ITEM 1A. Risk Factors
Investing
in our securities involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together
with all of the other information contained in this Annual Report, before deciding to invest in our securities. If any of the
following risks materialize, our business, financial condition, results of operation and prospects will likely be materially and
adversely affected. In that event, the market price of our common stock could decline, and you could lose all or part of your
investment.
Summary
The
risk factors described below are a summary of the principal risk factors associated with an investment in us. These are not the
only risks we face. You should carefully consider these risk factors and the other reports and documents filed by us with the
SEC.
● Changes in external competitive market factors;
● Uncertainties in generating sustained revenue or achieving profitability;
● Unanticipated working capital or other cash requirements;
● Our ability to consummate future acquisitions or strategic transactions;
Risks
Related to Our Business and Strategy
We
have incurred significant losses since our inception, expect to incur significant losses in the future and may never achieve or
sustain profitability.
We
have historically incurred substantial net losses, including net losses of $9,135,486, $7,625,397, $13,042,709, $7,791,469 and
$3,387,490 for the years ended December 31, 2020, 2019, 2018, 2017 and 2016, respectively. As a result of our historical losses,
we had an accumulated deficit of $65,323,411 as of December 31, 2020. Our losses have resulted primarily from costs related to
general and administrative expenses relating to our operations, as well as our research programs and the development of our product
candidates. Currently, we are not generating revenue from operations, and we expect to incur losses for the foreseeable future
as we seek to obtain regulatory approval for our product candidates. Additionally, we expect that our general and administrative
expenses will increase due to the additional operational and reporting costs associated with being a public company as well as
the projected expansion of our operations. We do not expect to generate significant revenue until any of our product candidates
are licensed or sold, if ever. We may never generate significant revenue or become profitable. Even if we do achieve profitability,
we may be unable to sustain or increase profitability on a quarterly or annual basis. Our failure to achieve and subsequently
sustain profitability could harm our business, financial condition, results of operations and cash flows.
We
currently depend entirely on the successful and timely regulatory approval and commercialization of our two product candidates,
which may not receive regulatory approval or, if any of our product candidates do receive regulatory approval, we may not be able
to successfully commercialize them.
We
currently have two product candidates (the CoreoGraft and the VenoValve) and our business presently depends entirely on our success
with our product candidates. In order for our product candidates to succeed the products need to be approved by regulatory
authorities, which may never happen. Our product candidates are based on technologies that have not been used previously in the
manner we propose. Market acceptance of our product candidates will largely depend on our ability to demonstrate their relative
safety, efficacy, cost-effectiveness and ease of use. We may not be able to successfully develop and commercialize our product
candidates. If we fail to do so, we will not be able to generate substantial revenues, if any.
We
are subject to rigorous and extensive regulation by the FDA in the United States and by comparable agencies in other jurisdictions,
including the European Medicines Agency, or EMA, in the European Union, or EU. Our product candidates are currently in development
and we have not received FDA approval for our product candidates. Our product candidates may not be marketed in the United States
until they have been approved by the FDA and may not be marketed in other jurisdictions until they have received approval from
the appropriate foreign regulatory agencies. Each product candidate requires significant research, development, preclinical testing
and extensive clinical investigation before submission of any regulatory application for marketing approval.
Obtaining
regulatory approval requires substantial time, effort and financial resources, and we may not be able to obtain approval of any
of our product candidates on a timely basis, or at all. The number, size, design and focus of preclinical and clinical trials
that will be required for approval by the FDA, the EMA or any other foreign regulatory agency varies depending on the device,
the disease or condition that the product candidates are designed to address and the regulations applicable to any particular
products. Preclinical and clinical data can be interpreted in different ways, which could delay, limit or preclude regulatory
approval. The FDA, the EMA and other foreign regulatory agencies can delay, limit or deny approval of a product for many reasons,
including, but not limited to:
● a product candidate may not be shown to be safe or effective;
● we may not be able to enroll enough patients to complete our product studies;
● a product candidate may fail to comply with regulatory requirements; and/or
If
our product candidates are not approved at all or quickly enough to provide net revenues to defray our operating expenses, our
business, financial condition, operating results and prospects could be harmed.
If
we are unable to successfully raise additional capital, our future clinical trials and product development could be limited and
our long-term viability may be threatened.
We
have experienced negative operating cash flows since our inception and have funded our operations primarily from proceeds received
from sales of our capital stock, the issuance of the convertible and non-convertible notes, and the sale of our products to larger
medical device companies. We will need to seek additional funds in the future through equity or debt financings, or strategic
alliances with third parties, either alone or in combination with equity financings to complete our product development initiatives.
These financings could result in substantial dilution to the holders of our common stock, or require contractual or other restrictions
on our operations or on alternatives that may be available to us. If we raise additional funds by issuing debt securities, these
debt securities could impose significant restrictions on our operations. Any such required financing may not be available in amounts
or on terms acceptable to us, and the failure to procure such required financing could have a material and adverse effect on our
business, financial condition and results of operations, or threaten our ability to continue as a going concern.
Our
present and future capital requirements will be significant and will depend on many factors, including:
● the costs, timing and outcome of regulatory review of our product candidates;
● the effect of competing technological and market developments;
● market acceptance of our product candidates;
● the ability to achieve revenue growth and improve gross margins;
We
may not be able to acquire additional funds on acceptable terms, or at all. If we are unable to raise adequate funds, we may have
to liquidate some or all of our assets or delay, reduce the scope of or eliminate some or all of our development programs.
If
we do not have, or are not able to obtain, sufficient funds, we may be required to delay development or commercialization of our
product candidates. We also may have to reduce the resources devoted to our product candidates or cease operations. Any of these
factors could harm our operating results.
The
COVID-19 pandemic has significantly negatively impacted our business.
The
COVID-19 pandemic has disrupted the global economy and has negatively impacted large populations including people and businesses
that may be directly or indirectly involved with the operation of our Company and the manufacturing, development, and testing
of our product candidates. The full scope and economic impact of COVID-19 is still unknown and there are many risks from COVID-19
that could generally and negatively impact economies and healthcare providers in the countries where we do business, the medical
device industry as a whole, and development stage, pre-revenue companies such as HJLI. The primary impacts of COVID-19 to our
operations were stay-at-home work requirements, travel restrictions limiting our ability to initiate and continue animal studies
and patient trials and disruptions to scheduled meetings with regulatory agencies such as the FDA. Notwithstanding these impacts,
we were able to use remote work tools, communications solutions, and other methods to continue our trials and regulatory submissions
with minimal impact to our overall development timeline. While many of these restrictions are currently relaxed, there can be
no assurance we will be able similarly adjust if they are put back in place in the future. At this time, we have identified
the following COVID-19 related risks that we believe have a greater likelihood of negatively impacting our company specific, including,
but not limited to:
We
may engage in future acquisitions or strategic transactions which may require us to seek additional financing or financial commitments,
increase our expenses and/or present significant distractions to our management.
In
the event we engage in an acquisition or strategic transaction, we may need to acquire additional financing (particularly, if
the acquired entity is not cash flow positive or does not have significant cash on hand). Obtaining financing through the issuance
or sale of additional equity and/or debt securities, if possible, may not be at favorable terms and may result in additional dilution
to our current stockholders. Additionally, any such transaction may require us to incur non-recurring or other charges, may increase
our near and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which
could adversely affect our operations and financial results. For example, an acquisition or strategic transaction may entail numerous
operational and financial risks, including the risks outlined above and additionally:
● exposure to unknown liabilities;
● higher than expected acquisition and integration costs;
● write-downs of assets or goodwill or impairment charges;
● increased amortization expenses;
● inability to retain key employees of any acquired businesses.
Accordingly,
although there can be no assurance that we will undertake or successfully complete any transactions of the nature described above,
and any transactions that we do complete could have a material adverse effect on our business, results of operations, financial
condition and prospects.
If
we fail to maintain an effective system of internal controls, we may not be able to accurately report financial results or prevent
fraud. If we identify a material weakness in our internal control over financial reporting, our ability to meet our reporting
obligations and the trading price of our stock could be negatively affected.
As
described in our Quarterly Report on Form 10-Q filed with the SEC on August 14, 2020, in connection with our issuance of warrants
in a private placement offering in February 2020, we identified a material weakness in our internal control over financial reporting
with regard to our failure to record an associated derivative liability on a timely basis. This deficiency did not result in the
revision of any of our issued financial statements.
Effective
internal controls are necessary to provide reliable financial reports and to assist in the effective prevention of fraud. Any
inability to provide reliable financial reports or prevent fraud could harm our business. We regularly review and update our internal
controls, disclosure controls and procedures, and corporate governance policies. In addition, we are required under the Sarbanes-Oxley
Act of 2002 to report annually on our internal control over financial reporting. Any system of internal controls, however well
designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that
the objectives of the system are met. A material weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial
statements will not be prevented or detected on a timely basis. Accordingly, a material weakness increases the risk that the financial
information we report contains material errors.
To
remediate this weakness, we devoted resources, and will continue to devote resources to the remediation and improvement of our
internal control over financial reporting, in particular over handling of complex financial accounting issues. As the Company
enters into transactions that involve complex accounting issues, it will consult with third party professionals with expertise
in these matters as necessary to ensure appropriate accounting treatment for such transactions. Based on this assessment and our
remediation plan, our management concluded that our internal control over financial reporting were not effective as of December
31, 2020.
If
our financial statements are not accurate, investors may not have a complete understanding of our operations or may lose confidence
in our reported financial information. Likewise, if our financial statements are not filed on a timely basis as required by the
SEC and The Nasdaq Stock Market, we could face severe consequences from those authorities. In either case, it could result in
a material adverse effect on our business or have a negative effect on the trading price of our common stock. Further, if we fail
to remedy this deficiency (or any other future deficiencies) or maintain the adequacy of our internal controls, we could be subject
to regulatory scrutiny, civil or criminal penalties or shareholder litigation. We can give no assurance that the measures we have
taken and plan to take in the future will remediate the material weakness identified or that any additional material weaknesses
will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or
circumvention of those controls.
Further,
in the future, if we cannot conclude that we have effective internal control over our financial reporting, investors could lose
confidence in the reliability of our financial statements, which could lead to a decline in our stock price. Failure to comply
with reporting requirements could also subject us to sanctions and/or investigations by the SEC, The Nasdaq Stock Market or other
regulatory authorities.
We
may never be able to generate sufficient revenue from the commercialization of our product candidates to achieve and maintain
profitability.
Our
ability to operate profitably in the future will depend upon, among other items, our ability to (i) fully develop our product
candidates, (ii) scale up our business and operational structure, (iii) obtain regulatory approval of our product candidates from
the FDA, (iv) market and sell our product candidates to larger medical device companies, (v) successfully gain market acceptance
of our product candidates, and (vi) obtain sufficient and on-time supply of components from our third-party suppliers. If our
product candidates are never successfully commercialized, we may never receive a return on our investments in product development,
regulatory compliance, manufacturing and quality assurance, which may cause us to fail to generate revenue and gain economies
of scale from such investments.
We
only utilize a few suppliers for porcine and bovine tissue for our two product candidates and the loss of a supplier could have
an adverse impact on our business.
We
rely on one domestic and one international third-party vendors to supply porcine and bovine tissue for our two product candidates.
Our ability to supply our current and future product candidates, if approved, commercially depends, in part, on our ability to
obtain this porcine and bovine tissue in accordance with our specifications and with regulatory requirements and in sufficient
quantities to meet demand. Our ability to obtain porcine and bovine tissue may be affected by matters outside our control, including
that these suppliers may cancel our arrangements on short notice or have disruptions to their operations.
If
we are required to establish additional or replacement suppliers for the porcine and bovine tissue, it may not be accomplished
quickly and our operations could be disrupted. Even if we are able to find replacement suppliers, the replacement suppliers may
need to be qualified and may require additional regulatory authority approval, which could result in further delay. In the event
of a supply disruption, our product inventories may be insufficient to supply our customers and the development of any future
product candidates would be delayed, limited or prevented, which could have an adverse impact on our business.
We
depend upon third-party suppliers for certain components of our product candidates, making us vulnerable to supply problems and
price fluctuations, which could harm our business.
We
rely on a number of third-party suppliers to provide certain components of our product candidates. We do not have long-term supply
agreements with most of our suppliers, and, in many cases, we purchase goods on a purchase order basis. Our suppliers may encounter
problems for a variety of reasons, including unanticipated demand from larger customers, failure to follow specific protocols
and procedures, failure to comply with applicable regulations, equipment malfunction, quality or yield problems and environmental
factors, any of which could delay or impede their ability to meet our demand. Our reliance on these third-party suppliers also
subjects us to other risks that could harm our business, including:
In
addition, there are a limited number of suppliers and third-party manufacturers that operate under the FDA’s Quality System
Regulation, or QSR, requirements, maintain certifications from the International Organization for Standardization that are recognized
as harmonized standards in the European Economic Area, or EEA, and that have the necessary expertise and capacity to supply components
for our product candidates. As a result, it may be difficult for us to locate manufacturers for our anticipated future needs,
and our anticipated growth may strain the ability of our current suppliers to deliver products, materials and components to us.
If we are unable to arrange for third-party manufacturing of components for our product candidates, or to do so on commercially
reasonable terms, we may not be able to complete development of, market and sell our current or new product candidates. Further,
any supply interruption from our suppliers or failure to obtain additional suppliers for any of the components used in our product
candidates would limit our ability to manufacture our product candidates. Failure to meet these commitments could result in legal
action by our customers, loss of customers or harm to our ability to attract new customers, any of which could have a material
and adverse effect on our business, financial condition, results of operations and growth.
If
we successfully develop our product candidates and are unable to sell or license them to larger medical device companies, we may
have to commercialize our products on our own, in which case we would have to demonstrate the efficacy and financial viability
of our products to doctors, hospitals, insurance companies, and other stakeholders.
There
are multiple stakeholders that determine the success of a medical device, including doctors, hospitals, medical insurance companies,
and others. Educating these stakeholders on the benefits of our product candidates will require a significant commitment by a
marketing team and sales organization. Surgeons and hospitals may be slow to change their practices because of familiarity with
existing devices and/or treatments, perceived risks arising from the use of new devices, lack of experience using new devices,
lack of clinical data supporting the benefits of such devices or the cost of new devices. There may never be widespread adoption
of our product candidates by surgeons and hospitals. In addition, medical insurance companies would need to understand the costs
and benefits of our product candidates compared to the existing standards of care, if they are to provide reimbursement for the
cost of our product candidates and the procedures to implant our product candidates. We may have difficulty and may never achieve
the market acceptance that we need from doctors, hospitals, medical insurance companies and others that are necessary for a successful
product.
If
larger medical device companies purchase or license any of our product candidates and they are unable to convince hospital facilities
to approve the use of our product candidates, we may be unable to generate a substantial royalty income from our products.
In
the United States, in order for surgeons to use our product candidates, the hospital facilities where these surgeons treat patients
will typically require that the product candidates receive approval from the facility’s VAC. VACs typically review the comparative
effectiveness and cost of medical devices used in the facility. The makeup and evaluation processes for VACs vary considerably,
and it can be a lengthy, costly and time-consuming effort to obtain approval by the relevant VAC. For example, even if the purchasers
or licensees of our product candidates have an agreement with a hospital system for purchase of our products, in most cases, they
must obtain VAC approval by each hospital within the system to sell at that particular hospital. Additionally, hospitals typically
require separate VAC approval for each specialty in which our product is used, which may result in multiple VAC approval processes
within the same hospital even if such product has already been approved for use by a different specialty group. VAC approval is
often needed for each different product to be used by the surgeons in that specialty. In addition, hospital facilities and group
purchasing organizations, or GPOs, which manage purchasing for multiple facilities, may also require the purchasers of licensees
of our products to enter into a purchasing agreement and satisfy numerous elements of their administrative procurement process,
which can also be a lengthy, costly and time-consuming effort. If our purchasers/licensees do not receive access to hospital facilities
in a timely manner, or at all, via these VAC and purchasing contract processes, or otherwise, or if they are unable to secure
contracts on commercially reasonable terms in a timely manner, or at all, their operating costs will increase, their sales may
decrease and their operating results may be harmed.
Our
long-term growth depends on our ability to develop and commercialize additional product candidates.
The
medical device industry is highly competitive and subject to rapid change and technological advancements. Therefore, it is important
to our business that we continue to enhance our product candidate offerings and introduce new product candidates. Developing new
product candidates is expensive and time-consuming. Even if we are successful in developing additional product candidates, the
success of any new product candidates or enhancements to existing product candidates will depend on several factors, including
our ability to:
● properly identify and anticipate surgeon and patient needs;
● develop an effective and dedicated sales and marketing team;
● avoid infringing upon the intellectual property rights of third-parties;
● provide adequate training to potential users of our product candidates; and
If
we are unsuccessful in developing and commercializing additional devices in other areas, our ability to increase our revenue may
be impaired.
New
technologies, techniques or products could emerge that might offer better combinations of price and performance than the products
and services that we plan to offer. Existing markets for surgical devices are characterized by rapid technological change and
innovation. It is critical to our success that we anticipate changes in technology and customer requirements and physician, hospital
and healthcare provider practices. It is also important that we successfully introduce new, enhanced and competitive product candidates
to meet our prospective customers’ needs on a timely and cost-effective basis. At the same time, however, we must carefully
manage our introduction of new product candidates. If potential customers believe that such product candidates will offer enhanced
features or be sold for a more attractive price, they may delay purchases until such product candidates are available. We may
also continue to offer older obsolete products as we transition to new product candidates, and we may not have sufficient experience
managing transitions. If we do not successfully innovate and introduce new technology into our anticipated product lines or successfully
manage the transitions of our technology to new product offerings, our revenue, results of operations and business could be adversely
impacted.
Our
competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, industry
standards, distribution reach or customer requirements. We anticipate that we will face strong competition in the future as current
or future competitors develop new or improved product candidates and as new companies enter the market with novel technologies.
If
we are unable to produce an adequate supply of our product candidates for use in our current and planned clinical trials or for
commercialization because of our limited manufacturing resources or our facility is damaged or becomes inoperable, our regulatory,
development and commercialization efforts may be delayed.
Our
manufacturing resources for our product candidates are limited. We currently manufacture our product candidates for our research
and development purposes at our manufacturing facility in Irvine, California. If our existing manufacturing facility experiences
a disruption, we would have no other means of manufacturing our product candidates until we are able to restore the manufacturing
capability at our current facility or develop alternative manufacturing facilities. Additionally, any damage to or destruction
of our facilities or our equipment, prolonged power outage or contamination at our facilities would significantly impair our ability
to produce our product candidates and prepare our product candidates for clinical trials.
Additionally,
in order to produce our product candidates in the quantities that will be required for commercialization, we will have to increase
or “scale up” our production process over the current level of production. We may encounter difficulties in scaling
up our production, including issues involving yields, controlling and anticipating costs, quality control and assurance, supply
and shortages of qualified personnel. If our scaled-up production process is not efficient or results in a product that does not
meet quality or other standards, we may be unable to meet market demand and our revenues, business and financial prospects would
be adversely affected. Further, third parties with whom we may develop relationships may not have the ability to produce the quantities
of the materials we may require for clinical trials or commercial sales or may be unable to do so at prices that allow us to price
our products competitively.
Our
facility and equipment would be costly to replace and could require substantial lead time to repair or replace. The facility may
be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, flooding, fire, vandalism and power
outages, which may render it difficult to operate our business for some period of time. While we have taken precautions to safeguard
our facilities, any inability to operate our business during such periods could lead to the loss of customers or harm to our reputation.
We also possess insurance for damage to our property and the disruption of our business, but this insurance may not be sufficient
to cover all of our potential losses and this insurance may not continue to be available to us on acceptable terms, or at all.
We
currently have no sales and marketing infrastructure and if we are unable to successfully sell and/or license our product candidates
to larger medical device companies, we may need to commercialize our product candidates on our own, if approved, and may be unable
to do so or may never generate sufficient revenue to achieve or sustain profitability.
In
order to commercialize products that are approved by regulatory agencies, our current business model is to license or sell our
product candidates to large medical device companies. We may not be able to enter into license or sale agreements on acceptable
terms or at all, which would leave us unable to progress our current business plan. Our ability to reach a definitive agreement
for collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the
terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. If
we are unable to maintain or reach agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, we
may have to curtail the development of our product candidates, reduce or delay development programs, delay potential commercialization
of our product candidates or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake
development or commercialization activities at our own expense.
Moreover,
even if we are able to maintain and/or enter into such collaborations, such collaborations may pose a number of risks, including
the following:
● collaborators may not perform their obligations as expected;
Our
business would be materially or perhaps significantly harmed if any of the foregoing or similar risks comes to pass with respect
to our key collaborations.
If
it becomes necessary for us to establish a sales and marketing infrastructure, we may not be able to do so or we may not realize
a positive return on this investment. We would have to compete with established and well-funded medical device companies to recruit,
hire, train and retain sales and marketing personnel. Once hired, the training process is lengthy because it requires significant
education of new sales representatives to achieve the level of clinical competency with our products expected by specialists.
Upon completion of the training, we expect our sales representatives would typically require lead time in the field to grow their
network of accounts and achieve the productivity levels we expect them to reach in any individual territory. If we are unable
to attract, motivate, develop and retain a sufficient number of qualified sales personnel, or if our sales representatives do
not achieve the productivity levels in the time period we expect them to reach, our revenue will not grow at the rate we expect
and our business, results of operations and financial condition will suffer. Also, to the extent we hire sales personnel from
our competitors, we may be required to wait until applicable non-competition provisions have expired before deploying such personnel
in restricted territories or incur costs to relocate personnel outside of such territories. Any of these risks may adversely affect
our ability to increase sales of our product candidates. If we are unable to expand our sales and marketing capabilities, we may
not be able to effectively commercialize our product candidates, which would adversely affect our business, results of operations
and financial condition.
Product
liability lawsuits against us could cause us to incur substantial liabilities, limit sales of our existing product candidates
and limit commercialization of any products that we may develop.
Our
business exposes us to the risk of product liability claims that are inherent in the manufacturing, distribution, and sale of
medical devices. This risk exists even if a device is cleared or approved for commercial sale by the FDA and manufactured in facilities
licensed and regulated by the FDA or an applicable foreign regulatory authority. Manufacturing and marketing of our commercial
devices and clinical testing of our product candidates under development, may expose us to product liability and other tort claims.
Furthermore, surgeons may misuse our product candidates or use improper techniques if they are not adequately trained, potentially
leading to injury and an increased risk of product liability. If our product candidates are misused or used with improper technique,
we may become subject to costly litigation by our customers or their patients. Regardless of the merit or eventual outcome, product
liability claims may result in:
● significant litigation costs;
● damage to our reputation;
● withdrawal of clinical trial participants;
● loss of revenue; and
● the inability to commercialize any product candidates that we may develop.
Although
we intend to maintain liability insurance, the coverage limits of our insurance policies may not be adequate, and one or more
successful claims brought against us may have a material adverse effect on our business and results of operations. If we are unable
to obtain insurance in the future at an acceptable cost or on acceptable terms with adequate coverage, we will be exposed to significant
liabilities.
The
loss of our executive officers or our inability to attract and retain qualified personnel may adversely affect our business, financial
conditions and results of operations.
Our
business and operations depend to a significant degree on the skills, efforts and continued services of our executive officers
who have critical industry experience and relationships. Although we have entered into employment agreements with our executive
officers, they may terminate their employment with us at any time. Accordingly, these executive officers may not remain associated
with us. The efforts of these persons will be critical to us as we continue to develop our product candidates and business. We
do not carry key person life insurance on any of our management, which would leave our company uncompensated for the loss of any
of our executive officers.
Further,
competition for highly-skilled and qualified personnel is intense. As such, our future viability and ability to achieve sales
and profit will also depend on our ability to attract, train, retain and motivate highly qualified personnel in the diverse areas
required for continuing our operations. If we were to lose the services one or more of our current executive officers or if we
are unable to attract, hire and retain qualified personnel, we may experience difficulties in competing effectively, developing
and commercializing our products and implementing our business strategies, which could have a material adverse effect on our business,
operations and financial condition.
Our
ability to use our net operating loss carry-forwards and certain other tax attributes may be limited.
As
of December 31, 2020 and 2019, we had available federal net operating loss carryforwards, or NOLs, of approximately $35.0
and $26.1 million. Pre-2018 federal NOLs carryovers of $12.0 million may be carried forward for twenty years and begin
to expire in 2029. Under the Tax Act, post-2017 federal NOLs can be carried forward indefinitely and the annual limit of
deduction equals 80% of taxable income. However, to the extent the Company utilizes its NOL carryforwards in the future, the
tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state
tax authorities of the future period tax return in which the attribute is used. As of December 31, 2020, and 2019, the Company
had net operating loss carryforwards for state income tax purposes of approximately $35.0 million and $26.1 million, respectively,
which can be carried forward for twenty years and begin to expire in 2028.
As
of December 31, 2020, we also had federal research and development tax credit carryforwards of approximately $0.2 million
which begin to expire in 2027. In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the
Code, a corporation that undergoes an “ownership change” (generally defined as a cumulative change in equity ownership
by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period) may be subject to limitations
on its ability to utilize its NOLs and certain credit carryforwards to offset future taxable income and taxes. We are currently
analyzing the tax impacts of any potential ownership changes on our federal NOLs and credit carryforwards. Future changes in our
stock ownership, as well as other changes that may be outside of our control, could result in ownership changes. Our NOLs and
credit carryforwards may also be limited under similar provisions of state law. We have recorded a full valuation allowance related
to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future tax benefits of such
assets.
Risks
Related to Regulatory Approval and Other Governmental Regulations
Our
business and product candidates are subject to extensive governmental regulation and oversight, and our failure to comply with
applicable regulatory requirements could harm our business.
Our
product candidates and operations are subject to extensive regulation in the United States by the FDA and by regulatory agencies
in other countries where we anticipate conducting business activities. The FDA regulates the development, testing, manufacturing,
labeling, storage, record-keeping, promotion, marketing, sales, distribution and post-market support and reporting of medical
devices in the United States. The regulations to which we are subject are complex and may become more stringent over time. Regulatory
changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower
than anticipated sales.
In
order to conduct a clinical investigation involving human subjects for the purpose of demonstrating the safety and effectiveness
of a medical device, a company must, among other things, apply for and obtain Institutional Review Board, or IRB, approval of
the proposed investigation. In addition, if the clinical study involves a “significant risk” (as defined by the FDA)
to human health, the sponsor of the investigation must also submit and obtain FDA approval of an IDE application. Our product
candidates are considered significant risk devices requiring IDE approval prior to investigational use. We may not be able to
obtain FDA and/or IRB approval to undertake clinical trials in the United States for any new devices we intend to market in the
United States in the future. If we obtain such approvals, we may not be able to conduct studies which comply with the IDE and
other regulations governing clinical investigations or the data from any such trials may not support clearance or approval of
the investigational device. Failure to obtain such approvals or to comply with such regulations could have a material adverse
effect on our business, financial condition and results of operations. It is uncertain whether clinical trials will meet desired
endpoints, produce meaningful or useful data and be free of unexpected adverse effects, or that the FDA will accept the validity
of foreign clinical study data, and such uncertainty could preclude or delay market clearance or authorizations resulting in significant
financial costs and reduced revenue.
Our
product candidates will be subject to extensive governmental regulation in foreign jurisdictions, such as the EEA, and
our failure to comply with applicable requirements could cause our business, results of operations and financial condition to
suffer.
In
the EEA, our product candidates will need to comply with the Essential Requirements set forth in Medical Device Regulation. Compliance
with these requirements is a prerequisite to be able to affix a CE mark to a product, without which a product cannot be marketed
or sold in the EEA. To demonstrate compliance with the Essential Requirements and obtain the right to affix the CE mark to our
product candidates, we must undergo a conformity assessment procedure, which varies according to the type of medical device and
its classification. The conformity assessment procedure requires the involvement of a Notified Body, which is an organization
designated by a competent authority of an EEA country to conduct conformity assessments. The Notified Body would audit and examine
the Technical File and the quality system for the manufacture, design and final inspection of our products. The Notified Body
issues a CE Certificate of Conformity following successful completion of a conformity assessment procedure and quality management
system audit conducted in relation to the medical device and its manufacturer and their conformity with the Essential Requirements.
This Certificate entitles the manufacturer to affix the CE mark to its medical products after having prepared and signed a related
EC Declaration of Conformity.
As
a general rule, demonstration of conformity of medical products and their manufacturers with the Essential Requirements must be
based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal
conditions of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal
conditions of use and that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed
against the benefits of its intended performance, and that any claims made about the performance and safety of the device (e.g.,
product labeling and instructions for use) are supported by suitable evidence. This assessment must be based on clinical data,
which can be obtained from (1) clinical studies conducted on the devices being assessed, (2) scientific literature from similar
devices whose equivalence with the assessed device can be demonstrated or (3) both clinical studies and scientific literature.
However, the pre-approval and post-market clinical requirements are much more rigorous. The conduct of clinical studies in the
EEA is governed by detailed regulatory obligations. These may include the requirement of prior authorization by the competent
authorities of the country in which the study takes place and the requirement to obtain a positive opinion from a competent Ethics
Committee. This process can be expensive and time-consuming.
The
FDA regulatory approval, clearance and license process is complex, time-consuming and unpredictable.
In
the United States, our product candidates are expected to be regulated as medical devices. Before our medical device product candidates
may be marketed in the United States, we must submit, and the FDA must approve a PMA application. For the PMA approval process,
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, pre-clinical, clinical trial, manufacturing and labeling data. In addition, modifications to products
that are approved through a PMA application generally require FDA approval. The time required to obtain approval, clearance or
license by the FDA to market a new therapy is unpredictable but typically takes many years and depends upon many factors, including
the substantial discretion of the FDA.
Our
product candidates could fail to receive regulatory approval, clearance or license for many reasons, including the following:
Even
if we were to obtain approval, clearance or license, the FDA may grant approval, clearance or license contingent on the performance
of costly post-marketing clinical trials or may approve our product candidates with a label that does not include the labeling
claims necessary or desirable for successful commercialization of our product candidates. Any of the above could materially harm
our product candidates’ commercial prospects.
Even
if our product candidates are approved by regulatory authorities, if we fail to comply with ongoing regulatory requirements, or
if we experience unanticipated problems with our product candidates, our product candidates could be subject to restrictions or
withdrawal from the market.
The
manufacturing processes, post-approval clinical data and promotional activities of any product candidate for which we or our collaborators
obtain marketing approval will be subject to continual review and periodic inspections by the FDA and other regulatory bodies.
Even if regulatory approval of our product candidates is granted in the United States, the approval may be subject to limitations
on the indicated uses for which the product candidates may be marketed or contain requirements for costly post-marketing testing
and surveillance to monitor the safety or effectiveness of the product. Later discovery of previously unknown and unanticipated
problems with our product candidates, including but not limited to unanticipated severity or frequency of adverse events, delays
or problems with the manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in
restrictions on such product candidates or manufacturing processes, withdrawal of the product candidates from the market, voluntary
or mandatory recall, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal
penalties.
We
are required to report certain malfunctions, deaths and serious injuries associated with our product once approved by regulatory
bodies, which can result in voluntary corrective actions or agency enforcement actions.
All
manufacturers marketing medical devices in the EEA are legally bound to report incidents involving devices they produce or sell
to the regulatory agency, or competent authority, in whose jurisdiction the incident occurred. Under the EU Medical Devices Directive
(Directive 93/42/EEC), an incident is defined as any malfunction or deterioration in the characteristics and/or performance of
a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, might lead to or
might have led to the death of a patient, or user or of other persons or to a serious deterioration in their state of health.
In addition, under the EU MDR, the manufacturers are obligated to publish Periodic Safety Update Report (annually for high risk
devices) which will be uploaded to EUDAMED and require conformity assessment by Notified Bodies.
Malfunction
or misuse of our product candidates could result in future voluntary corrective actions, such as recalls, including corrections
(e.g., customer notifications), or agency action, such as inspection or enforcement actions. If malfunctions or misuse do occur,
we may be unable to correct the malfunctions adequately or prevent further malfunctions or misuse, in which case we may need to
cease manufacture and distribution of the affected products, initiate voluntary recalls, and redesign the products or the instructions
for use for those products. Regulatory authorities may also take actions against us, such as ordering recalls, imposing fines,
or seizing the affected products. Any corrective action, whether voluntary or involuntary, will require the dedication of our
time and capital, may distract management from operating our business, and may harm our business, results of operations and financial
condition.
Legislative
or regulatory reforms in the United States or the EU may make it more difficult and costly for us to obtain regulatory clearances
or approvals for our product candidates or to manufacture, market or distribute our product candidates after clearance or approval
is obtained.
From
time to time, legislation is drafted and introduced in the U.S. Congress that could significantly change the statutory provisions
governing the regulation of medical devices or the reimbursement thereof. In addition, the FDA regulations and guidance are often
revised or reinterpreted by the FDA in ways that may significantly affect our business and our product candidates. For example,
as part of the Food and Drug Administration Safety and Innovation Act, or FDASIA, Congress reauthorized the Medical Device User
Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements”
and miscellaneous reforms, which are further intended to clarify and improve medical device regulation both pre- and post-clearance
or approval. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs
or lengthen review times of any future products or make it more difficult to manufacture, market or distribute our product candidates
or future products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and
if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require:
● additional testing prior to obtaining clearance or approval;
● changes to manufacturing methods;
● recall, replacement or discontinuance of our systems or future products; or
● additional record keeping.
Any
of these changes could require substantial time and cost and could harm our business and our financial results.
The
highly publicized PIP scandal (use of non-medical grade silicone in breast implants) in 2010 led to publishing the first version
of EU Medical Device Regulation (MDR) by European Commission in 2012. After 347 amendments by European Parliament in 2014, followed
by various versions, the final version of the new EU Medical Device Regulation (MDR 2017/745) was published on May 5, 2017. The
official entry to force of the MDR started on May 26, 2017 with the transition period of 3 years. The date of application of all
existing and new medical devices under MDR is May 26, 2020; however, Notified Bodies are currently not accepted any new CE Mark
applications under MDD (Medical Device Directives). All existing MDD CE certificates become void on May 26, 2024. EU requires
that all existing and new medical device undergo assessment under MDR as if they are new product application.
The
changes from EU Medical Device Directives (MDD) to Medical Device Regulation (MDR) are significant, with stricter clinical requirements
and post-market surveillance, shift from pre-approval to Life-cycle approach, centralized EUDAMED database for public transparency
(e.g. Periodic Safety Update Reports) and device registration, more device specific requirements (e.g. Common Specifications),
legal liability for defective devices, etc. The QMS audit under MDR will be much more rigorous, including audits and assessment
of suppliers and device testing. In addition, EU MDR introduces new stakeholders participating during the application review process,
which will result in a longer and more burdensome assessment of our new products. The new stakeholders will include Medical Device
Coordination Group (MDCG) established by Member States and Expert Panels appointed by European Union.
Further,
under the FDA’s Medical Device Reporting or MDR regulations, we are required to report to the FDA any incident in which
our product candidates may have caused or contributed to a death or serious injury or in which our product malfunctioned and,
if the malfunction were to recur, would likely cause or contribute to death or serious injury. Any adverse event involving our
products could result in future voluntary corrective actions, such as product actions or customer notifications, or regulatory
authority actions, such as inspection, mandatory recall or other enforcement action. Repeated product malfunctions may result
in a voluntary or involuntary product recall, which could divert managerial and financial resources, impair our ability to manufacture
our product candidates in a cost-effective and timely manner and have an adverse effect on our reputation, financial condition
and operating results.
Moreover,
depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA may require, or we may
decide, that we will need to obtain new approvals or clearances for the device before we may market or distribute the corrected
device. Seeking such approvals or clearances may delay our ability to replace the recalled devices in a timely manner. Moreover,
if we do not adequately address problems associated with our product candidates, we may face additional regulatory enforcement
action, including FDA warning letters, product seizure, injunctions, administrative penalties, withdrawals or clearances or approvals
or civil or criminal fines. We may also be required to bear other costs or take other actions that may have a negative impact
on our sales as well as face significant adverse publicity or regulatory consequences, which could harm our business, including
our ability to market our product candidates in the future.
We
are subject to federal, state and foreign healthcare laws and regulations, and a finding of failure to comply with such laws and
regulations could have a material and adverse effect on our business.
Our
operations are, and will continue to be, directly and indirectly affected by various federal, state or foreign healthcare laws,
including, but not limited to, those described below. These laws include:
The
risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted
by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Because of the breadth
of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some
of our business activities, including our relationships with surgeons and other healthcare providers, some of whom recommend,
purchase and/or prescribe our product candidates, and our distributors, could be subject to challenge under one or more of such
laws.
If
our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply
to us now or in the future, we may be subject to penalties, including civil and criminal penalties, damages, fines, disgorgement,
exclusion from governmental health care programs 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 against us for violation of these laws, even
if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention
from the operation of our business.
Regulatory
healthcare reform measures and other legislative changes may have a material and adverse effect on business, results of operations
and financial condition.
FDA
regulations and guidance are often revised or reinterpreted by FDA and such actions may significantly affect our business and
our product candidates. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs
or lengthen review times for our product candidates. Delays in receipt of, or failure to receive, regulatory approvals for our
product candidates would have a material and adverse effect on our business, results of operations and financial condition.
In
March 2010, the PPACA was signed into law, which includes a deductible 2.3% excise tax on any entity that manufactures or imports
medical devices offered for sale in the United States, with limited exceptions, that began on January 1, 2013. Although a two
year moratorium was placed on the medical device excise tax in 2016 and extended through December 31, 2019, it was permanently
repealed on December 20, 2019. Other elements of the PPACA, including comparative effectiveness research, an independent payment
advisory board and payment system reforms, including shared savings pilots and other provisions, may significantly affect the