtain this capital when needed may force us to delay,
limit or terminate our product development efforts or other operations.
We believe our current cash resources will be
sufficient to fund our current operating plans into the third quarter of 2026. We expect our expenses to increase in connection with our
ongoing activities, particularly as we continue to invest in clinical studies, sales, marketing, and engineering resources to bring our
products to market.
Building and scaling
technology products is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary
user experience required to obtain market acceptance and achieve meaningful product sales. In addition, our product candidates, once developed,
may not achieve commercial success. The majority of revenue will be derived from or based on sales of software products that may not be
commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our
business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.
Raising additional
capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies
and product candidates.
We may seek additional
capital through a combination of public and private equity offerings, debt financings, strategic partnerships and alliances and licensing
arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership
interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder.
The incurrence of indebtedness would result in increased fixed payment obligations and could involve restrictive covenants, such as limitations
on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating
restrictions that could adversely impact our ability to conduct our business. If we raise additional funds through strategic partnerships
and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, or our other
product candidates, or grant licenses on terms unfavorable to us.
We are highly dependent on our senior management
team and key personnel, and our business could be harmed if we are unable to attract and retain personnel necessary for our success.
We are highly dependent on our senior management
and key personnel. Our success will depend on our ability to retain senior management and to attract and retain qualified personnel in
the future, including sales and marketing professionals, engineers, scientists, clinical trial specialists and other highly skilled personnel
and to integrate current and additional personnel in all departments. The loss of members of our senior management, marketing professionals,
engineers, scientists and clinical trial specialists could result in delays in product development and harm our business.
Competition for skilled personnel in our market
is intense and may limit our ability to hire and retain highly qualified personnel on acceptable terms, or at all. To induce valuable
employees to remain at our company, in addition to salary and cash incentives, we have issued stock options that vest over time. The value
to employees of stock options that vest over time may be significantly affected by fluctuations in our stock price that are beyond our
control, and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable
employees, members of our management and other key personnel may terminate their employment with us on short notice. Our employment arrangements
with our employees provide for at-will employment, which means that any of our employees could leave our employment at any time, with
or without notice. We also do not maintain “key man” insurance policies on the lives of these individuals or the lives of
any of our other employees.
Our MR data post-processing products currently
depend on compatible use with only a limited number of MR scanners that are provided only by one manufacturer of MR devices.
Our MR data post-processing software products
are only compatible for post-processing disc MRS data acquired via certain scanner models and operating configurations provided by two,
third-party scanner vendors - SIEMENS and Philips. There are risks associated with our reliance on these MR scanner vendors, and/or the
MR service providers who own and operate the SIEMENS or Philips scanners, to maintain those scanners and their operating configurations
in a manner that continues to support compatibility with our products. There are also risks that current compatible scanner platforms
may become incompatible as a result of changes made to those scanners by SIEMENS or Philips, or by the scanner owner or related service
provider, which would frustrate our ability to continue supporting that MR provider customer with our products. There are also risks that
these SIEMENS or Philips scanners do not perform reliably as intended or expected in performing data acquisition exams as required by
our post-processing products, which would also frustrate the ability for our products to perform as intended. There is also a risk that
SIEMENS and Philips combined lose their install base of compatible MR Scanners due to cannibalization by other non-compatible replacement
scanner sales or fail to grow their install base of those compatible scanners, which could adversely affect the number and locations of
compatible scanners for our own market share and penetration. Manifestations of these risks becoming actually realized in the marketplace
could harm our business, financial condition, and results of operations. We are not subject to any exclusivity agreement or obligations
with SIEMENS or Philips, nor do we have any fee sharing, royalty, or other exchange of moneys or payments between us and Siemens or Philips
at this time. Initially, the nexus for our focused relationship with Siemens resulted from our determination that SIEMENS scanner models
were optimally positioned to support our product. We have had a collaborative relationship with Siemens since 2011 and have been party
to a Collaborative Agreement with Siemens since October of 2017, The Collaborative Agreement is terminable at any time by either party
if such party is of the opinion that the goals of the Collaborative Agreement cannot be achieved for technical, economic and/or clinical
reasons. If Siemens were to terminate its relationship with the Company, it would have a material adverse effect on our business. Subsequent
to our newly launched relationship and capability with Philips, the critical single source relationship with Siemens has been largely
mitigated and is now shared between two of the top three providers of MRI systems worldwide.
If we are not successful in enhancing awareness
of our technology, driving adoption across our current target population, increasing referrals from surgeons and clinicians, and expanding
the population of eligible patients, our sales, business, financial condition and results of operations will be negatively affected.
Our business depends on our ability to successfully
market our technology, which includes increasing the number of patients scanned with our technology, increasing adoption of our technology
and driving utilization of our technology by surgeons and clinicians. Additionally, our technology is primarily recommended and implemented
to provide advanced diagnosis and management of spine and back pain, in particular, for diagnosing painful discs causing discogenic low
back pain. Therefore, we are dependent on widespread market adoption of our technology. While we intend to expand the population of patients
we can provide with our diagnostic technology as well as increase the number of physicians, surgeons and clinicians that can prescribe
technology, there can be no assurance that we will succeed.
The commercial success of
our technology will continue to depend on a number of factors, including the following:
· our ability to continue to attract and retain key personnel.
If we fail to successfully market and sell our
technology cost-effectively and maintain and expand our market share, our sales, business, financial condition and results of operations
will be negatively affected.
Our commercial success will continue to depend
on attaining significant market acceptance of our technology among physicians, surgeons, patients, clinicians and imaging facilities,
and increasing the number of patients diagnosed by our technology.
Our commercial success will depend, in large part,
on the further acceptance by surgeons, physicians, clinicians, patients and imaging facilities of our technology as safe, useful, cost-effective,
and that it can increase the number of patients that are diagnosed. We cannot predict how quickly, or if at all, additional surgeons,
physicians, clinicians, patients and imaging facilities will adopt our technology over competing diagnostic platforms for support in on-going
care and treatment options that are expected to be supported by the intended diagnostic uses of our technology. For example, surgeons,
other physicians, clinicians, patients, and imaging facilities may be reluctant to use our technology due to familiarity with pre-existing
diagnostic systems that are more established or an otherwise resistance to adopt new technologies or change current practices. Our ability
to grow sales of our technology and drive market acceptance will depend on successfully educating surgeons, physicians, clinicians, patients
and MR imaging facilities on the relative benefits of our Technology.
We may be unable to compete successfully with
other diagnostic options for low back pain, or may be unable to continue providing value for supporting new treatments that may not need
the diagnostic information our products provide.
The medical device industry is intensely competitive,
subject to rapid change and significantly affected by new product introductions and other market activities of industry participants.
Our current competition primarily resides with the diagnostic standards over which our products are intended to improve – in particular,
X-ray, lumbar MRI, and PD. Our products are positioned for synergistic use with lumbar MRI, and to enhance the diagnostic value of lumbar
MR exams. However, the existing reliance on lumbar MRI as a standard of care for our DLBP indication, and on PD in some medical practices,
and the potential for other enhancements to those platforms and techniques, nonetheless also represents a competitive threat. To the extent
that these other platforms represent our primary competitors, they are mainly provided by large, well-capitalized companies with significant
market share and resources. Most of our competitors have more established sales and marketing programs than us and have greater name recognition.
These competitors also have long operating histories and may have more established relationships with potential customers. Also, there
can be no assurance that other companies or institutions will not succeed in developing or marketing devices and products that are more
accurate, useful, effective or safer than our technology or that would render our technology obsolete or noncompetitive.
Adoption of our technology depends on positive
clinical data as well as clinician acceptance of the data and our products, and negative clinical data or perceptions among these clinicians
would harm our sales, business, financial condition, and results of operations.
The rate of adoption and sales of our products
are heavily influenced by clinical data. We have published positive clinical data from an Institutional Review Board (“IRB”),
approved more than 100 patient single center trial in a major peer-reviewed spine journal which showed both: (a) high diagnostic accuracy
against provocation discography controls, and (b) much higher patient success outcomes for surgeries that treated discs identified as
painful using our products, versus much lower success rates when discs diagnosed as painful with our products were left untreated. However,
there can be no assurance that our clinical data will continue to be positive for our ongoing or future clinical studies. Additionally,
there can be no assurance that future clinical studies, including those to continue demonstrating the diagnostic accuracy and value of
our products in currently approved patient populations and those to support label retention and expansion for our products, will demonstrate
diagnostic acuity or value. Unfavorable or inconsistent clinical data from ongoing or future clinical studies conducted by us, our competitors,
or third parties, or the potential for negative interpretation of our clinical data by customers, competitors, patients, and regulators,
or the potential for finding new or more frequent adverse events related to the use of our products could harm our sales, business, financial
condition, and results of operations.
If adequate reimbursement is not available
for the procedures implementing our technology, or for clinicians to provide ongoing care for patients diagnosed with our technology,
it could diminish our sales or affect our ability to sell our technology.
Our ability to increase sales of our technology
depends, in significant part, on the availability of adequate financial coverage and reimbursement from third-party payors, which include:
(i) governmental payors such as the Medicare and Medicaid programs in the United States; (ii) private managed care organizations; and
(iii) private health insurers. Third-party payers determine which services and treatments they will cover and establish reimbursement
rates for those treatments. While we have secured certain reimbursement codes against which the use of our products can potentially be
billed, we do not yet currently bill any third-party payers directly for our technology. The cost of our customers using our technology
is currently being paid for by either: (i) billing patients to pay directly (ii) allocation at least in part against payments received
by healthcare providers for other procedures conducted in association with the use of our technology, or (c) third-party payer reimbursement
payments to one of our customers for approximately 20 patients through the date of this filing. A failure to obtain wide coverage and
adequate reimbursement for using our technology in conducting our new diagnostic procedures, or for clinicians providing ongoing patient
care based on or related to our diagnostic results could diminish our sales and affect our ability to sell our technology.
If adequate reimbursement for our temporary
Category III CMS Code designation for our products cannot be obtained or we are not successful in obtaining conversion to permanent Category
I codes at an adequate reimbursement level, it would diminish our sales and would affect our ability to market our technology.
On January 1, 2021, our Category III CPT Codes
became effective (see “Business”, “Reimbursement” above). Category III codes represent the first step in the reimbursement
process (See “Business” “Reimbursement” above). The effectiveness of our Category III codes commenced a five-year
period in which, in order to maintain our Category III status, we are required to demonstrate that the medical community needs (“Clinical
Needs”) the NOCISCAN product. Clinical Needs would be demonstrated to the CPT Committee based on the volume at which our Category
III codes are billed by imaging centers and physicians. In addition to demonstrating that there is Clinical Needs, we also are required
to show that NOCISCAN is clinically effective as indicated by patients having better outcomes when NOCISCAN reports are used to help guide
surgical treatments. We expect to show clinical effectiveness through a combination of clinical registries and clinical studies that build
upon our published clinical study the CPT committee used to create our Category III CPT codes. However, if we are not able to demonstrate
Clinical Needs, nor that NOCISCAN is clinically effective, our revenue would be limited to a direct patient payment model, which will
severely limit our ability to market our products and generate sufficient revenue to continue market our technology.
Further, for us to obtain a conversion from of
our CPT codes from Category III to Category I, we will need to attract a significant larger number of surgeons and imaging centers to
adopt our technology and thereby increase the volume of reimbursement claims data needed for the CPT committee to determine that our product
is needed in the healthcare marketplace. In addition to generating clinical use volume, we will also need to demonstrate the ongoing clinical
efficacy of our products to secure adequate reimbursement from payers. A failure to convert Category III codes to Category I codes will
ultimately make us more dependent on a patient pay model which will significantly diminish our sales and affect our ability to market
our technology.
Use of our technology requires appropriate
training for proper use of our products, and inadequate training may lead to negative patient outcomes, which could harm our business,
financial condition, and results of operations.
The successful use of our technology depends,
in part, on the training and skill of referring doctors and other healthcare providers for appropriately prescribing our diagnostic exam
for the correctly indicated patients and anatomy, and properly interpreting the results from using our product as indicated under our
related IFUs. It also depends upon MR technicians and operators appropriately implementing and using our technology as indicated under
our related IFUs. MR technicians and operators could also experience difficulty with the steps and techniques necessary to successfully
implement and use our technology protocols. We cannot guarantee that all medical and MR technician professionals will have the necessary
skills and training, according to our instructions for use, or will sufficiently comply with that training and instructions for use in
order to properly prescribe and interpret the results of our diagnostic imaging platform. We cannot be certain that surgeons, other physicians,
MRI technicians or operators, or other healthcare providers that use our technology will have received sufficient training or will continue
to comply with that training in their on-going practice in using our technology. If physicians and surgeons utilize our technology incorrectly
or, without adhering to or completing all relevant training according to our instructions, the utility and value of our diagnostic products
and their related patient outcomes from on-going care following that diagnostic work-up may not be consistent with the outcomes achieved
in our clinical studies or otherwise expected or desired by such care providers or the patients themselves. Adverse treatment outcomes
that could potentially arise from improper or incorrect use of our technology may negatively impact the perception of patient benefit
and safety of our technology, notwithstanding results from our clinical studies. These results could limit adoption of our technology,
which would harm our sales, business, financial condition, and results of operations.
We expect to increase the size of our organization
in the future, and we may experience difficulties in managing this growth. If we are unable to manage the anticipated growth of our business,
our future revenue and operating results may be harmed.
As of December 31, 2024, we had 5 full-time employees,
1 part-time employee,1 full-time consultant, and 2 part-time consultants. As our sales and marketing strategies develop, and as we transition
into operating as a public company, we expect to need additional managerial, operational, sales, marketing, financial and other personnel.
Future growth would impose significant added responsibilities on members of management, including:
Our future financial performance and our ability
to successfully market and sell our technology will depend, in part, on our ability to effectively manage any future growth, and our management
may also have to divert a disproportionate amount of attention away from day-to-day activities in order to devote a substantial amount
of time to managing these growth activities.
We may not be able to achieve or maintain satisfactory
pricing and margins for our NOCISCAN disc MRS diagnostic software products and related services, which could harm our business and results
of operations.
Software products classified as medical devices
have a history of price competition and we can give no assurance that we will be able to maintain satisfactory prices for our technology.
The pricing of our technology could be impacted by several factors, including pressure to reduce prices by our customers due to a decline
in the amount that third-party payers reimburse for diagnostic procedures using our technology or for clinicians providing ongoing patient
care related to the diagnostic information we provide. A decline in the amount that third-party payers reimburse our customers for ongoing
patient care could also make it difficult for us to maintain procedural volume without a corresponding reduction in prices for our products.
If we are forced to lower the price we charge for our technology, our gross margins will decrease, which will harm our ability to invest
in and grow our business. If we are unable to maintain our prices, or if our costs increase and we are unable to offset such increase
with an increase in our prices, our margins would erode and could harm our business, financial condition, and results of operations.
Our results of operations may be harmed if
we are unable to accurately forecast customer demand for our technology.
Our ability to accurately forecast demand for
our products could be negatively affected by many factors, including (i) our potential failure to accurately manage or execute our expansion
strategy, (ii) new product introductions by competitors, (iii) an increase or decrease in customer demand for our products or for other
competing products, (iv) our failure to accurately forecast customer adoption of new products, (v) unanticipated changes in general market
conditions or regulatory matters and (vi) weakening of economic conditions or consumer confidence in future economic conditions. Software
processing capacity, data storage, and related computer hosting resources in excess of customer demand may result in financial write-downs
or write-offs, which would cause our gross margin to be adversely affected and could impair the strength of our brand. Conversely, if
we underestimate customer demand for our products, our technical and IT resource support team, software processing and storage resources,
and computing architectures may not be able to support sufficient processing requirements to meet the demand for our products; and this
could result in lost sales and damage to our reputation and customer relationships. In addition, if we experience a significant increase
in demand, additional computing and storage capacity and resources, and additional technical support personnel required to support the
increased demand may not be available when required or on terms that are acceptable to us, or at all, which may negatively affect our
sales, business, financial condition, and results of operations.
Risks related to government regulation and
our industry
Our operations and technology are subject to
pervasive and continuing FDA regulatory requirements, and failure to comply with these requirements could harm our business, financial
condition and results of operations.
Before a regulated new medical device or service,
or a new intended use for an existing device or service, can be marketed in the United States, a company must first receive either 510(k)
clearance, or a PMA from the FDA, unless an exemption applies. In the 510(k) clearance process, before a device may be marketed, the FDA
must determine that: (i) a proposed device is substantially equivalent to a legally-marketed predicate device, which includes a legal
marketed device that has been previously cleared through the 510(k) process, (ii) was legally marketed prior to May 28, 1976 (pre-amendments
device), (iii) was legally marketed pursuant to an approved PMA and later down-classified, or (iv) is covered by a classification regulation
created through the de novo review process.
In the process of obtaining PMA approval, which
the FDA could potentially require in the future for our products, the FDA must determine that a proposed device is safe and effective
for its intended use based, in part, on extensive data, including, but not limited to, technical, preclinical, clinical study, manufacturing
and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining,
life-supporting or implantable devices.
We believe that one of our products under the
NOCISCAN Suite, NOCICALC, is a Class I 510(k)-exempt medical device, which only requires registration and no pre-market review with the
FDA, and which we registered as such with the FDA. We also believe the other of our products in the suite, NOCIGRAM, is “Clinical
Decision Support Software” under the 21st Century Cures Act and as such, is not considered a medical device, and thus
is not regulated by the FDA. Accordingly, we believe that our current products do not require FDA clearance or approval under either 510(k)
or PMA approval pathways. However, there can be no assurance that in the future, the FDA will not determine that PMA approval, de novo
classification, or 510(k) clearance is required for our products. If the FDA were to make such a determination, we would not be able to
sell or market our products without or until securing such approval or clearance and may be subject to potential fines and other penalties
or remedial actions for illegally marketing or selling an unapproved medical device, which would affect our sales, business, financial
condition, and results of operation.
If we are unable to expand the labeling claims
for using our technology to include additional indications, our growth potential could be harmed.
We intend to seek expanded labeling claims for
our technology in the future, including for example: (i) extending the intended indications for use to include disc MRS along the thoracic
or cervical spine, (ii) incorporating certain MRI image post-processing along with MRS data post-processing, and (iii) real-time post-processing
of MRS exam data during the exam itself via our software installed and operated within the MR scanner software environment (vs. our current
products which are for cloud-hosted post-processing of MRS data that is transferred to us, following the MRS exams, via our own remote
computing resources). If regulatory clearance or approval is required to expand the use of our technology, and which clearance and approval
may require clinical trial results, we could incur substantial costs and the attention of management could be diverted throughout this
process. However, there can be no assurance we will be able to obtain and maintain necessary clearance or approvals for additional uses
of our technology, or even if obtained, that the broadened use of our technology would be accepted or adopted by intended users, thus
limiting the growth potential of our business.
Our medical device products may be subject
to recalls, which could divert managerial and financial resources, harm our reputation and our business.
The FDA has the authority to require the recall
of medical device products in certain circumstances. A government mandated or voluntary product recall by us could occur because of device
malfunctions or other adverse events, such as quality-related issues resulting from product operating malfunctions or defects. Any future
recalls of our products could divert managerial and financial resources, harm our reputation and negatively impact our business.
If we initiate a correction or removal of certain
of our products from the market to reduce a risk to health posed by the device, we would be required to submit a Correction and Removal
report to the FDA and, in many cases, similar reports to other regulatory agencies. This report could be classified by the FDA as a device
recall which could lead to increased scrutiny by the FDA and our customers regarding the quality and safety of our products. Furthermore,
the submission of these reports could be used by competitors against us and could harm our reputation, which could cause customers to
delay purchase decisions, cancel orders or decide not to purchase our products and could cause patients to lose trust in our technology.
We may experience difficulties outside the
US in obtaining or maintaining regulatory clearance or approval, or exemptions therefrom, or in successfully gaining third-party reimbursement
or marketing our technology, even if approved or otherwise legally marketed.
Our NOCISCAN product suite was initially commercialized
as a Class I medical device under European Commission regulations. The process did not require pre-market submission, review, or certification
by a Notified Body in order to be CE marked. A “Notified Body” is an organization designated by an EU country to assess the
conformity of certain products before being placed on the market.
For commercialization outside the United States,
in particular the European Union (“EU”) and United Kingdom (“UK”), the Company, in conjunction with our regulatory
consultants, determined NOCISCAN to be a Class I medical device, for which we secured a CE mark via self-certification. As such, we self-certified
our product for the CE mark under a Declaration of Continuity (“DOC”) filed by us as part of a dossier with a qualified EU
Representative. Since self-certification was completed by the Company, the EU adopted Medical Device Regulation (EU) 2019/1020, known
as MDR, that went into effect on July 16, 2021. Under these new regulations, we believe NOCISCAN to be considered a Class II(a) device
that requires re-certification for CE mark by a Notified Body prior to May 2024. Notified Bodies carry out tasks related to conformity
assessment procedures set out in the applicable legislation, when a third party is required. Class II(a) device certification is subject
to additional requirements for approval beyond our existing submissions, including requiring pre-market review and CE mark approval by
a Notified Body, and which may require submission and approval of supportive clinical data. We are currently seeking to identify, but
have not yet engaged, a Notified Body for this purpose. The available number of Notified Bodies, and those engaging new company applicants,
has been significantly reduced in recent years and the ability for conducting a Notified Body review and CE mark approval can typically
take more than a year. Certain aspects of the new MDR also place new requirements on Class I medical devices that are not subject to the
extended 2024 grace period and became effective as of May 2021. This applies to new required policies and practices for post-market surveillance
of our products. While we are not currently compliant with these new requirements, we are in the process of updating our policies and
practices and taking the corrective actions to achieve and maintain ongoing compliance. We believe the actions we are taking are sufficient
to support the continuance of our commercial activities in the EU under our CE mark without adverse penalties or other consequences. However,
there is a risk that one or more regulatory body or agency in the EU may determine otherwise, either with respect to our prior non-compliance
that has since been corrected or with respect to the sufficiency of our corrective actions, and which could result in us incurring certain
penalties or other consequences.
If we are unable to engage or receive CE mark
approval from a Notified Body under the MDR by the May 2024 grace period deadline, or are determined to be non-compliant with MDR regulations
not subject to the grace period and therefore applicable to us as of May 2021, we could lose our CE mark, and may become unable to continue
promoting or selling our products for commercial use in the EU, UK, or other countries that relate their medical device regulations to
a CE mark.
In conjunction with Brexit, medical devices in
the UK are no longer governed by CE regulations. As such, the UK has introduced the UKCA marking system which largely follows the CE marking
regulations to include permitting use of the same submissions for approval. The major difference post-Brexit is that CE marking is regulated
by the EU and UKCA marking is regulated by the UK. The only practical implication to the Company is the requirement of a Notifying Body
within both the EU and the UK. If the Company is successful in meeting all requirements of the CE mark under MDR set forth above, the
company believes it will meet all requirements for UKCA marking. While we are not currently compliant with new requirements in the UK,
we are in the process of updating our policies and practices and taking what we believe are corrective actions to achieve and maintain
ongoing compliance in the UK. We believe our activities are sufficient to support the continuance of our commercial activities in the
UK under our CE mark without adverse penalties or other consequences. However, there is a risk that one or more regulatory body or agency
in the UK may determine otherwise, either with respect to our prior non-compliance that we believe has been corrected or with respect
to the sufficiency of those corrective actions and which could result in us incurring certain penalties or other adverse consequences
to our business. There can be no assurance that we can obtain a UKCA mark and if we are not able to secure a UKCA mark, we will lose our
ability to conduct business in the UK.
Sales of our technology outside of the United
States will be subject to foreign regulatory requirements governing clinical studies and marketing approval, as well as additional post-market
requirements. We would incur substantial expenses in connection with any international expansion. Additional risks related to operating
in foreign countries include:
· foreign taxes, including withholding of payroll taxes;
· difficulties staffing and managing foreign operations;
These and other risks associated with international
operations may harm our ability to attain or maintain profitable operations internationally, which would harm our growth potential.
Furthermore, there are foreign privacy laws and
regulations that impose restrictions on the collection, use, storage, disclosure, transfer and other processing of personal data, including
health information. For example, the European Union General Data Protection Regulation (“GDPR”), imposes stringent data protection
requirements, including, for example, more robust disclosures to individuals, a strengthened individual data rights regime, shortened
timelines for data breach notifications, limitations on retention of information, increased requirements pertaining to special categories
of data, such as health data, and additional obligations regarding third-party processors in connection with the processing of the personal
data. Our failure to comply with the GDPR or other applicable foreign privacy laws or regulations or significant changes in the laws and
regulations restricting our ability to obtain or use required patient information could significantly impact our business and our future
business plans.
If we fail to comply with fraud and abuse and
other healthcare laws and regulations in the U.S. and internationally including those relating to kickbacks and false claims for reimbursement,
we could face substantial penalties and our business, financial condition and results of operations could be harmed.
Healthcare providers play a primary role in the
distribution, recommendation, ordering and purchasing of any of our products. Through our arrangements with healthcare professionals and
hospital facilities, we are exposed to broadly applicable anti-fraud and abuse, anti-kickback, false claims and other healthcare laws
and regulations that may constrain our business, our arrangements and relationships with customers, and how we market, sell and distribute
our marketed medical devices. We have a compliance program, code of conduct and associated policies and procedures, but it is not always
possible to identify and deter misconduct by our employees, contractors, and other third parties, including our customers, and the precautions
we take to detect and prevent noncompliance may not be effective in protecting us from governmental investigations for failure to comply
with applicable fraud and abuse or other healthcare laws and regulations.
In the United States, we are subject to various
state and federal anti-fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and federal civil False
Claims Act, or the FCA. Our relationships with physicians, other health care professionals and hospitals are subject to scrutiny under
these laws. There are also similar laws in other countries that we may become subject to if we expand internationally.
The laws that may affect our ability to operate
include, among others:
State and federal regulatory and enforcement agencies
continue to actively investigate violations of healthcare laws and regulations, and the U.S. Congress continues to strengthen the arsenal
of enforcement tools. Enforcement agencies also continue to pursue novel theories of liability under these laws. In particular, government
agencies have increased regulatory scrutiny and enforcement activity with respect to manufacturer reimbursement support activities and
patient care programs, including bringing criminal charges or civil enforcement actions under the Anti-Kickback Statute, the FCA and HIPAA’s
healthcare fraud and privacy provisions.
Achieving and sustaining compliance with applicable
federal and state anti-fraud and abuse laws may prove costly. If we, or our employees, are found to have violated any of the above laws
we may be subjected to substantial criminal, civil and administrative penalties, including imprisonment, exclusion from participation
in federal healthcare programs, such as Medicare and Medicaid, and significant fines, monetary penalties, forfeiture, disgorgement and
damages, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings and the curtailment or
restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. Any
action or investigation against us for the violation of these healthcare fraud and abuse laws, even if successfully defended, could result
in significant legal expenses and could divert our management’s attention from the operation of our business. Companies settling
FCA, Anti-Kickback Statute or civil monetary penalties law cases also may be required to enter into a Corporate Integrity Agreement with
the OIG, in order to avoid exclusion from participation (which results in a loss of coverage for their products) in federal healthcare
programs such as Medicare and Medicaid. Corporate Integrity Agreements typically impose substantial costs and operational burdens on companies
to ensure compliance. Defending against any such actions can be detrimental to our reputation and brand and can otherwise be costly, time-consuming
and may require significant personnel resources, and may harm our business, financial condition and results of operations.
We have financial relationships with certain
physicians and health care providers, research investigators, and authors for our clinical or scientific publications that may be deemed
a conflict of interest and may be subject to certain statutory or regulatory requirements, under which a failure to comply could lead
to enforcement actions against us and other negative consequences for our business.
We have certain financial relationships with medical
doctors and other healthcare providers who are investors and shareholders in our Company and/or paid consultants, clinical investigators,
or speakers promoting our products and clinical results, some of whom are also our customers who pay us for patients receiving a NOCISCAN
exam, or otherwise prescribe and get paid for interpreting a NOCISCAN exam. There are risks that one or more of these relationships may
be determined to be a conflict of interest and be in violation of applicable laws, regulations, or guidelines, which could potentially
subject us to significant fines or curtailment of our active commercial operations, and which could also potentially harm our reputation
in the marketplace. If we are deemed to not comply with requirements governing the industry’s relationships with physicians or there
is an investigation into our compliance by the Office of the Inspector General, the Department of Justice, states’ attorney generals
or other government agencies, it could harm our sales, business, financial condition, and results of operations.
Regulatory compliance is expensive, complex
and uncertain, and a failure to comply could lead to enforcement actions against us and other negative consequences for our business.
The FDA, EU, and other foreign regulatory agencies
or governing bodies, regulate certain of our products as medical devices. Complying with these regulations is costly, time-consuming,
complex and uncertain. For instance, before a new medical device, or a new intended use for an existing device, can be marketed in the
United States, a company must first submit and receive either 510(k) clearance, de novo approval, or approval of a PMA from the FDA, unless
an exemption applies. FDA regulations and regulations of similar agencies are wide-ranging and include, among other things, oversight
of:
· product design, development, manufacturing (including suppliers) and testing;
· laboratory, preclinical and clinical studies;
· product safety and effectiveness;
· product labeling;
· product storage and shipping;
· quality assurance policies, practices, and record keeping;
· pre-market clearance or approval;
· marketing, advertising and promotion;
· product sales and distribution;
· product changes;
· product recalls; and
Further, improvements of our existing technology,
any potential new technology, and new indications for use of our current technology may be subject to extensive regulation, and we may
require permission from regulatory agencies and ethics boards to conduct clinical studies, as well as clearance or approval from the FDA,
or other such foreign regulatory agencies or governing bodies, prior to commercial sale. In order to commercialize and distribute our
products in markets outside of the United States, it will require approval from, or otherwise meeting the requirements of, non-U.S. regulatory
agencies.
The FDA and foreign regulatory bodies can delay,
limit or deny clearance or approval (or otherwise a related “exemption”) for a device for many reasons, including:
· adverse device effects experienced by participants in our clinical studies;
Future clinical studies may be delayed, suspended
or terminated for many reasons, including to support reimbursement coverage and certain potential label expansions for additional indications,
which will increase our expenses and delay the time it takes to secure reimbursement coverage or support label expansion for additional
indications.
We plan to continue to develop and execute clinical
studies to support reimbursement coverage for using our products, label retention for our products, label expansion for our products into
additional claims for diagnosing painful discs and improving patient outcomes and additional thoracic and cervical discogenic back pain
patient populations. We may also develop and execute clinical studies for new products or for label expansion for our current products
into patient populations suffering from other pain or tissue chemistry-mediated conditions. We may also develop modifications to our products,
and conduct related clinical studies, related to expanding indications for post-processing data from other MRS applications in the body.
We do not know whether future clinical studies will begin on time, will need to be redesigned, have an adequate number of patients enrolled
or be completed on schedule, if at all. The commencement and completion of clinical studies to support label retention and expansion for
additional indications or for new products may be delayed, suspended or terminated as a result of many factors, including:
· changes in regulatory requirements, policies and guidelines;
· the inability to recruit, enroll, or retain a sufficient number of patients;
· exceeding budgeted costs.
In addition, if the FDA concludes that we have
not adequately disclosed financial interests of our investigators or if our disclosed financial relationships with investigators result
in a perceived or actual conflict of interest that may have affected the interpretation of a study, the integrity of the data generated
at the applicable clinical study site or the utility of the clinical study itself, FDA may refuse to consider data from the study. This
could result in delay or rejection by the FDA. Any such delay or rejection could prevent us from supporting label retention and expansion
for our products.
A failure to comply with governmental regulatory
requirements would have a negative impact upon our business.
Failure to comply with applicable U.S. requirements
regarding promoting, manufacturing, labeling, and establishing and complying with appropriate quality assurance policies, systems, and
practices for our products may subject us to a variety of administrative or judicial actions and sanctions. We currently offer the NOCISCAN
product suite via two interactive products, NOCICALC, which is listed with the FDA as a Class I, 510(k)-exempt product, and NOCIGRAM,
a type of medical software that we have concluded is exempt from medical device regulation by the FDA pursuant to the 21st
Century Cures Act. This product suite is also self-certified and CE Marked as a Class I medical device under MDD requirements, while we
believe it is considered a Class II medical device and requiring Notified Body review and certification under newer MDR regulations (subject
to a grace period until December 2028). These products are marketed and sold with certain labeling and related instructions for use and
are promoted by various marketing and sales materials and related human interactions via our personnel and our target customers. We have
also established, and operate under, certain quality assurance systems, policies, and procedures under our QMS intended to be compliant
with applicable requirements for all relevant territories and jurisdictions related to our commercial activities. In the event that our
establishment, maintenance, marketing, promotion, labeling, or execution of these products, or these systems, policies, practices, or
procedures, are determined to be inadequate or non-compliant with applicable regulatory requirements, such defect could result in certain
potential enforcement actions or other adverse consequences, and our business would be negatively affected.
If we become subject to enforcement action
by governmental regulatory agencies, our business would be negatively affected.
Our failure to comply with applicable regulatory
requirements could result in enforcement action by the FDA or other governmental regulatory agencies, which enforcement actions may include
the following:
· unanticipated expenditures to address or defend such actions;
· recall, detention or seizure of our products;
· operating restrictions;
· withdrawing market authorizations that have already been granted;
· criminal prosecution
If any of these events were to occur, it would
have a negative impact on our business, financial condition and results of operations.
If certain of our medical device products cause
or contribute to a death or a serious injury or malfunction in certain ways, we will be required to report under applicable medical device
reporting regulations, or MDRs, which can result in voluntary corrective actions or agency enforcement actions and harm our reputation,
business, financial condition and results of operations.
FDA’s Medical Device Reporting (“MDR”)
regulation requires, medical device manufacturers to report to the FDA information of which the manufacturer becomes aware that a device
has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute
to death or serious injury if the malfunction of the device or a similar device marketed by the manufacturer were to recur. If we fail
to report events required to be reported to the FDA within the required timeframes, or at all, the FDA could take enforcement action and
impose sanctions against us. Any such adverse event involving our products also could result in the need to take corrective and preventative
actions, such as changes to design or manufacturing processes, corrections, removals, or recalls or customer notifications, or agency
action, such as inspection or enforcement action. Risk of harm to patients, including without limitation serious injury or death, associated
with using our products could also result in product liability actions against us. Any corrective action, whether voluntary or involuntary,
as well as defending ourselves in a lawsuit, would be costly, distract management from operating our business, could be used by competitors
against us, and may harm our reputation, business, financial condition and results of operations.
From time to time, we engage outside parties
to perform services related to certain of our clinical studies. If these third parties do not successfully carry out their contractual
duties or meet expected deadlines, we may not be able to complete our clinical studies on our planned timelines, or at all, and may incur
significant additional costs.
The FDA’s investigational device exemption
(“IDE”) regulations impose requirements on the conduct of certain clinical investigations conducted with medical devices.
The requirements depend on whether the study is considered to be exempt, a nonsignificant risk or a significant risk. In general, clinical
investigations with medical devices, including those that are IDE exempt, must comply with requirements for the protection of human subjects,
which include review and approval by an institutional review board (“IRB”) and informed consent of subject participants. Significant
risk device studies also must submit an IDE to FDA for approval. The IDE regulations specify the responsibilities of sponsors and investigators
to ensure compliance with IDE requirements, including compliance with Good Clinical Practice (“GCP”) requirements. Failure
to comply may result in FDA placing a temporary or permanent clinical hold on the study, issuance of warning letters, or other regulatory
actions.
From time to time, we engage consultants to help
design, monitor and analyze the results of certain clinical studies and trials that we sponsor. The consultants we engage may interact
with clinical investigators to enroll patients in our clinical studies. We depend on these consultants and clinical investigators to conduct
clinical studies and trials and monitor and analyze data from these studies and trials under the investigational plan and protocol for
the study or trial and in compliance with applicable regulations and standards. We may face delays in, or be prevented from, completing
our clinical studies if these parties do not fulfill their obligations in a timely, compliant or competent manner. Such roles, functions,
and related risks, also apply to certain employees of the Company. If these third parties or employees do not successfully carry out their
duties, comply with Good Clinical Practice (GCP) guidelines and other applicable requirements, or meet expected deadlines, or if the quality,
completeness or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical study protocols or for other
reasons, our clinical studies or trials may need to be extended, delayed or terminated by us or be placed on clinical hold by FDA, or
may otherwise prove to be unsuccessful, and we may have to conduct additional studies, which would significantly increase our costs.
Healthcare reform initiatives and other administrative
and legislative proposals may harm our business, financial condition, results of operations and cash flows in our key markets.
There have been, and continue to be, proposals
by the federal government, state governments, regulators and third-party payers to control or manage the increased costs of healthcare
and, more generally, to reform the U.S. healthcare system. Certain of these proposals could limit the prices we are able to charge for