Item 1A. RISK FACTORS
The
risks below are those that we believe are the material risks that
we currently face, but are not the only risks facing us and our
business. If any of these risks actually occur, our business,
financial condition and results of operations could be materially
adversely affected. Below is a summary of our risk factors with a
more detailed discussion following.
20
●
The COVID-19
pandemic in the United States has and may continue to negatively
impact our business, financial condition and results of
operations.
●
We have had a
history of losses, which may continue as we expand our selling
efforts.
●
Our revenue growth
for a particular period is difficult to predict, and a shortfall in
forecast revenues may harm our operating results.
●
Our current
comprehensive wound and skin care strategy involves growth through
acquisitions and investments, which requires us to incur
substantial costs and potential liabilities for which we may never
realize the anticipated benefits.
●
If we cannot meet
our future capital requirements, our business will
suffer.
●
Failure to retain
and recruit key personnel would harm our ability to meet key
objectives.
●
Failure to manage
our growth strategy could harm our business.
●
We operate in
highly competitive markets and face competition from large,
well-established medical device manufacturers and telehealth
providers as well as new market entrants, and if we are unable to
compete within our markets or our products and services do not gain
market acceptance, our operating results and financial condition
could suffer.
●
Security breaches
and other disruptions could compromise our information and expose
us to liability, which would cause our business and reputation to
suffer.
●
If we fail to
maintain an effective system of internal controls over financial
reporting, we may not be able to accurately report our financial
results or prevent fraud and our business may be harmed and our
stock price may be adversely impacted.
●
The Loan Agreement
governing our revolving line of credit includes restrictive terms,
and our failure to comply with any of these terms could result in a
default, which would have an adverse effect on our
business.
●
We rely on our
research and development partners to design, manufacture and supply
the products we have licensed for marketing.
●
Our future success
will largely depend on our ability to maintain and further grow
clinical acceptance and adoption of our products, and we may be
unable to adequately educate healthcare practitioners on the use
and benefits of our products.
●
Competitors could
invent products superior to ours and cause our products and
technologies to become obsolete.
●
Disruption of, or
changes in, our distribution model or customer base could harm our
sales and margins.
●
If we are unable to
manage product inventory in an effective manner, our profitability
could be impaired.
●
Failure of any
third-party assessments to demonstrate desired outcomes in proposed
endpoints may result in adverse regulatory actions, reduce
physician usage or adoption of our products, or reduce the price,
coverage and/or reimbursement for our products, which could have a
negative impact on our business performance.
●
We may have
exposure to product liability claims.
●
Interruptions in
the supply of our products or inventory loss may adversely affect
our business, results of operations and financial
condition.
●
Our planned
expansion into wound and skin care virtual consult and other
services will require entrance into several markets in which we
have little or no experience and is dependent on our relationships
with affiliated professional entities to provide physician
services.
●
Recent and frequent
state legislative and regulatory changes specific to telemedicine
may present us with additional requirements and state compliance
costs, with potential operational impacts in certain
jurisdictions.
●
If we are unable to
adequately protect our intellectual property rights, we may not be
able to compete effectively.
●
CellerateRX
Surgical no longer has patent protection. Accordingly, CellerateRX
Surgical may be subject to competition from the sale of
substantially equivalent products that could adversely affect our
business and operations.
●
We are heavily
dependent on technologies and products we have licensed from third
parties, and we may need to license technologies and products in
the future, and if we fail to obtain licenses we need, or fail to
comply with our payment obligations in the agreements under which
we in-license intellectual property and other rights from third
parties, we could lose our ability to develop and commercialize our
products.
●
We may be found to
infringe on intellectual property rights of others.
●
Our business is
affected by numerous regulations relating to the labeling,
marketing and sale of our products.
●
Delays in or
changes to the FDA clearance and approval processes or ongoing
regulatory requirements could make it more difficult for us to
obtain FDA clearance or approval of new products or comply with
ongoing requirements.
●
Changes in
reimbursement policies and regulations by governmental or other
third-party payors may have an adverse impact on the use of our
products.
●
We rely on our
research and development partners to comply with applicable laws
and regulations relating to product classification and FDA
marketing authorization.
●
We and our
employees and contractors are subject, directly or indirectly, to
federal, state and foreign healthcare fraud and abuse laws,
including false claims laws. If we are unable to comply, or have
not fully complied, with such laws, we could face substantial
penalties.
21
●
Our or our research
and development partners’ use and disclosure of personally
identifiable information is subject to federal and state privacy
and security regulations, and our failure to comply with those
regulations or to adequately secure the information we hold could
result in significant liability or reputational harm and, in turn,
a material adverse effect on our client base, business, financial
condition and results of operations.
●
If we fail to
comply with extensive healthcare laws and government regulations,
we could suffer penalties or be required to make significant
changes to our operations.
●
Our officers,
employees, independent contractors, principal investigators and
commercial partners may engage in activities that are improper
under other laws and regulations, which would create liability for
us.
●
We could be
adversely affected if healthcare reform measures substantially
change the market for medical care or healthcare coverage in the
United States.
●
Defects, failures
or quality issues associated with our products could lead to
product recalls or safety alerts, adverse regulatory actions,
litigation and negative publicity that could materially adversely
affect our reputation, business, results of operations and
financial condition.
●
It is possible that
we will require additional capital to meet our financial
obligations and support business growth.
●
The trading price
of the shares of our common stock is highly volatile, and
purchasers of our common stock could incur substantial
losses.
●
Our common stock
does not have a vigorous trading market, and you may not be able to
sell your securities at or near ask prices, or at all.
●
The potential sale
of large amounts of common stock may have a negative effect upon
the market value of our shares.
●
A few of our
existing shareholders own a large percentage of our voting stock
and have control over matters requiring shareholder approval and
may delay or prevent a change in control or otherwise lead to
actual or potential conflicts of interest.
●
Our Certificate of
Formation includes provisions limiting the personal liability of
our directors for breaches of fiduciary duties under Texas
law.
●
Texas law and our
Certificate of Formation and bylaws contain anti-takeover
provisions that could delay or discourage takeover attempts that
shareholders may consider favorable.
●
Our failure to meet
the continued listing requirements of The Nasdaq Capital Market
could result in a delisting of our common stock.
Risks Related to How We Operate Our Business
The COVID-19 pandemic in the United States has and may continue to
negatively impact our business, financial condition and results of
operations.
The
COVID-19 pandemic is ongoing in the United States and most of the
world. On January 30, 2020 the World Health Organization declared a
global emergency, and since that time governments have instituted
measures to attempt to contain spread of the virus, including
temporary limitations on non-essential business activities and
elective surgical procedures in hospitals.
A
majority of our revenue is currently generated from the sale of
products in connection with surgical procedures, and a significant
portion of those sales are to hospitals. Beginning in March 2020,
many states issued orders suspending elective surgeries in order to
free-up hospital resources to treat COVID-19 patients. This
resulted in a reduction in demand for our surgical products
beginning in the second half of March 2020. Additionally, most
states limited access to SNFs to only resident caregivers, which
impeded our ability to provide education and product training to
the clinicians who use our products in these facilities. These
restrictions resulted in an overall decline in sales for the second
quarter of 2020. During the third and fourth quarters of 2020, we
saw a strong rebound in product sales as restrictions on elective
surgeries eased in our primary markets in Texas, Florida, and the
southeastern United States.
The
extent to which these events impact our business will depend on
future developments regarding the rate of infection of the virus
and the further or lessening of current or new restrictions put in
place to contain the pandemic.
22
We have had a history of losses, which may continue as we expand
our selling efforts.
We have
incurred net losses in most years since we began our current
operations in 2004. We plan to continue making significant
investments in our sales force and clinical programs, which
substantially increase our operating expenses. Consequently, we
will need to continue our revenue growth to become profitable in
future periods. We cannot offer any assurance that we will be able
to generate future sales growth. If we fail to achieve
profitability, our stock price may decline, and you may lose part
or all of your investment.
Our revenue growth for a particular period is difficult to predict,
and a shortfall in forecast revenues may harm our operating
results.
Because
we are a relatively small company, our revenue growth and,
consequently, results of operations are difficult to predict. We
plan our operating expense levels based primarily on forecasted
revenue levels. A shortfall in revenue could lead to operating
results being below expectations as we may not be able to quickly
reduce our fixed expenses in response to short-term revenue
shortfalls. We have experienced fluctuations in revenue and
operating results from quarter to quarter and anticipate that these
fluctuations will continue until we achieve a critical mass with
our product and service sales. These fluctuations can result from a
variety of factors, including:
●
economic
conditions worldwide, as well as economic conditions specific to
the healthcare industry, which could affect the ability of surgical
and post-acute facilities to purchase our products and could result
in a reduction in elective operative procedures;
●
governmental
regulations, including those adopted in response to the COVID-19
pandemic;
●
the
uncertainty surrounding our ability to attract new customers and
retain existing customers;
●
changes
in reimbursement rates for our products by government and private
insurers;
●
the
length and variability of our sales cycle, especially gaining
approvals for the use of our products in additional hospitals and
surgery centers, which makes it difficult to forecast the quarter
in which our sales will occur;
●
issues
including delays in the sourcing of our products;
●
the
timing of regulatory approvals;
●
the
timing of operating expense relating to the expansion of our
business and operations;
●
changes
in the pricing of our products and those of our
competitors;
●
the
development of new wound care products or product enhancements by
our competitors; and
●
actual
events, circumstances, outcomes and amounts differing from
assumptions and estimates used in preparing our operating plan and
how well we execute our strategy and operating plans.
As a
consequence, operating results for a particular future period are
difficult to predict and prior results are not necessarily
indicative of future results. Any of the foregoing factors, or any
other factors discussed elsewhere herein, could have a material
adverse effect on our business.
Our current comprehensive wound and skin care strategy involves
growth through acquisitions and investments, which requires us to
incur substantial costs and potential liabilities for which we may
never realize the anticipated benefits.
In
addition to internally generated growth, our current strategy to
expand into wound and skin care virtual consult and other services
involves growth through acquisitions and investments. Between
January 1, 2020 and December 31, 2020, we have made minority
shareholder investments in two businesses at a total cost of
approximately $1.1 million, and in February 2021, we made an
additional $0.6 million investment in such businesses. In addition,
in January 2021 we acquired WounDerm for aggregate consideration of
29,536 shares of our common stock.
23
We may
be unable to continue implementing our growth strategy, and our
strategy ultimately may be unsuccessful. We engage in evaluations
of potential acquisitions and investments and are in various stages
of discussion regarding possible acquisitions, certain of which, if
consummated, could be significant to us. Any new acquisition or
investment could result in material transaction expenses, increased
interest and amortization expense, increased depreciation expense
and increased operating expense, any of which could have a material
adverse effect on our operating results. In addition, if we are
unable to integrate businesses and operations that we acquire in
the future, our profitability could suffer. These acquisitions and
investments also involve other risks, including diversion of
management resources otherwise available for the running of our
business and the development of our business as well as risks
associated with entering markets in which our marketing teams and
sales force has limited experience or where experienced
distribution alliances are not available. We may not be able to
identify suitable acquisition or investment candidates in the
future, obtain acceptable financing or consummate any future
acquisitions or investments. In addition, certain potential
acquisitions may be subject to antitrust and competition laws,
which could impact our ability to pursue strategic acquisitions and
could result in mandated divestitures. If we are unsuccessful in
our current strategy to expand into wound and skin care virtual
consult and other services, we may be unable to meet our financial
targets and our financial performance could be materially and
adversely affected.
If we cannot meet our future capital requirements, our business
will suffer.
We have
a history of operating losses and negative cash flow from operating
activities, and future results of operations involve significant
risks and uncertainties. Factors that could affect our future
operating results and cause actual results to vary materially from
expectations include, but are not limited to, demand for our
products and services, new product and service offerings from
competitors, regulatory approval of our new products, technological
change, and dependence on key personnel. Although we have taken
steps to improve our overall liquidity, if our cash flow is
insufficient, we may be forced to seek additional debt or equity
financing in order to:
●
fund
operating losses;
●
increase
marketing to address the market for surgical, wound and skin care
products and services;
●
take
advantage of opportunities, including more rapid expansion or
acquisitions of complementary products or businesses;
●
hire,
train and retain employees;
●
develop
and/or distribute new products; and/or
●
respond
to economic and competitive pressures.
If our
capital needs are met through the issuance of equity or convertible
debt securities, the percentage ownership of our current
shareholders may be reduced which may have a negative impact on the
market price of our common stock. Our future success may be
determined in large part by our ability to obtain additional
financing, and the incurrence of indebtedness would result in
increased debt service obligations which could result in operating
and financing covenants that would restrict our operations. There
can be no assurance that such financing would be available or, if
available, that such financing could be obtained upon terms
acceptable to us. If adequate funds are not available, or are not
available on acceptable terms, our operating results and financial
condition may suffer.
Failure to retain and recruit key personnel would harm our ability
to meet key objectives.
Our
success depends, in large part, on our ability to attract and
retain skilled executive, managerial, sales and marketing
personnel. We compete for such personnel with other companies, some
of which have greater financial resources than we do to recruit and
retain personnel. There can be no assurance that we will be able to
find and attract additional qualified employees or retain any such
executive officers and other key personnel. The inability to hire
qualified personnel or the loss of services of our executive
officers or key personnel may have a material adverse effect on our
business. Further, any inability on our part to enforce non-compete
arrangements related to key personnel who have left our company or
may leave our company in the future could have a material adverse
effect on our business.
Failure
to manage our growth strategy could harm our
business.
Our
ability to successfully implement our business plan and market and
sell our surgical, wound and skin care products and services
requires an effective plan for managing our future growth. We plan
to increase the scope of our operations at a rapid rate. Future
expansion efforts will be expensive and may strain our internal
operating resources. To manage future growth effectively, we must
maintain and enhance our financial and accounting systems and
controls, integrate new personnel and manage expanded operations.
If we do not manage growth properly, it could harm our operating
results and financial condition.
24
We operate in highly competitive markets and face competition from
large, well-established medical device manufacturers and telehealth
providers as well as new market entrants, and if we are unable to
compete within our markets or our products and services do not gain
market acceptance, our operating results and financial condition
could suffer.
Competition
from other medical device companies is significant and could be
significantly affected by new product introductions and other
activities of market participants. We compete with other companies
in acquiring rights to products or technologies from third-party
developers. Although our products have performed well in customer
evaluations, we are a relatively unknown brand in a market
dominated by companies with extensive product lines and large
customer bases. We may not, even with more efficacious products, be
able to secure contracts and achieve significant growth with large
national accounts.
In
addition, if we launch our wound and skin care virtual consult and
other service offerings, we will face competition from other
telehealth providers. The public health emergency caused by the
COVID-19 pandemic has led to the widespread adoption of
telemedicine for most health care clinical specialties, including
wound care and dermatology. As such, any clinical wound care or
dermatology physician and/or provider group that has incorporated
telemedicine into their practice could be considered competitive.
If we are unable to compete with other telehealth providers, our
operating results and financial condition may suffer.
Several
factors may limit the market acceptance of our products and
services, including the timing of regulatory approvals and market
entry relative to competitive products and services, the
availability of alternative products and services, the price of our
products and services relative to alternative products and
services, the availability of third-party reimbursement and the
extent of marketing efforts by third-party distributors or agents
that we retain. There can be no assurance that our products or
services will receive market acceptance in a commercially viable
period of time, if at all. Furthermore, there can be no assurance
that we can develop products and services that are more effective
or achieve greater market acceptance than competitive products and
services, or that our competitors will not succeed in developing or
acquiring products and technologies that are more effective than
those being developed by us, that would render our products and
technologies less competitive or obsolete.
Our
competitors enjoy several competitive advantages over us, including
but not limited to:
●
large
and established distribution networks in the U.S. and/or in
international markets;
●
greater
financial, managerial and other resources for products research and
development, sales and marketing efforts and protecting and
enforcing intellectual property rights;
●
greater
name recognition;
●
larger
consumer bases;
●
more
expansive portfolios of products and intellectual property rights;
and
●
greater
experience in obtaining and maintaining regulatory approvals and/or
clearances from the FDA and other regulatory agencies.
The
presence of competition in our market may lead to pricing pressure
which would make it more difficult to sell our products and
services at a profitable price or may prevent us from selling our
products at all. Our failure to compete effectively would have a
material adverse effect on our business.
Security breaches and other disruptions could compromise our
information and expose us to liability, which would cause our
business and reputation to suffer.
In the
ordinary course of our business, we use networks to collect and
store sensitive data, including intellectual property, proprietary
business information and important information of our customers,
suppliers and business partners, as well as personally identifiable
information of our customers and employees. The secure processing,
maintenance and transmission of this information is critical to our
operations. Despite our security measures, our information
technology and infrastructure may be vulnerable to attacks by
hackers or breached due to employee error, malfeasance or other
disruptions. Any such breach could compromise our networks and the
information stored there could be accessed, publicly disclosed,
lost or stolen. Any such access, disclosure or other loss of
information could result in the loss of existing customers,
difficulty in attracting new customers, backlash from negative
public relations, legal claims or proceedings, liability under laws
that protect the privacy of personal information, and regulatory
penalties. Further, such access, disclosure or loss may cause
disruption of our operations and the services we provide to
customers, damage to our reputation, and cause a loss of confidence
in our products and services, which could adversely affect our
business.
We have
programs, processes and technologies in place to prevent, detect,
contain, respond to and mitigate security related threats and
potential incidents. We undertake considerable ongoing improvements
to our systems, connected devices and information-sharing products
in order to minimize vulnerabilities, in accordance with industry
and regulatory standards. Because the techniques used to obtain
unauthorized access change frequently and can be difficult to
detect, anticipating, identifying or preventing these intrusions or
mitigating them if and when they occur, may be
challenging.
25
If we fail to maintain an effective system of internal controls
over financial reporting, we may not be able to accurately report
our financial results or prevent fraud and our business may be
harmed and our stock price may be adversely impacted.
Effective
internal controls over financial reporting are necessary for us to
provide reliable financial reports and to effectively prevent
fraud. Any inability to provide reliable financial reports or to
prevent fraud could harm our business. The Sarbanes-Oxley Act of
2002 (the “Sarbanes-Oxley Act”) requires management to
evaluate and assess the effectiveness of our internal control over
financial reporting. In order to comply with the requirements of
the Sarbanes-Oxley Act, we are required to continuously evaluate
and, where appropriate, enhance our policies, procedures and
internal controls. If we fail to maintain the adequacy of our
internal controls over financial reporting, we could be subject to
litigation or regulatory scrutiny and investors could lose
confidence in the accuracy and completeness of our financial