Item 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this Annual Report on
Form 10-K, including the consolidated financial statements and the related notes, before purchasing our common stock. If any of the following risks actually occur, they may materially harm our business and our financial condition and results of
operations. In any such event, the market price of our common stock could decline, and you could lose all or part of your investment.
Risks Related to our Business
Our recurring losses from operations and dependency upon future issuances of equity or other financing to fund ongoing operations have raised
substantial doubt as to our ability to continue as a going concern. We will be required to raise additional funds to finance our operations and remain a going concern; we may not be able to do so, and/or
the terms of any financings may not be advantageous to us.
The continuation of our business is dependent upon raising additional capital. We expect to devote substantial resources for the commercialization of the PACE and will continue to
research and develop the non-medical uses of the PACE technology, both of which will require additional capital resources. We incurred a net loss of $10.3 million and $27.3 million for the years ended December 31, 2022, and 2021, respectively. The
operating losses and the events of default on the Company’s notes payable indicate substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the filing of this Annual Report on Form 10-K.
The continuation of our business is dependent upon raising additional capital to fund operations. Management plans to obtain additional capital in 2023 through investments by strategic
partners for market opportunities, or to raise capital through the conversion of outstanding warrants, issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt. These possibilities, to the extent
available, may be on terms that result in significant dilution to our existing stockholders. In addition, there can be no assurances that our plans to obtain additional capital will be successful on the terms or timeline we expect, or at all. If
these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or, if available, to obtain funds through financing transactions with unfavorable terms. The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities
in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The consolidated financial statements do not include any
adjustment that might result from the outcome of this uncertainty. Our consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and
liabilities that might be necessary should we be unable to continue as a going concern.
We recently restated our financial statements for prior periods, which resulted in unanticipated costs and may adversely affect investor confidence, our stock
price, our ability to raise capital in the future and our reputation and may result in stockholder litigation and regulatory actions.
On March 28, 2023, the Audit Committee of our Board of Directors, after discussion with management and with our independent registered public accounting firm, concluded that our previously issued
consolidated financial statements as of and for the quarter and nine months ended September 30, 2022, quarter and six months ended June 30, 2022 and quarter ended March 31, 2022 (the “Affected Periods”) should no longer be relied upon due to errors
related to inaccurate application of US GAAP. As a result, we restated the financial statements for the Affected Periods.
Because of these restatements, we incurred unanticipated costs for accounting and legal fees, and the restatements may have the effect of eroding investor confidence in our company and our financial
reporting and accounting practices and processes and may raise reputational issues for our business. The restatements may negatively impact the trading price of our securities and make it more difficult for us to raise capital on acceptable terms, or
at all. In addition, the restatements and related material weaknesses in our internal control over financial reporting may also result in stockholder litigation against us, or adverse regulatory consequences, including investigations, penalties, or
suspensions by the SEC. Any such regulatory consequences, litigation, claim or dispute, whether successful or not, could subject us to additional costs, divert the attention of our management, or impair our reputation. Each of these consequences
could have a material adverse effect on our business, results of operations and financial condition.
We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we identify
additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting or disclosure controls and procedures, it may result in material misstatements of our consolidated financial statements or
cause us to fail to meet our periodic reporting obligations, which may adversely affect our business, financial condition, and results of operations.
We have identified material weaknesses in our internal control over financial reporting. 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 the annual or interim financial statements will not be prevented or detected on a timely basis. These material weaknesses are as follows:
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We are taking certain measures to remediate these material weaknesses described above as described in Part II, Item 9A of this Annual Report on Form 10-K; however, such material weaknesses had not been
remediated as of December 31, 2022. In addition, due to the material weaknesses in internal control over financial reporting, we have also determined that our disclosure controls and procedures were ineffective as of December 31, 2022. The material
weaknesses will not be considered remediated until management completes the design and implementation of the measures described above and the controls operate for a sufficient period of time and management has concluded, through testing, that these
controls are effective.
There can be no assurance as to when the material weaknesses will be remediated. At this time, we cannot provide an estimate of costs expected to be incurred in connection with implementing this
remediation plan; however, these remediation measures will be time consuming, will result in us incurring significant costs, and will place significant demands on our financial and operational resources.
We cannot assure that the measures we have taken to date and may take in the future will be sufficient to remediate the control deficiencies that led to our material weaknesses in internal control over
financial reporting or that they will prevent or avoid potential future material weaknesses to be identified in the future. The effectiveness of our internal control over financial reporting is subject to various inherent limitations, including cost
limitations, judgments used in decision making, assumptions about the likelihood of future events, the possibility of human error and the risk of fraud. Any failure to design, implement and maintain effective internal control over financial reporting
and effective disclosure controls and procedures, or any difficulties encountered in their implementation or improvement, may result in additional material misstatements of our consolidated financial statements, or cause us to fail to meet our
periodic reporting obligations, which may adversely affect our business, financial condition and results of operations.
If we are unable to successfully raise additional capital, our viability may be threatened; however, if we do raise additional capital, your percentage ownership
as a stockholder could decrease and constraints could be placed on the operations of our business.
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 promissory notes
and convertible promissory notes, the issuance of notes payable to related parties, and product sales. We will seek to obtain additional funds in the future either through equity or debt financings or through strategic alliances with third parties,
either alone or in combination with equity financings. 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 alternative business opportunities
that may be available to us. In addition, because of our private placements in August and November 2022, we are currently prohibited from incurring or guaranteeing most kinds of debt issued by public or private investors, which further constrains our
options to raise capital. If we can raise additional funds by issuing debt securities, these debt securities could impose significant additional 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 adverse effect on our business, financial condition, and results of operations, or threaten our ability to continue as a going concern.
A variety of factors could impact our need to raise additional capital, the timing of any required financings and the amount of such financings. Factors that may cause our future capital requirements to
be greater than anticipated or could accelerate our need for funds include, without limitation:
• delayed market acceptance of any approved product;
• lack of financial resources to adequately support our operations;
• unanticipated difficulties in operating in international markets;
• unforeseen problems in attracting and retaining qualified personnel;
• the impact of changes in U.S. health care law and policy on our operations;
• enactment of new legislation or administrative regulations;
• claims that might be brought in excess of our insurance coverage;
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• delays in timing of receipt of required regulatory approvals;
• the failure to comply with regulatory guidelines; and
• the uncertainty in industry demand and patient wellness behavior.
In addition, although we have no present commitments or understandings to do so, we may seek to expand our operations and product line through acquisitions. Any acquisition would likely increase our
capital requirements.
Our product candidates may not be commercialized successfully.
Market acceptance of our products will largely depend on our ability to demonstrate their relative safety, efficacy, cost-effectiveness and ease of use.
We are subject to risks that:
• the patient and physician community does not accept our product candidates.
We cannot predict whether we will successfully commercialize our product candidates. If we fail to do so, we will not be able to generate substantial revenues, if any.
The medical device/therapeutic product industries are highly competitive and subject to rapid technological change. If our competitors are better able to develop
and market products that are safer and more effective than any products we may develop, our commercial opportunities will be reduced or eliminated.
Our success depends, in part, upon our ability to maintain a competitive position in the development of technologies and products. We face competition from established medical device, pharmaceutical and
biotechnology companies, as well as from academic institutions, government agencies, and private and public research institutions in the United States and abroad. Many of our principal competitors have significantly greater financial resources and
expertise than we do in research and development, manufacturing, pre-clinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products. Smaller or early-stage companies may also prove to be significant
competitors, particularly through collaborative arrangements, or mergers with, or acquisitions by, large and established companies, or through the development of novel products and technologies.
For example, in 2019, Tissue Regeneration Technologies, LLC (DBAS Softwave) obtained clearance from the FDA for treatment of diabetic foot ulcers using non-focused shockwaves, as a 510(k) submission
based on our PACE system de novo clearance.
The industry in which we operate has undergone, and we expect it to continue to undergo, rapid and significant technological change, and we expect competition to intensify as technological advances are
made. Our competitors may develop and commercialize pharmaceutical, biotechnology or medical devices that are safer or more effective, have fewer side effects or are less expensive than any products that we may develop.
We may not successfully establish and maintain licensing and/or partnership arrangements for our technology for non-medical uses, which could adversely affect our ability to
develop and commercialize our non-medical technology.
Our strategy for the development, testing, manufacturing, and commercialization of our technology for non-medical uses generally relies on establishing and maintaining collaborations with licensors and other third
parties. We may not be able to obtain, maintain or expand these or other licenses and collaborations or establish additional licensing and collaboration arrangements necessary to develop and commercialize our product candidates. Even if we are able
to obtain, maintain or establish licensing or collaboration arrangements, these arrangements may not be on favorable terms and may contain provisions that will restrict our ability to develop, test and market our product candidates. Furthermore, our
licensing and collaboration agreements are subject to counterparty risk, and to the extent the licensors or other third parties that we enter into licensing, joint venture or other collaboration arrangements with face operational, regulatory or
financial difficulties, and to the extent we are unable to find suitable alternative counterparties in a timely manner, if at all, our business and results of operations could be materially adversely affected. Any failure to obtain, maintain or
establish licensing or collaboration arrangements on favorable terms could adversely affect our business prospects, financial condition, or ability to develop and commercialize our technology for non-medical uses.
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We expect to rely at least in part on third party collaborators to perform a number of activities relating to the development and commercialization of our technology for non-medical uses, possibly including the design
and manufacture of product materials, the obtaining of regulatory or environmental approvals and the marketing and distribution of any successfully developed products. Our collaborators also may have or acquire rights to control aspects of our
product development programs. As a result, we may not be able to conduct these programs in the manner or on the time schedule we may contemplate. In addition, if any of these collaborators withdraw support for our programs or product candidates or
otherwise impair their development, our business could be negatively affected. To the extent we undertake any of these activities internally, our expenses may increase.
Many of our product component materials are only produced by a single supplier for such product component. If we are unable to obtain product component materials
and other products from our suppliers that we depend on for our operations, or find suitable replacement suppliers, our ability to deliver our products to market will likely be impeded, which could have a material adverse effect on us.
We depend on suppliers for product component materials and other components that are subject to stringent regulatory requirements. Many of our product component materials are only produced by a single supplier for such
product component, and the loss of any of these suppliers could result in a disruption in our production. If this were to occur, it may be difficult to arrange a replacement supplier because certain of these materials may only be available from one
or a limited number of sources. Our suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction
and environmental factors. In addition, some of our suppliers have been and will continue to be affected by supply chain problems resulting from the pandemic. Establishing additional or replacement suppliers for these materials may take a substantial
period of time, as certain of these suppliers must be approved by regulatory authorities.
If we are unable to secure, on a timely basis, sufficient quantities of the materials we depend on to manufacture our products, if we encounter delays or contractual or other difficulties in our relationships with
these suppliers, or if we cannot find replacement suppliers at an acceptable cost, the manufacturing of our products may be disrupted, which could increase our costs and have a material adverse effect on our business and results of operations.
We have entered into an agreement with companies owned by a current board member and stockholder that could delay or prevent an acquisition of our Company and
could result in the dilution of our stockholders in the event of our change of control.
On February 13, 2018, we entered into an Agreement for Purchase and Sale, Limited Exclusive Distribution and Royalties, and Servicing and Repairs with Premier Shockwave Wound Care, Inc. (“PSWC”) and Premier Shockwave,
Inc. (“PS”), each of which is owned by a member of the Company’s board of directors and an existing stockholder of the Company. Among other terms, the agreement contains provisions whereby in the event of a change of control of the Company (as
defined in the agreement), the stockholders of PSWC have the right and option to cause the Company to purchase all of the stock of PSWC, and whereby the Company has the right and option to purchase all issued and outstanding shares of PSWC, in each
case based upon certain defined purchase price provisions and other terms. Such provision may have the effect of delaying or deterring a change in control of the Company, and as a result could limit the opportunity for our stockholders to receive a
premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock. In addition, in the event we do experience a change of control, such provision may cause dilution of our
existing stockholders if PSWC exercises its option to require the Company to purchase all issued and outstanding shares of PSWC and the Company finances some or all of such purchase price through equity issuances.
The loss of our key management would likely hinder our ability to execute our business plan.
As a small company with less than 40 employees, our success depends on the continuing contributions of our management team and qualified personnel. Turnover, transitions or other disruptions in our
management team and personnel could make it more difficult to successfully operate our business and achieve our business goals and could adversely affect our results of operation and financial condition. Our success depends in large part on our
ability to attract and retain highly qualified personnel. We face intense competition in our hiring efforts from other pharmaceutical, biotechnology and medical device companies, as well as from universities and nonprofit research organizations, and
we may have to pay higher salaries to attract and retain qualified personnel. The loss of one or more of these individuals, or our inability to attract additional qualified personnel, could substantially impair our ability to implement our business
plan.
We face an inherent risk of liability if the use or misuse of our products results in personal injury or death.
The sale of products may expose us to product liability claims which could result in financial loss. Our clinical and commercial product liability insurance coverage may not be sufficient to cover
claims that may be made against us. In addition, we may not be able to maintain insurance coverage at a reasonable cost, or in sufficient amounts or scope, to protect us against losses. Any claims against us, regardless of their merit, could severely
harm our financial condition, strain our management team and other resources, and adversely impact or eliminate the prospects for commercialization of the product candidate, or sale of the product, that is the subject of any such claim. Although we
do not promote any off-label use, off-label uses of products are common, and the FDA does not regulate a physician’s choice of treatment. Off-label uses of any of our products may subject us to additional liability.
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We are dependent on information technology and our systems and infrastructure face certain risks, including from cybersecurity breaches and data leakage.
We rely to a large extent upon sophisticated information technology systems to operate our businesses, some of which are managed, hosted, provided and/or used by third parties or their vendors. We
collect, store, and transmit large amounts of confidential information, and we deploy and operate an array of technical and procedural controls to maintain the confidentiality and integrity of such confidential information. A significant breakdown,
invasion, corruption, destruction or interruption of critical information technology systems or infrastructure, by our workforce, others with authorized access to our systems or unauthorized persons could negatively impact our operations. The
ever-increasing use and evolution of technology, including cloud-based computing, creates opportunities for the unintentional dissemination or intentional destruction of confidential information stored in our or our third-party providers’ systems,
portable media, or storage devices. We could also experience, and in some cases have experienced in the past, a business interruption, theft of confidential information, financial theft, or reputational damage from industrial espionage attacks,
malware, spoofing or other cyber-attacks, which may compromise our system infrastructure, lead to data leakage, either internally or at our third-party providers, or materially adversely impact our financial condition.
We have previously disclosed that we have experienced cybersecurity breaches from email spoofing. While we have invested in the protection of data and information technology, there can be no assurance
that our efforts will prevent service interruptions or security breaches. Any such interruption or breach of our systems could adversely affect our business operations and/or result in the loss of critical or sensitive confidential information or
intellectual property, and could result in financial, legal, business, and reputational harm to us.
We generate a portion of our revenue internationally and are subject to various risks relating to our international activities, which could adversely affect our
operating results.
A portion of our revenue comes from international sources, and we anticipate that we will continue to expand our overseas operations. Engaging in international business involves several difficulties and
risks, including, but not limited to, the following:
• export or import restrictions;
• political and economic instability,
• foreign exchange controls; and
• difficulties protecting or procuring intellectual property rights.
As we expand internationally, our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. Our expenses are generally
denominated in the currencies in which our operations are located, which is in the United States. If the value of the U.S. dollar increases relative to foreign currencies in the future, in the absence of a corresponding change in local currency
prices, our future revenue could be adversely affected as we convert future revenue from local currencies to U.S. dollars.
The COVID-19 pandemic has materially and adversely affected our financial results.
The COVID-19 pandemic has affected many countries, including the United States and several European countries. The consequences of the COVID-19 pandemic adversely affect our ability to commercialize our
products, ability to build inventory, increase our operating expenses, and has had a material adverse effect on our financial results. We have experienced a disruption of our supply channels during the years ended December 31, 2022, and 2021. Also,
the pandemic caused continued or additional actions by hospitals and clinics such as limiting elective procedures and treatments and limiting clinical trial activities and data monitoring. These factors have had a negative impact on our sales and our
results of operations and may continue to have a negative impact in the future.
Provisions in our Articles of Incorporation, Bylaws and Nevada law might decrease the chances of an acquisition.
Provisions of our Articles of Incorporation and Bylaws and applicable provisions of Nevada law may delay or discourage transactions involving an actual or potential change in control or change in our
management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Some of the following provisions in our Articles of
Incorporation or Bylaws that may decrease our attractiveness to be acquired are:
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In addition, Section 78.438 of the Nevada Revised Statutes prohibits a publicly-held Nevada corporation from engaging in a business combination with an interested stockholder (generally defined as a
person which together with its affiliates owns, or within the last three years has owned, 10% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder) unless the business
combination is approved in a prescribed manner. The existence of the foregoing provisions and other potential anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could
also deter potential acquirers of our Company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
Regulatory Risks
We are subject to extensive governmental regulation, including the FDA.
We and our product candidates, our suppliers, and our contract manufacturers are subject to extensive regulation by governmental authorities in the United States and other countries. Failure to comply
with applicable requirements could result in, among other things, any of the following actions:
• warning letters
• fines and other monetary penalties
• unanticipated expenditures
• product recall or seizure
• interruption of manufacturing
• operating restrictions
• injunctions, and
• criminal prosecutions.
In addition to the approval and clearance requirements, numerous other regulatory requirements apply to us and our products and product candidates, our suppliers and contract manufacturers. These
include requirements related to the following:
• testing
• manufacturing
• quality control
• labeling
• advertising
• promotion
• distribution
• export
We are also subject to inspection by the FDA and other international regulatory bodies to determine our compliance with regulatory requirements, as are our suppliers and contract manufacturers, and we
cannot be sure that the FDA and other international regulatory bodies will not identify compliance issues that may disrupt production or distribution or require substantial resources to correct.
The FDA’s requirements and international regulatory body requirements may change, and additional regulations may be promulgated that could affect us, our product candidates, and our suppliers and
contract manufacturers. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action. There can be no assurance that we will not be required to incur significant costs to
comply with such laws and regulations in the future, or that such laws or regulations will not have a material adverse effect upon our business.
Regulatory approval of our product candidates may be withdrawn at any time.
After regulatory approval has been obtained for medical device products, the product and the manufacturer are subject to continual review, including the review of adverse experiences and clinical results that are
reported after our products are made available to patients, and there can be no assurance that such approval will not be withdrawn or restricted. Regulators may also subject approvals to restrictions or conditions or impose post-approval obligations
on the holders of these approvals, and the regulatory status of such products may be jeopardized if such obligations are not fulfilled. If post-approval studies are required, such studies may involve significant time and expense.
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The manufacturing facilities we use to make any of our products will also be subject to periodic review and inspection by the FDA or other regulatory authorities, as applicable. The discovery of any new or previously
unknown problems with the product or facility may result in restrictions on the product or facility, including withdrawal of the product from the market. We will continue to be subject to the FDA or other regulatory authority requirements, as
applicable, governing the labeling, packaging, storage, advertising, promotion, recordkeeping, and submission of safety and other post-market information for all of our product candidates, even those that the FDA or other regulatory authority, as
applicable, had approved. If we fail to comply with applicable continuing regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approval, product recalls and seizures, operating restrictions and other adverse
consequences.
If we fail to obtain an adequate level of reimbursement for our approved products by third party payers, there may be no commercially viable markets for our
approved products, or the markets may be much smaller than expected.
The availability and levels of reimbursement by governmental and other third-party payers affect the market for our approved products. The efficacy, safety, performance, and cost-effectiveness of our
products, and of any competing products will determine the availability and level of reimbursement. Reimbursement and healthcare payment systems in international markets vary significantly by country and include both government sponsored healthcare
and private insurance. To obtain reimbursement or pricing approval in some countries, we may be required to produce clinical data, which may involve one or more clinical trials, that compares the cost-effectiveness of our approved products to other
available therapies. We may not obtain international reimbursement or pricing approvals in a timely manner, if at all. Our failure to receive international reimbursement or pricing approvals would negatively impact market acceptance of our approved
products in the international markets in which those pricing approvals are sought.
We believe that, in the future, reimbursement for any of our products may be subject to increased restrictions both in the United States and in international markets. Future legislation, regulation or
reimbursement policies of third-party payers may adversely affect the demand for our products currently under development and limit our ability to sell our products on a profitable basis. In addition, third-party payers continually attempt to contain
or reduce the costs of healthcare by challenging the prices charged for healthcare products and services. If reimbursement for our approved products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, market
acceptance of our approved products would be impaired and our future revenues, if any, would be adversely affected.
Failure to obtain regulatory approval in foreign jurisdictions will prevent us from marketing our products abroad.
International sales of our products and any of our product candidates that we commercialize are subject to the regulatory requirements of each country in which the products are sold. Accordingly, the
introduction of our product candidates in markets outside the United States will be subject to regulatory approvals in those jurisdictions. The regulatory review process varies from country to country. Many countries impose product standards,
packaging, and labeling requirements, and import restrictions on medical devices. In addition, each country has its own tariff regulations, duties, and tax requirements. The approval by foreign government authorities is unpredictable and uncertain
and can be expensive. Our ability to market our approved products could be substantially limited due to delays in receipt of, or failure to receive, the necessary approvals or clearances.
Prior to marketing our products in any country outside the United States, we must obtain marketing approval in that country. Approval and other regulatory requirements vary by jurisdiction and differ
from the United States’ requirements. We may be required to perform additional pre-clinical or clinical studies even if FDA approval has been obtained.
Uncertainty surrounding and future changes to healthcare law in the United States may have a material adverse effect on us.
The healthcare regulatory environment in the United States is currently subject to significant uncertainty and the industry may in the future continue to experience fundamental change because of regulatory reform. From
time to time, legislation is drafted and introduced in the United States Congress that could significantly change the statutory provisions governing the clearance or approval, manufacture, marketing, and pricing of medical devices. In addition, FDA
regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. We could experience an adverse impact on our operating results due to such changes, including increased
pricing pressure in these markets. Governments, hospitals, and other third-party payors also could reduce the amount of approved reimbursement for our products or deny coverage altogether. Reductions in reimbursement levels or coverage or other
cost-containment measures could adversely affect our future operating results.
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If we fail to comply with the United States Federal Anti-Kickback Statute, False Claims Act, and similar state laws, we could be subject to criminal and civil penalties and exclusion
from the Medicare and Medicaid programs, which would have a material adverse effect on our business and results of operations.
A provision of the Social Security Act, commonly referred to as the Federal Anti-Kickback Statute, prohibits the offer, payment, solicitation, or receipt of any form of remuneration in return for
referring, ordering, leasing, purchasing or arranging for, or recommending the ordering, purchasing or leasing of, items or services payable by Medicare, Medicaid or any other Federal healthcare program. The Federal Anti-Kickback Statute is very
broad in scope and many of its provisions have not been uniformly or definitively interpreted by existing case law or regulations. In addition, most of the states have adopted laws like the Federal Anti-Kickback Statute, and some of these laws are
even broader than the Federal Anti-Kickback Statute in that their prohibitions are not limited to items or services paid for by Federal healthcare programs, but instead apply regardless of the source of payment. Violations of the Federal
Anti-Kickback Statute may result in substantial civil or criminal penalties and exclusion from participation in Federal healthcare programs.
Our operations may also implicate the False Claims Act. If we fail to comply with Federal and state documentation, coding, and billing rules, we could be subject to liability under the Federal False
Claims Act, including criminal and/or civil penalties, loss of licenses and exclusion from the Medicare and Medicaid programs. The False Claims Act prohibits individuals and companies from knowingly submitting false claims for payments to, or
improperly retaining overpayments from, the government.
Our financial relationships with healthcare providers and others who provide products or services to Federal healthcare program beneficiaries are potentially governed by the Federal Anti-Kickback
Statute, False Claims Act, and similar state laws. We believe our operations comply with the Federal Anti-Kickback Statute, False Claims Act, and similar state laws. However, we cannot be certain that we will not be subject to investigations or
litigation alleging violations of these laws, which could be time-consuming and costly to us and could divert management’s attention from operating our business, which in turn could have a material adverse effect on our business. In addition, if our
arrangements were found to violate the Federal Anti-Kickback Statute, False Claims Act or similar state laws, the consequences of such violations would likely have a material adverse effect on our business, results of operations and financial
condition.
Failure to comply with the HIPAA Privacy, Security and Breach Notification Regulations, as such rules become applicable to our business, may increase our
operational costs.
The HIPAA privacy and security regulations establish comprehensive Federal standards with respect to the uses and disclosures of PHI by certain entities, including health plans and health care
providers, and set standards to protect the confidentiality, integrity, and availability of electronic PHI. The regulations establish a complex regulatory framework on a variety of subjects, including, for example: the circumstances under which uses
and disclosures of PHI are permitted or required without a specific authorization by the patient; a patient’s right to access, amend and receive an accounting of certain disclosures of PHI; the content of notices of privacy practices describing how
PHI is used and disclosed and individuals’ rights with respect to their PHI; and implementation of administrative, technical and physical safeguards to protect privacy and security of PHI. We anticipate that, as we expand our PACE business, we will
in the future be a covered entity under HIPAA. We intend to ensure our policies and procedures continue to comply with the Privacy Rule, the Security Rule and the HIPAA statute as such regulations become applicable to our business and as such
regulations are in effect at such time; however, there can be no assurance that our policies and procedures will be adequate or will prevent all incidents of non-compliance with such regulations.
The HITECH Act and its implementing regulations also require healthcare providers to notify affected individuals, the Secretary of the U.S. Department of Health and Human Services, and in some cases,
the media, when PHI has been breached as defined under and following the requirements of HIPAA. Many states have similar breach notification laws. In the event of a breach, to the extent such regulations are applicable to our business, we could incur
operational and financial costs related to remediation as well as preparation and delivery of the notices, which costs could be substantial. Additionally, HIPAA, the HITECH Act, and their implementing regulations provide for significant civil fines,
criminal penalties, and other sanctions for failure to comply with the privacy, security, and breach notification rules, including for wrongful or impermissible use or disclosure of PHI. Although the HIPAA statute and regulations do not expressly
provide for a private right of action for damages, private parties may also seek damages under state laws for the wrongful or impermissible use or disclosure of confidential health information or other private personal information. Additionally,
amendments to HIPAA provide that the state attorneys general may bring an action against a covered entity for a violation of HIPAA. As we expand our business such that Federal laws regarding PHI and privacy apply to our operations, any noncompliance
with such regulations could have a material adverse effect on our business, results of operations and financial condition.
We face periodic reviews and billing audits from governmental and private payors, and these audits could have adverse results that may negatively impact our
business.
As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental reviews and audits to verify our compliance with these programs and applicable laws and
regulations. We also are subject to audits under various government programs in which third-party firms engaged by the Centers for Medicare & Medicaid Services conduct extensive reviews of claims data and medical and other records to identify
potential improper payments under the Medicare program. Private pay sources also reserve the right to conduct audits. If billing errors are identified in the sample of reviewed claims, the billing error can be extrapolated to all claims filed, which
could result in a larger overpayment than originally identified in the sample of reviewed claims. Our costs to respond to and defend reviews and audits may be significant and could have a material adverse effect on our business, financial condition,
results of operations and cash flows. Moreover, an adverse review or audit could result in:
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• state or Federal agencies imposing fines, penalties and other sanctions on us;
• damage to our business and reputation in various markets.
Any one of these results could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Product quality or performance issues may be discovered through ongoing regulation by the FDA and by comparable international agencies, as well as through our
internal standard quality process.
The medical device industry is subject to substantial regulation by the FDA and by comparable international agencies. In addition to requiring clearance or approval to market new or improved devices, we
are subject to ongoing regulation as a device manufacturer. Governmental regulations cover many aspects of our operations, including quality systems, marketing and device reporting. As a result, we continually collect and analyze information about
our product quality and product performance through field observations, customer feedback and other quality metrics. If we fail to comply with applicable regulations or if post market safety issues arise, we could be subject to enforcement sanctions,
our promotional practices may be restricted, and our marketed products could be subject to recall or otherwise impacted. Each of these potential actions could result in a material adverse effect on our business, operating results and financial
condition.
The use of hazardous materials in our operations may subject us to environmental claims or liability.
We conduct research and development and manufacturing operations in our facility. Our research and development process may, at times, involve the controlled use of hazardous materials and chemicals. We
may conduct experiments in which we may use small quantities of chemicals, including those that are corrosive, toxic, and flammable. The risk of accidental injury or contamination from these materials cannot be eliminated. We do not maintain a
separate insurance policy for these types of risks. In the event of an accident or environmental discharge or contamination, we may be held liable for any resulting damages, and any liability could exceed our resources. We are subject to Federal,
state, and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations could be significant.
Risks Related to Intellectual Property
The protection of our intellectual property is critical to our success, and any failure on our part to adequately protect those rights could materially adversely
affect our business.
Our commercial success depends to a significant degree on our ability to:
• defend and enforce our patents once obtained;
The degree of intellectual property protection for our technology is uncertain, and only limited intellectual property protection may be available for our products, which may prevent us from gaining or
keeping any competitive advantage against our competitors. Although we believe the patents that we own or license, and the patent applications that we own, generally provide us a competitive advantage, the patent positions of biotechnology,
biopharmaceutical and medical device companies are generally highly uncertain, involve complex legal and factual questions and have been the subject of much litigation. Neither the United States Patent & Trademark Office nor the courts have a
consistent policy regarding the breadth of claims allowed or the degree of protection afforded under many biotechnology patents. Even if issued, patents may be challenged, narrowed, invalidated, or circumvented, which could limit our ability to stop
competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Further, a court or other government agency could interpret our patents in a way such that the patents do not adequately cover
our current or future products. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.
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We also rely upon trade secrets and unpatented proprietary know-how and continuing technological innovation in developing our products, especially where we do not believe patent protection is
appropriate or obtainable. We seek to protect this intellectual property, in part, by generally requiring our employees, consultants, and current and prospective business partners to enter into confidentiality agreements in connection with their
employment, consulting or advisory relationships with us, where appropriate. We also require our employees, consultants, researchers, and advisors who we expect to work on our products [and product candidates] to agree to disclose and assign to us
all inventions conceived during the workday, developed using our property or which relate to our business. We may lack the financial or other resources to successfully monitor and detect, or to enforce our rights in respect of, infringement or
breaches of these confidentiality agreements. In the case of any such undetected or unchallenged infringements or breaches, these confidentiality agreements may not provide us with meaningful protection of our trade secrets and unpatented proprietary
know-how or adequate remedies. In addition, others may independently develop technology that is similar or equivalent to our trade secrets or know-how. If any of our trade secrets, unpatented know-how or other confidential or proprietary information
is divulged to third parties, including our competitors, our competitive position in the marketplace could be harmed and our ability to sell our products successfully could be severely compromised. Enforcing a claim that a party illegally obtained
and is using trade secrets that have been licensed to us or that we own is also difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets.
Costly and time-consuming litigation could be necessary to seek to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could have a material adverse effect on our business. Moreover,
some of our academic institution licensees, evaluators, collaborators, and scientific advisors have rights to publish data and information to which we have rights. If we cannot maintain the confidentiality of our technologies and other confidential
information in connection with our collaborations, our ability to protect our proprietary information or obtain patent protection in the future may be impaired, which could have a material adverse effect on our business.
Accordingly, we may fail to secure meaningful patent protection relating to any of our existing or future products or discoveries despite the expenditure of considerable resources. Further, there may be
widespread patent infringement in countries in which we may seek patent protection, including countries in Europe and Asia, which may instigate expensive and time-consuming litigation that could adversely affect the scope of our patent protection. In
addition, others may attempt to commercialize products similar to our products in countries where we do not have adequate patent protection. Failure to obtain adequate patent protection for our products, or the failure by particular countries to
enforce patent laws or allow prosecution for alleged patent infringement, may impair our ability to be competitive. The availability of infringing products in markets where we have patent protection, or the availability of competing products in
markets where we do not have adequate patent protection, could erode the market for our products, negatively impact the prices we can charge for our products, and harm our reputation if infringing or competing products are manufactured to inferior
standards.
Patent applications owned by us or licensed to us may not result in issued patents, and our competitors may commercialize the discoveries we attempt to patent.
The patent applications that we own and that have been licensed to us, and any future patent applications that we may own or that may be licensed to us, may not result in the issuance of any patents.
The standards that the United States Patent & Trademark Office and foreign patent agencies use to grant patents are not always applied predictably or uniformly and can change. Consequently, we cannot be certain as to the type and scope of patent
claims to which we may in the future be entitled under our license agreements or that may be issued to us. These applications may not be sufficient to meet the statutory requirements for patentability and, therefore, may not result in enforceable
patents covering the product candidates we want to commercialize. Further, patent applications in the United States that are not filed in other countries may not be published or generally are not published until at least 18 months after they are
first filed, and patent applications in certain foreign countries generally are not published until many months after they are filed. Scientific and patent publication often occurs long after the date of the scientific developments disclosed in those
publications. As a result, we cannot be certain that we will be the first creator of inventions covered by our patents or applications, or the first to file such patent applications. As a result, our issued patents and our patent applications could
become subject to challenge by third parties that created such inventions or filed patent applications before us or our licensors, resulting in, among other things, interference proceedings in the United States Patent & Trademark Office to
determine priority of discovery or invention. Interference proceedings, if resolved adversely to us, could result in the loss of or significant limitations on patent protection for our products or technologies. Even in the absence of interference
proceedings, patent applications now pending or in the future filed by third parties may prevail over the patent applications that may be owned by us or licensed to us or that we may file in the future, or may result in patents that issue alongside
patents issued to us or our licensors or that may be issued or licensed to us in the future, leading to uncertainty over the scope of the patents owned by us or licensed to us or that may in the future be owned by us or impede our freedom to practice
the claimed inventions.
Our patents may not be valid or enforceable and may be challenged by third parties.
We cannot assure you that the patents that have been issued or licensed to us would be held valid by a court or administrative body or that we would be able to successfully enforce our patents against
infringers, including our competitors. The issuance of a patent is not conclusive as to its validity or enforceability, and the validity and enforceability of a patent is susceptible to challenge on numerous legal grounds, including the possibility
of reexamination proceedings brought by third parties in the United States Patent & Trademark Office against issued patents and similar validity challenges under foreign patent laws. Challenges raised in patent infringement litigation brought by
us or against us may result in determinations that patents that have been issued to us or licensed to us or any patents that may be issued to us or our licensors in the future are invalid, unenforceable or otherwise subject to limitations. In the
event of any such determinations, third parties may be able to use the discoveries or technologies claimed in these patents without paying licensing fees or royalties to us, which could significantly diminish the value of our intellectual property
and our competitive advantage. Even if our patents are held to be enforceable, others may be able to design around our patents or develop products similar to our products that are not within the scope of any of our patents.
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In addition, enforcing the patents that we own or license and any patents that may be issued to us in the future against third parties may require significant expenditures regardless of the outcome of
such efforts. Our inability to enforce our patents against infringers and competitors may impair our ability to be competitive and could have a material adverse effect on our business.
Issued patents and patent licenses may not provide us with any competitive advantage or provide meaningful protection against competitors.
The discoveries or technologies covered by issued patents we own or license may not have any value or provide us with a competitive advantage, and many of these discoveries or technologies may not be
applicable to our product candidates at all. We have devoted limited resources to identifying competing technologies that may have a competitive advantage relative to ours, especially those competing technologies that are not perceived as infringing
on our intellectual property rights. In addition, the standards that courts use to interpret and enforce patent rights are not always applied predictably or uniformly and can change, particularly as new technologies develop. Consequently, we cannot
be certain as to how much protection, if any, will be afforded by these patents with respect to our products if we, our licensees or our licensors attempt to enforce these patent rights and those rights are challenged in court.
The existence of third-party patent applications and patents could significantly limit our ability to obtain meaningful patent protection. If patents containing competitive or conflicting claims are
issued to third parties, we may be enjoined from pursuing research, development or commercialization of product candidates or may be required to obtain licenses, if available, to these patents or to develop or obtain alternative technology. If
another party controls patents or patent applications covering our product candidates, we may not be able to obtain the rights we need to those patents or patent applications in order to commercialize our product candidates or we may be required to
pay royalties, which could be substantial, to obtain licenses to use those patents or patent applications.
In addition, issued patents may not provide commercially meaningful protection against competitors. Other parties may seek and/or be able to duplicate, design around or independently develop products
having effects similar or identical to our patented product candidates that are not within the scope of our patents.
Limitations on patent protection in some countries outside the United States, and the differences in what constitutes patentable subject matter in these countries, may limit the protection we have under
patents issued outside of the United States. We do not have patent protection for our product candidates in several of our target markets. The failure to obtain adequate patent protection for our products [or product candidates] in any country would
impair our ability to be commercially competitive in that country.
The ability to market the products we develop is subject to the intellectual property rights of third parties.
The biotechnology, biopharmaceutical and medical device industries are characterized by many patents and patent filings and frequent litigation based on allegations of patent infringement. Competitors
may have filed patent applications or have been issued patents and may obtain additional patents and proprietary rights related to products or processes that compete with or are similar to ours. We may not be aware of all the patents potentially
adverse to our interests that may have been issued to others. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our product candidates
or proprietary technologies may infringe. Third parties may claim that our products or related technologies infringe their patents or may claim that the products of our suppliers, manufacturers or contract service providers that produce our devices
infringe on their intellectual property. Further, we, our licensees, or our licensors, may need to participate in interference, opposition, protest, reexamination or other potentially adverse proceedings in the United States Patent & Trademark
Office or in similar agencies of foreign governments with regards to our patents, patent applications, and intellectual property rights. In addition, we, our licensees, or our licensors may need to initiate suits to protect our intellectual property
rights.
Litigation or any other proceeding relating to intellectual property rights, even if resolved in our favor, may cause us to incur significant expenses, divert the attention of our management and key personnel from
other business concerns and, in certain cases, result in substantial additional expenses to license technologies from third parties. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can
because they have substantially greater resources. An unfavorable outcome in any patent infringement suit or other adverse intellectual property proceeding could require us to pay substantial damages, including possible treble damages and attorneys’
fees, cease using our technology or developing or marketing our products, or require us to seek licenses, if available, of the disputed rights from other parties and potentially make significant payments to those parties. There is no guarantee that
any prevailing party would offer us a license or that we could acquire any license made available to us on commercially acceptable terms. Even if we can obtain rights to a third party’s patented intellectual property, those rights may be nonexclusive
and, therefore, our competitors may obtain access to the same intellectual property. Ultimately, we may be unable to commercialize our product candidates or may have to cease some of our business operations because of patent infringement claims,
which could materially harm our business. We cannot guarantee that our products or technologies will not conflict with the intellectual property rights of others.
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If we need to redesign our products to avoid third party patents, we may suffer significant regulatory delays associated with conducting additional clinical studies or submitting technical, clinical, manufacturing, or
other information related to any redesigned product and, ultimately, in obtaining regulatory approval. Further, any such redesigns may result in less effective and/or less commercially desirable products if the redesigns are possible at all.
Additionally, any involvement in litigation in which we, or our licensees or our licensors, are accused of infringement may result in negative publicity about us or our products, injure our relations with any
then-current or prospective customers and marketing partners, and cause delays in the commercialization of our products.
Risks Related to our Common Stock
Our stock price is volatile.
The market price of our common stock is volatile and could fluctuate widely in response to various factors, many of which are beyond our control, including the following:
• changes in our industry;
• additions or departures of key personnel;
• sales of our common stock;
• our ability to execute our business plan;
• operating results that fall below expectations;
• period-to-period fluctuations in our operating results;
• general economic conditions and other external factors.
In addition, the securities markets have from time-to-time experienced significant price and volume fluctuations that are unrelated to the operating performance of companies. These market fluctuations
may also materially and adversely affect the market price of our common stock.
There is currently a limited trading market for our common stock, and we cannot predict how liquid the market might become.
To date, there has been a limited trading market for our common stock, and we cannot predict how liquid the market for our common stock might become. Until January 30, 2023, our common stock was quoted
on the OTC Pink, which is an inter-dealer market that provides significantly less liquidity than the New York Stock Exchange or the Nasdaq Stock Market. We are currently listed on the OTCQB.
The quotation of our common stock on the OTCQB does not assure that a meaningful, consistent, and liquid trading market exists. The market price for our common stock is subject to volatility and holders
of our common stock may be unable to resell their shares at or near their original purchase price, or at any price. In the absence of an active trading market:
• market visibility for our common stock may be limited; and
Trading for our common stock is limited under the SEC’s penny stock regulations, which has an adverse effect on the liquidity of our common stock.
The trading price of our common stock is less than $5.00 per share and, as a result, our common stock is considered a “penny stock,” and trading in our common stock is subject to the requirements of
Rule 15g-9 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Under this rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales
practice requirements. Generally, the broker-dealer must make an individualized written suitability determination for the purchaser and receive the purchaser’s written consent prior to the transaction.
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Regulations of the SEC also require additional disclosure in connection with any trades involving a “penny stock,” including the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because only a few brokers or dealers are likely to undertake these compliance activities. Compliance
with these requirements may make it more difficult for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market.
As an issuer of “penny stock”, the protection provided by the Federal securities laws relating to forward-looking statements does not apply to us.
Although Federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the Federal securities laws, this safe harbor is not available to issuers of penny
stocks. As a result, we will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect
because of our failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition
and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock
price appreciates.
The rights of the holders of common stock may be impaired by the potential issuance of preferred stock.
Our board of directors has the right, without stockholder approval, to issue preferred stock with voting, dividend, conversion, liquidation, or other rights which could adversely affect the voting power
and equity interest of the holders of common stock, which could be issued with the right to more than one vote per share, and could be utilized as a method of discouraging, delaying or preventing a change of control. The possible negative impact on
takeover attempts could adversely affect the price of our common stock.
We have not sought an advisory stockholder vote to approve the compensation of our named executive officers.
Rule 14a-21 under the Exchange Act requires us to seek a separate stockholder advisory vote at our annual meeting at which directors are elected to approve the compensation of our named executive
officers, not less frequently than once every three years (say-on-pay vote), and, at least once every six years, to seek a separate stockholder advisory vote on the frequency with which we will submit advisory say-on-pay votes to our stockholders
(say-on-frequency vote). We have not submitted to our stockholders a say-on-pay vote to approve an advisory resolution regarding our compensation program for our named executive officers, or a say-on-frequency vote. Consequently, the board of
directors has not considered the outcome of our say-on-pay vote results when determining future compensation policies and pay levels for our named executive officers.
If the Company fails to comply with our SEC filing obligations, our stock may become subject to limitations or reduction in stock price, liquidity, or volume.
Rule 15c2-11 under the Exchange Act (the “Rule”) governs the publication of quotations in over-the-counter (”OTC”) markets. On September 16, 2020, the SEC adopted amendments to the Rule which prohibits
broker-dealers from publishing or submitting for publication a quote for an issuer’s securities unless they are based on current publicly available information about the issuer. The amended Rule also limits the Rule’s “piggyback” exception, which
allows broker-dealers to publish quotations for a security in reliance on the quotations of a broker-dealer that initially performed the information review required by the Rule, to issuers with current publicly available information or issuers that
are up to date in their Exchange Act reports.
The practical impact of these changes requires us to maintain a level of periodic disclosure. However, we did not timely file with the SEC our Annual Report on Form 10-K for the year ended December
31, 2020 or our Quarterly Report on Form 10-Q for the quarters ended March 31, 2021 or June 30, 2021. As a result, our stock was removed from the OTC Bulletin Board on September 28, 2021, which limited the ability of broker-dealers to sell our
securities and the ability of stockholders to sell their securities in the secondary market. Upon filing the Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, we were allowed to return to the OTC Pink and subsequently uplisted
to the OTCQB. While trading on the OTCQB, and especially if we are removed from the OTCQB in the future, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
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Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
Our primary corporate and operations office is a leased facility in Eden Prairie, Minnesota, consisting of 8,199 square feet of space under a lease which expires on August 31,
2023. Under the terms of the lease, we pay monthly rent, subject to a 2.5% adjustment on an annual basis.
We also have a research and development office in a leased facility in Alpharetta, Georgia, consisting of 4,332 square feet of space under a lease that expires in July 2027.
Item 3. LEGAL PROCEEDINGS
We are engaged in various legal actions, claims and proceedings arising in the ordinary course of business, including claims related to breach of contracts and intellectual property matters resulting
from our business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined.
There are no material proceedings known to us to be contemplated by any governmental authority.
There are no material proceedings known to us, pending, or contemplated, in which any of our directors, officers or affiliates or any of our principal security holders, or any associate of any of the
foregoing, is a party or has an interest adverse to us.
In May 2021, the Company received notification that it is not in compliance with the Biovance portion of the License Agreement with Celularity as discussed in Note 21 of our Financial Statements
included in this Annual Report on Form 10-K. The Company has responded and asserted that the Company is not in breach and that the Supplier has breached various agreements. It is too early to determine the outcome of this matter. Any potential impact
to the Company cannot be fully determined at this time.
Item 4. MINE SAFETY DISCLOSURE
Not applicable.
PART II
Market Information
The Company’s common stock is quoted on the OTCQB under the symbol “SNWV”. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commissions, and may not necessarily
represent actual transactions.
Holders of Common Stock
As of December 31, 2022, there were 548,737,651 shares of common stock outstanding and approximately 201 holders of record of the Company’s common stock.
Dividends
The Company did not pay a cash dividend in 2022 or 2021. The Company intends to retain future earnings, if any, to finance the expansion of its business. The Company does not anticipate paying any cash
dividends in the foreseeable future.
Item 6. [Reserved]
Not applicable.
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The following Management’s Discussion and Analysis of Financial Condition and Results of Operations provides information management believes to be relevant to understanding the financial condition and results of
operations of the Company. The discussion focuses on our financial results of operations for years ended December 31, 2022, and 2021. You should read this discussion and analysis in conjunction with our consolidated financial statements and related
notes thereto on December 31, 2022, and 2021, and for years 2022, and 2021, which are presented within Part II Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. Amounts reported in thousands within this annual
report are computed based on the amounts in thousands, and therefore, the sum of the components may not equal the total amount reported in thousands due to rounding.
As discussed in Item 8. Financial Statements and Supplementary Data, in Note 3, we have restated our unaudited quarterly financial information for the quarter ended
March 31, 2022, quarter and six months ended June 30, 2022, and quarter and nine months ended September 30, 2022. Accordingly, Management’s Discussion and Analysis of Financial Condition and Results of Operations have been revised for the
effects of this restatement.
Executive Summary
We realized significant revenue growth during the year ended December 31, 2022, with a 29% growth in revenue to $16.7 million for the year ended December 31, 2022, as compared to $13.0 million in 2021. Gross margins
also increased to 74% from 62% in 2021. As the Company continues to focus on profitable growth, we have also reduced our operating loss by 37% to $9.0 million for the year ended December 31, 2022.
Net loss for the year ended December 31, 2022, was $10.3 million, or ($0.02) per basic and diluted share, compared to a net loss of $27.3 million, or ($0.05) per basic and diluted share, for the year ended December 31,
2021. We continue to focus on profitable growth and reduction in operating expenses. We believe these improvements sets the stage for additional growth as we head into 2023.
Results of Operations
The following table sets forth our consolidated statement of operations:
For the Years Ended December 31, Change
Operating expenses:
Depreciation and amortization 766 784 (18 ) -2 %
Revenue
Revenues for the year ended December 31, 2022, were $16.7 million, compared to $13.0 million for the same period in 2021, an increase of $3.7 million or 29%. The increase in net sales was primarily driven by the growth
of the UltraMIST® system.
Cost of Revenue
Cost of revenues for the year ended December 31, 2022, was $4.3 million, compared to $5.0 million for the same period in 2021. Gross profit as a percentage of revenues was 74% for the year ended December 31, 2022,
compared to 62% for the same period in 2021. The increase in gross profit as a percentage of revenues in 2022 was primarily due to the increase in sales of the UltraMIST system which has higher profit margins.
General and Administrative
General and administrative expenses for the year ended December 31, 2022, were $12.6 million as compared to $11.7 million for the same period in 2021, an increase of $0.9 million, or 7%. The increase in 2022 as
compared to 2021, was primarily due to the higher legal costs related to patent work and securities work.
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Selling and Marketing
Selling and marketing expenses for the year ended December 31, 2022, were $7.4 million as compared to $8.6 million for the same period in 2021, a decrease of $1.1 million, or 13%. The year-over-year decrease in sales
and marketing expenses in 2022 was a result of cost saving initiatives taken by management.
Research and Development
Research and development expenses for the year ended December 31, 2022, were $0.6 million, compared to $1.1 million for the same period in 2021. The decrease in research and development expenses in 2022, as compared to
2021, was primarily due to the reduction in employees.
Other Income (Expense), net
Other expense, net consists of the following:
Gain/(loss) on extinguishment of debt (418 ) 204 (622 ) nm
Loss on foreign currency exchange (9 ) (4 ) (5 ) 125 %
nm - not meaningful
Other expense totaled $1.3 million for the year ended December 31, 2022, as compared $13.1 million for the same period in 2021, a decrease of $11.8 million or 90%. The decrease was primarily driven by an increased gain
from the change in the fair value of derivative liability of $19.3 million, offset by increased interest expense of $7.0 million. The increased interest expense was the result of higher levels of debt outstanding during 2022, due to new issuances of
convertible debt, compared with 2021. The change in fair value of the derivative liability relates to warrants issued during 2022 with the convertible debt.
Liquidity and Capital Resources
Since inception, the Company has incurred losses from operations each year. As of December 31, 2022, we had an accumulated deficit of $194.2 million. Historically, our operations
have primarily been funded from the sale of capital stock, notes payable, and convertible debt securities. In August and November 2022, the Company raised new funding through two issuances of convertible notes payable with an aggregate principal
amount of $20.2 million, consisting of $16.0 million in newly raised capital and $4.2 million in refinanced accrued expenses, previous notes payable, and fees. The convertible notes bear interest at a rate of 15% per annum and have a conversion
price of $0.04 per share of common stock. The conversion price of the convertible notes is subject to adjustment, including if the Company issues or sells shares of common stock for a price per share less than the
conversion price of the convertible notes or if the Company lists its shares of common stock on The Nasdaq Capital Market and the average volume weighted average price of such common stock for the five trading days preceding such listing is less
than $0.04 per share; provided, however, that the conversion price shall never by less than $0.01.
The August and November 2022 financings also included two tranches of warrants, each of which is exercisable for an aggregate of 504.4 million shares of common stock at exercise prices of $0.04, and $0.067,
respectively. The exercise price of the warrants is subject to adjustment, including if the Company issues or sells shares of common stock or Share Equivalents (as defined in the warrants) for an effective
consideration price less than the exercise price of the warrants or if the Company lists its shares of common stock on The Nasdaq Capital Market and the average volume weighted average price of such common stock for the five trading days
preceding such listing is less than $0.04 per share; provided, however, that the exercise price of the warrants shall never be less than $0.01 per share. The warrants have a five-year term.
In August 2020, the Company issued a Senior Secured Promissory Note Payable (the “Senior Secured Note”) to NH Expansion Credit Fund Holdings L.P. pursuant to which the Company had outstanding debt of
$19.2 million as of December 31, 2022. Interest is charged at the greater of the prime rate or 3% plus 9%, paid quarterly. As of December 31, 2022, the Company is in default of the minimum liquidity provisions on the Senior Secured Note and, as a
result, is accruing interest at the default interest rate of an incremental 5%. Interest expense on the Senior Secured Note totaled $5.9 million and $3.1 million for the years ended December 31, 2022, and 2021, respectively.
See Notes 10 and 11 to the consolidated financial statements in Part II Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information regarding additional debt
commitments, the convertible notes and accompanying warrants issued in August and November 2022, and the Senior Secured Note.
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The following table presents summarized cash flow information:
For the period ended December 31,
Cash flows used by operating activities $ (17,169 ) $ (6,409 )
Cash flows provided by (used by) investing activities $ 332 $ (529 )
Cash flows provided by financing activities $ 17,384 $ 5,121
Cash Flows from Operating Activities
The largest driver of cash flows from operations is the change in fair value of derivative liabilities connected to our convertible debt and warrants issued with the August and November 2022
financings. The Company recognized a gain on these liabilities of $16.7 million for the year ended December 31, 2022, and a loss totaling $2.6 million for the year ended December 31, 2021.
Cash Flows Provided by Financing Activities
Cash flows provided by financing activities increased primarily from the proceeds of $16.2 million from the issuance of the convertible promissory notes discussed above in this section, Liquidity and
Capital Resources.
Going Concern
The continuation of our business is dependent upon raising additional capital to fund operations. We expect to devote substantial resources for the expansion and continued
commercialization of our UltraMist and PACE systems, which will require additional capital resources. This, as well as the events of default on various notes payable, raise substantial doubt about our ability to continue as a going concern.
Management plans to obtain additional capital in 2023 through the conversion of outstanding warrants, issuance of common or preferred stock, securities convertible into common stock, or secured or unsecured debt. These possibilities, to the
extent available, may be on terms that result in significant dilution to our existing stockholders. Although no assurances can be given that our plans to obtain additional capital will be successful or on the terms or timeline we expect,
or at all, management believes that potential additional issuances of equity or other potential financing transactions, as discussed above, should provide the necessary funding for us over the next 12 months. If these
efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or obtain funds through financing transactions with unfavorable terms.
The Company aims to achieve positive operating cash flows in the first half of 2023 as resources are devoted to grow revenue of the UltraMIST and PACE systems while managing
operating spend. We believe that sales growth and positive operating cash flows will be enabled by investment in new leadership in sales, operations, and finance departments and strategically managing spend to enable growth.
See Note 2 to the consolidated financial statements in Part II Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information on our ability to continue as a going
concern.
Critical Accounting Policies and Estimates
We have used various accounting policies to prepare the consolidated financial statements in accordance with U.S. GAAP. Our significant accounting policies are disclosed in Note 4 to the consolidated financial
statements in Part II Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
The preparation of the consolidated financial statements, in conformity with U.S. GAAP, requires us to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues,
and expenses. These estimates reflect our best judgment about economic and market conditions and the potential effects on the valuation and/or carrying value of assets and liabilities based upon relevant information available. We base our estimates
on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources.
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The following accounting policies and estimates are deemed critical:
Litigation Contingencies
We may be involved in legal actions involving product liability, intellectual property and commercial disputes, tax disputes, and governmental proceedings and investigations. The outcomes of these legal actions are not
completely within our control and may not be known for prolonged periods of time. In some actions, the enforcement agencies or private claimants seek damages that could require significant expenditures or result in lost revenues or limit our ability
to conduct business in the applicable jurisdictions. Estimating probable losses from our litigation and governmental proceedings is inherently difficult, particularly when the matters are in early procedural stages, with incomplete scientific facts
or legal discovery; involve unsubstantiated or indeterminate claims for damages; potentially involve penalties, fines, or punitive damages; or could result in a change in business practice. The Company records a liability in the consolidated
financial statements for loss contingencies when a loss is known or considered probable, and the amount may be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better
estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. Our significant legal proceedings are
discussed in Note 21 to the consolidated financial statements in Part II Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
Derivative Liability’s from Embedded Conversion Options and Warrants
The Company classified certain convertible instruments as having embedded conversion options which qualified as derivative financial instruments to be separately accounted for. The Company also
determined that certain warrants also qualified as derivative financial instruments. Various valuations models were used to estimate the fair value of these derivative financial instruments that are classified as derivative liabilities on the
consolidated balance sheets. The models include subjective input assumptions that can materially affect the fair value estimates and as such are subject to uncertainty. The material assumptions for the selected subjective inputs have not changed for
the reporting period, except for the expected volatility, which is estimated based on the actual volatility during the most recent historical period equal to the remaining life of the instruments.
Valuation of Intangible Assets and Goodwill
When we acquire a business, the assets acquired, and liabilities assumed are recorded at their respective fair values at the acquisition date. Goodwill is the excess of the purchase price over the estimated fair value
of net assets of acquired businesses. Intangible assets primarily include patents, trademarks, and customer relationships. Determining the fair value of intangible assets acquired as part of a business combination requires us to make significant
estimates. These estimates include the amount and timing of projected future cash flows of each project or technology, the discount rate used to discount those cash flows to present value, and the assessment of the asset’s life cycle. The estimates
could be impacted by legal, technical, regulatory, economic, and competitive risks. The test for impairment of goodwill requires us to make several estimates to determine the fair value of the goodwill. Our estimates associated with the goodwill
impairment test are considered critical due to the amount of goodwill recorded on our consolidated balance sheets and the judgment required in determining fair value. We assess the impairment of goodwill at the consolidated level annually. We also
test definite-lived intangible assets for impairment when an event occurs, or circumstances change that would indicate the carrying amount of the assets or asset group may be impaired. We assess the impairment of indefinite-lived intangible assets
annually and whenever an event occurs, or circumstances change that would indicate that the carrying amount may be impaired. Our assessment for goodwill and intangible assets impairment is based on future cash flows that require significant judgment
with respect to future revenue and expense growth rates and other assumptions and estimates. We use estimates that are consistent with the highest and best use of the assets based on a market participant’s view of the assets being evaluated. Actual
results may differ from our estimates due to several factors including, among others, changes in competitive conditions, regulatory changes, results of clinical trials, and changes in worldwide economic conditions.
Recently Issued Accounting Standards
Information regarding new accounting pronouncements is included in Note 4 to the consolidated financial statements in Part II Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
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Restatement of Interim Financial Statements
Results of Operations for the Three Months Ended March 31, 2022
(In thousands) Three Months ended March 31,
Depreciation and amortization 176 192 (16 ) -8 %
Revenues and Gross Margin
Revenues for the three months ended March 31, 2022, were $3.2 million compared to $2.1 million for the same period in 2021, an increase of $1.1
million. The increase was driven by sales of UltraMIST® devices and single-use accessories.
Gross margin as a percentage of revenue increased to 72.2% from 50.1% during the first quarter of 2022 as compared with the first quarter of the
prior year. The increase in gross margin percentages for the quarter was driven by higher sales of single-use accessories, which have a higher gross margin percentage, offset by the discontinuation of Biologics sales, which had a lower gross
margin percentage.
Operating Loss
Operating loss for the three months ended March 31, 2022, totaled $2.0 million loss compared to $4.4 million for the same period in 2021. The
decrease in operating loss is due to higher gross margin on UltraMIST as well as a decrease in operating expenses, primarily general and administrative and research and development.
General and administrative expenses decreased $0.9 million or 30% for the three-month period ended March 31, 2022, compared with the same period of
2021. This decrease was primarily due to registration penalties incurred in 2021 as well as a reduction in legal fees.
Research and development expenses decreased 53% to $166 thousand from $354 thousand during the first quarter of 2022 compared with the first quarter
of 2021. The decrease was primarily due to lower employee compensation in the first quarter of 2022.
Other Expense
Other expense increased for the three months ended March 31, 2022, by $2.6 million to $3.1 million, as compared to $0.5 million for the same period in 2021. This
increase in expenses is due to an increase in interest expense of $2.0 million, a loss on the issuance of debt of $3.4 million, partially offset by an increase in the change in fair value of derivatives of $2.8 million.
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Results of Operations for the Three and Six Months Ended June 30, 2022